New power sector distribution scheme to have a capital outlay of Rs 2 trn

Topics Power Sector

The Centre will fund 60% of the project outlay if states take up reforms on their own
A new power sector scheme aimed at better infrastructure, smart meters, and a private franchisee model for improving power supply in states is likely have an estimated capital outlay of Rs 2-2.5 trillion. The scheme will replace UDAY (Ujwal DISCOM Assurance Yojana), which concludes in March next year. 

UDAY did not entail direct grants from the Centre to states. Of the several suggestions for the scheme, sources said it was likely to be called ADITYA — Atal Distribution Transformation Yojana — named after the late prime minister Atal Bihari Vajpayee. 

Some officials, however, pointed out that the name could change.

The new scheme is likely to have two components. One is for infrastructure, which will include revamping the existing transmission and distribution network, feeder segregation, and feeder metering, and improving efficiency in the functioning of state-owned power distribution companies (discoms). This will include a plan for states to have multiple private franchisees as power suppliers.

The other part will focus on smart meters. The proposed expenditure will be equally split between the two components. R K Singh, Union minister for power and new and renewable energy, has said India will have 100 per cent smart metering in three years. 

Sources said the Centre’s share in the grant would be 40-60 per cent of the expenditure. States will bear the rest. “It is not a plain grant. The Centre is incentivising discoms to take up reforms. We would like different financing agencies to join hands and invest in states for distribution reforms,” said an official.

According to the draft plan, states will have the option of choosing multiple-supply franchisee models. This will entail hiring private companies as power suppliers. 

The Centre will fund 60 per cent of the project outlay if states take up reforms on their own. Grant disbursement would be target-linked, said officials, adding it could be in the form of loans too. “The final proposal is yet to be finalised. The idea is to incentivise discoms and not fund their losses,” said an official.

“The basic issue plaguing many state distribution utilities is the lack of cost-reflective tariffs and efficiency gains not happening in accordance with the plan. Central government assistance only comes in terms of capital grants and hence utilities relapse into financial stress, which leads to default, under-spending on operations and maintenance, and inability to supply quality power,” said Debasish Mishra, partner, Deloitte Touche Tohmatsu India.

Despite four restructuring schemes in the past 15 years, state-owned discoms continue to make losses. As of March 31 this year, the cumulative losses were Rs 28,000 crore (of 21 states). 

UDAY, the latest of the four, was launched to improve the finances and operations of discoms. The financial part included states taking over 75 per cent of the losses of discoms and issuing bonds against them.

The discoms also issued sovereign-guaranteed bonds against the remaining 25 per cent. With their balance sheets clear, the discoms were mandated to fix their technical and commercial (AT&C) losses, improve the quality of power supply, reduce power theft, and have regular tariff revisions to bridge the cost-revenue gap. Most states have failed to implement these operational reforms.

The RBI and the Central government have acknowledged that UDAY has not been able to achieve what it was meant to do. Union Finance Minister Nirmala Sitharaman in her July 2019 Budget speech said, “UDAY needs to be reviewed.” Singh, in a letter to states, said the performance of discoms under UDAY had worsened.

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