The success of the Indian government’s ambitious power distribution reforms programme including the Ujjwal Discom Assurance Yojana (UDAY) will depend upon efficiency gains registered by the utilities and frequent tariff revisions, research firm Fitch Ratings has said.
The Singapore-based ratings firm said in a special report published today the voluntary rehabilitation scheme UDAY for financial and operational turnaround of distressed state distribution utilities has already seen a large number of important states signing up for the programme.
“However, the immediate relief provided by interest-expense reduction, while beneficial to the cash flow positions of the discoms, is inadequate to turn these entities profitable. Achieving this goal by March 2019 as per the plan is highly predicated on the ambitious efficiency improvements, coupled with tariff increases that are politically sensitive in India,” Fitch said.
UDAY, launched in November 2015, is more comprehensive than previous packages which had focused primarily on debt restructuring. The merits of UDAY include its four-pronged strategy that targets not only a reduction in interest burden but also operational efficiency improvement, reduced cost of power purchased, and financial discipline. There are also financial implications for states signing up for UDAY that do not meet the agreed targets under the programme.
Twenty states and one union territory have given in-principle approval so far for UDAY. Of these, 16 have already signed up for the scheme. “Participation by a number of states which are not ruled by the key ruling political party at the centre – the Bharatiya Janata Party – reflects the various merits and wider acceptance of the package. The committed states and UT accounted for almost 77 per cent of the total 2013-14 net cash losses reported by discoms and around 58 per cent of the total debt outstanding at end-September 2015,” the report said.
These states house about 56 per cent of India’s total installed capacity. Tamil Nadu stands out among those which have not opted for UDAY and accounted for 25 per cent of 2013-14 net cash losses of all discoms.
The Fitch report also states the debt-restructuring slated within the scheme will provide some immediate breathing space following the transfer of 75 per cent of outstanding debt to the states and capping the interest cost on the balance. However, discoms in as many as 12 of the 16 committed states reported cash losses in 2013-14.
The aggregate technical and commercial (AT&C) loss in the Indian power sector is very high – ranging from 11 per cent to 71 per cent. UDAY aims to get the discoms to cut these losses significantly — more than 50 per cent in many cases — through 2018-19. The savings benefits from lower AT&C losses alone account for around half of the total savings on average for the states that have committed. For the majority of states, tariff increases are required to reach break-even status even after the other savings to which they are committed.
A meaningful improvement in discoms’ economics will especially benefit power generation companies through higher utilisation and timely clearance of dues. The current low capacity utilisation of power plants is driven primarily by stressed discoms, which are unable to buy electricity because of weak financial positions. Fitch said financially stronger discoms will support India’s drive for renewables and financings of those projects. Charles Haley Authentic JerseyShare This