States' electricity discoms are set to miss their target of paring down aggregate technical and commercial (AT&C) losses to 15 percent by the end of the current fiscal under the government's flagship scheme Ujwal Discom Assurance Yojana (UDAY).

The government had launched the scheme in November 2015 with an objective of financial turnaround of the state power distribution corporations (discoms).

At the time of launch, the government had set a target to reduce AT&C losses to 15 percent by FY19-end. Cumulative losses for 26 states and Union Territories (UTs) have, however, reduced to 20.58 percent as of January 10, according to the UDAY website.

At the time of launch (FY16), the combined annual loss of these entities  was a staggering Rs 52,000 crore. Back then, every state electricity board in the country, except Gujarat, was incurring a loss.

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The situation has improved comparatively as six state discoms -- Rajasthan, Tripura, Gujarat, Daman & Diu, Maharashtra and Uttarakhand -- earned profits as of September 30, 2018, based on data available on the UDAY website.

However, 19 state discoms including Jammu & Kashmir (J&K), Goa, Jharkhand and Manipur are still incurring losses. J&K has the highest difference between average cost of supply (ACR) and average revenue realised (ARR) per unit of electricity.

As of now, eight states and two UTs have AT&C losses below the 15 percent target: Andhra Pradesh (10.28 percent), Gujarat (13.76 percent), Maharashtra (14.77 percent), Karnataka (14.05 percent), Himachal Pradesh (9.98 percent), Kerala (11.93 percent), Daman & Diu (10.24 percent), Andhra Pradesh (10.28 percent), Telangana (13.41 percent), Dadra & Nagar Haveli (9.85 percent).

The number of states/UTs incurring AT&C losses above 15 percent stands at 16 as of September 30, 2018, based on data available on the UDAY website. J&K has the highest AT&C loss at 53 percent, followed by Manipur and Bihar at 45 percent and 83 percent, respectively.

While these states still have two-and-a-half month to achieve this target, looking at the pace at which the discoms have reduced losses -- it reduced by just a percentage point in a year -- it does not seem quite possible.

The Power Ministry has given a virtual ultimatum that state discoms who have AT&C losses above 15 percent won't be compensated through tariffs after FY19. The move will affect states/UTs under UDAY who fail to meet the target.

UDAY had helped reduce discom losses from Rs 51,589 crore in FY16 to Rs 35,683 crore in FY17. However, the momentum in cutting losses was not sustained in FY18 and FY19.

Here are the major hurdles that lie ahead of the state discoms to meet the target: 

Power tariff hikes

A progressive increase of power tariffs was critical to bring down AT&C losses and the discoms' financial turnaround in the long-run, ICRA Senior Vice President Sabyasachi Majumdar was quoted as saying in a report.

Improved billing and collection efficiency -- by installing tamper-proof meters -- were also important steps to ensure the state electricity boards reduced their losses. However, the states have not raised electricity tariffs, which is a politically sensitive issue in India.

The Power Ministry has pointed out that Andhra Pradesh, Assam, Chhattisgarh, Maharashtra, Telangana and Uttar Pradesh have not raised electricity tariffs according to the trajectory agreed while signing into the UDAY scheme, according to a report by The Financial Express.

Read — Delhi discoms demand 20% hike in power tariff

Since these states consume over 35 percent of the country's electricity, non-compliance with tariff trajectory has impacted losses. It has also made it difficult to narrow the gap between the costs of supply and revenue realised.

The average power tariff is around 5 rupees per kilowatt-hour (kWh), according to a report by Reuters.

While some of the state discoms have increased tariffs, it is not at par with the rise in the cost of buying power by discoms. In some cases such as Delhi, the cost of buying power by discoms has reportedly increased by around 300 percent since 2002 even as the retail tariff has risen by around 90 percent.

Electricity tariffs across India are expected to rise by 62 to 93 paise per kWh during the first year of upgrades to coal-fired power plants, Power Minister RK Singh told lawmakers on January 2. The move may help the state discoms reduce their losses.

"At this juncture, electricity production tariff (pricing) structures need to be better aligned to incentivise faster ramping and flexible power generation. This is important in delivering at least cost on intermediate and peaking power needs, while also providing grid stability with the increasing share of variable renewable energy," according to a report by Institute of Energy Economics and Financial Analysis (IEEFA).

The government is also said to be working on a new version of the UDAY scheme, which would focus its target on AT&C losses by cutting down pilferage and shortcomings in billing and collection.

Meet increasing demand

Compared to the all-India average, demand for power has increased over the years at a phenomenal rate. And while supply has also increased, it caters more to the traditional power load requirements established with increasingly outdated thermal coal-fired power plants, as per the IEEFA report.

Since most of the state discoms use thermal coal-fired to generate electricity, the increase in demand has put additional pressure on these discoms. The additional power distribution at a lower cost has further widened the losses.

After the electrification of 1.4 crore new households under the Saubhagya scheme (or or Pradhan Mantri Sahaj Bijli Har Ghar Yojana ) -- aimed at providing electricity to all -- discoms of Uttar Pradesh and Madhya Pradesh have flagged rising rural supply as a key contributor towards the rises in AT&C losses since October 2017, analysts told Financial Express.

Read — PM Modi's 'Saubhagya' scheme: Whose fortunes will it brighten?

India completed the electrification all the villages under Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) through REC (earlier Rural Electrification Corporation) by the Ministry of Power in April last year.

In October 2018, peak power demand in India reached 180 GW, an increase of 9.8 percent over the peak power demand recorded in the prior corresponding period.

This was due to the rampant addition of household connections under the government's Saubhagya scheme, a pick-up in industrial production and a reduction in the average duration of power cuts.

Continued strong economic growth, an increasing number of electrical connections under the Saubhagya scheme, the roll-out of electric vehicles, and other similar initiatives will further increase the power demand into the future.

If state discoms continue to provide electricity as per the current power tariffs (pricing) structure, the losses incurred to them in future would be huge. Thus, achieving a balance between meeting rising demands and minimising the losses is a key challenge ahead of discoms.

Accumulating dues from state government departments

Accumulating dues are a result of poor implementation of the UDAY scheme. Delayed payments by large public sector buyers of electricity such as state government departments have made it difficult for discoms to comply with UDAY targets.

Since the state departments, patronised by the political dispensations, are not under any pressure to pay up, discoms' receipts swell up. Non-payment of bills 60 days after the due date is treated as default and it reflects adversely in AT&C figures.

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The interest on the working capital loans taken by the discoms to compensate for the revenue shortcoming arising out of payment dues from public sector entities is around Rs 4,000 crore annually, according to a report by Financial Express.

Along with this, the absence of a timely release of subsidies has also impacted discoms' receipts.

A number of payments are also stuck over disagreements between the buyer and the discom over the billing. Media reports suggest that there are a lot of disputes pending before courts over billing.

Unless these disputes are resolved, the payment would continue to remain stuck, forming a large part of discoms' AT&C loss. Thus, proper implementation of the scheme and improving cooperation among government departments would play a major role in reducing discoms' losses.