Your power bills may rise annually after Centre proposes index-linked pricing

The Union power ministry has proposed index-linked tariff revisions in its draft National Electricity Policy (NEP) released on Wednesday, to force cost-reflective pricing if state electricity regulatory commissions (SERCs) fail to act. The nature and methodology of the index will have to be devised by the SERCs under the draft policy.

Further, the NEP said that an increase in power purchase cost—by distribution companies or discoms—must be automatically passed through to consumers on a monthly basis. The ministry has recommended setting up stabilization funds by discoms to manage power purchase cost fluctuations. This would potentially imply even higher bills for consumers every month.

The ministry has sought responses from all stakeholders including discoms, regulators, state governments and consumer groups, on the draft policy, within 30 days.

To be sure, electricity is a concurrent subject, with tariffs determined by the SERCs, but irregular revisions have contributed to financial stress at distribution companies. According to data from the power ministry, 15.04% of electricity supply turned into losses—technically called aggregate technical and commercial (ATC) losses—in FY25.

Noting that recovery of cost of service is essential for the sustainability of the power sector, the ministry in its draft policy said, “From FY 2026-27, state commissions must ensure that tariffs fully reflect costs without creating regulatory assets. Tariffs must be linked to a suitable index for automatic annual revision, which operates if no tariff order is passed by the state commission."

A regulatory asset is created when the regulator accepts certain expenditures but does not factor them in while determining present tariff. These expenditures are to be adjusted in future tariff. The so-called regulatory assets now amount to around ₹3 trillion, additionally burdening the sector.

The cost-price math

Currently, average cost of electricity supply is around ₹6.82 per unit, per data from tariffs orders. Industrial customers pay around ₹10 per unit (national average tariff).

In comparison, on average, households (residential category) pay ₹6.47 per unit, commercial ( ₹10.49 per unit), and public services and electric vehicle charging ( ₹10.49 per unit). Tariffs, however, differ from state to state, discom to discom, and also range across varying slabs across states.

Further, the Indian industry pays significantly higher tariffs than its global peers, in effect cross-subsidising the agricultural and household consumers.

Significantly, about 45% of India’s power demand comes from the agriculture and residential categories, according to government data, necessitating the gap to be subsidised by industry. The country’s installed power generation capacity is 509 gigawatt (GW). Its annual power demand is growing at 4%, and is expected to double by 2032.

Speaking at the annual conference of All India Discoms Association on Wednesday, Union power minister Manohar Lal asked discoms to come up with cost-reflective tariffs and also requested the utilities not to commit free power until the state government pays subsidies to the utilities.

Notably, the draft Electricity (Amendment) Bill, which is likely to be tabled in the upcoming budget session of Parliament, has also proposed a progressive reduction of cross-subsidies in the power sector.

Distribution: The weak link

Discoms are the weakest link in the electricity value chain. While there are 67 discoms in India, 16 of these are run by the private sector in Delhi, Mumbai, Odisha, West Bengal, Gujarat, and Dadra and Nagar Haveli.

“Although competition has been successfully introduced in generation and transmission, the supply segment—tied to distribution—remains a monopoly, limiting consumer choice and elevating industrial tariffs," the draft policy noted.

Poor payment records of the state-owned discoms have sunk their balance sheets into huge debts— ₹7 trillion, according to a group of ministers on financial viability of discoms—, adversely affected power generation companies, and also contributed to stress in the banking sector.

However, they reported a cumulative profit of ₹2,700 crore in FY25 for the first time after over a decade. This was largely due to the gap shrinking between average cost of supply (ACS) and supplied (average realizable revenue, or ARR) to 6 paise per unit in FY25, compared to 48 paise per in FY24.

According to the NEP, tariff orders must be issued before the commencement of each financial year, and true-up orders—which reflect the actual revenue and cost recorded in a fiscal compared to initial estimates—for the previous financial year issued within the current financial year.

Currently, the tariffs are fixed by the SERCs based on recommendations from discoms in the form of an annual tariff petition. However, given that power tariff is a politically sensitive issue, state discoms in many cases do not revise tariffs on a regular basis.

While the Electricity Act, 2003, states that any subsidy declared for any consumer or class of consumers must be paid by the state government in advance to the distribution licensee, it has not been followed in practice by the state administrations.

What kind of index will it be?

India’s former power secretary Anil Razdan said that the implementation of the proposal would require the SERCs to come up with a formula for the index. “Tariff is now a domain of regulatory commissions. With the existing regulatory mechanism in place, which is essentially handling tariffs, it needs to be seen how the index-based mechanism works out," Razdan said.

Alok Kumar, director general of the All India Discoms Association (AIDA) suggested an ‘RPI-x’ based formula for tariff determination and, “after about five years of its implementation, its effect and benefits need to be reviewed".

RPI refers to retail price index or consumer price index (CPI) and 'x' usually refers to the efficiency in operations brought about over a period of time that lowers the cost. Such a formula is used in several countries including the UK and Australia.

Kumar further noted that although electricity is a concurrent subject, if a tariff-related law is brought into effect by the Centre, then as per the Electricity Act, SERCs need to implement the norm in the states.

Good move, but higher bills for consumers

Experts agree that consumers would have to pay more, but the NEP would also result in better financial discipline of discoms.

“The fixed charges paid by consumers, specifically the household consumers, would go up significantly," Jayant Deo, former CEO of Indian Energy Exchange (IEX), the country’s largest electricity exchange, said. “Under the policy, discoms must recover the full cost of power supply. In many states, discoms do not come forward to propose cost-reflective tariffs, either due to states’ pressure or for other reasons."

“The draft NEP 2026 is more ambitious, decentralised, and market-oriented, with a strong focus on sustainability, technology, consumer rights, and financial discipline," Sambitosh Mohapatra, partner and leader, climate and energy at PwC India said. “It addresses new challenges such as energy transition, grid flexibility, cybersecurity, and the need for large-scale investments, while building on the achievements and lessons of the past two decades."

Former chief statistician of India Pronab Sen struck a cautious note when he said: “While it's important to ensure that a key infrastructure sector such as power does not become weak and eventually collapse due to financial losses, there would also be a requirement for regulatory oversight on tariffs in case an automatic index-based tariff revision is put into place. As discoms operate as a monopoly currently in specific areas, in the case of private players there may be instances where tariffs increase significantly. This also will have to be checked so that there is not much pressure on the consumers."

Other proposals in NEP

The NEP has also pitched for peer-to-peer (P2P) energy trading to help meet enhanced energy demand to drive economic growth, while ensuring access to cost-competitive, reliable and clean electricity.

It has also proposed setting up of a robust cybersecurity framework and mandatory storage of power sector data within India to ensure data sovereignty and system resilience. This comes in the backdrop of several instances of cyber attack on the Indian power grid during Operation Sindoor.

Speaking at the All India Discoms Association's event in New Delhi, power secretary Pankaj Agarwal said that the government is working on a data sharing policy in order to streamline sharing of data among discoms and load despatch centres to better forecast the power demand in the country.

Over the years, Centre has come up with a number of initiatives for revival of discoms including the Accelerated Power Development and Reform Programme (APDRP) and Ujwal Discom Assurance Yojana (UDAY).

The NEP targets per capita consumption of 2,000 kWh (kilowatt hours) by 2030 and over 4,000 kWh by 2047. India plans to cut emissions intensity by 45% below 2005 levels by 2030, and achieve net-zero by 2070, requiring a shift to low-carbon energy.

Currently, the ₹3 trillion Revamped Distribution Sector Scheme is underway, under which states are supported for smart meter installations and other reforms. Amid a slow progress in the smart metering space, the deadline of the scheme has been extended to 2028 from the initial timeline of 2026.