UDAY full form is Ujwal Discom Assurance Yojana. The Government of India launched the UDAY Scheme on November 5, 2015, to aid in the operational and financial turnaround of Power Distribution Companies (DISCOMs) owned by any state. It aims to provide a solution for revenue and cost efficiency to state DISCOMs, as well as affordable and accessible 24×7 power to all. Furthermore, the scheme is structured to tackle challenges associated with revenue-side efficiency and cost-side efficiency, with the overarching aim of enhancing the overall performance and financial well-being of DISCOMs throughout the nation.

This topic of the “UDAY Scheme” is important from the perspective of the UPSC IAS Examination which falls under General Studies Paper 3 (Mains) and General Studies Paper 1 (Preliminary) and particularly in the Economy section of the UPSC Exam. In this article, we shall discuss the ‘UDAY Scheme’ and learn about Ujwal DISCOM Assurance Yojana, Its objectives, features, benefits, challenges, way forward, and more!

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The Union Cabinet approved the Revamped Distribution Sector Scheme- A Reforms-based and Results-Linked Scheme in June 2021.

The scheme aims to improve the operational efficiency and financial stability of all DISCOMs/Power Departments except private sector DISCOMs by providing conditional financial assistance to DISCOMs for supply infrastructure strengthening.

Objectives of the Scheme:

• To close the ACS-ARR gap by 2024-25.
• To reduce AT&C losses to 12-15% across India by 2024-25.
• To build institutional capabilities for modern DISCOMs.
• To improve the quality, dependability, and affordability of power supply to consumers by establishing a financially sustainable and operationally efficient Power Distribution Sector.

What is the UDAY Scheme?

UDAY stands for Ujwal DISCOM Assurance Yojana. It is a government-backed scheme launched in 2015. It aims to improve the financial health of electricity distribution companies (DISCOMs) in India. The scheme aims to reduce AT&C (Aggregate Technical and Commercial) losses, improve operational efficiency, and attract private investment in the power sector.

Quick Glance on UDAY Scheme

Here are some key facts and figures about the UDAY Scheme for the UPSC Exam:

Objectives of the UDAY Scheme

The UDAY scheme aims to:

• Reduce AT&C losses from 22% to 15%.
• Close the gap between ACS and ARR by 2018-19.
• Improve operational efficiency by mandating smart metering and transformer and meter upgrades.
• Implement energy-saving measures, such as promoting energy-efficient LED bulbs, agricultural pumps, fans, and air conditioners.
• Reduce power costs, interest burdens, and power losses in the power distribution sector.
• Improve DISCOMs' operational efficiency to provide adequate power at affordable rates.
• Encourage states to participate in the scheme by offering incentives to the best performers.

Features of the UDAY Scheme

Here are the features of the UDAY scheme:

• To achieve a financial turnaround: States will assume 75% of the DISCOM debt as of September 30, 2015, with 50% in FY 2015-16 and the remaining 25% in FY 2016-17.
• States will issue non-SLR bonds, including SDL bonds, to acquire this debt and transfer the proceeds to DISCOMs through a combination of grants, loans, and equity.
• The maturity period for these bonds will be 10-15 years, with a moratorium period of up to 5 years.
• The interest rate on these bonds will be G-sec plus a 0.5% spread, with an additional 0.25% spread for non-SLR bonds.
• The borrowing for this purpose will not be counted when calculating the state's fiscal deficit.
• To achieve financial stability, the remaining 25% of the debt will be managed.
• It can be issued as State-backed DISCOM bonds.
• Alternatively, banks/financial institutions can re-price it at an interest rate not exceeding the bank base rate + 0.10%.
• States will also take responsibility for future DISCOM losses, following a graded trajectory:
  • 0% of losses for 2014-15 and 2015-16.
  • 5% of losses for 2016-17.
  • 10% of losses for 2017-18.
  • 25% of losses for 2018-19.
  • 50% of losses for 2019-20.
• Any remaining losses will be financed through State bonds or DISCOM bonds backed by State Government guarantees, based on the final loss trajectory agreed upon with the Ministry of Power.
• Special provisions apply to Jharkhand and Jammu and Kashmir for the takeover of outstanding CPSU dues.

Also read: Priority sector lending for UPSC here.

How does the UDAY Scheme work?

The UDAY Scheme incentivizes states by exempting state takeover of DISCOM debts from Fiscal Responsibility and Budget Management (FRBM) limits for two years:

• Increased domestic coal supply
• Rationalization of coal linkages
• Allowing for liberal coal swaps
• States will be given access to coal linkages at prices that have been announced, as well as additional or priority funding for Ministry of Power and Ministry of New & Renewable Energy programs, provided that they reach the program’s operational milestones.
• Furthermore, the Participating States and DISCOMs must enter into an MoU with the Government of India and assume 50% of the outstanding debt as of September 30, 2015, by March 31, 2016.

Benefits of the UDAY Scheme

• Reduction in power costs through the following central assistance:
  • Increasing domestic coal supply
  • Price reductions for coal
  • Supply of washed and crushed coal
  • Additional coal at predetermined prices
  • Allocation of coal linkages at predetermined prices
  • Coal linkage rationalization and the availability of coal-swapping facilities
  • Completion of interstate transmission lines more quickly
  • Power acquisition via transparent competitive bidding
• Additional priority funding is available through DDUGJY, IPDS, and other programs.

Impact of UDAY Scheme

The following are some of the impacts of the Uday Scheme:

• Financially sound DISCOMs
• A rise in the demand for power
• Improvement in PLF of generating plants
• Fall in stressed assets
• Availability of cheaper funds
• Increased capital investment
• Development of the Renewable Energy sector

Why is the UDAY Scheme needed?

In India, DISCOMs (Power Distribution Companies) have been accruing losses and incurring debt as a result of supplying electricity at far below-cost rates.

The quality of life and overall economic growth and development are hampered because these financially strapped DISCOMs cannot provide sufficient power at reasonable prices.

Source: ibef.org

Further, Power distribution inefficiencies, such as significant transmission and distribution losses on power, have put additional financial pressure on DISCOMs, which have been taking on a lot of debt from banks to keep themselves operating.

Finally, the Union Government devised a financial plan to assist these DISCOMs and reduce their transmission losses, which totaled ₹ 2.75 lakh crore (US $ – 49.60 billion) from 2011-2012 to 2014-2015.

Current status (Accomplishments) of UDAY Scheme

• According to the terms & conditions of the UDAY program, state governments were supposed to reduce AT&C losses to 15% and the ACS-ARR gap to zero by 2018-19,24 through operational improvements such as mandatory smart metering of large customers, distribution infrastructure upgrades, and energy-efficiency measures.
• Despite a slight decrease from 23.96 percent in 2015-16 to 22.03 percent in 2018-19, Turning Around the Power Distribution Sector Introduction the AT&C loss figure is now 24.54 percent.
• The ACS-ARR gap increased from 0.54/kWh in 2015-16 to 0.72/kWh in 2018-19.
• However, the Centre announced another new scheme to promote the viability of discoms in the 2021-22 Budget.
• Additionally, a redesigned, reform-based, result-linked power distribution sector program will be introduced with a 3,05,984 crore investment over five years.
• The scheme will provide assistance to discoms for infrastructure creation, such as pre-paid smart metering and feeder separation, system upgrades, and so on, in exchange for financial improvements.

Challenges and Shortcomings of the UDAY Scheme

• So far, the UDAY scheme has assisted cash-strapped Discoms in lowering their debts and total AT&C loss.
• However, it has been unable to address cross-subsidy and power-procurement costs.
• Discom reforms are also affected by geography and consumer mix.
• Rajasthan, a large geographically spread-out state with a predominantly rural population, struggles to improve discom performance.
• Hilly states, particularly in the northeast, have also faced difficulties in reforming their discoms.
• Limited state and discom capacities, as well as a tight budget and poor macroeconomic conditions, are significant barriers.
• The central schemes have only been marginally successful in reducing transmission losses in terms of transmission infrastructure deployment.
• However, the loss level has remained significantly high, owing primarily to poor billing. Arunachal Pradesh, for example, suffers from a 56% AT&C loss and a 45% billing efficiency.

Way Forward

• The history of power sector reforms shows that India is far too large and diverse for a one-size-fits-all solution.
• Importing external expertise, structural frameworks, and new technology will be necessary, but these steps will not be enough to propel India’s power sector transition.
• Privatisation of discoms has frequently been viewed as a means of improving overall sector efficiency.
• However, privatization becomes more difficult when the discom’s service area is more rural.
• In addition to these schemes, the Central Government has attempted to promote discom reform through initiatives such as the Annual Integrated Ratings of State Power Distribution Utilities.
• The Indian electricity distribution sector must now achieve operational efficiency, profitability, and readiness for emerging and future demand, as well as for technological changes, in order to support a low-carbon, climate-resilient future.

UPSC Previous Year Questions

Q1. Do you think India will meet 50 percent of its energy needs from renewable energy by 2030? Justify your answer. How will the shift of subsidies from fossil fuels to renewables help achieve the above objective? (UPSC Mains 2022, GS Paper 3).

Q2. Describe the benefits of deriving electric energy from sunlight in contrast to conventional energy generation. What are the initiatives offered by our Government for this purpose? (UPSC Mains 2020, GS Paper 3).

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