How Tariff Reforms Can Empower Discoms and India’s Clean Energy Future

States are pushing power reforms, but lasting impact depends on accountability, public trust, and cost-reflective tariff

India has more than doubled its non-fossil capacity in the last 8 years, but can it sustain this momentum? We are also targeting 500 GW of non-fossil fuel capacity by 2030. The pathway to this goal runs directly through the state distribution companies (discoms) — many of which continue to grapple with mounting losses and structural inefficiencies. Discoms' accumulated debt has doubled from INR 3.76 lakh crores in 2015 to INR 7.53 lakh crores in 2024 (equivalent to 2.31 per cent of the national GDP), implying that debts are becoming unsustainable. This concern is being regularly highlighted in the annual power ministers' conference. The increasing debt levels of DISCOMs post-Ujwal DISCOM Assurance Yojana (UDAY) reflect a combination of persistent policy gaps in UDAY implementation, shortfalls in subsidy and regulatory support, and the effects of external economic shocks such as the COVID-19 pandemic—factors that have overshadowed the temporary relief provided by the scheme.

Most discoms continue to incur high debt and losses despite several reform packages. In FY22, India's transmission and distribution losses stood at 15 per cent, while the world average is 6 per cent. The technical losses remain high because the grid comprises legacy infrastructure (such as high HT:LT ratio, overloaded transformers). The commercial losses are on account of gaps in tariff design, poor billing and collection efficiency, meter tampering and electricity theft. These persistent losses constrain discoms' ability to invest in essential network upgrades, facilitate open access, and integrate more RE – all key steps needed to meet India's rising electricity demand with a clean and affordable supply. A key enabler often discussed in addressing these challenges is tariff reform, which could provide discoms with much-needed financial stability.

This is the first part of a four-part blog series exploring India’s evolving power tariff landscape (read Part 2 here, Part 3 here, and Part 4 here). This installment explores how tariff rationalisation impacts discoms and India's clean energy future.

Why do tariff reforms matter for India's energy transition?

With a significant RE procurement plan by 2030, states like Gujarat and Maharashtra anticipate flat procurement cost trajectories and eventually lower consumer tariffs (Figure 1). For instance, in Maharashtra, over the next five years (FY 26 to 30):

• Solar capacity to double (to ~28 GW); Plus 15.5 GW agri solar by Sep 2026
• PSP 8x (up from 250 MW)
• Hybrid RE 14x (up from 300 MW)

Review of regulatory development points out that states like Karnataka, Gujarat, Maharashtra, and Madhya Pradesh are implementing progressive tariff structures that reflect actual costs, reduce cross-subsidies, and create tariff signals for renewable energy adoption. The following sections unpack state-level developments on tariff rationalisation that offer not just lessons but templates for other states to follow.

A. Achieving cost-reflective tariffs for categories by eliminating cross-subsidy

Cost-reflective tariffs include aligning the Average Billing Rate (ABR)—the average price consumers pay—with the actual Cost of Supply (CoS) for providing electricity. Achieving this requires aligning the ABR with the Average CoS (first step) and subsequently with the “embedded cost to serve” for each consumer category at different voltage levels (second step) and progressively reducing cross-subsidisation. The Electricity Act, 2003 mandates that cross-subsidies shall be “progressively reduced”, and the National Tariff Policy, 2016 directs State Electricity Regulatory Commissions (SERCs) to notify a roadmap for aligning consumer tariffs within ± 20 per cent of the Average Cost of Supply (ACoS). Over the past decade, several states have laid out a trajectory to eliminate cross-subsidy from the tariff structure. 

Tariffs determined by the SERCs for agricultural consumers in some states and domestic consumers in most states are already close to the ACoS. Consequently, states' reliance on cross-subsidies from commercial and industrial (C&I) consumers has reduced, with state governments now shouldering a larger subsidy burden. The next aim for the state regulators should be to decide consumers' tariffs based on voltage-wise cost of supply (VCoS) or category-wise CoS, which will enable more efficiency in the overall tariff structure.. Table 1 captures development across a few states, such as Karnataka, Madhya Pradesh, Bihar, and Maharashtra, which are working towards eliminating cross-subsidy.

Table 1: Trends in category-wise cost alignment across states

State	Development
Karnataka	Karnataka Electricity Regulatory Commission (KERC) outlined a trajectory to eliminate the cross-subsidy received by the agriculture category from FY 2025-26 (21 per cent) to FY 2027-28 (nil). The agriculture category was the only beneficiary of the cross-subsidy.
Bihar, Madhya Pradesh, Maharashtra and Tamil Nadu	The domestic tariff in these states is more than 90 per cent of the ACoS, implying lower cross-subsidy. The data is for FY 2023.
Madhya Pradesh and Bihar	The agriculture tariff is more than 90 per cent of the ACoS. The data is for FY 2023.

Source: Authors' compilation from KERC Tariff Order FY 2025; Energy Transition Preparedness Initiative (ETPI)

B. Achieving a balanced electricity tariff structure through greater fixed costs recovery

An electricity bill usually has two parts: fixed and variable charges. Fixed charges (FC) cover discoms’ costs like maintaining the grid, essential infrastructure upgrades and take-or-pay commitments to power generators. Variable charges help them recover the cost of electricity sold. Discoms typically do not recover all their fixed costs purely through fixed charges. Instead, a significant portion is included in variable charges. It means if consumers reduce their electricity consumption—even if they maintain the same contracted demand—the discom loses the fixed costs embedded in those variable charges.

However, in the recent past, several states have attempted to correct this distortion by increasing the fixed charges and reducing the variable charges. Depending on the state context, this alignment is achieved over a few years to avoid tariff shocks to consumers. Table 2 captures development across a few states.

Table 2: Steps taken by states to enhance fixed cost recovery

State	Development
Karnataka	KERC outlined a trajectory in 2025 to progressively increase fixed charges and further reduce energy charges from FY 26 to FY 28. Plans to increase the fixed cost recovery from 19 per cent (FY 24) to 40 per cent (FY 28). The benefits for discoms on account of increased fixed recovery are discussed in the subsequent sections. KERC increased fixed charges across consumer categories by INR 5-25 per kW and reduced the energy charges substantially, by up to 205 paise per unit for commercial and 160 paise per unit for industrial consumers.
Maharashtra	Maharashtra Electricity Regulatory Commission (MERC) has introduced a modest INR 5 annual hike in fixed charges across the control period (FY 26 to FY 30) for key consumer categories, including domestic, C&I, and public service users. This step is expected to raise the share of fixed charges in discom revenue from 17 per cent (FY 24) to ~20 per cent (FY 30).
Rajasthan	Rajasthan Electricity Regulatory Commission (RERC) in 2024 increased fixed charges by INR 20-55 for 17 consumer categories, including all domestic and industrial categories. However, it left fixed and energy charges for agriculture unchanged. The impact on overall FC recovery was not clear in the regulatory order.
Delhi	Delhi Electricity Regulatory Commission (DERC) observed in 2018 that low fixed charges caused seasonal revenue volatility—high inflows in summer but low in other months—while payment obligations to generators and transmitters remained steady year-round; it addressed this imbalance in its 2018 tariff order.

Source: Authors' analysis from KERC Tariff Order 2025, MERC Tariff Order FY 2025-26, RERC Tariff Order FY 2024-25 and DERC Approach Paper and Tariff Order 2018

C. Aligning electricity tariffs with granular time block costs

Time-of-Day (ToD) or Time-of-Use (ToU) pricing involves varying electricity prices based on actual supply and demand conditions, encouraging efficient energy use. Given that electricity generation and balancing costs vary throughout the day, particularly with increasing renewable energy (RE) shares, tariffs should also reflect this variability. The ambitious deployment of smart meters under the Revamped Distribution Sector Scheme (RDSS) across states facilitates this shift, enabling slot-wise billing and dynamic pricing.

The mandate originates from the Electricity (Rights of Consumers) Amendment Rules, 2023, which expands the scope of ToD tariffs—already applicable to most C&I consumers in many states—to all C&I consumers with demand above 10 kW and introduces them for domestic consumers from 1 April 2025. A major shift now underway is aligning ToD tariffs with solar generation hours to better reflect real-time system costs. Table 3 captures development across a few states.

Table 3: State-level ToD tariff adjustments and innovations

State	Development
Maharashtra	MERC adopted a detailed seasonal ToD structure, offering 20-30 per cent rebates during solar hours and imposing a 25 per cent peak-hour surcharge for industrial and commercial consumers. This sophisticated design incentivises load shifting but also adds complexity for consumers evaluating open access procurement.
Gujarat	GERC offers an INR 0.60/kWh rebate for electricity consumed between 11:00 and 15:00, aligning incentives with peak solar hours. ToD has been extended to more consumer groups, including non-residential low-tension users and both low- and high-tension electric vehicle charging stations. A surcharge of INR 0.45/unit applies to billing demand up to 500 kVA and INR 0.85/unit for demand > 500 kVA.
Madhya Pradesh	MPERC introduced a 20 per cent surcharge during peak hours, a 20 per cent rebate during solar hours, and a seasonally adjusted night off-peak rebate ranging from 7.5  to 10 per cent. MPERC has progressively refined its ToD structure over the years. These adjustments reflect evolving supply-demand dynamics.

Source: Authors' compilation from MERC Tariff Order FY 2025-26, GERC Tariff Order FY 2025-26 and MPERC Tariff Order FY 2025-26

D. States are reducing the number of categories and sub-categories

Tariff simplification involves reducing, merging or modifying consumer categories to make tariffs simpler, more understandable, and easier to administer. Table 4 captures development across a few states.

Table 4: State actions to streamline and consolidate consumer categories

State	Development
Maharashtra	MERC reclassified several consumer types to better reflect end use—shifting staff quarters and hostels to residential, adding facilities like toll plazas, gyms, and warehouses under commercial, and moving CNG stations, ready-mix plants, and defence ordnance factories to the industrial category. Community-run Water ATMs were brought under public water works tariffs.
Punjab	PSERC consolidated multiple load- and usage-based slabs into simpler, consumption-linked categories across domestic, non-residential, and large supply consumers.
Rajasthan	RERC merged consumption slabs for Below Poverty Line/Astha Card holders and small domestic consumers into a single slab for usage up to 50 units per month.

Source: Authors' compilation from MERC Tariff Order FY 2024-25, PSERC Tariff Order FY 2025-26 and RERC Tariff Order FY 2024-25

How do tariff reforms unlock grid upgrades, RE integration, and smarter contracts?

Rationalised tariffs not only create the enabling environment for unlocking the full benefits of critical initiatives underway for more renewable energy integration and grid modernisation, but also make way for introducing bold ideas such as new contracting structures. The ongoing initiatives implemented by the central and state governments range from upgrading distribution infrastructure, smart meter deployments, to thermal power plant flexibility and integrating energy storage systems.

Tariff rationalisation measures can catalyse a chain of reforms enabling smarter procurement decisions, improving load management, and incentivising storage and flexible generation. Table 5 highlights the benefits that tariff reforms can unlock for discoms.

Table 5: Tariff reforms unlock investment and efficiency gains for discoms

Initiatives	Targets	Benefits that can be unlocked for discoms
Upgrading and augmenting the infrastructure	PM Surya Ghar targets 30 GW roof-top solar installation for domestic consumers by 2027 Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan (PM- KUSUM) targets 34.8 GW of agriculture solarisation by March 2026	Proper recovery of both fixed and variable costs enables systematic investments in distribution infrastructure rather than piecemeal upgrades. This is even more crucial given the rapid growth of solar deployment under PM Surya Ghar and PM—KUSUM, which requires preparing the grid for high solar penetration, voltage stability,  variation and reverse power flow events.
Energy Storage Systems	Agarwal et al, 2025 estimate - 132-280 GWh of battery energy storage systems (BESS), along with 100 GWh of pumped storage hydro (PSH) for moderate to high demand scenarios	Energy Storage Systems, such as BESS and PSH, involve high upfront costs and need predictable revenue streams enabled by clear tariff signals to attract serious investment. Ensuring full fixed cost recovery will make BESS bankable for RE balancing, energy dispatch, peak shaving, and grid-support services.
Smart Metering deployment	The RDSS targets 25 crore smart meters by 2027	Without smart meters, it is difficult to implement granular, dynamic tariffs.  When linked to real-time pricing, smart meters enable demand response and reduce peak loads, transforming them into active grid management tools.
Thermal Power Plant flexibility	40 per cent technical minimum load - Central Electricity Authority's Roadmap (2023)	Retail ToU tariffs send a clear price signal to consumers to shift their demand, which in turn shapes the system load profile. This encourages thermal generators to operate more flexibly, i.e. ramping up during high-price (peak) hours and ramping down during low-price (surplus) hours - thus supporting RE integration
Optimising power procurement cost through innovative  contracting structures	Intra-day,  day-ahead and monthly capacity contracts	Granular pricing pushes discoms toward exploring diverse contracts, such as intra-day, short-term, and capacity-based deals, that suit high RE penetration and help discoms optimise their procurement strategy.

Source: Authors' analysis

What lessons can guide India’s next phase of power tariff reforms?

Tariff reform without a matching push for discom accountability on service quality, resource planning, and new contract instruments risks the efficacy of such reforms and undermines public trust.

State electricity regulators must now adopt a genuine “carrot and stick” approach. Tariff rationalisation is the carrot, designed to improve discom cost recovery and financial health. But without the accompanying stick of accountability, reforms risk becoming one-sided. The Consumer Service Rating of Discoms Report 2023–24 highlights that only six private discoms secured the top A+ rating, indicating exemplary performance in consumer service parameters such as complaint resolution, bill delivery, call centre responsiveness, and reliability indices. In contrast, 23 out of 62 discoms were rated C or lower, reflecting significant room for improvement. SoP enforcement has historically been weak. Few commissions regularly review service quality data or ensure automatic compensation for lapses. KERC’s 2025 tariff order marks a shift, mandating automatic payouts, detailed reporting, and performance benchmarks from FY2026–27. But penalties remain too low to drive real behaviour change. Compensation must be scaled up to reflect actual consumer loss, and SoP implementation made more visible, data-driven, and institutionalised.

Regulators must also push discoms and the state governments to improve forward-looking decision-making. This includes robust resource adequacy planning, appropriate valuation of different fuel types (coal, solar, wind, hydro, nuclear), timely investments in grid infrastructure expansion and flexibility options, and accelerated adoption of market-based instruments like capacity contracts and derivatives. Tariffs, too, must evolve dynamically in response to rising RE uptake and shifting consumer demand patterns.

How can states ensure tariff reform leads to a resilient and equitable power system?

As we conclude, here are the key insights that emerge from our assessment, pointing the way forward for India's power sector reform journey:

• Template for action: Reforms in some states serve as a guide for others

• Urgency of reform: Delaying tariff reform hampers the speed and scale of capital-intensive programs like smart metering and energy storage.

• Risks of inaction: Without proper price signals, investments misalign, consumer behaviour stays unresponsive, and costly short-term fixes dominate.

• Need for consumer trust: Reliable supply and enforceable service standards are vital for public confidence.

If more regulators can combine financial realism with institutional accountability, India's power sector may finally be equipped to support its clean energy ambitions with resilience, transparency, and fairness.

Vishal Tripathi is a Consultant and Prateek Aggarwal is a Programme Lead at the Council on Energy, Environment and Water (CEEW), New Delhi. Send your comments to vishal.tripathi@ceew.in

Vishal TripathiAuthor

Prateek AggarwalAuthor