Policy Wise: India’s Power Sector

Power sector reforms


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Affordability of electricity

This article analyses the issue of affordability of electricity in the country and the factors making it expensive.

How recent changes increased subsidy burden

  •  Recent policy measures like the the “Saubhagya” scheme have remarkably improved the first 3 ‘A’s, i.e., awareness, accessibility and availability.
  •  It has also increased the cost of supply due to an increase in LT distribution network length necessitating more conductors, meters, transformers, etc.
  • Most of the newly-added consumers are from rural areas of low-income states like UP and Bihar.
  • They belong to subsidised consumer categories, viz. agriculture, rural-domestic, etc.
  • Thus, the subsidy burden of respective state governments has increased.

Affordability of subsidy by States

  • The state’s capacity to service power subsidy of its BPL consumers is dependent on its per capita income which varies from state to state.
  •  The central government provides no subsidy for this purpose.
  • Therefore, making electricity affordable for consumers becomes a priority for the power sector.
  •  Limiting focus only to reduction of the cross-subsidy burden of industries may not be fruitful.

Policy steps to make electricity affordable

1) Expedite overdue distribution reforms

  • While generation and transmission sectors have been unbundled, unbundling (segregation of carrier and content business) of distribution has been started yet.
  • Privatisation of, and governance reforms in, state-owned distribution companies are likely to unlock huge value and provide efficiency gains through loss reduction for making power affordable.

2) Capping of stranded capacity charges

  • As of now, we have surplus installed capacity of around 370 GW against a peak demand of 183 GW.
  • So, any fresh capacity addition should be limited to projected load demand growth and replacement of retiring power plants.
  • This will reduce the stranded capacity charges the discoms are currently paying to gencos under their long-term power purchase agreements without taking any power from them under availability-based tariff regime.

3) Scrap cost-plus regime

  • Now, when the country has sufficient installed capacity, it makes no sense to provide a risk-free 15.5% tax-free (or 22% after-tax) return on equity to the power companies.
  • No new project (except hydro and nuclear) should be allowed on cost-plus route or MoU route under section 62 of the Electricity Act.

4) Restructure normative debt-equity financing to 80:20

  • At present, the regulatory norm used for tariff computation of projects is 70:30 debt: equity.
  • Debt servicing is limited only to the term of the loan, i.e., up to 12 years, but Return of Equity is allowed in perpetuity even after the plant has fully depreciated.
  • This needs to be limited to the useful life of the unit.

5) No double-whammy for consumers:

  • National Clean Energy Fund was created as a non-lapsable fund in 2010 for promoting clean technology, and since then around Rs 1 lakh crore has been collected from coal cess.
  • However, most of it has been diverted and used for other purposes like funding to states for their GST losses, etc.
  • Asking gencos to install Fuel Gas Desulfurization and pass on the cost to the consumer amounts to a double whammy for the consumers who first paid the coal-cess and now will have to bear the FGD cost also.
  • We should stop using cess as a tax and NCEF should be used to fund the clean energy initiative and FGD installation etc.

Consider the question “What are the factors responsible for making the electricity costly in India. Suggest the pathways to make it affordable to all.”


Making electricity affordable following these steps would be instrumental in the progress of the nation.

Source: https://www.financialexpress.com/opinion/powering-reforms-bringing-power-psus-under-competitive-bidding-will-help-in-tariff-reduction/2057940/


Electricty generation,transmission and Distribution

Saubhagya scheme

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Notify of
Inline Feedbacks
View all comments


Join us across Social Media platforms.

💥Mentorship New Batch Launch
💥Mentorship New Batch Launch