Reforming India’s chronic power distribution issues

Union Power Minister Manohar Lal Khattar’s recommendation to list power generation and distribution companies on stock exchanges could drive accountability and efficiency. However, this approach faces significant obstacles, rooted in India’s politically-driven tariff policies that undermine the financial viability of state-run power distribution companies (Discoms).

The consolidated debt of Discoms has ballooned to ₹6.84 lakh crore, with total losses nearing ₹6.46 lakh crore. These staggering numbers reflect rising electricity demand, costly imported coal, and inefficiencies, leading to fiscal strain across 16 states, including major ones like Uttar Pradesh, Maharashtra, and Punjab.

Over the past two decades, successive government bailouts—most recently the Revamped Distribution Sector Scheme (RDSS) in 2022—have yielded limited success. Discoms have struggled to meet operational prerequisites like infrastructure upgrades and smart metering needed for central budget allocations. Similarly, the Ujwal Discom Assurance Yojna (UDAY), which aimed to reduce debt and improve operational performance, failed to deliver sustainable results. Financial deterioration has persisted, with technical and commercial losses climbing to 17% in FY24 from 15% the previous year.

The gap between the average power supply cost and revenue (down from ₹0.45 per kWh in FY23 to ₹0.21 in FY24) underscores the need for states to implement cost-reflective tariffs. However, tariff hikes by state regulators have been modest, often influenced by political considerations.

Industrial and commercial consumers are charged higher rates to subsidize free or low-cost electricity for certain sections of society. Despite the National Tariff Policy limiting cross-subsidies to 20% of average supply cost, most states exceed this limit, increasing business costs and operational inefficiencies.

Few states meet renewable energy purchase obligations. The mismatch between market-linked electricity pricing and current policies hampers the integration of solar and wind energy into the grid, threatening India’s climate commitments.

To strengthen India’s power sector and align with its economic and environmental goals, key reforms are essential.

Electricity prices should reflect market realities to ensure financial sustainability.

Streamlined infrastructure for integrating renewables is crucial to meet climate targets.

Rationalizing subsidies and adhering to the National Tariff Policy limits can reduce inefficiencies.

Without these systemic changes, India’s power sector will struggle to support the country’s growing energy needs and broader economic ambitions.