India’s electricity tariff structure may be headed for a redesign, with a new report flagging a structural mismatch between the fixed costs incurred by power distribution companies and the revenue they recover through fixed charges.
The report, prepared by the Central Electricity Authority, has called for a national framework to rationalise electricity fixed charges and redesign tariffs so that DISCOMs can recover fixed costs more transparently, without creating sharp distortions across consumer categories.
The issue was referred by the Ministry of Power after the All India DISCOMs Association sought a national framework for rationalisation of fixed charges and redesign of retail tariffs, particularly in the context of fixed cost recovery by distribution utilities.
According to the report, fixed costs account for 38 per cent to 56 per cent of the Annual Revenue Requirement of DISCOMs across the states studied. However, fixed charges currently contribute only a limited share of total retail revenue in several states.
The report said the existing model, where a large part of fixed cost recovery is embedded in energy charges, creates structural issues for DISCOMs. These include volume risk, stranded costs and tariff distortions.
Under the present structure, DISCOMs must pay fixed capacity charges to generators even when power demand falls or when consumers shift part of their consumption to rooftop solar, open access or captive power.
The report noted that when high-paying industrial or residential consumers reduce their drawal from the grid but remain connected for reliability and standby supply, DISCOMs are left with unrecovered fixed infrastructure costs.
It said these costs are then either passed on to other consumers through higher tariffs in the next cycle or reflected in accumulated losses, affecting the financial viability of distribution companies.
The report also warned that increasing fixed charges abruptly may have uneven effects across consumers and states.
For residential and other small consumers, especially those with low load factors, a rise in fixed charges could raise monthly bills even when consumption remains low.
For industrial consumers, the report said a sharp rise in fixed charges can significantly increase total electricity bills, reduce competitiveness and, in some cases, encourage investment in rooftop solar or storage to reduce contract demand.
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The report underlined that tariff reform has to be carried out gradually and with safeguards.
It said fixed charge components should be revised in a phased manner, while factoring in metering infrastructure, billing practices, regulatory decisions and the paying capacity of consumers.
The CEA report has recommended a uniform framework for calculating fixed costs across states to ensure consistency, transparency and cost-reflective tariffs.
It said fixed cost components should include power purchase costs, transmission charges, load despatch centre charges and distribution costs such as return on equity, interest on loan, depreciation, operation and maintenance expenses, and interest on working capital.
The report has proposed category-wise fixed cost recovery targets.
For domestic and agricultural consumers, it suggested a target fixed cost recovery of 25% by 2030, followed by a higher target of 50% by the end of 2035.
For industry, commercial and institutional consumers, the report suggested a target fixed cost recovery of 100%.
It also recommended standardising two-part tariff design for all types of consumers.
For low-tension residential consumers, fixed charges should be levied in ₹ per kilowatt per month.
For high-tension consumers and industrial, commercial and institutional categories, charges should be levied in ₹ per kVA per month.
The report has also recommended redefining billing demand across states by linking it with the higher of the prescribed percentage of contract demand, actual recorded demand and percentage of actual billing demand in the previous 11 months for industrial and commercial consumers.
It said standardisation is needed because billing demand definitions vary significantly across states.
For consumers above 50 kW or state-specific thresholds, the report has suggested moving to kVAH-based billing to replace power factor incentives and penalties.
This, it said, would simplify tariffs and reflect grid costs more directly.
The report also highlighted the need to treat net-metered consumers separately.
It said these consumers often reduce net consumption from the grid through solar generation but continue to depend on the grid during non-solar hours and for reliability.
For open access and captive consumers, the report has suggested a separate standby charge framework based on fixed commitment, planned standby and unplanned standby.
It said this would help recover the cost of maintaining grid infrastructure for backup use.
The report cited international examples from the United States, the United Kingdom and Europe, where two-part electricity tariff structures are commonly used.
It noted that regulators in advanced economies generally keep household fixed charges lower while assigning higher fixed cost recovery to industrial consumers because of their larger capacity and infrastructure requirements.
The report concluded that recovering fixed costs through fixed charges is essential for the financial viability of DISCOMs and for making tariffs more equitable.
At the same time, it said any increase in fixed charges must be carefully designed to avoid undue impact on small consumers and to prevent fresh distortions in electricity billing.
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