Week Nov 09 - Nov 13, 2015

UDAY planned to usher sunrise for beleaguered discoms

Cash losses of state electricity boards (SEBs) have grown multi-hold in the last few years due to higher aggregate & technical (AT&C) losses - (~32%), irregular tariff revision due to political intervention and lower subsidy released by state governments over the years. The distribution companies (discoms) continued to be state controlled even after the 2003 unbundling in the sector primarily due to political will as most political parties across the country used power tariff to chase electoral success (freebies like free power to agriculture, tariff realisation below cost and corruptions). This impacted the financial health of discoms resulting in huge accumulated losses of ~ Rs 3,80,000 crore, increased debt burden of ~Rs 4,80,000 crore to finance the same and lower power offtake due to poor purchasing power.

As per the Annual Report for FY14 on the working of state power utilities and electricity departments, the Planning Commission said the gap between average costs of power supply per unit and average tariff per unit narrowed from ~27% to ~22% over the past few years. However, discoms regularly faced an inverse price elasticity situation on the supply and demand sides, with cost of buying always outstripping the cost of supplying power.

Average cost of power has always outstripped average selling price

Source: PFC, ICICI Securities

Gap in tariff realisation with & without subsidy

Source: PFC, ICICI Securities

Trend in AT&C losses over the years

Source: PFC, ICICI Securities

Accordingly, the inefficiency in the discoms space has resulted in accumulated losses of over Rs 3.8 lakh crore with an average annual losses hovering at around ~Rs 60,000 crore

 Trend in discom losses over the year

Source: PFC, ICICI Securities


Of this huge accumulated loss, just eight states having 19 discoms account for 75% of the total loss. These include Rajasthan, Andhra Pradesh, Telangana, Uttar Pradesh, Tamil Nadu, Haryana, Jharkhand and Bihar. Consequently, these states have piled up huge debts on their balance sheet accounting for 60% of the total discom loan of Rs 4.3 lakh crore.

Loans by top eight loss making state discoms


Source: PFC, ICICI Securities

Government’s past initiatives to bail out discom woes fail due to lack of proper execution

The Centre has intervened on several occasions in the past to clear discom losses through many schemes like Accelerated Power Development Programme (APDP) in FY00-01 and later Accelerated Power Development Reform Programme (APDRP) in 2002 with the intention to bring down AT&C losses and improve the financial condition of discoms. However, with no central grant attached to the scheme, it failed to take off post the unbundling of the sector, which began in 2003. The scheme was later refurbished by UPA II in 2008 as Restructured –APDRP with a fixed central grants in key areas of investments like reducing distribution losses, energy account and energy efficiency. However, the scheme failed as discoms continue to underperform due to political intervention and failure to bring down losses. Consequently, discoms’ borrowing increased significantly over the years to fund these mounting losses, which later impacted its ability to repay interest as the operational efficiency across SEBs failed to improve.

Discoms debt/equity ratio


Source: PFC, ICICI Securities

The second attempt to bail out discoms was made in 2012 by the UPA II government by launching a Financial Restructuring Plan (FRP) to clear mounting loss of ~ Rs 1.9 lakh crore of eight discoms. One of the key terms of the FRP was to divide the short term liabilities (STL) of discoms into two halves - 50% of which was to be assumed by the state government in a progressive manner, starting with discoms issuing state government back bonds, which would later be replaced with state government issued debt securities. The other 50% of STL would be serviced by the discoms, with a moratorium on principal repayment for three years backed by state government guarantees. However, only Haryana, Rajasthan, Tamil Nadu and Uttar Pradesh joined the programme while others failed to avail the same because of accounting issues, non transparency in books and delay in unbundling progress in few states, which was a key criteria to be eligible to avail the scheme.

UDAY set to lead to sunrise for beleaguered discoms

The Union Cabinet has approved a third round of power reform - Ujjwal Discom Assurance Yojana (UDAY) to bring about a turnaround in the financials of the state discoms, which would eventually revive the poor state of the power sector in the long term. As per the scheme, the state government would take over 75% of the discom’s debt (~Rs 4.3 lakh crore) while the balance 25% would be restructured with banks where the interest rate on these debt would be reduced by 3-4%. The salient features of UDAY include:

Major initiative of plan focuses on:

Improving operational efficiencies of discoms’ – This would be achieved by lowering the aggregate technical & commercial losses (AT&C) to 15% from current level of 30% over the next three to four years. This would be done by undertaking various measures like compulsory smart metering, upgradation of transformers, meters, usage of LED bulbs. The said measure would eliminate the gap between average revenue realised (ARR) & average cost of supply (ACS) by 2018-19. On achieving the targeted milestone, the Centre will provide further assistance by increase in funding under existing schemes Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Integrated Power Development Scheme (IPDS), Power Sector Development Fund (PSDF)

Reduction of cost of power – To be achieved through measures such as increased supply of cheaper domestic coal, coal linkage rationalisation, liberal coal swaps from inefficient to efficient plants, coal price rationalisation based on gross calorific value (GCV), supply of washed and crushed coal and faster completion of transmission lines. The said measure is likely to bring in savings of Rs 20,000 crore annually for the sector.

Reduction in interest cost of discoms’ – The discoms’ total outstanding loans was at Rs 598691 crore (state government loan - Rs 52769 crore & banks - Rs 545922 crore) as on FY14. As per the above mentioned initiative, 75% of the discom’s debt will be transferred to the books of state government while the balance 25% debt will be restructured by banks. This would lower the interest rate burden to ~9.5% – 10.0% on outstanding loans compared to the current rate of 12-13%. The debt reduction plan is likely to lower interest cost burden to the tune of Rs 12000-14000 crore for state discoms. Reduction in debt cost will improve the cash flow of Discoms, which, in turn, would strengthen its purchasing power capacity.

Enforcing financial discipline on discoms through alignment with state finances – Through this scheme, the Centre has made states directly accountable for improvement in operational efficiency and discoms’ losses in future. The UDAY scheme also clearly mentions banks shall not be funding future losses of the discoms, thus throwing the ball in the state’s court for any discrepancies it undertakes against the scheme. Also, the future losses of discoms shall be taken over by states in a gradual manner, with states funding up to 50% of losses in FY21 from 5% in FY17. While the debt will not be reflected on the state’s book for the next two years, the same will be reflected from FY18. Thus, inefficiencies in managing the same will be borne by the state.

UDAY – Strong intent but execution remains key

We believe the above-mentioned scheme will be successful only if implemented in a desired manner. The UDAY scheme will definitely address the near term cash flow issue of the discoms, by lowering its debt burden and, hence, increasing their purchasing power. Also, with RBI’s clear direction to banks to restrict fresh funding to discom losses, we believe the state government will be made more accountable and responsible for improving discoms efficiency. Of late, the discoms have taken serious initiatives to improve their efficiency like regular tariff hike, installation of smart meters, better collections, etc. As per the Power Ministry, the Haryana Discom is likely to breakeven by FY17E post adoption UDAY scheme while other major states have been given a target to break even by FY19E. To reiterate our point, Tamil Nadu Generation and Distribution Company (TANGEDCO), for example, has lined up a slew of reforms like repair of transformers, installing mini-transformers (every 200 connections would have a transformer as against one for about 1,000-1,500 at present), providing SIM cards in metres to monitor consumption, etc. in its bid to improve distribution of power and augment revenue. This would lead to increased power offtake by discoms and, thus, better PLF for generating companies.

Disclaimer: We expressly clarify that this communication is neither a solicitation nor an invitation of any sort whatsoever from ICICI Securities Ltd. or any of its subsidiaries to create a client relationship. This communication is not intended to be a source of advertising or any specific advice; the recipient should always seek the advice of competent counsel licensed to practice in the recipient's country/state. In case this mail doesn't concern you, please Unsubscribe from mailing list.