Powering India’s Future, The Electricity (Amendment) Bill, 2025 and the High-Stakes Overhaul of Distribution
India’s power sector stands at a critical juncture, caught between the legacy of a state-controlled, subsidy-laden system and the urgent imperatives of a 21st-century economy: efficiency, sustainability, and market-driven growth. The Draft Electricity (Amendment) Bill, 2025, poised for introduction in the upcoming Budget session, represents the most ambitious legislative attempt in decades to untangle this Gordian knot. Primarily targeting the perennially troubled distribution sector—the final and most crucial link in the electricity value chain—the bill proposes three landmark reforms. These measures aim to recalibrate the financial, operational, and competitive foundations of how electricity reaches the consumer. While the proposed changes are conceptually salutary, promising to reduce costs for industry, unburden distribution companies (discoms), and inject competition, their successful implementation hinges on navigating a labyrinth of technical, financial, and federal complexities. This reform push is not merely an administrative tweak; it is a fundamental re-engineering of a sector vital to India’s economic competitiveness and energy transition.
The Tripartite Reform Agenda: A Deep Dive
The bill’s architecture rests on three interconnected pillars, each designed to address a specific pathology in the current distribution ecosystem.
1. The March Towards “Cost-Reflective” Tariffs and the Phasing Out of Cross-Subsidy
At the heart of India’s power sector malaise lies a distorted tariff structure. For decades, state electricity regulatory commissions (SERCs) have set tariffs for different consumer categories—households, agriculture, industry, and commercial—based not on the actual cost of supply but on socio-political considerations. Industrials and commercial users, particularly railways, have been charged significantly higher tariffs to subsidize power supplied to agriculture and low-income domestic consumers at below-cost rates. This cross-subsidy has been a double-edged sword. While ensuring affordable power for politically sensitive constituencies, it has rendered Indian industry uncompetitive, distorted investment signals, and crucially, bankrupted the discoms. The discoms, caught between high purchase costs from generators and an inability to recover full revenue due to subsidized tariffs and rampant aggregate technical and commercial (AT&C) losses, have accumulated staggering debts, often bailed out by periodic central government schemes.
The 2025 Bill mandates a decisive shift. It requires discoms to move to “cost-reflective” tariffs, phasing out cross-subsidies borne by industry and railways over five years. This is a seismic policy shift. The macroeconomic rationale is compelling: reducing power costs for manufacturing and transport (railways) directly enhances the competitiveness of “Make in India,” reduces logistical costs, and can stimulate broad-based industrial growth. As Power Minister Manohar Lal has clarified, the subsidy to preferred sectors like agriculture will not vanish; instead, it will transition from being an implicit, discom-crippling cross-subsidy to an explicit, direct benefit transfer (DBT)-style subsidy on the books of the state governments. This mirrors the progress already seen under the Revamped Distribution Sector Scheme (RDSS), where state government subsidies are now paid upfront to discoms, improving their financial viability and bringing transparency to state finances. The goal is to transform discoms from loss-making, politically-managed entities into commercially viable, profit-seeking corporations.
2. Introducing Competition through Multiple Discoms in a Supply Area
The most radical proposal in the bill is the end of the geographical monopoly enjoyed by discoms. Presently, a single discom, typically a state-owned entity, has exclusive rights to supply electricity in a licensed area. The bill proposes to allow multiple discoms to operate in the same area, enabling consumers to choose their supplier, much like in telecommunications. Discoms can either build their own parallel distribution network or, more likely, pay to use the existing network of an incumbent (a concept known as common carriage or wheeling).
The theory is rooted in classic market economics: competition will drive efficiency, innovation, and customer service. A discom facing the threat of losing customers to a rival will be compelled to reduce AT&C losses (theft and inefficiency), improve billing and collection, invest in better infrastructure, and offer innovative tariff plans or value-added services. This could be a particular boon for promoting decentralized renewable energy, like rooftop solar. An agile, new discom could specialize in aggregating rooftop solar generation, managing behind-the-meter storage, and offering tailored green power plans—a segment often neglected by incumbent, bureaucracy-heavy discoms.
3. Relieving Discoms of the Obligation to Supply High-Load Consumers
The third major change involves redefining the universal service obligation of discoms. Currently, discoms are obligated to meet the demand of all consumers within their area, including large industrial and commercial users with a demand exceeding 1 Megawatt (MW). These high-load consumers are both a blessing and a curse: they provide a large, reliable revenue stream but also impose a significant operational burden. Discoms must maintain sufficient generation capacity and network infrastructure (often lying idle or underutilized) to meet these consumers’ peak and sudden demands, leading to stranded assets and inefficient capital allocation.
The bill proposes to relieve discoms of the obligation to supply these high-load consumers. These consumers would instead be free to procure power directly from the market through open access—buying from generators, power exchanges, or renewable energy developers. This allows industrials to negotiate competitive rates, procure green power to meet sustainability mandates, and secure more reliable supply. For discoms, it removes a major planning complexity and asset-stranding risk, allowing them to focus on serving the more heterogeneous and politically sensitive mass of residential and agricultural consumers.
The Implementation Minefield: Challenges and Prerequisites
While the direction of reform is laudable, the path is strewn with formidable challenges that demand careful navigation.
On Cost-Reflective Tariffs: The success of this pivot depends entirely on a credible, transparent, and rigorous assessment of the “cost” itself. The current cost structure is bloated by inefficiencies across the chain. If discoms are allowed to pass on all their costs—including those arising from high Aggregate Technical and Commercial (AT&C) losses, inflated power purchase agreements (PPAs) with generators, or expensive coal transport due to Indian Railways’ cross-subsidization of passenger fares—then the benefit to industry will be nullified. The reform, therefore, cannot be isolated to distribution. It must be part of a holistic overhaul that pressures upstream entities (generators, transmission companies, Coal India, Railways) to also become cost-efficient. A “cost-reflective” tariff based on an inefficient cost base is merely a recipe for legitimizing high prices.
On Multiple Discoms and Competition: The Mumbai experience, where Tata Power and Adani Electricity (formerly Reliance Infra) compete in certain areas, serves as both an inspiration and a cautionary tale. While competition has driven service quality improvements, it has also led to protracted legal battles over network rollout obligations and consumer migration, with cases reaching the Supreme Court. Key risks in a national rollout include:
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Cherry-Picking: New entrants may only target lucrative industrial and commercial consumers in urban clusters, leaving incumbent discoms saddled with loss-making rural and agricultural consumers, undermining their viability and defeating the purpose of reform.
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Overcapacity and Stranded Assets: A rush to build duplicate networks could lead to wasteful capital expenditure, ultimately paid for by consumers through tariffs.
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Regulatory Overload: The regulator’s role becomes immensely more complex, having to ensure non-discriminatory network access, manage consumer switching protocols, prevent anti-competitive behavior, and protect the interests of vulnerable consumers.
A gradual, controlled approach—perhaps starting with franchisee models in urban areas or limiting the number of licensees—is wiser than an unbridled free-for-all.
On Freeing High-Load Consumers: This move is contingent on the maturity and liquidity of India’s power markets. While the short-term power market and open access provisions exist, they still face significant barriers: high surcharges (like cross-subsidy surcharge and additional surcharge) levied by states to protect discom revenues, transmission congestion, and regulatory uncertainty. A sudden deluge of large consumers into the open access market could destabilize both the market and the discoms losing their prime customers. A carefully managed transition, with a clear roadmap for reducing regulatory hurdles and strengthening market infrastructure, is essential.
The Bigger Picture: Decentralization, Green Transition, and Federalism
Beyond the immediate bill, these reforms intersect with larger megatrends. The rise of decentralized renewable energy (DRE)—rooftop solar, microgrids—fundamentally challenges the centralized, one-way grid model. A competitive distribution landscape can accelerate DRE adoption by creating service providers who profit from managing distributed assets. The reforms could thus be a catalyst for India’s energy transition.
However, the elephant in the room is federalism. Electricity is a concurrent subject. The success of these reforms depends overwhelmingly on state government cooperation. States have historically used cheap power as a political tool and have been reluctant to cede control over their discoms. Convincing states to forego cross-subsidy revenue (which they would have to replace with direct budgetary support) and to open their territories to private competition will require deft political negotiation, financial incentives, and a spirit of cooperative federalism.
Conclusion: A Necessary Gambit with No Guarantees
The Electricity (Amendment) Bill, 2025, is a necessary and bold gambit. It recognizes that the old model of state-managed, subsidy-driven distribution is fiscally unsustainable and economically detrimental. By aiming to make tariffs rational, discoms commercial, and markets competitive, it seeks to plug the bleeding wound of the power sector.
Yet, legislation is only the first step. The devil lies in the regulatory details, the political will of states, and the capacity of institutions to manage this complex transition. The bill’s ultimate test will be whether it can lower the cost of power for the productive economy without sacrificing energy access for the poor, whether it can attract private investment without creating private monopolies or cherry-picking, and whether it can strengthen the grid for a renewable future. If implemented with careful sequencing, robust regulatory oversight, and inclusive planning, it could switch on a new era of reliable, affordable, and sustainable power for India. If rushed or poorly designed, it risks adding new layers of complexity to an already troubled system. The coming parliamentary debate and subsequent rule-making will determine which future gets powered up.
Q&A: Unpacking the Electricity (Amendment) Bill, 2025
Q1: What exactly is meant by “cost-reflective tariffs,” and how does phasing out cross-subsidy impact different consumer categories like industry, agriculture, and households?
A1: “Cost-reflective tariffs” mean that the price charged for electricity closely aligns with the actual cost incurred to generate, transmit, and distribute it to a specific consumer category, plus a reasonable profit margin. Currently, tariffs are not cost-reflective due to cross-subsidy: industrial and commercial consumers pay much more than the cost of supply, while agricultural and many domestic consumers pay far less. Phasing out this cross-subsidy over five years means industries and railways will see their power bills decrease significantly, boosting competitiveness. For subsidized categories (agriculture, poor households), the effective price they pay need not rise, but the subsidy mechanism will change. The state government will provide the subsidy amount directly to the discom on behalf of these consumers, making the financial support transparent in the state’s budget rather than hidden in the discom’s accounts. The challenge is ensuring state governments have the fiscal capacity to provide these explicit subsidies.
Q2: How does the introduction of multiple discoms in one area theoretically improve efficiency, and what are the potential pitfalls, as evidenced by Mumbai’s experience?
A2: The theory is that competition creates incentives for efficiency. If consumers can switch suppliers, discoms are forced to reduce losses from theft and inefficiency (AT&C losses), improve billing and collection, invest in network reliability, and offer better customer service to retain clients. This should lower overall system costs. However, Mumbai’s experience highlights pitfalls: (1) Litigation and Disputes: Fierce competition can lead to legal battles over network access, consumer poaching, and regulatory interpretations. (2) Cherry-Picking: New entrants may only serve lucrative, high-density commercial areas, leaving the incumbent with the costly-to-serve, loss-making rural or low-income customers, crippling its finances. (3) Duplication of Assets: Building parallel networks can lead to overcapacity and higher capital costs, which may eventually be passed on to consumers. Effective regulation is crucial to ensure a level playing field and prevent market failure.
Q3: What is “open access,” and why is liberating high-load consumers (above 1 MW) from discom supply considered a significant operational relief for discoms?
A3: “Open access” allows large consumers (with demand above a threshold, e.g., 1 MW) to purchase electricity directly from generators or the open market (power exchanges) instead of from their local discom, while using the existing transmission and distribution networks for a wheeling charge. Freeing discoms from the obligation to supply these consumers is a major relief because it removes a significant planning and financial burden. Discoms no longer have to enter into long-term, expensive power purchase agreements (PPAs) to meet the uncertain demand of these large users or maintain underutilized network capacity specifically for their peaks. This reduces the risk of stranded assets, simplifies load forecasting, and allows discoms to focus on managing supply for the more stable, if politically sensitive, mass of smaller consumers.
Q4: The article mentions that a “holistic view of power costs” is needed, considering upstream entities like generators and the Railways. Why is this context critical for the success of cost-reflective tariffs?
A4: Mandating cost-reflective tariffs at the discom level in isolation could be counterproductive if the input costs they face are themselves inflated due to inefficiencies or cross-subsidies elsewhere in the value chain. For instance: (1) Generators: If discoms are locked into high-cost, long-term PPAs with state-owned generators, they will simply pass these costs on. (2) Railways: A significant portion of coal transport cost is influenced by the Indian Railways’ policy of using freight earnings to subsidize passenger services. This makes coal, and thus power, more expensive. Therefore, for cost-reflective tariffs to truly lower end-user prices and not just reshuffle costs, parallel reforms are needed to ensure efficiency and fair pricing in generation, coal mining, and freight transport. Otherwise, discoms and consumers end up paying for systemic inefficiencies.
Q5: How do these proposed reforms align with and potentially accelerate India’s transition to renewable energy and decentralized power?
A5: The reforms create a more conducive environment for renewables and decentralization in several ways: (1) Competitive Discoms: New, agile discoms might specialize in aggregating rooftop solar, offering green power tariffs, and managing behind-the-meter battery storage, services often ignored by traditional monopolies. (2) Open Access for Green Procurement: Large consumers freed from discom supply can directly purchase power from renewable projects through open access, creating direct demand for green energy and helping corporations meet ESG (Environmental, Social, and Governance) targets. (3) Efficiency Focus: Reducing AT&C losses through competition means less waste, effectively making renewable energy (which often has a higher upfront cost but low running cost) more competitive against conventional power. (4) Grid Modernization: A competitive, market-oriented distribution sector will necessitate investments in smart grid technologies to manage diverse supply sources and consumer choice, which is the backbone for integrating variable renewable energy.
