Unpacking India’s Electricity Subsidies

Key Findings

Discoms finance trends show indicators moving in the opposite direction

• Source of discom revenues: Sales revenue as a share of total expenditure has fallen 3% from FY 2016 to FY 2019, despite the fact that UDAY required discoms to increase revenue recovery. In FY 2019, 24 of 31 states and UTs had a revenue gap.
• Costs of power supply: In FY 2019, 19 of 31 states and UTs had a higher supply cost as compared to FY 2016. Higher supply cost is mainly driven by high power purchase costs, which include inefficient planning and forecasting of demand, fixed cost commitments going up while demand has not, increasing fuel costs, or increasing system costs (such as transmission).
• Billing and collection efficiency: Under UDAY, states had to reduce “aggregate technical and commercial (AT&C) losses” to 15% by FY 2019. 25 out of 31 states and UTs have not reduced losses in line with targets. Poor collection is typically the biggest contributor to these losses.

Subsidy outcomes are moving in different directions, but there are common challenges with tariff design and cross-subsidies

• Dependence on direct tariff subsidies: Only seven states have been able to reduce direct tariff subsidies as a share of expenses since FY 2016. A lack of effective targeting, coupled with no upper-limit for subsidized consumption, could be disastrous for discom finances.
• Tariff design and subsidy payments: Nationally, agricultural consumers were allotted 75% of total subsidies, followed by domestic consumers at 20% and industries at 4%. Only four states (Delhi, Haryana, Tamil Nadu, and Uttar Pradesh) have clearly specified subsidy support for a fixed number of units. In every year from FY 2016 to FY 2019, at least seven states and UTs had not transferred the full subsidy amounts to discoms by the end of the financial year.
• Cross-subsidies: Between FY 2016 and FY 2019, the revenue deficit on account of domestic and agriculture consumers has grown 48% from INR 1,17,824 crore (USD 16.1 billion) to INR 1,74,391crore (USD 23.7 billion). Whereas, the cross subsidy inflow has increased by just 11% from INR 67,785 crore (USD 9.2 billion) to INR 75,027 (USD 10.1 billion).

Transparency and data reporting could be considerably improved

• Subsidy data reporting: Only 13 states and UTs clearly report subsidy data, with only seven reporting subsidies by category basis. Further, data on 15 states and UTs show significant variation depending on the source of reporting (PFC or state documentation such as tariff orders).

Key Recommendations

Improve data reporting to help inform effective policy

Decision makers (including discoms, state regulators, the Central Electricity Regulatory Commission, and the Forum of Regulators) should work together to improve transparency and reporting by:

• Creating a uniform reporting format
• Synchronizing terminology across regulatory orders
• Mandating transparency on consumer electricity bills
• The timely release of regulatory orders and data reports
• The commissioning of independent evaluations of attempts to improve discom performance

Improve Data on Subsidy Distribution to Explore Better Subsidy Targeting

• To identify the potential for improved subsidy targeting, decision makers should map out the extent to which different groups benefit from electricity subsidies
• Subsidy targeting can allow for upward tariff revisions for higher-income consumers that do not harm the poor and vulnerable, and this, in turn, can help to enable a reduction in cross-subsidies

Coordinate DBT Implementation with Subsidy Targeting Effort

• DBT-P implementation could be structured in a way that the underlying registry of beneficiaries contains data that makes it easier to explore subsidy targeting options in collaboration with agencies that manage non-energy social protection schemes
• Before implementing DBT in the whole state, close attention needs to be paid to ongoing pilots with strong monitoring, evaluation, and learning mechanisms to ensure smooth implementation

Billing and Collection

• Discom must continue their ongoing efforts to achieve universal metering of all consumers
• Discoms need to ensure timely delivery of accurate bills. For this, discoms need to strengthen their management systems, keep a check on erroneous bills, expand their human resource base, and provide appropriate incentives to meter readers