Two reforms that rewired the India's electricity distribution sector

Fuel passthrough and RDSS upgrades drive efficiency, collections, and profitability

The near-magical turnaround in India’s electricity distribution sector — the power industry’s main revenue pillar — is almost entirely attributable to one government action taken three years ago: the automatic passthrough of fuel costs for distribution companies (discoms).

 

Implemented in December 2022, this single move addressed the long-standing issue of non-cost-reflective tariffs and helped discoms return to profitability in 2024-25 (FY25) after more than a decade.

 

Power procurement costs — with fuel as the largest component — account for 70–80 per cent of the total average cost of supply (ACS) and have long been the biggest obstacle in narrowing the gap between ACS and average revenue realised (ARR). That changed in December 2022, when the power ministry amended Rule 14 of the Electricity Rules, 2005, mandating adjustments to fuel and power purchase costs. The rule allows automatic monthly passthrough of fuel and power purchase adjustment surcharges to consumers, depoliticising tariff revisions.

 

Since then, the number of states implementing automatic fuel-cost passthrough has risen sharply. By the end of FY25, 30 of 36 states and Union Territories had adopted the change, issuing regulations aligned with Rule 14. This was up from 24 states a year earlier. Power costs accounted for 75 per cent — or ₹5.38 per unit — of the ACS of ₹7.1 per unit for all rated power discoms in FY25.

 

While Rule 14 addressed costs, a parallel change tackled the revenue side: smart meters to improve billing accuracy. Smart meter installations increased from 4,000 per day in 2022-23 (FY23) to 14,000 per day in 2023-24 and surged to 115,000 per day by May 2025, taking the total to 31.4 million.

 

In FY25, 21 utilities crossed the power ministry’s billing efficiency threshold of 92 per cent, while 17 reported collection efficiency of 100 per cent. This included major discoms with traditionally high commercial and line losses in Andhra Pradesh, Jharkhand, Madhya Pradesh, Rajasthan, Karnataka, and Kerala.

 

With cost and revenue issues largely addressed since 2022, the ACS-ARR gap narrowed dramatically. It had fallen only marginally from 78 paise per unit in 2013-14 to 65 paise per unit in 2020-21. By FY25, it dropped to just 6 paise per unit, according to the latest discom rankings by the power ministry, measured on a tariff subsidy received basis and excluding regulatory income and Ujwal Discom Assurance Yojana grants.

 

“Apart from resolving the fuel cost passthrough issue and accelerating smart metering, two other factors improved discom health: the implementation of the Revamped Distribution Sector Scheme (RDSS) launched in 2021 and allowing states to raise additional financial resources to 0.5 per cent of their Gross State Domestic Product, linked to mandatory reforms,” said Alok Kumar, power secretary from February 2021 to June 2023.

 

The RDSS is a reform-based, results-linked scheme with an outlay of ₹3.03 trillion over five years ending in March this year. It aims to build a financially sustainable and operationally efficient distribution sector. The scheme provides financial assistance for infrastructure upgrades, subject to pre-qualifying criteria and achievement of minimum benchmarks. RDSS targets national aggregate technical and commercial (AT&C) losses of 12–15 per cent and an ACS-ARR gap of zero by FY25.

 

Reflecting this progress, AT&C losses fell from 22.6 per cent in 2013-14 to 15.04 per cent in FY25. In the latest discom rankings, 38 utilities — including 33 discoms and five power departments — recorded AT&C losses below 15 per cent in FY25. This included discoms in Andhra Pradesh, Karnataka, Kerala, Tamil Nadu, and private utilities in Delhi, Gujarat, Maharashtra, and Uttar Pradesh.

 

The RDSS has played a major role in improving operational and financial performance, said Lokesh Chandra, managing director, Maharashtra State Electricity Distribution Company (MSEDCL). “AT&C losses have fallen due to RDSS implementation. The scheme has made payment of government dues and subsidies mandatory. As a result, many discoms are now receiving accumulated dues from government consumers,” he told Business Standard.

 

“At the same time, automatic passthrough of fuel adjustment charges allows recovery of higher power procurement costs monthly, rather than waiting for tariff truing-up after two and a half years. So the ACS-ARR gap has narrowed. Discoms have also begun paying their dues to generating companies on time, thanks to the Late Payment Surcharge (LPS) Rules. For MSEDCL, we reported a ₹508 crore profit in FY25, compared with a ₹5,000 crore loss the previous year.”

 

Launched in 2022, the LPS Rules aim to strengthen discom finances by encouraging timely payments to generators. They introduced a system for paying current dues and liquidating past dues, reducing payable days from 131 in FY23 to 113 in FY25, according to the latest power ministry rankings.

 

However, despite improvements, discoms ended FY25 with accumulated losses of ₹6.47 trillion — a 6.3 per cent decline from ₹6.91 trillion the previous year. Total borrowings also fell 4.2 per cent to ₹7.26 trillion.