State-owned distribution utilities (discoms) are likely to benefit from measures taken under Ujwal Discom Assurance Yojana (UDAY) scheme in the near to medium term. However, strict focus on efficiency improvements and timeliness and adequacy of tariff finalisation would be critical for sustained financial turnaround of discoms.
Says Mr. Sabyasachi Majumdar, Senior Vice President, ICRA “Discoms are going to 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 cost of power procurement arising out of improved domestic coal availability along with recent policy measures by the Government of India (GoI) such as flexible utilisation of domestic coal linkage and e-auction process for short term power. However, serious focus of utilities on improving their efficiency levels (mainly aggregate technical & commercial loss levels) in line with stipulated targets as well as timeliness and adequacy of tariff hike in relation to the cost of power supply (including periodic pass-through of fuel & power purchase cost) remains critical in the long run for sustained improvement in the financial position of the discoms”
16 states/UTs have signed MOUs as of now for participating in UDAY. The de-leveraging and refinancing for state owned discoms under UDAY scheme is expected to improve their liquidity and profitability profile in the near term. Further, improved domestic coal availability along with recent policy measures by the GoI such as flexible utilisation of domestic coal linkage and e-auction process for short term power remain favourable for discoms in terms of likely reduction in 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. Also, the tariff hikes given in most states have been modest at 0.6% – 8.8%, with SERCs in three states not approving any tariff hike, while SERCs in two states approving a reduction in tariff for some categories of consumers.
While the states of Uttar Pradesh and Punjab have issued tariff orders recently, the tariff determination process has witnessed some delays. Further, the actual tariff revisions allowed for FY2017 by SERCs in both the states were lower i.e. at 3.18% (for Uttar Pradesh) and (-)0.98% (for Punjab) for the year, as against the stipulated level (5%-6%) under MoUs signed for implementation of UDAY. The respective SERCs in Uttar Pradesh and Punjab cited the avoidance of a tariff shock to the consumers as the 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. “The fuel and power purchase cost adjustment (FPPCA) framework for such a pass-through is yet to be implemented in Uttar Pradesh, despite the high unrecovered revenue gap, which is an area of concern. While 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,” says Mr. Majumdar.
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