CEA proposes phased increase in DISCOM fixed charges
The Central Electricity Authority (CEA) has released a report titled “Rationalising Consumer Fixed Charge to Reflect Fixed Cost of DISCOM,” proposing a national framework to restructure retail electricity tariffs and gradually increase the share of fixed charges in consumer electricity bills.
The report was prepared following a representation from the All India DISCOMs Association (AIDA) and subsequent deliberations chaired by the CEA Chairperson. It highlights a growing mismatch between the fixed costs incurred by power distribution companies (DISCOMs) and the fixed charges currently recovered from consumers.
Mismatch in cost recovery
According to the report, fixed costs such as payments to thermal generators, transmission charges, employee expenses and network maintenance account for 38% to 56% of a DISCOM’s total Annual Revenue Requirement (ARR). However, fixed charges currently contribute only 9% to 20% of total retail tariff revenue across sampled states for FY2025-26.
The report showed that fixed charges account for 19% of total revenue in Bihar and Madhya Pradesh against fixed costs of 60% and 55% respectively. Maharashtra records fixed charges at 20% against fixed costs of 48%, while Uttar Pradesh and Punjab recover only 17% and 9% respectively against fixed costs exceeding 50%.
CEA stated that the current tariff structure exposes DISCOMs to structural financial risks. One major concern identified is “volume risk,” where utilities continue paying fixed capacity charges under take-or-pay power purchase agreements even when electricity demand declines. This creates liquidity stress because revenues fall with lower energy sales while fixed liabilities remain unchanged.
The report also highlighted “stranded cost” risks arising from migration of high-paying consumers toward rooftop solar, captive generation and open access procurement. Although such consumers remain connected to the grid, their reduced energy purchases leave DISCOMs with unrecovered fixed infrastructure costs.
Another issue flagged was tariff distortion. The report noted that embedding fixed costs within energy charges prevents accurate cost-to-serve pricing and results in consumers with high energy consumption cross-subsidising users with high contracted demand but low actual consumption.
Impact on consumers
The report traced the policy debate back to the Ministry of Power’s Committee for Rationalisation of Tariffs in 2016. A subsequent consultation paper had recommended that fixed charges recover at least 50% of fixed costs for domestic and agricultural consumers and 75% for other consumer categories over a three-year period. The Parliamentary Standing Committee on Energy reiterated similar recommendations in its August 2022 report.
According to the report, several states have gradually increased fixed charges for high-tension industrial consumers between FY2017-18 and FY2025-26. Fixed charges rose at an average annual rate of 7% to 9% in seven out of 16 states, while overall tariffs increased only 1% to 4% annually. Andhra Pradesh, Chhattisgarh, Odisha and Gujarat, however, recorded no increase during the period.
The CEA cautioned that aligning fixed charges fully with fixed costs could require tariffs to increase by up to three times in some states. For industrial consumers with low load factors, such increases could make fixed charges account for nearly two-thirds of total electricity bills.
The report estimated that annual fixed charge payments for a 1 MW industrial consumer currently range from around Rs 24 lakh per MW per year in Odisha to Rs 66 lakh in Tamil Nadu. If fixed charges are revised to recover 50% of fixed costs, annual liabilities could increase to Rs 94 lakh in Odisha and Rs 1.88 crore in Maharashtra. The report noted that such increases may accelerate investments in captive solar and battery storage systems.
For residential consumers, the report observed that low-consumption households often bear a higher fixed-cost burden as a percentage of their total bill. In Rajasthan, for example, a below poverty line (BPL) consumer using 30 units per month pays around 51% of the bill as fixed charge, while a consumer using 300 units pays only 18%. Similar disparities were observed in Maharashtra.
Recommendations and implementation
The report also compared India’s tariff structures with international practices. In the United States, fixed charges account for 10% to 20% of residential bills and 20% to 35% of industrial bills. In the United Kingdom, fixed charges constitute 15% to 25% of household bills and 25% to 40% for industrial consumers. Across Europe, fixed-charge shares range from 10% to 30% for residential consumers and 25% to 45% for industrial users.
CEA noted that regulators in developed economies deliberately cap fixed-charge exposure for low-income households and recover a larger share of fixed costs from industrial consumers.
The report recommended a phased implementation strategy. It proposed that fixed-cost recovery for domestic and agricultural consumers should rise to 25% by 2030 and further increase to 50% by the end of 2035. For industrial, commercial and institutional consumers, the report recommended 100% recovery of fixed costs through fixed charges.
The CEA also proposed standardisation of two-part tariffs across states, with low-tension consumers billed in Rs per kW per month and high-tension consumers billed in Rs per kVA per month. It further recommended standardised billing demand definitions, transition to kVAh billing for consumers above 50 kW, separate tariff structures for net metering consumers and introduction of differentiated standby charges for open access and captive consumers.
The report suggested that the proposals be discussed with the Forum of Regulators for implementation. It added that any increase in fixed charges should be introduced gradually alongside recalibration of time-of-day tariffs and fuel surcharge adjustment mechanisms.
The featured photograph is for representation only.
