The Union government has proposed linking electricity tariffs to a suitable index for automatic annual revision, arguing that politically delayed tariff hikes have become a structural weakness in India’s power distribution sector.
In the draft National Electricity Policy 2026 (NEP 2026), released for public consultation by the Ministry of Power, the government says electricity tariffs must enable “timely recovery of the cost of supply” and warns that irregular revisions have pushed distribution companies (discoms) into chronic financial stress.
The draft policy states that “tariff revisions should be done on an annual basis” and adds that an “appropriate indexation mechanism may be adopted for automatic tariff revision in case tariff orders are not issued in time.”
However, industry experts said that rolling out automatic annual tariff revisions could face hurdles, as electricity is a state subject and tariff-setting powers lie with state regulators, requiring political and regulatory alignment across states.
Why the government wants automatic tariff revision?
According to a note shared by the Ministry of Power, the failure to revise tariffs regularly has created a widening gap between costs and revenues across states.
“Tariffs in many states are not cost-reflective and are often kept below the cost of supply, leading to accumulation of losses and debt in the distribution sector,” the note stated.
The ministry points out that discoms have accumulated losses of about ₹6.9 lakh crore and outstanding debt of more than ₹7.18 lakh crore, adding that “cost increases on account of fuel prices, inflation and financing costs are not passed through in a timely manner.”
Indexation as a safeguard against regulatory delays
The Centre has positioned index-linked tariff revision as a backstop rather than a substitute for regulatory authority.
The draft policy clarifies that automatic revision would apply only when tariff orders are delayed, ensuring that “there is no regulatory vacuum and cost recovery continues.”
The ministry’s note adds that the mechanism is aimed at bringing predictability and discipline to tariff determination while retaining the role of State Electricity Regulatory Commissions.
Reducing cross-subsidies to support industry competitiveness
NEP 2026 links tariff reform to India’s manufacturing, transport and infrastructure goals, flagging the burden of high power tariffs on industrial and commercial consumers as well as large public transport systems.
“High cross-subsidisation has resulted in high tariffs for industrial and commercial consumers, adversely impacting competitiveness,” the draft policy stated, adding that electricity pricing should not become a constraint for sectors critical to economic growth.
The draft policy proposes exempting manufacturing units, railways and metro systems from cross-subsidy surcharges, arguing that cost-reflective tariffs and targeted subsidies are a more efficient way to support vulnerable consumers without distorting power prices for industry and essential infrastructure.
Letting large consumers exit discom supply
The draft policy also allows state regulators, in consultation with governments, to exempt discoms from supplying power to consumers with a contracted load of 1 MW and above, provided such consumers can arrange power on their own.
According to the ministry’s note, this would “reduce the fixed-cost burden on distribution utilities” and improve efficiency in power procurement, while easing tariff pressure on smaller consumers.
Such consumers would be allowed to meet their electricity needs through direct power procurement from the market, including bilateral contracts, power exchanges or captive generation, as permitted under existing regulations.
Captive generation typically involves large consumers meeting their electricity needs through on-site or group-owned power plants—ranging from renewable energy projects such as solar and wind to, potentially in the future, small modular nuclear reactors—set up primarily for self-consumption.
A politically sensitive reform
While NEP 2026 presents tariff indexation as a technical correction, it also reflects the Centre’s concern that tariff determination at the state level has often been influenced by non-economic considerations.
The Ministry of Power's note stated that “timely tariff revision is frequently deferred due to socio-political considerations, resulting in persistent under-recovery of costs by distribution utilities,” underscoring the link between delayed tariff action and the sector’s financial stress.
“Sustainable and financially viable distribution utilities are essential for reliable power supply, energy transition and higher per capita electricity consumption,” the note stated, stressing that cost-reflective tariffs are central to India’s long-term economic and climate objectives.
Whether states and regulators accept automatic, index-linked tariff revision will determine if NEP 2026 can overcome constraints that have hindered earlier power-sector reform efforts, an industry executive said.
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