Link power tariff hikes to inflation, suggests expert report to 16th FC

An expert report to the 16th Finance Commission suggests inflation-linked power tariff hikes could ensure timely revenue recovery for discoms and help consumers avoid sharp increases

Annual power tariff increases can be linked to inflation, instead of infrequent and large tariff hikes, which would be critical for timely revenue recovery for distribution companies at modest tariff hike levels, an expert report submitted to the 16th Finance Commission has recommended.

 

“Had such inflation-linked tariff increases been implemented during FY16–FY23, the accumulated revenue gap would have decreased by Rs 4.41 lakh crore, translating to an annual additional revenue recovery of Rs 60,000 crore, eliminating Rs 1.6 lakh crore in interest costs,” the study, prepared by Prayas Energy Group, said.

 

The increased revenue recovery would have been through an average tariff increase of just 3.9 per cent, with state-specific variations, which is only marginally higher than the actual average tariff increase observed in the same period.

   

The proposed approach includes regular and predictable tariff increases, creating more stable and certain pricing for consumers. It also said the adoption of inflation-linked tariffs can be incentivised in states with regulatory assets or cumulative revenue gaps exceeding 3 per cent of revenue, or where working capital borrowings account for more than 50 per cent of total borrowings.

 

“This measure should be complemented with adoption of renewables-reflective time-of-day pricing and regular fuel surcharge adjustments,” the report, titled Grid Lines and Bottom Lines – Analysis of the Financial Performance of Electricity Distribution Companies, said.

 

The study has also recommended a takeover of losses and liabilities of discoms by state governments through bond issuance, stating that the bonds could be structured as 20-year instruments, with the takeover phased across five tranches to manage the fiscal impact on states.

 

“Based on available data, taking over cumulative and annual losses totalling Rs 7.45 lakh crore in FY24 across 22 states would cost around Rs 70,000 crore annually for the entire 20-year bond period if done as a one-time takeover,” it said.

 

The expert report has also proposed increasing solar and wind generation to reduce or halt growth in power purchase costs, solarisation of agriculture, and reporting of timely payment of subsidies as part of conditional central sector assistance.

 

According to the report, power discoms in India are already facing disruptive shifts that will affect the structure of the electricity sector and their future business model. This includes the low contribution of cross-subsidy from commercial and industrial (C&I) consumers in discoms’ revenue, and the adoption of agricultural solarisation at a large scale, which will rapidly reduce costs and subsidies.

 

The report comes on the back of the proposed Electricity (Amendment) Bill, which has proposed the use of smart prepaid meters, promoting privatisation, and introducing competition to break state-owned monopolies.