Will fixed-charge reform fix discom losses, or only repackage them?

The CEA wants a new fixed-charge framework to help discoms recover costs, but experts say tariff redesign cannot replace operational and regulatory reforms

The Central Electricity Authority (CEA) has proposed a national framework to rationalise fixed charges in electricity tariffs, arguing that discoms are increasingly unable to recover fixed costs under the current tariff structure.

 

The report says a large part of discom expenditure is fixed. Utilities must pay capacity charges to generators, transmission costs, employee expenses, network maintenance and interest obligations regardless of how much electricity consumers use. Yet, a major share of revenue still depends on per-unit electricity sales.

 

This mismatch is sharpening as rooftop solar, open access and captive power reduce grid consumption among high-paying industrial and commercial consumers.

 

According to the CEA, fixed costs account for nearly 38–56 per cent of annual revenue requirements across states, while recovery through fixed charges remains much lower in many cases.

 

The central question, however, is whether redesigning tariffs can genuinely improve discom finances or only change how losses are recovered.

Why fixed charges matter

Discoms have traditionally depended on rising electricity sales to recover costs. Higher industrial demand and growing consumption allowed utilities to spread fixed infrastructure expenses across larger sales volumes.

 

But power-sector economics are changing. Industrial consumers are increasingly buying electricity through open access markets. Rooftop solar adoption is rising, and captive generation is expanding. These trends reduce purchases from the grid, especially among premium-paying consumers who historically cross-subsidised other categories.

 

“Discoms face challenges when existing cross-subsidising consumers move part of their consumption to power markets due to the difference between retail tariffs and short-term market prices,” said Anujesh Dwivedi, partner at Deloitte India, and leader of the firm’s Power, Utilities and Renewables practice for the South Asia region.

 

“A rational fixed-charge framework will help ensure that connected consumers contribute fairly to grid and capacity costs, even if their net energy drawal falls,” he added.

 

The CEA has proposed increasing recovery through fixed charges so utilities are less dependent on power sales. Experts say this reflects a deeper shift in electricity economics rather than a routine tariff change.

 

“Tariff redesign can improve discom's cost recovery and disincentivise flight of customers under open access,” Dwivedi said. However, he cautioned that fixed charges should recover only prudent costs and should not become a mechanism to “protect or hide discom inefficiencies”.

What tariff redesign can achieve

Supporters say higher fixed-cost recovery can make discom revenue more stable, especially as demand patterns become more volatile.

 

The reform could reduce “volume risk”, or the risk that revenues fall when electricity sales decline even though underlying costs remain unchanged. It may also ease pressure on discoms to keep raising per-unit tariffs to offset lower consumption by industrial users.

 

“The new pricing mechanism can reduce revenue volatility, which may significantly reduce the cost of stranded discom assets,” said Labanya Prakash Jena, director at Climate and Sustainability Initiative (CSI), a think tank that works in the field of climate policy and finance.

 

Analysts said the proposal is primarily a cost-recovery reform, not a full financial turnaround strategy.

 

“Higher fixed charges are likely to improve the predictability and stability of discom revenues, but their impact on long-term credit profiles and financial metrics may remain limited unless accompanied by broader operational and regulatory reforms,” said Yogesh Jambhale, senior manager-research at Rubix Data Sciences.

What tariff redesign cannot fix

The reform does not directly address the structural weaknesses that have historically driven discom losses. These include aggregate technical and commercial (AT&C) losses, delayed subsidy payments, politically suppressed tariffs, poor billing and collection efficiency, regulatory assets and debt.

 

Government data show AT&C losses improved from 22.62 per cent in FY14 to 15.04 per cent in FY25. The ACS-ARR gap narrowed from ₹0.78 per unit to Rs 0.06 per unit over the same period. Distribution utilities collectively also reported a profit after tax of around ₹2,701 crore in FY25.

 

Yet financial stress persists. State-owned discom debt rose to ₹7.4 trillion in March 2024 from ₹6.6 trillion a year earlier. Subsidy dependence also remains high.

 

“Tariff redesign alone cannot resolve the deeper structural stress in the power sector,” Jena said. “The revised tariff design is primarily a new financial mechanism and does not address fundamental challenges such as commercial and technical losses, delayed state subsidy payments, and legacy high-cost power purchase contracts.”

Rating agencies expressed similar concerns.

 

“This will only smoothen cash flows ensuring steady inflows, it does not have a direct impact on financial metrics,” said Rohit Inamdar, chief rating officer at Infomerics Valuation and Rating Ltd.

 

Analysts said sustained improvement will depend on reducing AT&C losses further, ensuring timely tariff revisions, clearing regulatory assets and improving subsidy discipline.

Consumer impact

The reform could also reshape electricity bills.

 

If a larger share of recovery shifts to fixed charges, consumers may face higher minimum bills even when usage is low. That could affect low-consumption households, MSMEs and small commercial establishments.

 

“Low-consumption domestic users, small agricultural users and micro and small commercial establishments with low load factors are among the most vulnerable categories,” said Vijay Menon, chief operating officer at Navitas Solar, a company specialised in manufacturing of key solar materials.

 

Experts also warned that higher fixed charges could weaken incentives for energy conservation because consumers would save less by reducing use.

 

“This pricing mechanism can weaken incentives for energy efficiency, as consumers will have limited incentive to invest in it,” Jena said.

 

“Higher fixed charges are definitely likely to hurt low-consumption users, as they increase unavoidable monthly costs regardless of how much electricity is actually consumed,” said Sudharman Ezhil, director and chief executive officer of Natrinai Ventures, a clean energy firm specialising in developing and operating solar power projects.

 

He added that higher fixed charges could also accelerate rooftop solar adoption as consumers seek greater control over long-term energy costs.

Rooftop solar question

The rooftop solar sector is also watching the proposal closely.

 

As more consumers install solar systems while remaining connected to the grid for backup and balancing support, utilities are seeking separate network-recovery charges.

 

“Consumers are likely to buy fewer units from discoms after installation of rooftop solar units. However, they still need the grid for backup, balancing, voltage support and reliability,” Dwivedi said.

 

Menon added that Maharashtra has already introduced grid-support charges for rooftop solar users, signalling the direction future tariff structures may take.

Lessons from neighbourhood

International experience suggests tariff redesign alone may not fully repair financially stressed power systems.

 

Pakistan, for instance, introduced tariff hikes and fixed-charge adjustments as part of wider power-sector reforms. Yet the country continued to face rising circular debt and large capacity-payment burdens.

 

The lesson for India is clear: tariff redesign can improve recovery predictability, but deeper operational and governance issues can continue to weaken power-sector finances if left unresolved.

A useful reform, not a full solution

The proposed fixed-charge framework responds to a genuine structural challenge in India’s electricity sector. As demand patterns change and consumers gain more alternatives to grid power, discoms are trying to secure recovery of unavoidable network and capacity costs.

 

But analysts said the reform should not be mistaken for a complete discom turnaround strategy.

 

“Tariff redesign can improve discom cost recovery,” Dwivedi said, “but it cannot comprehensively fix structural stress in discoms.”

 

The real test will be whether states reduce losses, issue timely tariff orders, clear subsidy dues, improve collections and allow utilities to operate under more financially sustainable conditions.