Why discoms want higher fixed-cost recovery and what it means for industry

Discoms want higher fixed charges to recover rising power network costs, but this move could raise electricity bills and hurt manufacturing competitiveness for industries

India’s power distribution companies (discoms) are seeking major tariff reforms that could change how industries and businesses pay for electricity.

 

A recent framework by the Central Electricity Authority (CEA) proposes gradually increasing fixed-cost recovery from industrial, commercial and institutional consumers by 2030. This move aims to address rising financial pressure on discoms, which continue bearing heavy infrastructure costs even as large consumers shift towards rooftop solar, captive plants and open-access renewable power.

 

However, higher fixed charges could keep power bills high even when consumption falls, raising concerns over industrial competitiveness and manufacturing growth.

 

Why discoms want higher fixed charges

 

The CEA framework highlights a growing mismatch in India’s electricity tariff structure. According to the proposal, fixed costs now make up nearly 38-56 per cent of a discom’s annual revenue requirement, while fixed charges recover only around 9-20 per cent of revenues in many states.

   

This means much of the infrastructure cost is still recovered through per-unit electricity charges instead of fixed charges. For discoms, this creates financial stress because most of their costs remain fixed even when electricity demand declines.

 

Utilities continue paying fixed capacity charges to power generators, transmission costs, network maintenance expenses and employee salaries regardless of actual power consumption.

 

The pressure has increased as industrial and commercial consumers increasingly shift towards rooftop solar, captive power generation and open-access renewable procurement. While these consumers buy less electricity from the grid, they still depend on the network for backup supply and balancing support.

 

The CEA describes these as “stranded costs” that discoms continue to bear even when electricity sales fall.

 

As more high-paying consumers partially move away from the grid, the burden of fixed costs spreads across a smaller paying base, worsening the financial stress on utilities already dealing with losses and subsidy burdens.

 

Discoms, therefore, argue that tariffs should move closer to “cost-to-serve” principles, where consumers pay more directly for grid access rather than only for electricity consumed.

 

Anujesh Dwivedi, partner at Deloitte India, said, “Many C&I consumers procure power from short term open access while maintaining their contract demand with discoms."

 

This allows consumers to purchase cheaper power from open markets and return to discom supply during expensive peak periods. “This poses a challenge for the discoms in the form of loss of potential revenue,” he told Business Standard.

 

What it means for the industry

 

The higher fixed electricity charges could significantly raise operating costs for industries. Unlike energy charges, which vary with consumption, fixed charges are linked to contracted demand, meaning businesses may continue paying high bills even when production slows or factories run below capacity.

 

Sectors such as steel, cement, textiles, chemicals and export-oriented MSMEs are especially concerned about rising fixed operating costs. Commercial buildings, hospitals, universities, malls, IT parks and data centres could also face higher baseline electricity costs.

 

The CEA itself acknowledged that sharply higher fixed charges could hurt industrial competitiveness. Industry players warn this may conflict with India’s manufacturing and 'Make in India' goals.

 

Could industries move away from the grid?

 

Experts warn that higher fixed charges could unintentionally push more consumers away from discom supply.

 

Sabyasachi Majumdar, senior director, CareEdge Ratings, told Business Standard, “An increase in grid power costs will drive industrial and commercial users towards using more of captive power- renewable or otherwise, with or without storage, and towards more open access purchases.”

 

Eswara Rao Nandam, managing director and chief executive officer at Polymatech Electronics Ltd, added that this is more feasible for light and medium industries. "Heavy manufacturing sectors requiring uninterrupted high-load operations still depend substantially on stable grid power," he told Business Standard.

 

Over the past few years, falling renewable-energy costs, rooftop solar expansion, battery storage and group captive models have already encouraged large consumers to reduce dependence on traditional grid electricity.

 

Higher fixed charges could accelerate this shift further.

 

Sumedh Agarwal, director - Smart and Resilient Power & Mobility at Alliance for an Energy Efficient Economy (AEEE), said: “Heavy industries with flat load curves like steel, cement, and aluminium are already moving fast through the group captive route, exempt from cross-subsidy surcharge.”

 

“With Solar-Wind-BESS RTC contracts landing at ₹4.5-5.5/kWh, the migration is happening at scale. Every exit shrinks the high-tariff base, pushing discoms deeper into a death spiral,” he told Business Standard.

 

Are there alternatives?

 

Experts say discom reforms should not rely only on increasing fixed charges. Eswara Rao Nandam suggested alternatives such as time-of-day tariffs, demand-linked pricing, graded tariffs for MSMEs and improved standby-power mechanisms.

 

He also said discoms should focus on reducing transmission losses, improving billing efficiency, expanding smart metering and ensuring timely subsidy payments.

 

Sabyasachi Majumdar said utilities must work towards lowering overall supply costs through more efficient power sourcing and reduced AT&C losses.

 

Sumedh Agarwal proposed three reforms. “Decouple subsidies from tariffs through Direct Benefit Transfer, push granular time-of-use pricing and treat industries as grid assets through demand response and aggregator markets,” he said.

 

Why this matters

 

India’s power sector is changing rapidly as renewable energy, rooftop solar and captive power generation expand. Discoms want higher fixed charges to ensure stable revenues, but if tariffs rise too much, industrial electricity could become less competitive.

 

The real challenge is to design a tariff structure that keeps both discoms and industry financially viable in a rapidly changing energy economy.