In November 2015, the Indian government announced UDAY scheme to restructure DISCOM balance sheets and address persistent concerns about their poor bankability. The scheme, the third such restructuring package for DISCOMs in the last seventeen years, was supposed to be a fundamental reform for long-term revival of the power sector. But after some easy wins – transfer of debt to the state governments and reduction of T&D losses from over 30% to an average of 21% – progress has stalled and the crisis is building up again.
- DISCOMs are lapsing into financial trouble again and again because of their public ownership and lack of political will for an effective reform;
- Financially weak DISCOMs pose multiple risks to the power sector beyond just delayed payments;
- With long-term reform of the power sector still a few years away, the risk is unlikely to disappear any time soon;
Where did UDAY go wrong and why again? The answer lies in public ownership of the DISCOMs and lack of political will. The state governments, who call all the effective shots in the sector, have continued to use cheap power as a vote grabbing tool. Some of the key scheme provisions such as funding of ongoing operational losses by the state governments have not been implemented. Poorly run DISCOMs have been unable to find operational efficiencies to improve payment recovery and T&D loss position. But the most important reason is that there is no one to effectively police the underperforming DISCOMs. The regulators are too weak to act and the central government does not have the tools (or willingness?) to punish errant state governments.
Good financial health of the DISCOMs is important not just for timely payments to power projects but also for overall health of the sector. Financially stretched DISCOMs are unlikely to have the necessary resources to buy power to meet demand from agricultural and residential consumers. That has grave consequences for power demand and the government’s ‘power for all’ mission. Loss making DISCOMs are also more likely to indulge in deviant behaviour such as tender cancellation, curtailment, PPA renegotiation as well as resist growth of rooftop solar, open access and other market-based mechanisms.
Something must give as this is not a sustainable situation. Frequent busts and restructuring cycles have a heavy cost on the economy and should not be allowed to go on.
Regrettably, long-term reform of the power sector seems a few years away. If the state is unwilling to act, the private sector could force a solution by staying away from new investments. The developers are reeling under the crisis and yet ignoring DISCOM risk as there is too much capital chasing too few projects. Even the worst rated DISCOMs are able to get attractive tariffs from top-tier developers as happened in the recent Uttar Pradesh solar auction. Instead, some developers are appealing for a trade receivable discounting facility but we are not hopeful of that either as the lending community is increasingly opposed to DISCOM risk.