Power Report

Can Indians really expect 24x7 power supply in the near future?

The Centre has promised uninterrupted supply. But the financial health of electricity distribution companies is a big hurdle to achieving this goal.

On September 25, Union Power Minister RK Singh promised that after providing each household in India with an electricity connection by December 2018 under the Saubhagya scheme, the Centre would ensure that every home received “reliable and quality power” all day. However, if the target of providing four crore households with an electricity connection by the end of 2018 is ambitious, ensuring that power is supplied 24x7 seems like a distant hope for now.

Power cuts are not unknown in India, even in major towns and cities. On October 4, for instance, the eastern suburbs of Mumbai and large parts of Thane and Navi Mumbai saw power cuts that lasted for about three hours. This despite the fact that the state’s power production plants have the capacity to produce more power than they are currently producing.

Though the Union government has claimed that the country produces surplus power, the term actually refers to a short-term mismatch between the demand and supply of power.

Problems with power distribution

Several links in the power supply chain are not working as they should. One of them is power distribution. Power distribution companies, which purchase electricity from power producers or generators, provide the last-mile electricity connection to consumers. It is their job to buy the right volumes of power at the cheapest possible rate, and sell it to consumers. However, power distributors in India are in a precarious financial condition.

As of March 2015, distribution companies in India had accumulated losses of Rs 3.8 lakh crore and total debt of Rs 4.3 lakh crore. They were paying about 14% to 15% per year on this debt.

At the same time, these companies were running high Aggregate Technical and Commercial losses that result from meter tampering, power lost due to inefficient transmission systems and human error. In some states, these losses were as high as 30% of the total power deployed.

Loaded with huge debt on which they have to pay high interest and unable to collect their dues or raise their tariffs upwards because political considerations, many distribution companies choose to cap their losses. They do this by providing less power than consumers require. This is referred to as “load-shedding”.

The UDAY scheme

To counter these problems, the Union government in November 2015 launched the Ujwal Discom Assurance Yojana or UDAY. The scheme is intended to improve the financial health of power distribution companies by transferring their debts from their balance sheets to the states in which they operate, consequently reducing the amount these companies have to pay annually as interest on their debt.

States were asked to take over 75% of the debt of distribution companies in a phased manner – 50% in the first year and 25% in the second year. In addition, the government provided distribution companies with a variety of financial tools to ensure that they would find it easier to pay interest on their remaining debt.

In return for this debt transfer, the Union government required the distribution companies to reduce their Aggregate Technical and Commercial losses to 15% by March 2019. It also asked them to raise their rates to make sure that the companies do not sell power at a loss.

Among other things, the government proposed that distribution companies cut their losses by installing smart meters, upgrading transformers to cut transmission losses, and using cheaper domestic coal.

However, this is not the first time that efforts have been made to improve the health of power distribution companies. In 2012, the Congress-led United Progressive Alliance government approved a similar package to allow distribution companies to restructure their short-term loans. In this package, state governments took over half of the outstanding loans of state electricity boards and converted them into bonds backed by state governments. The lending banks were asked to restructure the remaining 50% of the loans and provide a three-year moratorium on principal payments to the distribution companies.

However, that plan did not quite work: distribution companies built up large debts again because their operations did not improve.

UDAY scheme disappoints

Even the UDAY scheme, which completes two years next month, has not matched up to expectations.

A status check by Scroll.in shows that since the beginning of their respective UDAY programmes, only three of the top 10 electricity-consuming states were able to cut their losses. The losses of others actually worsened.

The power ministry, however, claims that the UDAY scheme has achieved some of its objectives and it has yielded “encouraging results”.

In a press release in August, the ministry said that after interventions under UDAY, Aggregate Technical and Commercial losses in states have shown an improvement of more than 1% and the gap between Average Cost of Supply and Average Revenue Realised has reduced by Rs 0.13 a unit. It added that states show varying degrees of performance because they joined the scheme at different times.

But data shows that as many as 14 states that Scroll.in analysed had signed Memorandums of Understanding under the UDAY scheme as on July 2016. These included seven out of the 10 biggest power consumers: Andhra Pradesh, Punjab, Uttar Pradesh, Rajasthan, Karnataka, Gujarat and Haryana. Madhya Pradesh joined the scheme a month later while Maharashtra joined it in October that year. Among the states analysed by Scroll.in, Tamil Nadu was the last to join the UDAY scheme. It signed its Memorandum of Understanding regarding UDAY in January.

In July, the power minister also said that about 86% of bonds for the distribution companies’ debts, amounting to Rs 2.32 lakh crore, had already been issued under the scheme. However, this does not mean that the power sector is out of trouble.

Under UDAY, distribution companies were also supposed to solve some of the problems for power producers, which are operating much below full capacity because of the inability of distribution companies to buy power. However, if power distribution companies stay bankrupt, there is little they can do to help power producers, said Ashok Kumar Khurana, Director General, Association of Power Producers.

“The discoms [distribution companies] are literally bankrupt and some are so even after UDAY coming into the picture,” said Khurana. “Each unit of power that they buy, they incur a loss on it because of their own financials so they choose to not buy power at all, turning coal-fired plants into liabilities for companies that run them since they cannot monetise them to their full capacity.”

To cut the losses, each state signed a Memorandum of Understanding projecting tariff increases for each subsequent year post-UDAY. However, some states have not delivered on their promises. While 15 states have issued tariff orders, only eight have actually raised electricity rates, ranging from 2% in Chhattisgarh to 55% in Bihar. All tariff changes are applicable from April 1. Gujarat did not change its tariff at all.

Scroll.in analysed 11 states that had revised their electricity rates and found that only seven raised their tariffs as specified in their Memorandums of Understanding under UDAY while the remaining four failed to meet their targets. The states that overshot their targets include Bihar, Uttarakhand, Madhya Pradesh and Karnataka. Those that did not raise their tariffs enough to meet targets include Telangana and Chhattisgarh.

A questionnaire sent to the ministry of power remained unanswered at the time of publishing this story. The story will be update when the ministry responds.

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