UDAY Scheme: Moving India’s distribution companies (DISCOMs) to an innovative future?
Read on to find out how Indian utilities amassed debts more than INR 4 trillion (USD 60 billion)? How’s the ensuing tussle between the Centre & States around the financial restructuring plan? And why does it matter — to innovators, to startups or to the people?
November 2014. Me and my co-founder were in midst of a serious discussion. We had blocked a 3-hour slot in a meeting room. In one of Zurich’s startup community spaces.
A tough decision to make.
On the table in front laid a signed Letter of Intent from an Indian electricity distribution company (a.k.a. DISCOM) for a significantly large pilot project of our nascent, so-far-untried technology.
Next to it, a Supply Quotation from a hardware partner with a seriously large number of zeros in the price column.
During the last months, countless hours were spent on —
- developing hardware prototypes & writing code,
- business development with the DISCOM & regulators,
- technology discussions with this hardware supplier to bring them up to the level of ‘partners’ and finally,
- on explorations with potential financiers to field the supplier’s bill.
The catch was — we were dealing with a DISCOM which although was in the dire need of our solution and appeared to be an ideal first customer, had no capital to buy-in into the pilot project.
Even if it’s not the lion’s share, some cash contribution on their part was what our potential investors were looking for.
After having spent several weeks of our own time exhausting possible funding sources available for our DISCOM partner, sadly we could see no hope. With this, also came the realization that this was the unfortunate case of all major DISCOMs in India.
Now, we weren’t ignorant of the fact that Indian DISCOMs were severely cash-strapped and under huge debts. You could say it was a bit naïve (call it, founders’ zeal) on our part to believe strongly that we could convince the DISCOM to pull-in some cash out of the operational efficiency funds and/or soft loans from the State Govt.
After all, if they love our product (which they did), how hard could it be for them to mobilize some cash? But we were wrong.
At that point, to us — a young startup, practically bootstrapping — sadly it just seemed impossible to bring any innovation to the last leg of the electricity supply chain — to Indian distribution utilities.
The irony is that DISCOMs were in desperate need of lifelines. Frugal, cost-effective innovations such as our solution could have been one such.
After those 3 hours, we decided to pull the plug — the pilot project had to be killed. We couldn’t find a way to convince investors to bet on our technology without a tiny bit of assurance of commercial commitment from the DISCOMs. Even we — being the zealous, admittedly tad bit over-enthusiastic founders — were now ever-so-slightly hopeful of receiving a Purchase Order post the successful pilot project.
We had to shelve our innovation till it’s time would come and shifted our focus towards more interesting things from a startup’s perspective.
Here comes the scheme…
Cautious hope sparked inside me again in November 2015 as I read about the Ujjwal DISCOM Assurance Yojana a.k.a. UDAY scheme for state-owned DISCOMs in India.
If I were to summarize this much-needed scheme’s key aspects, it would go like this:
- Indian states who opt to participate in this voluntary scheme would take over the debts of their DISCOMs in a phased manner (50% of debts in FY 2016, 25% in FY 2017) by issuing state government bonds in the market or directly to the banks currently holding the DISCOMs’ debt.
- In return for freedom from financial liability and interest costs, DISCOMs are mandated to reach critical operational efficiency goals in a strict timeframe. These goals include — smart metering, setting up advanced grid loss tracking infra, energy efficiency targets, quarterly tariff revision, etc. The purpose is to push DISCOMs to reduce their Aggregate Technical & Commercial losses (ATC) to a 15% level, eventually lead them to profitability. (Current average Indian levels are in the order of 25–40% as compared to 2–5% in Western Europe).
- States and the Federal government jointly take steps to reduce cost of power purchase by — increasing domestic coal supply, rationalizing coal price, speeding up transmission & distribution infrastructure projects and assuring rightly-priced power purchase agreements.
The rationale is to enforce financial and operational discipline among the DISCOMs by aligning their finances with the finances of the States. Over time, these measures hope to bridge the gap between costs and sales revenues for the DISCOMs, leading them on to profitability (eventually).
If you would like to dig deeper into the financial impacts on the involved stakeholders, I would highly recommend you read my other article.
Why this scheme, why now?
By September 2015, DISCOMs all across India had amassed a collective debt of INR 4.3 trillion (more than USD 60 billion ) and accumulated financial losses in the order of INR 3.8 trillion (USD 57 billion).
Wondering, how could it come to this?? Aren’t there checks and balances?
For the lack of a more apt way of putting it across, I shall quote words of eminent Author and Corporate Advisor, R. Gopalakrishnan from his article which appeared on Economic Times on 19. June 2016:
“The discoms are, for the large part, companies under the Companies Act. They are supposed to be governed and to behave like any private sector company (in fact, they should behave in an exemplary manner to set an example to private sector). For many decades, state governments gave away electricity freebies to secure political patronage, discoms obediently picked up the bill on their balance sheet, and banks subserviently financed the discoms. As of March 2015, the aggregated accumulated losses of discoms are, hold your breath, Rs 3.8 lakh crore and their outstanding debt is Rs 4.3 lakh crore, approximately $65 billion! This is apart from the ‘regulatory assets’ of another Rs 75,000 crores, approximately $11 billion!”
So that’s what happened!
What’s mentioned above as ‘regulatory assets’ are in fact chunks taken out of the accumulated losses and marked in DISCOMs’ books as ‘debts owed by end-consumers to the DISCOMs’. With the state regulatory bodies’ assurance that this debt will be paid by end-consumers, the auditors having no way to confirm or disprove this assurance, and thus have certified the accounts of DISCOMs anyway.
(In my opinion, another case of nexus between the regulator and state governments — resulting in the failure to fix tariffs which reflect cost of electricity delivery).
Having the DISCOMs under such immense financial strain has meant that efforts towards 100% rural electrification, 24 x 7 power supply and transition towards clean energy have been incredibly steep uphill battles to fight.
From my perspective, I will highlight three reasons which demonstrate the clear and urgent need for such a scheme.
First, the worst-hit have been the plans (read, promise) of 24 x 7 power supply. Without this, we cannot expect India to transition into a more developed economy with a reasonably good quality of life for all its citizens.
Take a look at this graph. It shows Human Development Index (HDI), a measure of social & economic well-being of a country’s citizens plotted against the per capita annual electricity use of the country.
Experts note that no country has reached a HDI > 0.9 with its citizens consuming less than 4000 kWh of electricity per capita per year.
In 2015–16, Central Electricity Authority (CEA) of India reports India’s per capita electricity consumption at 1075 kWh. So clearly, we have a long long way to go and critical to the success of this journey is achieving 24 x 7 power for all.
Second, poor financial health of DISCOMs has done significant damage to the distributed renewable energy sector — rooftop solar PV, in particular.
Only a few DISCOMs in India have made any progress in following through regulatory directives to set up a long-term feasible incentive mechanism to promote rooftop solar PV. As a result, the progress made lags significantly behind the 40 GW of rooftop solar PV before 2020 — a much talked about (and super essential, IMO) plan that the Government of India has made.
A big reason for this failure is the lack of confidence potential buyers of solar PV units have in their DISCOM. A majority of the incentive mechanisms are based on net-metering wherein DISCOMs sign a Power Purchase Agreement (PPA) with these electricity prosumers (producers + consumers) to buy excess solar fed into the grid at a premium price. This is to ensure that investment made by end-consumers in a solar PV unit bears good returns within a reasonable span of time.
Now, a DISCOM with a visibly gloomy financial state invites nothing but doubts and risks of non-payment of dues by DISCOMs to such PV units. This has also meant that very little amount of private capital has been deployed in this sector.
The result — a growth which has fallen considerably short of promises made and regulatory steps taken.
Third, due to huge negative balances and socio-political pressure therefrom, state DISCOMs have been very undisciplined when it comes to following electricity grid standards.
Extreme outcomes of such carelessness (forced externally or otherwise) could lead to recurrence of massive blackouts such as the one that occurred in 30. and 31. July 2012. Small acts of DISCOMs putting self-interest ahead of grid safety was one of the primary causes behind the outage event which plunged 700 million residents into darkness for several hours.
To know more, you can read my article below which examines the sequence of events that led to the outage event and identifies the primary causes.
So… a year in — what’s happened, what’s to come?
During its launch, Central government announced that — it expects the scheme to realize an overall annual savings of INR 1.8 trillion (USD 27 billion, in contrast to the INR 880 billion estimated by ICRA) for the DISCOMs by lowering interest costs and other efficiency measures involved.
As of writing this article, 17 states including some of the most distressed ones, have accepted this voluntary scheme. According to the Ministry of Power’s newsletter, UDAY has already addressed 62% of the DISCOM debt existing at the end of 2014–15.
Now, these are significant achievements.
A transparency portal has been launched which shows the key financial and operational indicators of all participating states. Even a mobile app is being built to improve access to the portal.
Now, these are very good transparency and accountability measure taken, even if the intentions are, if I may say so, mildly boastful in nature.
Of course, there has been scepticism among several key states such Tamil Nadu, without whose coming aboard, the scheme cannot be labelled a success. Recently, Tamil Nadu has agreed to join the scheme before end of 2016, after several rounds of negotiations with the Centre.
Personally, my concerns about the true success of this scheme are twofold —
First, there is little incentive for the states to comply, even if initial reception appears encouraging. The incentive that’s on plate is — states participating and performing as per the scheme milestones will be given additional/priority to Centre’s debt-free grants for rural electrification, grid modernization and for clean energy growth. On the other hand, failing to meet these milestones may mean that states partially or fully forfeit these grants. Here’s the catch. Without a concrete commitment on amounts or the timeline of said grants from the central government, this scheme resembles a tightrope walk ahead for the states. For the moment, at least.
Second, a similar ambitious plan called Financial Restructuring Programme (FRP) was launched in September 2012. The key aspects included taking over of 50% of DISCOM debt by state governments to be converted into bonds (eventually equity) as well as mandatory part-privatization of all DISCOMs.
But the results were dismal. Most of the states who participated failed to meet the performance milestones set by the FRP, some experts argue, making the plan essentially equivalent to throwing good money after bad.
The key issue with FRP was that the plan was not wide-angled enough and was more like a stop-gap arrangement.
While UDAY is far more encouraging and comprehensive than the FRP, it does inherit some of the flaws. Primarily, the inability to address macro-issues which have led to this debt situation in the first place — highly skewed sub-cost tariffs, appalling personnel productivity, rickety infrastructure and non-competitive corporate culture eating away at DISCOMs’ topline.
(I do have ideas on how to address some of these issues, but that’s a topic for another article. Follow the publication to get updates.)
Having said this, there is surely reason for cautious hope. Pressure is building on the state governments from general public, businesses and industries to overhaul old practices, improve supply quality and energy access. And UDAY might just be the right gamble for the state governments to make.
If truly successful, it would be a one-of-its-kind cooperation between the Centre and States to solve a big problem that’s crippling India’s growth.
Now, why should you care?
A significant potential for innovation (read disruption) in the domain of energy delivery lies within the DISCOMs— them being the customer-facing, the last mile of the supply chain. And with it comes a vast untapped market having numerous problems that need solving.
Being in good financial health means that DISCOMs in India could some day soon, like their European and North American counterparts make strategic long-term investments in smart grid infrastructure, customer-experience and energy efficiency.
Speaking on behalf of startups, I foresee the energy retail domain in India will soon be open and ready to spend on innovative products and services. Some of it is already happening — primarily in the solar energy domain. But a more direct and more relevant collaboration between utilities (DISCOMs) and startups can be foreseen to pick up in the next couple of years.
All this makes me super excited about a (hopefully) near future when a small team of entrepreneurs would find the DISCOMs in India ready for disruption.
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(Originally published on 20.11.2016)
