OPINION | Pricing electricity for people and planet, not just discoms

Electricity tariffs are a powerful cornerstone of India’s energy transition pathway. The price consumers pay for electricity not only determines the financial health of distribution companies (discoms) but also influences the uptake of rooftop solar, energy-efficient appliances and demand-side flexibility.

Against this backdrop, the Central Electricity Authority’s recent proposal to increase the fixed component of monthly electricity bills raises important questions.  

Recovering fixed costs through demand charges is Economics 101. However, there is more to tariffs than pure economics. In this case, the proposed approach risks producing outcomes that are detrimental to customers, adverse for India’s climate and energy transition objectives, and ultimately counterproductive for the long-term sustainability of the power sector. This is so because the proposal focuses on the costs incurred by utilities without adequately considering the value delivered to customers.

Electricity is not merely a network asset; it is a service. Customers do not pay for transformers, substations, or distribution lines. They should pay for reliable, high-quality electricity delivered when they need it. Yet, across much of India, the quality of service remains far from satisfactory.

Outages are common in many urban and rural areas. Low reliability requires investments in back-ups, reducing profitability and net income. Poor quality, such as large and frequent voltage fluctuations, damages appliances and equipment. These are not discretionary expenditures, but real costs imposed by poor service quality.

Regulatory standards themselves remain unambitious by global standards, with limited attention to parameters such as System Average Interruption Duration Index (SAIDI), System Average Interruption Frequency Index (SAIFI), voltage variation, harmonics and momentary interruptions that increasingly matter in a modern, digital economy.

Given the prevailing quality, increasing fixed charges is unjustifiable as it would require households to bear the cost of maintaining backup, while also paying higher fixed charges. Such a proposal would be contrary to the stated intent of the Electricity Act, 2003 to protect the interests of consumers. Therefore, before regulators impose higher fixed charges, they should ensure measurable improvements in reliability and power quality.

The proposal also risks creating unintended behavioural consequences as it reduces incentives to invest in clean energy and India’s climate agenda.

Energy efficiency is a cornerstone of India’s development strategy. Programmes promoting efficient appliances, cooling technologies and demand-side management have enormous economic and environmental benefits. The logic is straightforward: customers invest in efficient technologies as savings translate into lower electricity bills. Higher fixed charges dilute that incentive.

When a growing share of the bill is fixed, the financial incentive for reducing consumption declines. The payback period for efficient appliances lengthens, reducing willingness to invest in energy-saving technologies. India has committed to substantially reducing the emissions intensity of its GDP and consistently highlighted energy efficiency as the least-cost pathway.

The same concern applies to India’s flagship PM Surya Ghar Yojana that seeks to accelerate rooftop solar adoption across millions of households. The programme recognises that decentralised solar generation can reduce pressure on the grid, lower peak demand, improve energy security and contribute to national decarbonisation goals. But higher fixed charges undermine the economics of rooftop solar. As fixed charges increase, the portion of the bill that can be avoided through self-generation declines.

The contradiction is hard to ignore. On one hand, the government is investing public resources to encourage households to conserve energy and become clean-energy producers. On the other, tariff reform risks reducing financial incentives for it. Tariff structures should be designed to accelerate efficiency and renewable energy, rather than making such investments less attractive.

For lower-income households, high fixed charges can be perceived as unfair because a large portion of the bill becomes unavoidable irrespective of actual usage. Such perceptions influence payment discipline and encourage theft as customers seek ways to recover value from a high fixed monthly obligation. A tariff structure that weakens the relationship between consumption and payment risks undermining both customer trust and utility accountability.

The challenge facing discoms is real. Revenue models designed for a 20th-century electricity system are under pressure from efficiency improvements, changing consumption patterns and the growth of distributed generation. However, increasing fixed charges is a blunt instrument that addresses utility concerns while overlooking customer welfare and national climate objectives.

The more durable solution lies in efficient tariff design.

Electricity tariffs should be linked to the quality delivered and time of use. Three decades into power sector reform, utilities need to bear the consequences of poor performance. Increases in demand charges should be linked to improved supply quality and service rather than relying on the premise that fixed costs are high.

Similarly, time-of-use tariffs offer a fairer and more scientific mechanism for improving cost recovery and system efficiency. Electricity consumed during peak periods imposes significantly higher costs on the network than during off-peak hours. Pricing should reflect that reality. Such an approach encourages demand shifting, improves asset utilisation and reduces system-wide costs without discouraging efficiency or clean energy adoption.

The nationwide deployment of smart meters under the Revamped Distribution Sector Scheme is an opportunity. Use of these meters should extend beyond increasing revenue collection to measure power quality and time-segmented consumption, creating the foundation for performance-linked and time-sensitive tariff structures.

India’s electricity tariffs remain an unfinished reform. But tariff design cannot be driven solely by utilities’ financial needs. Electricity pricing shapes customer behaviour, technology adoption and investment decisions across the economy. Tariffs must reward reliability, encourage efficiency and accelerate clean energy adoption. They must work for customers and utilities, for climate goals and balance sheets. Electricity pricing must ultimately be designed for people and the planet.

The author is senior fellow, Ashoka Centre for a People-centric Energy Transition and visiting professor, ISB.

The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.