India's power reforms: New policy aims to address persistent fault lines

India’s power sector, once defined by shortages, blackouts, and access deficits, now has an installed capacity exceeding 500 gigawatts and shortages have fallen to negligible levels. Universal household electrification has been achieved, renewable capacity targets have been met well ahead of schedule, and grid reliability has improved steadily. Yet, the sector continues to grapple with financial fragility, distorted pricing, and institutional inefficiency, particularly in distribution. The Draft National Electricity Policy (NEP), 2026, released by the Union Ministry of Power, is designed to confront the challenges. This follows the Draft Electricity (Amendment) Bill, released late last year. Some of the issues raised by the policy paper will hopefully be addressed by the proposed electricity amendment Bill. 

The policy rightly recognises that tariff dysfunction is at the heart of the sector’s problems. Though distribution companies reported a net profit in 2024-25 after having suffered losses for several years, the outstanding debt exceeds ₹7.1 trillion, despite repeated bailouts. Tariffs embedded in politics, delayed regulatory orders, and the persistent use of electricity pricing as a welfare instrument have led to this fallout. Notably, the draft proposes indexed, automatic tariff revisions in an attempt to impose discipline. If state regulators fail to issue tariff orders before the start of a financial year, tariffs would be adjusted automatically, using a pre-specified cost index. This can prevent the cash-flow crises, which have forced utilities into arrears and debt cycles. 

Equally significant is the effort to curb cross-subsidisation, which has made India’s industrial electricity tariffs among the highest in the world. For decades, industry and commerce have been used to subsidise agriculture and households. This has weakened manufacturing competitiveness, raised logistics costs, and encouraged large consumers to exit the public grid through captive generation. In this regard, the policy proposes a gradual reduction in cross-subsidies, a minimum tariff floor of 50 per cent of the average cost of supply and exemptions from cross-subsidy, and additional surcharges for large consumers such as manufacturing units, railways, and metro systems. It also suggests relaxing the universal service obligation for consumers above 1 megawatt who can procure power independently. The draft policy also talks about energy transition. With solar and wind now forming a large share of capacity, it is important to manage intermittency and ensure reliability. Thus, the policy calls for resource adequacy planning at national, state, and distribution utility levels, recognising that variable renewables must be backed by storage, hydro, gas, coal flexibility, and grid services. 

It proposes phasing out monopoly distribution by allowing multiple supply licensees in the same area, promoting public-private partnerships, and professionalising utility governance. However, implementation will be a challenge. The scale of investment required is immense, estimated at ₹50 trillion by 2032 and ₹200 trillion by 2047. Most state-owned discoms remain inherently inefficient, politically constrained, and financially dependent on state support. Regulatory capacity varies widely across states, and resistance to tariff changes remains strong. While the policy provides a sound economic blueprint, the political economy and electoral challenges associated with reforming the sector need to be addressed.