Cheaper power for Indian factories needs a credible plan to fund subsidies

India should bring industrial electricity prices closer to the cost of serving factories. Its draft National Electricity Policy, released for comment this week, proposes to exempt manufacturing, railways and metro railways from cross-subsidies and surcharges. Lower bills could improve the competitiveness of power-intensive producers. They would also remove revenue that distribution companies use to support other tariffs. The reform will work only if that revenue is replaced by genuine savings or by a subsidy that the state pays on time. The difficult part is designing the transition so that factories receive a durable price signal and poorer consumers continue to have affordable, reliable power. Power Ministry release, 21 January · Draft National Electricity Policy 2026

A tariff cut for one class has to balance somewhere

A distribution utility buys electricity, pays for network capacity and incurs costs to deliver and bill power. Tariffs can exceed the attributed cost of service for some users and fall below it for others. The resulting cross-subsidy is funded by the users paying the higher tariff. It differs from a subsidy paid from a state budget. In India both can coexist in a single utility. The Electricity Act already provides that when a state government requires a subsidy on a tariff determined by the regulator, it must compensate the affected entity in advance as the regulator directs. The practical issue is how accurately the obligation is estimated and how reliably the money arrives. Electricity Act 2003, sections 42 and 65 · Draft National Electricity Policy 2026

Power Finance Corporation’s 13th integrated ratings report puts the FY2023–24 cash-adjusted gap between average cost of supply and average revenue realised at ₹0.39 per kilowatt-hour, down from ₹0.59 the previous year under that measure. The same report puts the national aggregate technical and commercial loss rate at about 16.1%. The two indicators answer different questions. The first asks how far average realised revenue falls short of cost after the report’s adjustments. The second combines losses associated with the delivery of energy and failures in billing or collection. The national figures conceal wide variation across utilities. A state with a large gap has less room to remove industrial contributions before it secures other funding. PFC’s 13th integrated rating of distribution utilities

Take a utility selling 2,000 million kilowatt-hours per year to eligible manufacturers, with a cross-subsidy contribution of ₹1.50 per unit above the relevant cost of service. At unchanged volumes, removing that contribution takes away ₹300 crore a year. If the utility has 10,000 million kilowatt-hours in total sales, it would need the equivalent of ₹0.30 per unit across the whole sales base to replace the shortfall. The numbers are illustrative. Faster collections, lower procurement costs, a state transfer or higher tariffs for other users could each change the result. The arithmetic shows why an exemption needs a state-specific funding plan before it appears in a tariff order.

The strongest industrial case is about marginal decisions

For a factory considering a new line, the electricity bill enters the cost of each additional unit produced. A high tariff can affect where the plant locates, whether a process is electrified and whether the firm invests in captive generation or buys power through open access. Some plants can switch suppliers or install generation, whereas smaller firms tied to a local distribution company have fewer options. A reduction that improves the economics of grid power can retain some paying demand on the network and make the static revenue loss smaller. The size of that response depends on reliability and on the price of alternatives. A lower tariff has less value to a firm that still has to keep diesel backup for frequent outages. Power Ministry release, 21 January · Electricity Act 2003, sections 42 and 65

The draft also proposes moving more recovery of fixed costs into demand charges and introducing an indexed revision if a state commission fails to issue a tariff order. Recovering network and contracted-capacity costs through a demand charge can make the energy price a better signal about the cost of using one more unit. The design has distributional consequences. Two factories that buy the same amount of energy can impose different peak capacity requirements. A small workshop with sporadic production could pay more per unit than an otherwise similar workshop with steadier use. The regulator needs an intelligible method for valuing peak demand and a way for users to reduce the charge by shifting it. Power Ministry release, 21 January · Draft National Electricity Policy 2026

This is important at the scale envisaged in the draft. The Ministry puts electricity consumption at 1,460 kilowatt-hours per person in FY2024–25 and targets 2,000 by 2030, about 37% higher. Per-person use is an economy-wide measure that includes electricity consumed by firms and other users. Meeting the target depends partly on attracting new productive demand. It also depends on having capacity when that demand arrives. A manufacturer that can run a flexible process in the afternoon can make use of abundant solar output. A continuous process needs dependable power into the evening. Tariff reform should distinguish those two loads rather than offering a discount that ignores the cost of serving them. Power Ministry release, 21 January · Draft National Electricity Policy 2026

Replacing cross-subsidy with budget subsidy is only half the reform

Explicit transfers have an accountability advantage. A legislature can see the cost of a concession and compare it with other uses of public money. A concession financed by other customers is less visible in the state budget. The strongest objection is that state finances are already strained and that payment delays can turn an explicit subsidy into a receivable carried by the utility. The utility still has to pay generators and service debt. A delay can lead to more borrowing, overdue payments or reduced spending on maintenance. Raising the visibility of a subsidy helps only if the funding arrangement also changes the reliability of cash flows. Electricity Act 2003, sections 42 and 65 · PFC’s 13th integrated rating of distribution utilities

The gains from better distribution can help pay for the transition. Better metering and collection can turn delivered power into revenue, and more careful procurement can reduce the price paid for capacity that is seldom used. Gains from loss reduction should be verified through feeder data and actual collections. They should enter the funding plan once there is evidence they are recurring. The PFC report’s variation across utilities shows why a national deadline alone would produce different results across states. Utilities with lower losses and credible subsidy receipts can move faster. Those with persistent gaps need a budget commitment and an operational improvement plan before they give up a reliable source of revenue. PFC’s 13th integrated rating of distribution utilities · Draft National Electricity Policy 2026

The best defence of the current cross-subsidy is that it reaches households through a bill they already receive and can be more dependable than a discretionary cash transfer. That is a genuine advantage where household registries are incomplete or a consumer lacks a separate meter. A transition could keep an affordable basic consumption block while ensuring that the corresponding utility payment is appropriated and reconciled. A universal low rate for all household consumption also benefits people with larger homes and appliances, so the design of the block affects who receives the subsidy. Data on bill incidence, disconnections and collection rates are needed to check whether the new arrangement protects the intended households. Electricity Act 2003, sections 42 and 65 · Draft National Electricity Policy 2026

Make the trade-off visible before tariffs change

A commission considering the exemption should publish a before-and-after tariff model by consumer class. It should show the attributed cost of service, the cross-subsidy currently collected, the expected demand response and the exact state transfer or cost reduction needed. Compare that model with cash actually received, industrial demand and the quality of service over time. If industrial load grows, discom finances improve and low-income households retain access to reliable power, the case for a faster transition strengthens. If subsidy arrears rise or fixed charges leave smaller businesses paying more despite the tariff cut, the design needs revision. A competitive industrial tariff is valuable precisely because factories can plan around it. Financing it with an uncertain payment simply transfers that uncertainty to the electricity system. Draft National Electricity Policy 2026 · PFC’s 13th integrated rating of distribution utilities