Success of the DISCOM package crucial to the future of solar power

09 November 2015 |

Last week, the government unveiled its Ujwal DISCOM Assurance Yojana (UDAY), a scheme intended to find a permanent solution to the financial mess facing the power distribution companies (DISCOMs) in the country. The key planks of the scheme are getting state governments to assume 75% of total debt obligations of their respective DISCOMs and getting banks to reduce interest rates on the remaining DISCOM debt.

  • A successful revival of the power distribution sector is vital for the success of Indian power sector and it is important to learn lessons from the failure of many similar restructuring packages announced in the past, most recent being central government’s financial restructuring package (FRP) in 2013.
  • DISCOMs can only return to profitability if serious tariff reforms are taken up along with the measures suggested in the package
  • In an encouraging move, the central government has linked availability of various central government funds such as Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and Integrated Power Development Scheme (IPDS) to the successful implementation of UDAY

A significant part of the 270 GW of power generation capacity in India lies unutilized because DISCOMs refuse to procure power that they are forced to sell at a loss.  IPPs are crippled by reduced offtake and payment delays of as long as 12 months. In turn, the national banks are staring at huge potential debt write-downs affecting the health of the national banking sector.  DISCOM financial health is critical not only for the proper functioning of the power sector but for wider health of the economy including success of the ‘Make in India’ campaign.

Asking states to assume bulk of DISCOM debt will reduce the DISCOM financial burden. More importantly, it will force states to directly bear the cost of DISCOMs operating inefficiencies and tariff subsidies.  The scheme will therefore hopefully significantly alter the behavior of state governments going forward and improve political will for DISCOM reforms.

However, serious discussion on tariff reforms seems to be largely missing from the package due to political considerations. Tariff reforms should allow DISCOMs to charge prices that reflect cost of delivery, including a return on capital. If this is not done, DISCOMs will always stay in a poor financial state. If the states are unwilling to swallow this bitter pill, this scheme will fail like the previous restructuring package announced in 2013. It is therefore encouraging to see that the central government has linked availability of various central government funding programs to successful implementation of UDAY. Also, participating states will be provided with additional coal supplies and low cost power from NTPC and other central public sector generators. It remains to be seen where these measures will have sufficient ‘pull factor’ for the states.

Poor DISCOM financial health has serious ramifications for continued growth of the solar sector. The economic case for solar power is becoming stronger by the day but offtake concerns can imperil the solar sector in much the same way as they have for the thermal power sector. A successful revival of the power distribution sector and tariff reforms will immensely benefit both utility scale and rooftop solar.

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