India's power distribution sector is caught in a vicious cycle of populist subsidies, mounting debt, and inefficiency. As political promises of free electricity become more widespread, the financial health of state-owned power distribution companies (discoms) continues to deteriorate, making another large-scale bailout a question of 'when', not 'if'. The total debt of these discoms has already crossed a staggering Rs 7.5 lakh crore.
The Unsustainable Subsidy Model and the Flight of Paying Customers
The core of the problem lies in the cross-subsidy model. Industrial and commercial consumers, who pay tariffs up to twice that of domestic users, effectively subsidise agricultural and low-income household consumers. However, this model is collapsing. A significant shift is underway as these high-paying customers are exiting the grid. In 2022-23, a remarkable 30% of all industrial demand was met by captive power generation units, with a growing share from renewables.
This trend is set to accelerate. With the falling cost of renewable energy plus storage solutions, even more industries will seek cheaper, cleaner alternatives by the end of this decade. This exodus leaves discoms with fewer lucrative customers to fund the subsidies for agriculture and households. The burden then falls disproportionately on Micro, Small and Medium Enterprises (MSMEs) and relatively affluent households, while the state exchequer's fixed borrowing limits are stretched further.
Past Bailouts Have Failed: Time to Change the Rules
Over the last 25 years, multiple government schemes—Ujwal Discom Assurance Yojana (UDAY) being a prominent one—have attempted to revive discoms with a mix of financial restructuring and conditional aid. The result, however, has been a recurring cycle of debt accumulation followed by another rescue package. It is increasingly clear that another bailout will not bring meaningful change. The fundamental rules of the game need an overhaul.
The only durable escape from this quagmire is to introduce genuine competition in the power distribution sector. Allowing multiple suppliers to operate in the same geographical area would force incumbents, whether public or private, to innovate and become efficient. The proposed amendments to the Electricity Act aim to create this very framework for a competitive retail electricity market by separating 'content' (the electricity supply) from 'carriage' (the distribution network or wires).
Massive Scope for Efficiency Gains
The potential for cost reduction through competition is enormous. For instance, glaring inefficiencies in labour costs highlight the problem. In 2023-24, the employee cost for public discoms in states like Punjab and Tamil Nadu was around Rs 0.99 per kWh and Rs 0.92 per kWh, respectively—almost double that of their private sector counterparts. Streamlining such operational inefficiencies in billing, collection, and workforce management would directly lower the cost of supply, making subsidies less burdensome for the state.
The Industrial Demand for Cheaper Power
State governments are caught in a difficult balancing act. While they must provide subsidised power for political constituencies, they also face intense pressure from industry for affordable and reliable electricity to remain competitive. Average industrial tariffs in India can be up to 40% higher than the cost of supply, and they vary wildly between states—from Rs 8.4 per kWh in Gujarat to Rs 10.22 per kWh in Tamil Nadu.
High power costs deter fresh investment and hurt the global competitiveness of Indian manufacturing. This push is further amplified by external factors like the European Union's Carbon Border Adjustment Mechanism (CBAM), which incentivises a rapid shift to clean energy. Industries will naturally migrate to regions or sources offering cheaper, greener power.
While incumbent discoms will resist any move that breaks their geographical monopoly, the status quo is unsustainable. The path forward requires incentivising states to implement these tough reforms. Potential solutions could include offering long-term, interest-free loans for capital expenditure or guidance from institutions like the 16th Finance Commission. The conclusion is inescapable: for a viable power sector, competition is the hill to die on.
