AT&C losses have shown only marginal improvement

Vivek Sharma, Senior Director, Energy & Natural Resources, CRISIL Infrastructure Advisory

Discuss the impact of Ujwal DISCOM Assurance Yojana (UDAY) on power demand. What is your outlook for the next fiscal?
The key objective of UDAY was financial turnaround of power distribution companies (discoms), which would have led to purchase of more electricity, reduced load-shedding and improved hours of supply. Though some glimpses of increase in power demand can be seen, there is still huge unmet demand in the system and plant utilisation factor continues to be sub-optimal. That's because there hasn't been commensurate improvement in Aggregate Technical & Commercial (AT&C) losses despite UDAY providing one-time relief on the interest burden. As for demand outlook, given the focus of states on providing 24X7 power for all, and a likely amendment in the Electricity Act to penalise load-shedding by discoms, things should improve.

Has UDAY helped improve financial health of discoms over the last one year? Please share the latest data on this.
With one-time debt take-over under UDAY, states have been able to reduce the overall gap between average cost and revenue (at an all-India level) from 61 paise in financial year 2016 (FY16) to 32 paise in FY18. However, AT&C losses have shown only marginal improvement from 24 per cent in FY16 to 22.83 per cent in FY18 , well below the target of under 15 per cent. The gap is likely to increase, unless compensated by a tariff increase.
 
What is the progress on increasing power tariffs to cover costs? How the political will be a catalyst in this regard?
UDAY specifies that apart from AT&C loss reduction, adequate tariff increase is also vital for the financial turnaround of discoms. In FY18, Bihar, Uttar Pradesh (UP) and Madhya Pradesh (MP) increased their retail tariffs by 20 per cent, 12.8 per cent and 9.48 per cent, respectively, while there has been no tariff increase in Tamil Nadu and Telangana. Further, tariffs are a politically sensitive issue. Rajasthan had to roll back its increase for agricultural consumers by almost 25 paise leading to additional burden of Rs 500 crore on the state. Similar demands were raised in Uttarakhand to roll back tariff increase of five per cent.

Given that many elections are due next fiscal, adequate tariff increases are doubtful, which may result in additional under-recoveries for discoms.

How long will UDAY take to turnaround discoms? Are there any efforts by the latter to ensure reliable 24x7 power supply?
The major cost reduction measure under UDAY was taking over of debt burden and thus savings in interest cost. The impact of such savings is already reflecting in the reduced average cost of supply (ACS) and average billing rate (ABR) gap. However, making discoms self-sustainable would still depend on reduction in AT&C losses. Many states are working on measures to reduce these losses by focusing on 100 per cent metering, feeder separation programs, and theft reduction measures through regularisation of consumers, ABC cabling, etc. These would help discoms to provide 24 hours supply to low-paying consumers and simultaneously ensure adequate recovery of cost. Availability of capital, however, will remain a concern.

Which states have made strides through UDAY and who are the laggards?
AT&C losses in some states have shown a decreasing trend and have reduced from an average of 25.72 per cent in FY15 to 23.98 per cent in FY16. The target, as I said earlier, was to achieve levels below five per cent. However, in FY18 many states have shown a rise in AT&C losses and are lagging on the UDAY targets. Such a rise in AT&C losses can result in higher financial losses, which would take away from achievements under UDAY. The following graph shows how states are doing on their UDAY targets:

Though surplus power is available in the country, off-take at discoms' end is slack. Are there any visible signs of the state discoms signing new power purchase agreements (PPAs)?
The slack in power off-take is due to a combination of factors such as financial health of discoms, lower demand growth, energy efficiency measures, and availability of solar power at competitive rates. However, with higher demand growth expected in the next 2 to 3 years, majorly because of 100 per cent electrification targets, improvement in hours of supply, and potential economic recovery, base demand may shift to an increasing trend, resulting in the revival of the sector and improved plant load factors.