Power Crisis

Context: The rising challenges in the Discoms poses risk to the state’s government finances.

Challenges to the Discoms:

• Failure of Ujwal DISCOM Assurance Yojana (UDAY): The Discoms failed to improve the operational efficiency even after 75% of their debt has been taken over by the States under the scheme.
• For E.g. financial losses of state-owned Discoms rose by about 81% in FY19.
• Rising gap between the average cost of power purchased and supplied.
• Aggregate Technical and Commercial Losses have also not been reduced to the desired extent.
• Competition from Solar Power: Increasing solar power supply will affect capacity utilization in thermal plants.
• Tariff for solar power has been falling and hit a record low of Rs 2.36 per unit in July 2020.

Implications on government finances:

• Potential threat to debt sustainability: Rising trend of off-budget borrowings for the power sector has been recorded– Reserve Bank of India study.
• Power utilities account for over 60 % of total outstanding guarantees given by the states; In UP, Tamilnadu, and Rajasthan, it is worth over 80%.
• Affects potential growth:
• The quality of state government expenditure has deteriorated as they tend to cut capital expenditure to meet fiscal targets.
• An increase in debt and interest payment will further affect their ability to make investments

Way Forward: Smooth functioning of both generation and distribution sectors is critical for sustainable economic growth.

• Address the root cause: Rather than providing liquidity support, States need to allow Discoms price power fairly and transparently.

• Balance with the environment: While higher solar power production is desirable from an environmental standpoint, it is also critical to keep thermal plants viable to meet overall power demand.