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•    Government of India launched the Ujwal DISCOM Assurance Yojana (UDAY) in November 2015, to improve the financial health and operational efficiency of India’s debt-ridden power distribution companies (discoms). 
•    Discoms are responsible for buying electricity from the generation companies and selling them to consumers.

Objectives of UDAY

•    UDAY targets in reducing the average technical and commercial loss from around 22% to 15% along with eliminating the gap between revenue-side supply & cost-side supply by 2018-19.
•    Improvement of operational efficiency through compulsory smart metering, up-gradation of transformers, meters, etc. Also, the adoption of energy efficiency measures like the promotion of efficient LED bulbs, agricultural pumps, fans & air-conditioners would be initiated.
•    Reduction of the power cost, interest burden and loss of power in the Distribution sector along with improvement of the operational efficiency of DISCOMs for the supply of adequate power at affordable rates.
•    UDAY is basically a debt restructuring plan for the DISCOMs and is optional for the states.
•    Attracting the states for their active participation in the scheme by providing incentives to the performing states. 75% of the debts of their respective DISCOMs are taken over by the joining states by signing a Memorandum of Understanding in a phased manner by issuing bonds. The other 25% of the debts will be issued by DISCOMs in the form of bonds.

Challenges in UDAY 

•    High Aggregate Technical & Commercial (AT&C or distribution) losses - AT&C losses remain high, with some states indicating losses of over 40%, far from the 15% target. So far, only 7 states including, Tamil Nadu, Telangana, Kerala, Gujarat, Andhra Pradesh, Goa and Himachal Pradesh, have registered losses below 15% while the rest of the states have failed to achieve even this.
•    Increased gap - The scheme also requires DISCOMs to bring down the gap between the average cost of supply and average revenue realised to zero. Instead of reducing this gap, a number of states like Punjab, Jammu and Kashmir, Manipur and Goa have seen this gap widened in the last few years.
•    Increasing cost - The prevailing maladies in the distribution system rising share of renewable energy (RE) is increasing the average cost of supply, as it is displacing consumption of low-cost coal.
•    Less profit than loss - The interest received is lower by at least 4-6% indicating that there is a loss of income. For every ₹1 lakh crore of UDAY bonds issued involves a loss of up to ₹6,000 crore for banks and FIs that have lent money to them.
•    State burden - By also mandating that State governments have to progressively take over the losses of their SEBs, the Centre has put the onus on the States to deal with the problem. The share of discom losses that states have to bear will increase from 5% in 2016-17 to 10% this fiscal and eventually to 50% by 2019-20.
•    Debt non-payment - Around 21,000 MW of private coal-fired generation capacity is under stress due to the non-payment of debts by discoms. Discoms of states like Tamil Nadu, Madhya Pradesh, and Maharashtra have defaulted on their Power Purchase Agreements (PPA) obligations. These states are forcing the centre to consider options like giving more powers to regulators to penalise discoms.