Follow India Renewable Energy News on WhatsApp for exclusive updates on clean energy news and insights

Electricity Pricing Needs Reform, Not Populism

India is seeking to address long-standing weaknesses in its power sector that have allowed electricity tariffs to become tools of political populism. The Centre’s renewed push for financial discipline, reflected in the National Electricity Policy (NEP) 2026, now requires sincere cooperation from state governments if the reforms are to succeed.

The guidelines issued last week aim to strengthen the financial health of loss-making power distribution companies by limiting the ability of state regulators and utilities to indefinitely delay tariff revisions that reflect the true cost of power supply. This approach aligns with the Union government’s broader effort to rein in unfunded populist measures.

Past reform initiatives often linked central financial support to milestones such as tariff rationalisation, but these conditions were not always enforced effectively. Tamil Nadu, for instance, went without revising electricity tariffs for eight years. When rates were finally increased in July 2022, the state’s power minister acknowledged that the move was driven by the need to meet borrowing conditions tied to funding equivalent to about 0.5% of the state’s GDP. The episode underscored how easily tariff discipline can be abandoned once alternative funding avenues emerge. Recognising this risk, the Centre proposed legislative amendments in November 2025 to prevent such reversals.

A key focus of the NEP 2026 is the role of state electricity regulatory commissions, which form the operational core of sector governance. Under the policy, regulators are expected to decide on tariff petitions within 120 days. Any delays must be justified, and persistent payment defaults could even result in the removal of regulators by state governments. While concerns remain about potential collusion between state authorities and regulators—either through prolonged inaction or by avoiding tariff petitions altogether—the policy introduces safeguards to address such scenarios.

One such measure is the introduction of an indexation mechanism that would automatically adjust tariffs in line with rising costs. This provision is expected to improve investor confidence in the distribution segment, particularly as proposed amendments would allow multiple distributors to share power infrastructure, reducing entry barriers and encouraging competition. However, these safeguards must be backed by strong central incentives to ensure consumers receive reliable electricity at reasonable prices, while limiting the scope for politically motivated underpricing that undermines service quality.

A robust and efficient electricity market is essential for India’s ambition to become a global manufacturing hub. Equally important is achieving the right mix of energy sources through effective resource planning. As renewable energy expands and rooftop solar systems gain traction, the number of stakeholders involved in power generation and distribution is increasing. The presence of stranded solar generation capacity in parts of western India highlights planning gaps that the NEP 2026 seeks to address.

With rising wind and solar output, states must invest in battery storage and other balancing technologies to manage intermittency. To support this transition, the policy outlines a framework for closer coordination between the Central Electricity Authority and state-level departments. Taken together, the proposals offer reassurance about the sector’s policy direction. Their success, however, will hinge on sustained and meaningful engagement between the Centre and the states—especially since electricity remains a concurrent subject under India’s Constitution.