State-owned distribution utilities will benefit from the Ujwal Discom Assurance Yojana (UDAY) scheme in FY2017 but stricter focus on efficiency and timely tariff revisions is critical for their sustained financial turnaround said ICRA in a recent study.
UDAY was launched by the centre to improve performances of the state power distribution companies.
Sabyasachi Majumdar, senior vice president, ICRA said: "Discoms will benefit significantly in the near to medium term from measures taken under UDAY. These include lower interest costs arising out of de-leveraging, and reduction in power procurement cost arising out of improved domestic coal availability along with recent policy measures by Government such as flexible utilisation of domestic coal linkage and e-auction process for short term power."
"However, serious focus of utilities on improving their efficiencies, mainly aggregate technical & commercial loss levels, is necessary. This has to be in line with targets set by UDAY. Timeliness and adequacy of tariff hike in relation to the cost of power supply is also necessary. It has to necessarily include periodic rise in fuel and power purchase costs. These factors remain critical in the long run for sustained improvement in the financial position of the discoms," he said.
Till now 16 states and union territories have signed memorandum of understanding for participating in UDAY. De-leveraging and refinancing under the scheme is expected to improve liquidity and profitability profile of Discom's in the near term.
Improved domestic coal availability along with recent policy measures by the government including flexible utilisation of domestic coal linkage and e-auction for short term power remain favourable for discoms. These would reduce cost of power purchase.
However, ICRA notes that state electricity regulatory commissions (SERCs) in only 20 out of 29 states have issued tariff orders for FY2017 so far, indicating moderate progress in terms of issuance of tariff orders for the year.
Tariff hikes allowed in most states have been modest, ranging between, 0.6% and 8.8%. SERCs in three states have not approved any tariff hike. In two states SERCs have reduced tariff for some categories of consumers.
SERCs from Uttar Pradesh and Punjab have issued tariff orders recently however the tariff determination process has witnessed delays.
Tariff revisions allowed for FY2017 by SERCs in both the states were lower at 3.18% (for Uttar Pradesh) and a negative 0.98% (for Punjab) for the year, against the stipulated level of 5%-6% under MoUs signed for implementation of UDAY.
The respective SERCs in Uttar Pradesh and Punjab cited avoidance of a tariff shock to the consumers as primary reason for the modest tariff hikes. Besides, a limited tariff hike is also on account of stricter norms for efficiency improvement as well as certain other cost items by SERCs, which led to significant disallowance of power purchase cost and other cost overheads.
Given that the fuel and power purchase costs cannot be controlled and accounts for 80% of the cost of supply for any Discom, a timely pass-through of variations in power purchase costs to consumers is also critical for the financial health of discoms.
Majumdar said: "Fuel and power purchase cost adjustment framework for such a pass-through is yet to be implemented in Uttar Pradesh, despite a large unrecovered revenue gap - a matter of concern. Tariff hike has been limited, unrecovered revenue gap remains quite large particularly for distribution utilities in Uttar Pradesh, also with no clarity on amortization of the same by SERC."