CEEW: UP’s debt-ridden discoms can save Rs 900 crore annually

• The CEEW study also highlighted that Uttar Pradesh's discoms incurred an expenditure of Rs 3,000 crore in FY 2018-19 as stranded fixed charges

• Trimming down power purchase costs, especially adherence to MOD (Merit Order Dispatch), would be crucial to addressing the revenue deficit facing discoms, said the study

New Delhi: UP (Uttar Pradesh), the state whose discoms accounted for nearly 15 percent of all outstanding dues to power generators, could have saved Rs 900 crore annually by simply prioritising the purchase of power from the most cost-efficient plants, a report released by CEEW (Council on Energy, Environment and Water) said on Wednesday. The CEEW study added that another reason denting UP's discoms revenues is stranded fixed charges. It pointed out that discoms incurred an expenditure of Rs 3,000 crore in FY 2018-19, nearly six percent of their total procurement cost, as stranded fixed charges to three recently contracted generation sources. 

"The state's discoms must better utilise stranded assets, consider buying surplus electricity from neighbouring states, and explore other such alternatives before contracting or commissioning new capacity," the study opined.

Why are UP's discoms making losses?

Public discoms across the country, in general, have been reeling under heavy financial losses and the resulting debt burden due to a host of reasons, ranging from political to cultural to operational to economic.

The CEEW study, based on an assessment of the UDAY (Ujwal Discom Assurance Yojana) scheme, found that discoms in Uttar Pradesh had lost more than 80 paise on each unit of electricity sold in recent years. The study also highlighted that the persisting gap between the average cost of supply and average revenue realised could be due to a high share of low-paying consumers, significant unmetering, and low billing and collection efficiencies.

Prateek Aggarwal, Programme Associate at CEEW, said, "Transparency in disclosing costs would be key to availing relief under the Aatma Nirbhar Bharat Abhiyan, where Rs 90,000 crore has been announced to help discoms pay generators. Uttar Pradesh's regulator must also recognise all costs and losses appropriately. Further, the financial health of discoms is also dependent on the release of undisbursed additional subsidies from the UP government."

How can discoms move towards cost-efficiency?

Power purchase costs account for 75-85 percent of the total annual expenditure of UP's discoms. Trimming down power purchase costs, especially adherence to MOD (Merit Order Dispatch), would be crucial to addressing this revenue deficit. MOD is a process via which discoms prioritise the purchase of power from the most cost-efficient plants. 

Currently, discoms often deviate from MOD due to a range of issues, including poor coal availability at some low-cost generating stations, inefficient operational scheduling, and an inherent preference to have state-owned generators dispatch on account of flexible payment terms. Uttar Pradesh's discoms highlighted a revenue deficit of Rs 4,500 crore in their recently filed annual revenue requirements for FY 20-21. 

Karthik Ganesan, Research Fellow at CEEW, said, "Consumer demand for electricity and their ability to pay timely has been hit due to the ongoing COVID-19 pandemic in the state. Hence, the need to weed out inefficiencies in the procurement process is even more necessary now. Given the tremendous challenges with augmenting revenue, the default option for the discom is cost reduction. An important step would be ensuring the reallocation of coal between the various plants that the state procures from. This would ensure that the most efficient plants are generating as much as technically possible. The state government, the Uttar Pradesh Rajya Vidyut Utpadan Nigam Limited (UPRVUNL), and UP discoms should come together to rationalise coal availability and prices."

Stranded fixed charges to rise to Rs 10,000 cr by FY23: CEEW

Since the state reorganisation (with the bifurcation of UP and creation of Uttarakhand as a separate state) in 2000, UP has increased its total installed generation capacity five-fold to 25,799 MW2 (as of September 2019) and all villages in the state have been connected to the distribution grid.

A total of 27,843 MW—comprising 11,999 MW of thermal, 1,594 MW of hydro, 1,250 MW of wind, and 13,000 MW of solar and other renewable sources—is likely to be contracted for long-term supply. Projects in the newly contracted capacity are in the planning or construction stage. At the same time, 1,325 MW of thermal capacity will be retired (UPERC, Uttar Pradesh Electricity Regulatory Commission 2019). The CEEW study warned that with expansion in capacity, stranded fixed charges are likely to climb up to Rs 10,000 crore by FY 2023.

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