The Ministry of Power’s Ujwal DISCOM Assurance Yojana (UDAY), a financial and operational reform scheme for distribution companies (DISCOMs), announced in November 2015 (refer) is bearing surprisingly quick and positive results. The scheme aims to address debilitating financial health of most state power distribution companies (DISCOMs) leading to offtake concerns for private power generators and stress in the overall banking sector. So far, 18 states including some of the most distressed states – Uttar Pradesh, Bihar, Rajasthan, Haryana, Punjab and Jammu & Kashmir – have signed up for the scheme with Tamil Nadu also expected to sign up shortly. According to the Ministry of Power, UDAY has already addressed 62% of the Discom debt existing at the end of 2014-15 (refer).

• Almost 80% of entire DISCOM debt would be removed from their balance sheets by the end of next year reducing their overall financial losses by more than 50%;
• Improvement of DISCOM financials will have a hugely positive and long-lasting impact on the solar sector by way of improving availability of private capital and growing demand for power by DISCOMs;
• By successful implementation of UDAY alongside development of government solar parks, the Indian government has addressed two of the most critical challenges facing the renewable sector;

Preliminary data compiled by the Ministry of Power (refer) shows that bonds worth INR 1.73 trillion (USD 26 billion) have already been issued by 11 states and the number is expected to increase as larger states such as Tamil Nadu and Maharashtra issue bonds. 13 states have filed for tariff review petitions in 2016-17 and most states have shown an improvement in distribution losses. Difference between cost of supply and revenue per unit of electricity has reduced by more than half in some of the worst performing states – Haryana has reduced the deficit to INR 0.23 per unit in March 2016 (INR 0.65 per unit in FY15) and Uttar Pradesh reported a decline to INR 0.41 per unit (INR 1.17 per unit) (refer).

Improvement in financial position of DISCOMs will bring several important benefits for the solar sector. First, offtake risk perception will come down and concerns related to non-payment of dues by DISCOMs should disappear by next year in our view. Second, availability and cost of private capital is expected to improve significantly with a cascading impact on competitiveness of solar power. Finally, improving DISCOM finances will address growing concerns around grid curtailment by improving demand for power (currently many DISCOMs back down the grid rather than buying more power because they make losses on incremental sale of power to rural and residential consumers) and increasing investments in upgradation of transmission and distribution infrastructure.

The Indian government has addressed two very critical challenges for the renewable sector. The solar parks policy has already addressed the issue of land acquisition to a large extent. Successful implementation of UDAY will help resolve the long-standing issue of DISCOM bankability and pave way for long-term growth of the sector.