The Central Electricity Authority (CEA) under the Indian government recently recommended that state power distribution utilities rejig consumer tariffs in phases to align them closer with the costs incurred.
Currently, while their books appear balanced when they annually seek tariff approvals from state regulators to levy on consumers, a significant chunk of their expenditure—the fixed costs borne, be it power purchase payments or employee salaries—is misaligned with their pricing systems.
According to the CEA, while the fixed part accounts for 38-56% of utilities’ total costs, the ‘fixed’ charges collected from consumers bring in only 9-20% of the total retail revenue required to cover expenses. The rest is to be recovered from tariffs that vary by consumption.
This discrepancy is structural, warps the tariff calculus and thus blurs the true extent of subsidy that states need to shell out when their utilities fall short of revenues. Worse, it stymies the ability of utilities to become more efficient and makes it harder for states to draw competition into this sector.
Purchasing supply from power plants is the largest bill that utilities bear, about three-fourths of the total (some of it must be paid regardless of quantity drawn and is thus a fixed cost). With user bills kept especially low for the household and agricultural segments, most states have a cross subsidy; these users are effectively subsidized by industrial and commercial consumers that pay higher charges.
The problem gets aggravated when demand drops thanks to, say, a cooler-than-usual summer, as revenues that vary by usage contract. The cross-subsidy burden on large users also pushes them towards captive sources on ‘open access’ networks, which helps them save energy costs.
A tariff framework that relieves commercial users could increase the subsidy burden on states. However, they could moderate the effect by addressing another anomaly; utilities often garner state subsidies by masking losses as supplies to unmetered farm users. Instead, they should minimize losses through better infrastructure upkeep and theft reduction.
Given how the West Asia conflict has laid siege on India’s economy, the country must pursue productivity gains in every sphere. Since competitively priced and reliable power supply could make a major difference, the urgency of utility reforms cannot be overstated.
It would also aid efforts to introduce competition in the electricity retailing business, which remains fraught with inefficiency typical of monopoly-dominated fields.
A proposed amendment in India’s legislative framework seeks to let new entrants access existing distribution networks.
If enacted, it will remove a key hurdle, while tariff reforms would catalyse investments, improve the efficiency of supply and help lower charges. But then again, the greater the number of paying consumers, the stronger the incentive for new players to deploy capital and improve distribution systems.
Tariff reforms could also be viewed from the prism of demand emerging from high-use consumers. Climate change is projected to drive heavy use of air-conditioners, for example. Data centres for the artificial intelligence juggernaut could also become high-value customers.
Given the ballooning welfare outlays of states, they will need consumers that buy electricity in large quantities and help their utilities rack up revenues.