India power distribution reforms

Corporates Utilities – Non US / India

India Power Distribution Reforms Off to a Promising Start but Efficiency Gains Key to a Sustainable Improvement Special Report Discoms’ Revival Plan: India’s central government introduced a voluntary rehabilitation scheme, Ujwal Discom Assurance Yojana (UDAY), for financial and operational turnaround of distressed state distribution utilities (discoms) in November 2015. The scheme is more comprehensive than previous packages which had focused primarily on debt restructuring. The current four-pronged strategy aims to: 1) reduce the interest burden, 2) improve operational efficiency, 3) reduce power purchase cost, and 4) enforce financial discipline.

‘Carrot and Stick’ Approach: The states shall take over 75% of the debt from the discoms opting for the scheme, outstanding as of end-September 2015 until financial year 2017 (FY17, ending 31 March), and future losses (if any) in a graded fashion. The discoms will in turn reduce aggregate technical and commercial (AT&C) losses, and the gap between cost of supply and realised revenue, as per the agreed trajectory. The discoms will receive a limited working-capital facility, and will comply with renewable purchase obligations.

The states may receive additional/priority funding for improving power infrastructure under various central government schemes when they meet pre-set operational milestones. These states shall also benefit from better coal linkages and prices, higher capacity utilisation, faster completion of inter-state transmission lines, and cheaper power from central undertakings. The states will forfeit their claim on grants from the schemes in the case of missing the targets.

Wider Acceptance: Twenty Indian states and one union territory (UT) have given in-principle approval for UDAY. Out of these, 16 have already signed up for the scheme. Participation by a number of states which are not ruled by the key ruling political party at the centre – the Bharatiya Janata Party – reflects the various merits and wider acceptance of the package.

UDAY in its current state is applicable only to the state-owned discoms.

Most Key States Under Purview: The committed states and UT accounted for almost 77% of the total FY14 net cash losses reported by discoms, and around 58% of the total debt outstanding at end-September 2015. These states house about 56% of India’s total installed capacity. Uttar Pradesh, Rajasthan, Madhya Pradesh and Haryana are the major dedicated states – accounting for about 73% of FY14 net cash losses, along with 47% of total outstanding debt. Tamil Nadu, liable for 25% of FY14 net cash losses, is yet to come on board.

Related Research India Discom Reform Success is Key to Power Sector Woes (November 2015) Falling Utilisation a Key Problem in India’s Power Sector (November 2015)

Analysts Rachna Jain +65 6796 7227 rachna.jain@fitchratings.com Muralidharan R +65 6796 7236 muralidharan.r@fitchratings.com

www.fitchratings.com

Financial Restructuring Insufficient: The discoms in as many as 12 of the 16 committed states/UTs reported net cash losses in FY14. Furthermore, most of these (on FY14 numbers) would continue with cash losses even after accounting for stipulated interest savings. However, the debt-restructuring slated within the scheme will provide some immediate breathing space, transferring 75% of outstanding debt to the states and capping the interest cost on the balance.

Tariff Revision, Efficiency Imperative: Adequate tariff hikes and timely reduction of AT&C losses are essential for a sustainable structural improvement of the state discoms. To this effect, the holistic approach including infrastructure updates, consumer indexing, smart metering, demand-side management and quarterly tariff revisions would really be essential.

Credit Positive for Gencos: A meaningful improvement in discoms’ economics will benefit power generation companies (gencos) via higher utilisations and timely clearance of dues. The current low capacity utilisation of power plants is driven primarily by stressed discoms, which are unable to buy electricity because of their weak financial positions. Sound utilities will be in a better position to off-take required power for their region of operations.

1 September 2016

Corporates Discoms, the Weakest Link in India’s Power Sector India’s installed power generation capacity has increased by an impressive 10% over the last year to 305 gigawatts (GW) by end-July 2016, driven primarily by the addition of privately owned coal-fired and renewable energy-based power plants. This bodes well for the emerging economy, with per capita electricity consumption of only about 1,010 kilowatt hours (kWh) in FY15, although power generators continue to face low and declining capacity utilisation.

The reduced capacity utilisation is driven primarily by financially stressed power discoms, which are unable to purchase electricity because of their weak financial positions. This underscores the importance of successfully addressing the power distributors’ financial health. It is a combination of crippling debt, expensive power, technical and commercial losses, and lessthan-commensurate increase in tariff, which has resulted in discoms being saddled with huge accumulated losses (end-March 2015: INR3.8trn) and towering debt (end-September 2015: INR4.3trn).

Out of annual losses of about INR640bn reported by the discoms in FY14, around 88% was accounted for by only five states – Uttar Pradesh, Rajasthan, Tamil Nadu, Madhya Pradesh and Haryana. These states also house about 30% of total installed capacity in India, including allocated shares in joint and central sector utilities.

Thermal Capacity Led by Coal

Installed Capacity by Fuel Thermal

Nuclear

Hydro

Other RE

212

211

194

189

177

168

100

156

140

152

150

139

200

210

132

250

280

Gas

Coal

0

50

Source: Central Electricity Authority

Jul 16

Mar 16

Sep 15

Mar 15

Sep 14

Mar 14

Sep 13

Mar 13

Sep 12

Jul 16

Mar 16

Sep 15

Mar 15

Sep 14

Mar 14

Sep 13

Mar 13

Sep 12

Mar 12

0 Mar 12

70

Source: Central Electricity Authority

Electricity Consumption

Thermal Plant Load Factor

India - amongst the lowest in the world

...continues the downtrend

Cambodia Philippines India Indonesia Thailand Brazil World China Malaysia United Kingdom Singapore United States

(%) 90

India overall Central government-owned power plants State government-owned power plants Privately-owned power plants

80 70 60 0

5,000 10,000 (kWh/capita)

Source: The World Bank (2013)

India Power Distribution Reforms September 2016

Diesel (GW)

(GW) 350

15,000

50 FY10

FY11

FY12

FY13

FY14

FY15

FY16

Source: Ministry of Power, Coal and New & Renewable Energy; Central Electricity Authority

2

Corporates Annual Discom Losses

Discoms Realization Gap

Total loss in last 6 years: INR3.7trn

Cost of supply vs. revenue

6

Cost of supply (LHS) Revenue post subsidy (LHS) Gap (RHS) (INR/kWh) 1.0

5

0.8

(INRbn) 900 (INR/kWh)

750 600

450

4

300

3

0.6 0.4

2

150

0.2

1

0

FY10

FY11

FY12

FY13

FY14

FY15E

Source: Ministry of Power, Coal and New & Renewable Energy

0

0.0 FY10

FY11

FY12

FY13

FY14

Note: Data for utilities selling directly to customers Source: Power Finance Corporation

UDAY – A Holistic Scheme for Revival of the Discoms UDAY is a voluntary scheme which entails both financial and operational efficiency improvement of state-owned discoms in the participating states. The scheme benefits from a comprehensive approach targeting not only a reduction in interest burden, but also operational efficiency improvement, reduced cost of power purchase and financial discipline.

Under the scheme, there is a clear demarcation of responsibilities between the state discoms, the state governments and the central government – as specified in the respective tripartite contracts executed between the three parties. The general framework encompassing key requirements is elaborated below; however, the contracts are customised in accordance with the current financial and operational position of the state discoms. For instance, Jharkhand and Jammu & Kashmir are also allowed to raise debt to clear the dues of various central undertakings outstanding at end-September 2015.

The discoms will need to reduce AT&C losses and eliminate the gap between average cost of supply (ACS) and average revenue realized (ARR) to zero, in accordance with the agreed trajectory. This will be driven by a number of measures, including feeder and distribution transformer metering, consumer indexing, mapping of losses, infrastructural upgrades, smart metering, and demand-side management. The discoms would undertake quarterly revision of tariffs and also comply with the renewable purchase obligation within a specified period.

The states shall take over 75% of discoms’ debt, outstanding as of end-September 2015, by 1 FY17. The states will issue non-statutory liquidity ratio (SLR ) bonds either in the market or directly to the respective financial institutions holding discoms’ debt. The proceeds shall be transferred to the discoms as a combination of grant, equity and loan to pay the corresponding debt on their books. The debt taken over by the states in FY16-FY17 will not be included in their fiscal deficit computations, thereby not affecting other borrowings and investments by the states. However, the states are required to take over and fund future losses of the discoms in a graded manner. The banks shall lend only up to 25% of the discoms’ previous year’s revenue as a working-capital facility, and will not extend short-term debt to finance losses.

There are incentives embedded in these contracts to motivate states to commit to further lossreduction and efficiency improvements – which are imperative for this scheme to make a meaningful difference to the status quo. Participating states may receive additional/priority funding under various central government schemes in cases where they meet operational milestones. The states shall also benefit from additional coal, higher capacity utilisation, faster completion of inter-state transmission lines, and cheaper power from central undertakings.

The state governments, along with the central government in certain cases, shall review the performance of discoms on a monthly basis. We expect a considerable increase in oversight from the governments over performance of the discoms against the set benchmarks.

1

India Power Distribution Reforms September 2016

SLR is prescribed by the central bank of India (RBI) as a ratio of cash deposits that banks have to maintain in the form of cash, gold and other RBI approved securities

3

Corporates Salient Features of UDAY Generation

Transmission

Distribution

Private + government

Mostly government

Mostly government

Consumption

Over the years

Lower Tariffs + Expensive Power + AT&C Losses + Crippling Debt = Accumulated Losses (INR3.8tn), Outstanding Debt (INR4.3tn) November 2015

The Central Government’s Optional Scheme for Operational & Financial Sustainable Turnaround of State-owned Companies State Government Approves Its Participation in UDAY?

No

Business as Usual

Yes

A tripartite agreement between the Ministry of Power (Central Government), State Government and Discom

Additional/Priority Funding From Central Schemes

Yes

Monthly Review: Milestones Achieved?

No

Forfeit Claims in Central Schemes

* The debt taken over in FY16 and FY17 will not be included in the fiscal deficit of States; rest 25% of the debt shall be either converted into loans/bonds with interest rate not more than the bank’s base rate plus 0.1% or issued (fully/partly) by the Discom as State guaranteed bonds at the prevailing market rates, equal to or less than bank base rate plus 0.1%.

India Power Distribution Reforms August 2016

4

Corporates Wider Acceptance Fifteen states and one union territory have already signed final contracts under UDAY. Out of these, a number of states are not ruled by the key political party at the centre – the Bharatiya Janata Party. Maharashtra (13% of the country’s installed capacity) has also given its inprinciple approval to join the package, while Tamil Nadu (9% of the installed capacity, 25% of FY14 net cash losses) is still at bay.

UDAY in its current state is applicable only to the state-owned discoms. The central government is considering allowing private discoms to take operational benefits under the scheme at least, as the state governments cannot be burdened with debt at private discoms.

Indian States and UTs State/UT Contracts signed 1 Jharkhand 2 Chhattisgarh 3 Rajasthan 4 Uttar Pradesh 5 Gujarat 6 Bihar 7 Punjab 8 Haryana 9 Jammu & Kashmir 10 Uttarakhand 11 Goa 12 Karnataka 13 Andhra Pradesh 14 Manipur 15 Madhya Pradesh 16 Puducherry~ Approved in principle 1 Himachal Pradesh 2 Maharashtra 3 Odisha 4 Telangana 5 Tripura Yet to come on board 1 Tamil Nadu 2 West Bengal 3 Arunachal Pradesh 4 Assam 5 Kerala 6 Meghalaya 7 Mizoram 8 Nagaland 9 Andaman & Nicobar Islands~ 10 Sikkim 11 Delhi~ 12 Dadra and Nagar Haveli~ 13 Chandigarh~ 14 Daman & Diu~ 15 Lakshwadeep~

Date of contract

Ruling political party

Cash Generation losses/(profits) Capacity Debt outstanding FY14 End-September 2015 End-July 2016 % share % share % share 2.6 0.3 0.9 0.9 0.4 5.3 27.4 18.7 5.9 29.9 12.4 6.3 -1.7 n.a.

9.9 0.3 0.7 1.0 -2.1 4.8 4.2 5.1 8.0 2.8 4.1 n.a.

1.0 -0.8 n.a.

1.1 <0.1 n.a.

0.1 0.2 n.a.

5.7 0.2 3.4 5.2 0.4 n.a.

0.1 10.9 8.1 6.2 0.1 n.a.

0.1

5 Jan 16 25 Jan 16 27 Jan 16 30 Jan 16 13 Feb 16 22 Feb 16 4 Mar 16 11 Mar 16 15 Mar 16 31 Mar 16 16 Jun 16 16 Jun 16 24 Jun 16 26 Jul 16 10 Aug 16 10 Aug 16

Bharatiya Janata Party Bharatiya Janata Party Bharatiya Janata Party Samajwadi Party Bharatiya Janata Party Janata Dal (United) Shiromani Akali Dala Bharatiya Janata Party People's Democratic Partya Indian National Congress Bharatiya Janata Party Indian National Congress Telugu Desam Partya Indian National Congress Bharatiya Janata Party Indian National Congress

n.a. n.a. n.a. n.a. n.a.

Indian National Congress Bharatiya Janata Party Biju Janata Dal Telangana Rashtra Samithi Communist Party of India (Marxist)

-0.3 -0.8 0.4 n.a.

0.1

n.a. n.a. n.a. n.a. n.a.

1.5 13.2 3.1 3.8 0.2

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

All India Anna Dravida Munnetra Kazhagam All India Trinamool Congress Indian National Congress Bharatiya Janata Party Communist Party of India (Marxist) Indian National Congress Indian National Congress Nagaland People's Fronta Bharatiya Janata Party' Sikkim Democratic Fronta Aam Aadmi Party Bharatiya Janata Party' Bharatiya Janata Party' Bharatiya Janata Party' Bharatiya Janata Party'

24.7 -0.9 0.5 0.9 -1.2 <0.1 0.4 0.4 n.a.

-0.1 -1.5 n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

8.6 3.3 0.1 0.4 1.3 0.2 <0.1 <0.1 <0.1 0.1 2.6 <0.1 <0.1 <0.1 <0.1

a

Alliance with Bharatiya Janata Party; ~Union Territories; 'Union territories (ex-Delhi and Puducherry) are directly ruled by the central government Source: Ministry of Power, Coal and New & Renewable Energy, Power Finance Corporation, Central Electricity Authority, Fitch

Financial Restructuring – Only a Temporary Breathing Space To start with, the participating states will take over 75% of discoms’ debt outstanding at endSeptember 2015 by FY17. The rest of the debt will be re-priced or issued as state-guaranteed discom bonds at coupon rates about 3% less than the average existing interest rate (around 12%). This will indeed provide immediate interest cost-savings to the discoms. However, the actual annual interest savings, as disclosed in the snippets of the signed tripartite agreements, will be significantly lower than the expected 81.25% (illustrated below) for most of the states.

Amongst other reasons, this could be because of a considerable portion of debt on the

India Power Distribution Reforms September 2016

5

Corporates discomsâ&#x20AC;&#x2122; books being at concessional interest rates, or a higher proportion of debt takeover by the states via interest-bearing loans instead of grants/equities in the first two to three years.

Anticipated Interest Savings from Debt-Restructuring Illustration Discoms before UDAY Discoms after state takes over 75% of debt Interest cost after lower rates Expected interest cost savings (%)

Debt (units) 1,000 250 250

Interest (%) Interest (units) 12 120 12 30 9 23 81.25%

Source: Fitch

Likely Interest Savings Per Contract Uttar Pradesh Rajasthan Haryana

Interest expense Annual interest savings per FY14A (INRm) tripartite contract (INRm) 51,850 16,000 85,660 30,000 26,010 10,400

Annual interest savings per tripartite contract (%) 31 35 40

Source: Ministry of Power, Coal and New & Renewable Energy, Power Finance Corporation, Fitch

Moreover, most of the 12 out of the 16 committed states which reported net cash losses in FY14 will continue to do so even after accounting for the annual interest cost savings (on FY14 numbers). Hence, debt restructuring is not the only solution to turn around the financial profile of discoms on a sustained basis.

Financial Restructuring not Enough for Sustainable Improvement Efficiency enhancement, and adequate and timely tariff hikes are essential

Punjab

Pradesh

Andhra

Bihar

Chhattisgarh

Jharkhand

FY14 cash losses post annual interest savings

Haryana

Madhya Pradesh

Uttar Pradesh

Rajasthan

FY14 cash losses

(INRbn) 40 0 -40 -80 -120 -160 -200

Note: Details of contract with other utilities are either not available or not applicable Source: Power Finance Corporation, Ministry of Power, Coal and New & Renewable Energy

Adequate Tariff Revisions Imperative But Not a Cure-All UDAY requires the state discoms to initiate quarterly revision of tariffs in order to pass on legitimate costs to consumers and mitigate the burden. A rise in power tariffs is a politically sensitive subject in India, while the tariff increases cannot be considered as substitutes for efficiency improvement â&#x20AC;&#x201C; as the state regulators cannot pass on the inefficiency of the discoms to consumers. Most of the states in India have AT&C losses of more than 20%.

Notwithstanding, most of the states have indeed effected tariff increases, with an average annual increase of 8% in the last five years.

India Power Distribution Reforms September 2016

6

Corporates States with Higher Than National Average Tariff Hikes (%) State Kerala Delhi Nagaland Andhra Pradesh Tamil Nadu Chhattisgarh Tripura Haryana Meghalaya Rajasthan Jammu and Kashmir Bihar Uttar Pradesh Odisha Goa

FY12 0 22 34 8 0 0 0 4 0 9 15 19 0 20 0

FY13 30 22 12 18 37 18 17 19 13 8 19 12 18 12 12

FY14 8 5 7 23 0 0 31 13 7 9 9 7 5 2 0

FY15 24 8 0 0 15 15 0 0 15 16 0 0 11 0 8

FY16 Average hike 3 16 0 14 5 14 5 13 0 12 14 11 0 11 8 10 8 10 0 10 0 10 3 9 5 9 5 9 14 8

Source: Ministry of Power, Coal and New & Renewable Energy

Operational Efficiency, Lower AT&C Losses Indispensable The financial restructuring will provide some immediate relief, while efficiency improvement and lower AT&C losses, along with adequate tariff revisions, are important for a sustainable structural improvement of the discoms, and hence the entire Indian power sector.

Most of the states have AT&C losses of more than 20%. The participation in the revival package requires the state discoms with current AT&C losses of more than 20% to reduce this to 15%, and to 10% for the other states, over the next three to four years. Along with technical losses, AT&C losses also account for billing and collection efficiency of the discoms. The scheme proposes various measures to achieve the required efficiency levels. These include: 1) feeder and distribution transformer metering, 2) consumer indexing and mapping of losses, 3) upgrade or change of transformers, meters, 4) smart metering of all consumers billing more than 200 units per month, 5) demand-side management, 6) awareness campaigns against theft, and 7) assured increased power supply in areas where AT&C losses are reduced.

State Discoms: Aggregate Technical and Commercial Losses (FY14) (%)

80 60 40 20 0

Goa

Delhi

Maharashtra

Andhra Pradesh

Himachal Pradesh

Kerala

Gujarat

Punjab

Puducherry

India

Uttarakhand

Karnataka

Tamil Nadu

Chhattisgarh

Rajasthan

Uttar Pradesh

Madhya Pradesh

Assam

Tripura

West Bengal

Haryana

Mizoram

Meghalaya

Odisha

Nagaland

Jharkhand

Bihar

Manipur

Jammu & Kashmir

Sikkim

Arunachal Pradesh

22 %

Source: Ministry of Power, Coal and New & Renewable Energy

India Power Distribution Reforms September 2016

7

Corporates We have considered the expected financial performance of state-owned discoms in Uttar Pradesh, Rajasthan, Madhya Pradesh and Haryana, as is agreed in the contracts signed with the Ministry of Power. These four states account for 73% of FY14 net cash losses reported by the discoms in India, along with 47% of the outstanding debt at end-September 2015. The extent of challenges to achieve the targets varies considerably across the states, as is evident from the situation within these four states.

State Uttar Pradesh Rajasthan Madhya Pradesh Haryana

AT&C losses (%) Current Target 34 15 25-32 15 26 15 30 15

Required Tariff Increase (%) Turnaround Period FY14-FY16 7 7 5 8 5 <4 n.a.

7

Source: Ministry of Power, Coal and New & Renewable Energy; Fitch

Savings Estimates from Lower AT&C Losses on FY14 Numbers

Savings Estimates from Loss Reduction Additional Cash Energy procurement Energy AT&C losses Power Revenue/ (%) requirementa State sold cost Savings Losses (M kWh) (M kWh) (M kWh) (M kWh) (INR/kWh) (INRm) (INRm) FY14A FY14A Target FY14A target savings FY14A target FY14A Uttar Pradesh 57,596 25 15 76,795 67,760 9,035 4.8 43,569 160,500 Rajasthan 43,147 27 15 59,105 50,761 8,344 4.2 35,180 147,370 Madhya 36,622 28 15 50,864 43,085 7,779 3.8 29,466 58,400 Pradesh Haryana 34,564 34 15 52,370 40,664 11,706 3.8 44,806 27,620 a

Assuming same end-demand and per unit power purchase cost Source: Power Finance Corporation, Ministry of Power, Coal and New & Renewable Energy, Fitch

Uttar Pradesh Uttar Pradesh

India ex Uttar Pradesh

100%

The inferences below highlight the significance of lower AT&C losses, efficiency, adequate tariff hikes and financial restructuring in improving the position of the discoms.

Uttar Pradesh

80% 60% 40%

20% 0%

FY14 cash losses

Debt at end-Sep 15

Source: Ministry of Power, Coal and New & Renewable Energy

 75% of the discoms’ debt to be taken over by FYE17  ACS-ARR gap to be eliminated by FYE20  AT&C losses to reduce to 14.86% from 34.22% by FYE20  Transmission losses to decline to 3.95% from 5.2% by FYE20  Average tariff increase of 6.5% over FY17-FY20  State government to conduct monthly review of performance

India Power Distribution Reforms September 2016

Uttar Pradesh is likely to draw an overall benefit of INR330bn through its participation in UDAY, according to synopsis of the contract published by the Ministry of Power. The annual saving in the interest cost to the discoms – on take-over of INR399bn (75%) of the discoms’ debt and repricing of the balance – would be around INR16bn. On the other hand, the reduction in transmission and AT&C losses would bring additional operating profit of INR177bn during the period of turnaround. The support from central government along with demand side management and other measures will result in additional savings of about INR93bn to the state. Notwithstanding, an annual increase of 6.5% is also required in average tariff for eliminating the gap between cost of supply of power and tariff by FY20.

Uttar Pradesh

Uttar Pradesh

Benefits more from lower AT&C losses than interest cost savings

Need lower AT&C losses, lower interest and higher tariff

(INRm) 0 -30,000 -60,000 -90,000 -120,000 -150,000 -180,000

Interest cost

Cost of energy lost

ARR

ACS

(INR/unit) 8 6

4 FY14 cash Losses (a)

(a) post annual (a) post interest interest savings and loss savings, w/o tariff increase Source: Tripartite contract, Fitch

2 0 FY16 FY17 FY18 Source: Tripartite contract

FY19

FY20

8

Corporates Rajasthan

Rajasthan Rajasthan

India ex Rajasthan

100%

80% 60% 40%

20% 0%

FY14 cash losses

Debt at end-Sep 15

Source: Ministry of Power, Coal and New & Renewable Energy

 75% of the discoms’ debt to be taken over by FYE17  ACS-ARR gap to be eliminated by FYE19  AT&C losses to be reduced by FYE19:

Rajasthan is likely to draw an overall benefit of INR210bn through its participation in UDAY, according to synopsis of the contract published by the Ministry of Power. The annual saving in the interest cost to the discoms – on take-over of INR605bn (75%) of the discoms’ debt and repricing of the balance - would be around INR30bn. Yet the reduction in transmission and AT&C losses would bring additional operating profit of INR73bn during the period of turnaround. The support from central government along with demand-side management and other measures will result in additional savings of about INR52bn to the state. Notwithstanding, an annual increase of 4.5% is also required in the average tariff for eliminating the gap between cost of supply of power and tariff by FY19.

Rajasthan

Rajasthan

Benefits from both - lower AT&C losses and lower interest costs

Need lower interest, lower AT&C losses and higher tariff

(INRm) 0

o Jaipur: From 32% to 15%

-160,000

o Ajmer: From 26.8% to 15%  Transmission losses to decline to 3.5% from 4.2% by FYE19

ACS

10

-80,000

-120,000

Cost of energy lost

ARR (INR/unit)

-40,000

o Jodhpur: From 25% to 15%

Interest cost

8 6 4

FY14 cash losses (a)

(a) post annual (a) post interest interest savings and loss savings, w/o tariff increase Source: Tripartite contract, Fitch

2 0

FY16

FY17

FY18

FY19

Source: Tripartite contract

 Average tariff increase of 4.5% over FY16-FY19  State government to conduct monthly performance review, along with central government

Madhya Pradesh India ex Madhya Pradesh Madhya Pradesh 100% 80%

Madhya Pradesh Madhya Pradesh is likely to draw an overall benefit of INR175bn through its participation in UDAY, according to the Ministry of Power. The annual saving in the interest cost to the discoms – on take-over of INR261bn (75%) of the discoms’ debt and repricing of the balance – would be INR22bn. On the other hand, the reduction in transmission and AT&C losses would bring additional operating profit of INR85bn during the period of turnaround. The support from central government along with demand-side management and other measures will result in additional savings of INR59bn to the state. Notwithstanding, an annual increase of 4.8% is also required in tariffs for eliminating the gap between cost of supply of power and tariff by FY20.

60%

Madhya Pradesh

Madhya Pradesh

40%

Benefits more from lower AT&C losses

Need lower AT&C losses and higher tariff

(INRm)

20% 0% FY14 cash losses

Debt at end-Sep 15

Source: Ministry of Power, Coal and New & Renewable Energy

 75% of the discoms’ debt to be taken over by FYE21  ACS-ARR gap to be eliminated by FYE20  AT&C losses to reduce to 15% from 26.27% by FYE20

0 -10,000 -20,000 -30,000 -40,000 -50,000 -60,000 -70,000

Interest cost

Cost of energy lost

ARR

ACS

(INR/unit)

FY14 cash Losses (a)

(a) post annual (a) post interest interest savings and loss savings, w/o tariff increase Source: Tripartite contract, Fitch

6 5 4 3 2 1 0 FY16

FY17

FY18

FY19

FY20

Source: Tripartite contract

 To maintain transmission losses at 2.88%  Average tariff increase of 4.8% over FY16-FY20  State government to conduct monthly review of performance

India Power Distribution Reforms September 2016

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Corporates Haryana Haryana

Haryana India ex Haryana

100% 80% 60% 40% 20%

0% FY14 cash losses

Debt at end-Sep 15

Source: Ministry of Power, Coal and New & Renewable Energy

 75% of the discoms’ debt to be taken over by FYE17  ACS-ARR gap to be eliminated by FYE20  AT&C losses to come down to 15% from 29.58% by FYE19  Transmission losses to decline to 2.5% by FYE22  Constant tariff over FY17-FY19  State government to conduct monthly review of performance

India Power Distribution Reforms September 2016

Haryana is likely to draw an overall benefit of INR142bn through its participation in UDAY, according to the Ministry of Power. The annual saving in the interest cost to the discoms – on take-over of INR260bn (75%) of the discoms’ debt and repricing of the balance – would be around INR10bn. The reduction in transmission and AT&C losses, however, would bring additional operating profit of INR72bn during the period of turnaround. The support from central government along with demand-side management and other measures will result in additional savings of INR39bn to the state. With these measures, the state can eliminate the gap between cost of supply of power and tariff by FY20 even without any increase in average tariff.

Haryana

Haryana

Benefits more from lower AT&C losses

Need lower AT&C losses and lower interest costs

(INRm) 40,000 20,000

Interest cost

Power purchase cost

ARR

ACS

(INR/unit)

0

9

-20,000

6

-40,000 FY14 cash losses (a)

(a) post annual (a) post interest interest savings and loss savings, w/o tariff increase Source: Tripartite contract, Fitch

3

0 FY16

FY17

FY18

FY19

FY20

Source: Tripartite contract

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Corporates

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India Power Distribution Reforms September 2016

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