UDAY Scheme- Ujwal DISCOM Assurance Yojna in India UPSC

What is the Uday scheme?

  • The state governments’ efforts to achieve 100% village electrification would not yield fruit unless the electricity distribution corporations (DISCOMs) of the state governments improve their performance. Power outages also affect national goals such as ‘Make in India’ and ‘Digital India.’ Furthermore, financial stressed DISCOMs defaulting on bank loans has the potential to have a significant impact on the banking industry and the economy as a whole.
  • The UDAY (Ujwal DISCOM Assurance Yojana) was announced by the Government of India in November 2015 to help DISCOMs with their financial and operational turnarounds and to ensure a long-term solution to the problem. The strategy also attempts to lower the DISCOMs’ interest load, electricity costs, and AT&C (Aggregate Transmission & Technical) losses.
  • DISCOMs are locked in a vicious cycle, with operating losses funded by debt, due to legacy concerns. By 2014–15, DISCOMs had a debt of Rs. 4.3 lakh crore, with interest rates as high as 14–15 percent and AT&C losses as high as 22%. The strategy ensures the growth of lively and efficient DISCOMs by permanently resolving the sector’s past and potential future challenges. It gives DISCOMs the chance to break even in the next two to three years. This will be accomplished through four initiatives: I improving operational efficiencies; (ii) lowering power costs; (iii) lowering interest costs; and (iv) enforcing financial discipline.
  • To reduce the average AT&C loss from around 22% to 15% and eliminate the gap between ARR (Average Revenue Realized) and ACS (Average Cost of Supply) by 2018–19, operational efficiency will be improved through measures such as mandatory smart metering, transformer and meter upgrades, and energy efficiency through measures such as efficient LED bulbs, agricultural pumps, fans and air-conditioners.
  • 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), supply of washed and crushed coal, and faster transmission line completion would all help to lower power costs. Through increased domestic coal supply, coal rationalization, and coal switching, NTPC alone is estimated to save Rs. 0.35 per unit, which will be passed on to DISCOMs.

The following are the scheme’s most important features:

  • States will take over 75% of the DISCOM debt in 2015–16, 50% in 2016–17, and 25% in 2017–18. From as high as 14–15 percent, the interest cost will be reduced to 8–9%.
  • In the fiscal years 2015–16 and 2016–17, the Government of India will not consider debt taken over by states in the computation of state budget deficits.
  • States will issue non-SLR bonds on the market or directly to banks and financial institutions (FIs), including SDL (State Development Loan) bonds.
  • Banks and financial institutions must convert DISCOM debt not taken over by the state into loans or bonds with interest rates not exceeding the bank’s base rate plus 0.1 percent. Alternatively, the DISCOM may issue this debt in whole or in part as State-guaranteed DISCOM bonds at market rates that are equivalent to or less than bank base rate plus 0.1 percent.

States will gradually take over DISCOM losses in the future.

  • States that accept UDAY and meet operational milestones will receive additional/priority funding from the Ministry of Power and Ministry of New and Renewable Energy’s Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Integrated Power Development Scheme (IPDS), Power Sector Development Fund (PSDF), or other schemes. States that fail to reach operational milestones risk losing their claim to IPDS and DDUGJY funds.
  • Such States will also receive additional coal at stated prices and, if available due to increased capacity utilization, low-cost power from NTPC and other Central PSUs. UDAY is an optional program for all States. States are encouraged to take use of the benefit as soon as possible, as it is conditional on performance. [By March 2019, the majority of states/UTs had signed up for the program.]
  • DISCOM financial obligations are, in essence, contingent liabilities of the individual States that must be acknowledged as such. DISCOM debt is de facto state borrowing that is not included in de jure borrowing. Credit rating firms and multilateral agencies, on the other hand, are aware of this de facto debt in their assessments. Similar remarks were made by the 14th Finance Commission. Similarly, to encourage rural electricity, the DDUGY (Deendayal Upadhyaya Gram Jyoti Yojana) scheme was introduced. Budgetary support for the continuation of the RGGVY (Rajiv Gandhi Grameen Vidyutikaran) in the 12th and 13th Plans has been carried over to the new scheme as well.
  • UDAY speeds up the reform process across the whole power sector, ensuring that power is accessible, affordable, and available to everyone. The uday (rising) of a ‘Powerful’ India is really heralded by UDAY.
  •  Due to a lack of adequate investment in “transmission and distribution” (T&D) projects, T&D losses have constantly been on the higher side, reaching 32.86 percent in 2000–01. The minimization of these losses was critical to the state utilities’ economic viability (SEBs). The notion of Aggregate Technical and Commercial (AT&C) loss was created since T&D loss was unable to capture all losses in the network. AT&C loss is a true indicator of overall system losses since it includes both technical and commercial losses in the network.
  • The system’s high technical losses are mostly attributable to a lack of investment in system enhancement projects over the years, which has resulted in unplanned distribution line extensions, overloading of system elements such as transformers and conductors, and a lack of adequate reactive power supply.

Commercial losses are mostly caused by:-

(I) inefficient metering,

(ii) theft, and

(iii) pilferages.

Increased metering efficiency, appropriate energy accounting and auditing, and improved billing and collection efficiency can all help to eliminate this. Fixing the responsibility of personnel/feeder managers might significantly reduce AT&C losses.

Uday is the fourth program supported by the government, following the APRDP (Accelerated Power Development and Reform Programme) in 2001, the Restructured-APRDP in 2008, and the IPDS (Integrated Power Development Scheme) in 2014, which absorbed the R-APRDP.

UDAY’s performance: According to the government, the scheme’s performance cannot be described as excellent. In 2019-20, ten of the 28 states that implemented it showed either reduced losses or increased profits (April-December). Moreover, while most states have made progress in closing the ACS-ARR gap and lowering AT&C losses, they are still far behind in meeting the UDAY targets (as they have been in previous attempts).

Meanwhile, a new scheme is being proposed to replace it. The new system is designed to maintain Discoms under it after they reach their deficit targets; otherwise, they will have to convert to alternative models, such as franchise or PPP models, which involve the private sector. The Centre is also likely to support the new scheme with grant funding, something it did not do with UDAY.

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