Eco Survey flags need to end power cross-subsidy, cut material intensity

The Economic Survey 2025-26 tabled in Parliament on Thursday highlighted two large issues that must be addressed urgently for the growth of India’s energy sector, including high levels of cross-subsidy in power supply and the huge material and capital intensity associated with renewable energy projects.

 

Cross-subsidisation involves charging higher tariffs to industrial and commercial power consumers to offset lower tariffs for domestic and agricultural users. This is structured through category-wise subsidies, where the average billing rate for the former category exceeds the average cost of supply (ACoS), while the latter pays below ACoS. 

“Going forward, a balanced approach could include rationalising tariffs for subsidised categories by introducing phased rates and quotas, as well as voluntary and category-based exclusions,” the Survey said. 

 

The Electricity Act requires State Electricity Regulatory Commissions to progressively reduce cross-subsidies in tariffs to ensure that they reflect the cost of supply. However, in some states, for certain categories, ACoS coverage exceeds the ±20 per cent limit specified in the Tariff Policy.

 

The Survey said that in order to tackle this issue, the government last month introduced the Electricity (Amendment) Bill, 2025, to address deep-rooted inefficiencies, alleviate financial strain on the power sector, promote competition, and optimise network costs across the power distribution sector.

 

The Bill aims to transform the existing market structure by rationalising cross-subsidies, promoting cost-reflective tariffs, and enabling direct power procurement by industrial users. It mandates that tariffs must reflect the cost of supplying electricity and that the cross-subsidies paid by manufacturing enterprises, railways, and metro railways must be eliminated within five years.

 

Highlighting the success of power reforms, the Survey said Rs 1.85 lakh crore has been invested to boost distribution infrastructure across various states, and projects worth Rs 2.8 lakh crore have been approved to improve power supply and implement smart metering solutions under the Revamped Distribution Sector Scheme (RDSS).

 

On the renewable energy front, the Survey said the first eight months of 2025-26 recorded a historic 34.56 gigawatt capacity addition, the largest-ever annual increase in non-fossil capacity, led by solar power. However, several challenges, including high capital costs, land acquisition delays, and grid availability, need to be addressed along with the integration of battery energy storage systems (BESS) and pumped storage hydropower (PSP).

 

The Survey also said renewable energy systems such as solar and wind are highly material-intensive and require capital-intensive energy storage technologies for integrating renewable energy into the power grid. “Material and storage requirements represent the two roadblocks to greater utilisation of these energy sources,” the Survey said.

 

Highlighting the huge material and energy required for producing renewable energy equipment, the Survey said solar panels with a power capacity of 1 GW require 18.5 tonnes of silver, 3,000 tonnes of polysilicon, and 10,252 tonnes of aluminium. “To make 1 GW, 18.5 tonnes of silver, which at 250 MWh per tonne equals 4,625 MWh, is roughly the equivalent of the yearly electricity consumption of 350–400 US households,” it said, adding that the world will soon run short of copper at the current rate of rising power demand, in part due to the proliferation of AI data centres.

 

The Survey also said that while India has reduced its emissions intensity by 36 per cent since 2005 and achieved 50 per cent non-fossil power capacity, climate finance remains skewed towards mature sectors such as solar and wind, even as critical areas like adaptation, financing for MSMEs, urban infrastructure, and hard-to-abate industries remain underfunded.