Power Bills May Rise Annually as Centre Proposes Index-Linked Pricing in Draft Policy

The Union power ministry has proposed significant changes in electricity tariff determination that could lead to automatic annual increases in power bills for consumers across India. The draft National Electricity Policy (NEP) released on Wednesday includes provisions for index-linked tariff revisions that would operate automatically if state electricity regulatory commissions (SERCs) fail to pass tariff orders.

Automatic Annual Revisions Proposed

According to the draft policy, starting from the financial year 2026-27, state commissions must ensure that tariffs fully reflect costs without creating regulatory assets. The policy specifically states that "tariffs must be linked to a suitable index for automatic annual revision, which operates if no tariff order is passed by the state commission."

The ministry has recommended that the nature and methodology of this index be devised by the SERCs themselves. This move aims to address the irregular tariff revisions that have contributed to financial stress at distribution companies (discoms) across the country.

Monthly Cost Pass-Through Mechanism

In addition to annual revisions, the draft NEP proposes that any increase in power purchase costs by distribution companies must be automatically passed through to consumers on a monthly basis. The ministry has further recommended setting up stabilization funds by discoms to manage power purchase cost fluctuations, which could potentially result in even higher monthly bills for consumers.

The power ministry has sought responses from all stakeholders including discoms, regulators, state governments, and consumer groups on the draft policy within 30 days.

Addressing Financial Stress in Power Sector

Electricity is a concurrent subject in India, with tariffs traditionally determined by state electricity regulatory commissions. However, irregular revisions have created significant financial challenges for distribution companies. According to power ministry data, 15.04% of electricity supply turned into losses in FY25, technically called aggregate technical and commercial (ATC) losses.

The draft policy emphasizes that "recovery of cost of service is essential for the sustainability of the power sector." This comes against the backdrop of regulatory assets—expenditures accepted by regulators but not factored into current tariffs—amounting to approximately ₹3 trillion, creating additional burdens on the sector.

Current Tariff Structure and Cross-Subsidies

The current electricity tariff landscape reveals significant disparities:

Average cost of electricity supply: ₹6.82 per unit
Industrial customers pay: Approximately ₹10 per unit (national average)
Households (residential category): ₹6.47 per unit on average
Commercial consumers: ₹10.49 per unit
Public services and EV charging: ₹10.49 per unit

Tariffs vary significantly across states, discoms, and consumption slabs. Notably, Indian industry pays substantially higher tariffs than global peers, effectively cross-subsidizing agricultural and household consumers. Approximately 45% of India's power demand comes from agriculture and residential categories, necessitating this subsidy structure.

Distribution Companies: The Weak Link

Distribution companies remain the weakest link in India's electricity value chain. While there are 67 discoms in India, only 16 operate in the private sector across specific regions. The draft policy notes that "although competition has been successfully introduced in generation and transmission, the supply segment—tied to distribution—remains a monopoly, limiting consumer choice and elevating industrial tariffs."

State-owned discoms have accumulated massive debts of approximately ₹7 trillion, adversely affecting power generation companies and creating stress in the banking sector. However, they reported a cumulative profit of ₹2,700 crore in FY25 for the first time in over a decade, largely due to the gap between average cost of supply and average realizable revenue shrinking to 6 paise per unit from 48 paise in FY24.

Expert Perspectives on Index Implementation

India's former power secretary Anil Razdan noted that implementing the proposal would require SERCs to develop a formula for the index. "With the existing regulatory mechanism in place, which is essentially handling tariffs, it needs to be seen how the index-based mechanism works out," Razdan commented.

Alok Kumar, director general of the All India Discoms Association (AIDA), suggested an 'RPI-x' based formula for tariff determination, similar to systems used in the UK and Australia. RPI refers to retail price index or consumer price index, while 'x' represents efficiency gains that lower costs over time.

Consumer Impact and Regulatory Oversight

Experts agree that consumers would likely face higher bills under the proposed system, but acknowledge that the NEP could improve financial discipline among discoms. Jayant Deo, former CEO of Indian Energy Exchange, stated that "fixed charges paid by consumers, specifically household consumers, would go up significantly" under the policy.

Former chief statistician Pronab Sen emphasized the need for regulatory oversight: "While it's important to ensure that a key infrastructure sector such as power does not become weak due to financial losses, there would also be a requirement for regulatory oversight on tariffs in case an automatic index-based tariff revision is put into place."

Additional Proposals in Draft NEP

The draft National Electricity Policy includes several other significant proposals:

Peer-to-peer (P2P) energy trading to meet enhanced energy demand
Establishment of a robust cybersecurity framework
Mandatory storage of power sector data within India for data sovereignty
Target of 2,000 kWh per capita consumption by 2030 and over 4,000 kWh by 2047
Support for India's emissions reduction goals of 45% below 2005 levels by 2030 and net-zero by 2070

The policy comes amid ongoing efforts to reform the distribution sector, including the ₹3 trillion Revamped Distribution Sector Scheme, which has been extended to 2028 for smart meter installations and other reforms.

Union power minister Manohar Lal, speaking at the annual conference of All India Discoms Association, urged discoms to implement cost-reflective tariffs and requested utilities not to commit free power until state governments pay subsidies. The draft Electricity (Amendment) Bill, likely to be tabled in the upcoming budget session, also proposes progressive reduction of cross-subsidies in the power sector.