Power ministry working on tariff redesign, tweaking fixed charges

The Centre is considering a national framework to rationalise fixed charges and redesign retail tariffs to improve cost recovery and reduce financial stress for discoms

 

The Union power ministry is working on developing a national framework for rationalisation of fixed charges in power tariffs and the redesign of retail tariffs to smoothen the recovery of fixed costs by the distribution utilities. 

The Central Electricity Authority (CEA) under the ministry has already held discussions on the idea with the All India Discom Association (AIDA) and the distribution utilities. The detailed recommendations are now being shared with the Forum of Regulators to seek comments. 

The basic idea to address the gap that currently exists between the fixed costs incurred by the discoms and the fixed charges recovered from consumers based on the approval of the respective state electricity regulator. 

While fixed costs, including thermal generator payments and transmission costs, account for up to 56 per cent of a discom's total annual revenue requirement (ARR), fixed charges currently contribute only 9 per cent of their total revenue. 

"This gap highlights a structural divergence between cost and tariff recovery mechanisms. This is an issue because relying on energy charges to recover fixed costs creates volume risk and stranded costs for discoms," AIDA told the ministry in its report.

Discoms pay fixed capacity charges regardless of power drawn, and recovering these costs through variable energy sales creates liquidity crises during periods of low demand, such as cool summers or economic downturns. 

Similarly, when high-paying industrial or residential consumers shift to captive power or open access, they reduce their energy consumption but remain reliant on the grid, leaving discoms with unrecovered "stranded" fixed costs for their infrastructure. 

Further, hiding fixed costs in energy charges prevents cost-to-serve pricing, causing high-consumption users to heavily subsidise the infrastructure costs of consumers, who have high contract demands but low actual usage. 

The discussions also seek to address the issue of a sharp increase in fixed charges, which can have several unintended consequences. For industrial consumers, especially those with low load factors, higher fixed charges may significantly raise total electricity bills and reduce competitiveness. 

For residential consumers, a rise in fixed charges could affect small, low-income, and rural households that use less electricity but would still face high monthly bills. 

As a solution for the problem, the discoms have proposed progressively increasing the fixed cost recovery over the next five years (by 2030) to target 25 per cent for domestic and agriculture categories, and 100 per cent for industry, commercial, and institutional categories. 

They have also suggested shifting all states to standardised two-part tariffs, charging low-tension consumers in "Rs per kilowatt per month" and high-tension categories in "Rs per kilo volt ampere per month". 

Another key suggestion is to create separate tariff categories with specific fixed, variable, and time of day (ToD) rates for net-metering consumers, recognising their unique grid interactions.