UDAY Scheme

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Context: A well-meaning scheme that was aimed as a pointed intervention to the weakest link in the electricity value chain- power distribution- UDAY seems to have been failing in its objectives. 

Prelims: Economic and Social Development, Sustainable Development, Poverty, Inclusion, Demographics, Social Sector initiatives, etc.
Mains: GS II- Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Concerned ministry: Ministry of Power.

Ujwal DISCOM Assurance Yojana (UDAY):  

  • UDAY Scheme was launched by Union Power Ministry for financial turnaround and revival package for state electricity distribution companies (DISCOMs).
  • It aims to help to make discoms financially and operationally healthy so they can supply adequate power at affordable rates.
  • UDAY is a comprehensive scheme providing measures for both revenue-side efficiency and cost-side efficiency.
    • On the revenue side, it proposes an annual tariff increase, the strict discipline of quarterly fuel cost adjustment, etc.
    • For cost-side efficiency, the scheme focuses on the reduction of interest burden, reduction in fuel cost through coal swapping, coal price rationalization, time-bound loss reduction, etc.
  • The scheme’s target is also to reduce the average Aggregate technical and commercial (AT&C) loss from around 22% to 15% and eliminate the gap between average revenue realized & average cost of supply by 2018-19.
  • The targets will be achieved by improving operational efficiency through compulsory smart metering, up-gradation of transformers, meters, etc.
  • Energy efficiency measures would be adopted like the promotion of efficient LED bulbs, agricultural pumps, fans & air-conditioners, etc.
  • The scheme is optional for states; however, by providing incentives for performing states, the scheme attracts the participation of the states.
    • The states joining the scheme would sign a Memorandum of Understanding to take over 75% of the debts of their respective DISCOMs in a phased manner, by issuing bonds.
    • The other 25% of the debts will be issued by DISCOMs in the form of bonds.

The objective of the scheme:

  • The Scheme aims at reducing power losses in the Distribution sector, reducing the cost of power, reducing the interest burden and improving the operational efficiency of DISCOMs so that adequate power can be supplied at affordable rates.
  • This objective is mainly to be achieved via a phased takeover of the debts of the DISCOMs by the state governments. UDAY is basically a debt restructuring plan for the DISCOMs.


Where did UDAY fail?

  • Discom losses, which had progressively reduced in the first couple of years since the scheme’s rollout in November 2015, have rebounded in FY ’19 to nearly double the losses recorded the previous year.
  • Broadly, the scheme had three critical components:
    1. The takeover of discom debt by state governments,
    2. reduction in aggregate technical and commercial (AT&C) losses, timely tariff revisions and
    3. elimination of the gap between the average per-unit cost of supply (ACS) and average revenue realised (ARR) by FY19.
  • AT&C losses: The scheme has failed to achieve the desired goals as at the aggregate level, the AT&C losses for major states stood at 19.05% as against the target of reducing them to 15 percent by the end of FY19.
    • In the case of some states, especially in the northern and central parts of the country, the losses are of a much higher magnitude, suggesting that pilferage continues to be rampant.
  • ACS- ARR Gap: While the ACS-ARR gap was supposed to be eliminated by FY19, it remains as high as Rs 0.25 per unit.
    • In many states, the gap is even higher.
    • Part of the problem can be traced to inadequate tariff hikes.
    • While it is true that some states have aggressively raised tariffs, the median hike remains muted.
  • Power subsidy: There’s also the issue of whether the power subsidy released by state governments is adequate.
    • As a result, discoms have reported financial losses to the tune of Rs 21,658 crore at the end of FY19, reversing the declining trend since the launch of UDAY.
    • This deterioration in the financial position of discoms does not bode well for the entire power sector chain. Reports suggest that dues by state discoms to power generators have in fact risen.
  • There are several other operational efficiency targets under UDAY, such as feeder metering, smart metering, and feeder segregation. Progress on these is mixed.
    • For instance, not much progress has been made in the case of smart metering above 200 and up to 500 kW and above 500 kW.

Given the faltering achievements, there is a  possibility of a new scheme being rolled out to address UDAY’s shortcomings. The primary reason for failure, as is being recognized in policy circles, is the failure of discoms to collect the full cost that they pay for power. 

These issues need to be addressed quickly or else discom losses will rise further to levels where talks of another bailout are likely to surface.

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