Electricity overcharging: Cross-subsidies cost businesses Rs 75k crore in FY19

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December 22, 2020 8:00 AM

Policy thresholds passed over; industries resort to open access & captive power to cut costs

According to a report on Indian electricity subsidies by Canada-based think tank International Institute for Sustainable Development (IISD), levying higher charges on industries is gradually proving to be detrimental to the discoms.According to a report on Indian electricity subsidies by Canada-based think tank International Institute for Sustainable Development (IISD), levying higher charges on industries is gradually proving to be detrimental to the discoms.

Since the National Tariff Policy 2016 prescribed the tolerable extents of cross-subsidy among various segments of electricity consumers, the market-distorting system that jacks up the costs of industries and businesses, hasn’t seen even a smidgen of correction. In fact, in absolute term, the cross subsidies have marginally increased in the four years to FY19 (see chart).

Among them, industrial and commercial consumers have borne a cross-subsidy burden of Rs 75,027 crore in FY19 against Rs 67,785 crore in FY16. Of course, a larger part of the subsidies – largely cornered by the domestic and agriculture consumers – is borne by state governments and these were to the tune of Rs 1.1 lakh crore in FY19, `against Rs 75,608 crore in FY16.

For discoms, the subsidies are ‘receivables’, but delays in the release of the subsidy by the governments often cause their losses to rise.

While Uttar Pradesh, Tamil Nadu, Karnataka and Delhi have the highest industrial power tariffs, ranging between Rs 8-10/unit (kWh), even higher rates of Rs 9-12/unit are charged on commercial consumers in Maharashtra, Kerala, Telangana and West Bengal.

The National Tariff Policy 2016 puts limits on cross subsidies at 20% of the average cost of power supply. While the cost of power supply at the national level is around `6 per unit, average tariffs for commercial and industrial users are higher by 52% and 23%, respectively. On their part, domestic and agricultural consumers pay bills at rates 27% and 87%, respectively, lower than supply costs.

According to a report on Indian electricity subsidies by Canada-based think tank International Institute for Sustainable Development (IISD), levying higher charges on industries is gradually proving to be detrimental to the discoms. Wary of higher tariffs, industrial and commercial consumers are increasingly resorting to buying power competitively through the ‘open access’ route and are even building their own captive generation capacities for cheaper electricity.

A fifth of industrial consumers in Maharashtra, Rajasthan and Gujarat have migrated to the open access route, while substantial investments in captive power plants — equivalent to 20–30% of total power sales — have been recorded in Odisha, Chhattisgarh, and Jharkhand, the study finds.

The IISD report also notes that agricultural consumers were allotted 75% of the subsidies, followed by domestic consumers at 20%. A few states such as Punjab, Arunachal Pradesh and Goa offer subsidies to industries as well, to the extent of 4% of their total subsidies.

In FY19, Chhattisgarh and Andhra Pradesh released only 60% and 21%, respectively, of the subsidy amounts booked by their discoms. Less than 90% of the booked amount was disbursed by the state governments across the country in FY19. In fact, delayed subsidy disbursal by the state governments is a key reason – apart from inefficient billing and inadequate tariff hikes – behind discoms’ financial losses surging 83% to Rs 61,360 crore in FY19.

The quantum of tariff levied on consumer categories depend on the demography of the states. For instance, though the industrial tariff of Rs 6.97/unit in Gujarat is significantly lower than that in other states, the state discom sells 57% of its electricity to this consumer category, and earns 79% of its revenues from them. On the other hand, more than 50% supplies in states like Andhra Pradesh, Karnataka, Kerala, Madhya Pradesh, Rajasthan, Tamil Nadu and Telangana go to domestic and agricultural consumers, while only up to 35% of the revenues of these states’ discoms come from these subsidised categories.

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