Electric message kerala’s tariff hike is a symptom of the power sector’s main problem states must subsidies consumers directly

Electric message kerala’s tariff hike is a symptom of the power sector’s main problem states must subsidies consumers directly

Kerala’s electricity regulator on Saturday raised the average tariff across consumer categories by 6.6%, the first hike in almost three years. The increase was modest as the state government’s electricity distribution company (discom) sought an average increase of 18%. The dissonance between the regulator and discom on the right tariff level is a symptom of the perennial crisis India’s power sector finds itself in. Tariffs are not periodically revised, making it hard to bridge the deficit between cost of supply and electricity revenue. An outcome is that total discom losses are huge – it was Rs 5 lakh crore in 2019-20.

The root cause of the power sector problems, however, is the approach of state governments and not the performance of regulators. The Electricity Act allows states to subsidise customers on the condition that they pay the subsidy amount to their discoms in advance. That seldom happens. Consequently, discoms delay payment to power generation companies. Aggregate discom overdue was just over Rs 1 lakh crore at the beginning of June. The delayed payment has a domino effect and there are cash flow problems all through the chain in the power sector.

GoI has tried to address this problem for two decades, but with negligible success. Two critical benchmarks are never met. For example, the Uday scheme aimed to eliminate the deficit between electricity cost and revenue by 2018-19 and simultaneously lower the aggregate transmission and commercial losses to 15%. In 2019-20, there was a deficit of Rs 0.6 per KHw between electricity cost and revenue, and AT&C loss was 20.9%. GoI’s efforts revolve around financial engineering and the incentives are not strong enough to nudge states to make durable changes.

Currently, GoI is in the midst of another effort, a revamped distribution sector scheme, to solve the problem. The efficacy of the scheme will be enhanced through two measures. Regulators need to act on an existing law to notify a road map to adjust tariffs in a way that brings them within 20% of the average cost of supply. Separately, the learnings of the pilot projects of DBT for electricity subsidy carried out in states such as Kerala and Himachal Pradesh need to be debated. A transition to DBT is the only durable solution as public pressure on state governments will lower incidence of payment delays.