Ujwal DISCOM Assurance Yojna or UDAY.

by Mentors4ias · November 9, 2015

The Union Cabinet has given its approval to a new scheme moved by the Ministry of Power – Ujwal DISCOM Assurance Yojna or UDAY.
UDAY provides for the financial turnaround and revival of Power Distribution companies (DISCOMs), and importantly also ensures a sustainable permanent solution to the problem.
UDAY is a path breaking reform for realizing vision of affordable and accessible 24×7 Power for All.

DISCOMS

Distribution is the weakest link in the power value chain wherein DISCOMs in the country have accumulated losses of approximately 3.8 lakh crore over the past few years
Discoms were trapped in a vicious cycle with operational losses being funded by debt
Many Discoms are not charging fair tariff for the electricity consumed and thus financially stressed DISCOMs are not able to supply adequate power at affordable rates
Financial liabilities of DISCOMs are the contingent liabilities of the respective States and need to be recognized as such. Debt of DISCOMs is de facto borrowing of States which is not counted in de jure borrowing.
However, credit rating agencies and multilateral agencies are conscious of this de facto debt in their appraisals.
In line with the above and similar observations of Fourteenth Finance Commission, States shall take over 75% of DISCOM debt as on 30 September 2015 over two years – 50% of DISCOM debt shall be taken over in 2015-16 and 25% in 2016-17.
This will reduce the interest cost on the debt taken over by the States to around 8-9%, from as high as 14-15%; thus improving overall efficiency.
Further provisions for spreading the financial burden on States over three years, will give States flexibility in managing the interest payment on the debt taken over, within their available fiscal space in the initial few years.

The new scheme UDAY lays thrust on four initiatives for financial turnaround of Discoms.

Improving operational efficiencies of DISCOMs;
Reduction of cost of power;
Reduction in interest cost of DISCOMs;
Enforcing financial discipline on DISCOMs through alignment with State finances.

Operational efficiency improvements like compulsory smart metering, upgradation of transformers, meters etc., energy efficiency measures like efficient LED bulbs, agricultural pumps, fans & air-conditioners etc. will reduce the average AT&C loss from around 22% to 15% and eliminate the gap between Average Revenue Realized (ARR) & Average Cost of Supply (ACS) by 2018-19.

Reduction in cost of power would be achieved through measures such as increased supply of cheaper domestic coal, coal linkage rationalization, liberal coal swaps from inefficient to efficient plants, coal price rationalization based on GCV (Gross Calorific Value),

States shall take over 75% of DISCOM debt as on 30 September 2015 over two years -50% of DISCOM debt shall be taken over in 2015-16 and 25% in 2016-17.
Government of India will not include the debt taken over by the States as per the above scheme in the calculation of fiscal deficit of respective States in the financial years 2015-16 and 2016-17.
DISCOM debt not taken over by the State shall be converted by the Banks / FIs into loans or bonds with interest rate not more than the bank’s base rate plus 0.1%.
Alternately, this debt may be fully or partly issued by the DISCOM as State guaranteed DISCOM bonds at the prevailing market rates which shall be equal to or less than bank base rate plus 0.1%.
States shall take over the future losses of DISCOMs in a graded manner.
State DISCOMs will comply with the Renewable Purchase Obligation (RPO) outstanding since 1st April, 2012, within a period to be decided in consultation with Ministry of Power.
States accepting UDAY and performing as per operational milestones will be given additional / priority funding through Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY),Integrated Power Development Scheme (IPDS), Power Sector Development Fund (PSDF) or other such schemes of Ministry of Power and Ministry of New and Renewable Energy.
States are encouraged to take the benefit at the earliest as benefits are dependent on the performance. It empowers DISCOMs with the opportunity to break even in the next 2-3 years.

UDAY is a shining example of the utilization of the best principles of cooperative and competitive federalism and has been evolved through discussions at the highest levels with multiple States.
Adopting UDAY is optional for States, but provides the fastest, most efficient and financially most feasible way for providing 24X7 Power for All. It will be operationalized through a tri-partite agreement amongst the Ministry of Power, State Government and the DISCOM.