Since most states have a limited room for tax reduction, any type of continuous support to their discoms might get difficult. As a result, the discoms will have to become commercially viable through well-thought tariff hikes and a material reduction in AT & C losses. As per the report, these states account for approximately 85% of the losses currently.
As per the Memorandum of Understanding (MoU) signed by the states under the UDAY scheme in FY 2016, the discoms were to initiate structural reforms in the form of AT& C losses reduction by 900 basis points (bps) to approximately 15% in FY 2019. In turn, the state governments were to let go off three to four months of discom debt further reducing their interest cost burden.
Since the initiation of the scheme, the discoms enjoyed the benefit of debt reduction, but the structural reforms happened at 400 bps till December 2018 from pre-UDAY levels and average tariff increase happened ~3% per annum.
Any further improvement in the operations may be difficult for the discoms since now the focus is on new rural connections which comes with an inadequate tariff hike, in turn, increasing the losses.
Further, the funding needs for budgeted capital expenditure, and external debt of the discoms would reach to ~ 2.6 Lakh crores by the end of FY 2020.
Currently out of the 15 states, nine states are already violating the Fiscal Responsibility and Budget Management Act Bound of 25% debt and gross state product ratio. This makes the structural reforms of discoms a critical need in the form of cost-effective tariffs and better infrastructure for the reduction in AT&C losses. ]]>
After this development, the MNRE Secretary had written to the Principal Secretary in Andhra Pradesh’s Energy Ministry in December 2017 that “the generic tariff determined by the Andhra Pradesh Electricity Regulatory Commission (APERC) may have taken 23.5% CUF as average CUF in the state for wind power projects and therefore, it is likely that there may be certain sites where CUF is more than the average CUF”. Recently Mr.Jain (MNRE) wrote to the Andhra Pradesh Electricity Regulatory Commission (APERC), as well as all state discoms, that “in the view of Secretary, MNRE’s letter, discoms have to treat wind power as must-run stations and take the entire power from them without curtailment.”
Due to the previous announcement from the APERC, the developers had assumed that about 2,000 MW of projects which had been turned down by the state’s discoms would have turned into Non-Performing Assets.
Despite the letter, some people in the industry feel that the bigger problem is of ‘backdown’ – discoms’ refusal to take wind power at times citing non-availability of grid capacity which has gone unaddressed and the MNREs letter won’t be of much help to the developers.
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The proposed company is said to compete with the private firms and contractors to bag contracts for appointing franchises or engineer tenders. Currently, there is no national-level distribution company, only small level distribution consultancy wings like Rural Electrification Corporation (REC), Power Grid Corporation and NTPC. The new company will act as a consultancy firm without acquiring a distribution license. This announcements also gives support to the Prime Minister’s wish to of giving power to all till the 2019 elections.
Similar to the National Tariff Policy (NTP) 2016 amendments, the draft Electricity Act is also in the process of being circulated for comments. The proposed amendments suggest separation of distribution infrastructure ownership from power supply licenses and also penalties in income for unexpected load shedding.
According to Deutsche Bank Market Research report, the annual losses of discoms have reduced by 70% to approximately INR 17,350 crore in the past two years.
We feel that with various amendments being proposed in the policies if the implementation is carried out strategically, the state of country’s electrification will see a new sun in the coming years. ]]>
The participating states have taken over Rs 2.09 lakh crores of debt of their DISCOMs. The remaining debt is mostly in the form of CAPEX debt or scheme based debt which usually either pays itself off or which converts into grants. Therefore, the process of the states taking over the debts of DISCOMs and issuing them as SDL bonds has now been completed. Now the remainder of the action which includes bond issuance by the DISCOMs has to be completed.
Due to these actions, till March 2017, the participating DISCOMs had achieved net savings of Rs 15,000 Cr. The gap between Average Cost of Supply (ACS) and Average Revenue Realized (ARR) had also come down by 14 paisa per unit along with a reduction of 1% in the AT&C losses.
Details about the UDAY scheme and its implementation on our blog can be accessed here.
]]>This is going to be a very discouraging development for the wind industry since a number of PPAs were signed at a higher price which is no longer being accepted by the DISCOMs. A similar development was also covered on our blog.
The article can be accessed here.
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Source: Livemint (Dated: 13 Apr 2017)To briefly summaries, the UDAY scheme aimed at “financial turnaround of Power Distribution Compa-nies”.
Under the scheme, the state government was re-quired to take over 75% of the existing debt of the Discom and issue State Government bonds in re-turn.
The remaining 25% debt would be issued either as a bond by the Discom (guaranteed by the state gov-ernment) or the terms of the loan would be changed by the banks. In return, the Discom’s were required to undertake a series of reforms.
The key ones were:
- Reduction of AT&C losses to 15% by 2018-19,
- Quarterly tariff revision (to partly reduce the burden of large revisions once a year),
- Reduce the gap between cost and revenue per unit to zero by 2018-19 and
- Discom’s were to comply with RPO outstanding since April 2012 as per timelines suggested by MoP.
For a more detailed list of the requirements and for a detailed understanding of the scheme, refer our article here, or the scheme document here. After an year from launching, 17 states and UT’s have signed up for the UDAY scheme, while 15 have not. Notable states that have not signed up include Tamil Nadu, West Bengal, Kerala, Orissa, Assam and Telangana.
These states have relatively large Discoms and, espe-cially in the case of Tamil Nadu, significant accumulated losses and bank debt. Another way to look at this is the political affiliation of the state.
Most states that have signed up for UDAY scheme are associated or governed by BJP. Notable exceptions are Uttar Pradesh, Karnataka and Bihar. The only notable exception amongst the states that have not signed is Assam (governed by the BJP).
Bonds issuance:
8 states have issued bonds, aggregating to Rs 149,000 crore. The coupon rate (interest rate) on these ranges from 8.12% to 8.55%. Of the total bonds issued more than 80% are contributed by just 3 states – Rajasthan, UP and Haryana. To understand the impact of the bond issuance, we analyzed the balance sheet of one Discom (the Jaipur Discom). The key points are:
*Coupon rates are as per latest issuance
Total debt of the Jaipur Discom has reduced by Rs 5,722 crore, or 22% of the total. However, this ag-gregate number includes a significantly higher amount of debt that was directly taken by the Discom from the banks. This debt is now replaced with debt owed to the state government. Thus, while the debt burden of the Discom has not changed much, its the banks that have benefited the most – they now own government bonds (which are a very good asset to own), compared to Discom loans. The performance on the actions that the Discom’s were supposed to take is analyzed below.
Note : Additional Bank debt taken over in June 2016 – Rs 7,228 crore.
Tariff increases:
Of the 8 largest Discom’s analyzed, not a single Discom undertook tariff revisions on a quarterly basis. Further, there was a wide difference between tariff increases of different Discoms. Discom’s of UP, Punjab, Bihar, Jharkhand & J&K did not increase tariff at all. While Ra-jasthan increased domestic tariff by 2%, Chhattis-garh increased the same by 21%. It is important to note that while Rajasthan issued bonds of 58,000 crores, Chhattisgarh only issued bonds for Rs 870 crores (the lowest amongst all states).
Haryana raised domestic tariff by a respectable 19%Industrial tariff increased also show a similar story – Rajasthan raised tariffs by 1.67%. ,Haryana by 0.98%, while Chhattisgarh by 18%. Other states did not raise tariffs.
Renewable Purchase Obligations:
An important requirement of the UDAY scheme was that Discom’s were to be fully complaint of RPO ?from April 1, 2012 onwards. The scheme document says the following with regards to RPO –
“Clause 9 – DISCOM’s opting for the scheme will comply with the Renewable Purchase Obligation (RPO) outstanding since 1st April 2012, within a pe-riod to be decided in consultation with MoP”
However, the MoU entered between the Ministry of Power and the Discom’s is completely silent on the RPO requirement. Prima facie, it appears that this point has been dropped by the Ministry. The only exception is the MoU with UP Discom, which has the following provision.
“Clause 1.3 (f) – In compliance with the Renewable Purchase Obligation (RPO) outstanding since 1.4.2012 to 31.3.2015, Discoms of UP shall fulfill RPO obligation 3 years after the Discom reaches break-even i.e. the Financial year 2019-20”
This clause presents several legal and practical prob-lems that will impact the REC markets significantly. Firstly, it is in direct contravention to the Electricity Act 2003 which obligates RPO on all consumption.
There is no provision for waiver or roll forward of such obligations. In light of this, can the MoP and UP Discom circumvent an act of the parliament and mutually decide a timeline for compliance? Further, the MoU wordings itself leave ample scope for further delay/ waiver when it says – “...3 years after the Discom reaches break-even…”. If the Discom does not reach break-even does that mean it will get further time?
In short, the original intent of the UDAY scheme re-sulting in RPO compliance has been abandoned by the Ministry of Power itself.
Reduction in AT&C losses:
AT&C losses remain very high for most Discom’s in the country. This is due to several reasons – weak distribution infrastructure being one. However, this caption is also a proxy for un-checked theft of power and un-metered supply. Even without the UDAY scheme, AT&C losses have been declining. However, since this data becomes available only at the time of ARR filing by the Discom, it is not possi-ble to verify if the decline has accelerated after the adoption of UDAY.
*Source: Forum of Regulators (FoR) Report
Conclusion:
The UDAY scheme has resulted in significant redrawing of the balance sheet of the Discoms. The beneficiaries of the scheme have been the banks, which were sitting on unsustainable levels of debt with loss making enti-ties. This debt has now been replaced with high quality government debt. However, in terms of real reforms and changes on the ground, whether relating to tariff increases or RPO compliance, there seems to be little that is changing. Unless the government follows through with actual op-erational changes, the story is likely to repeat itself over the next 5-10 years, where Discom’s will have again built up unsustainable debt and losses.
Our previous blog on Uday scheme can be accessed?here.
In the past, CSS has been calculated on the basis of the cost of the marginal 5% (in other words the most expensive 5%) of power procured by the state. This results in a bias towards the highest cost paid, resulting in high CSS. The National tariff policy (NTP) has suggested change in this methodology to a weighted average cost model, and also proposed that CSS be restricted to 20% of the tariff. However, recent increases show that states have largely ignored the provisions of the NTP.
A big reason for the rise in CSS is also the fact that states continue to shy away from raising tariffs for domestic, agricultural and such categories. According to the Business Standard article, States like Chhattisgarh, UP, Uttarakhand and Bihar have already come up with their tariff orders for the financial year 2016-17, but have not raised retail tariffs. Only Gujarat has allowed a retail tariff increase.
With increasing cost of power the burden to foot the bill therefore falls on industrial and commercial consumers. As per the MoP data the below graph depicts change in CSS over the span of 1 year in the major states which varies from 35% to 321%.
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The order has come as per the GERC Open Access Regulation which states, that additional surcharge shall be determined in every 6 months periods.
The GUVNL (Gujarat Urja Vikas Nigam Limited) furnished the data to the commission as per the guidelines defined and proposed an additional surcharge of Rs. 0.44/kWh. The additional surcharge has decreased by Rs. 0.22/kWh from the previous surcharge.
The Additional Surcharge will be applicable to the consumers of MGVCL, UGVCL, PGVCL and DGVCL, who avail power through open access from any source other than their respective DISCOMs and will be applicable for the open access transaction commencing from 1st October, 2016 to 31th March, 2017. The graph below depicts how the addition surcharge has varied over the past:
The regulation can be accessed?here. ]]>
In order to achieve the target of 1, 75,000 MW of renewable capacity by March, 2022, MNRE has notified the RPO uniformly for all States/ UTs initially for three years from 2016-17 to 2018-19 as given in the table below:
State Discoms will have to mandatorily draw at least 2.75% of their total power consumption from solar plants in the current fiscal, according to the renewable purchase obligation (RPO) norms laid down by the power ministry. Considering this proposed regulatory changes and stricter enforcement by states FY2016-17 is expected to bring a good fortune to the REC Market.
The article can be accessed here. ]]>