Cost of Free Power | Gist of Rajya Sabha TV / RSTV (now Sansad TV) - UPSC PDF Download

Context 

The assembly elections in five states have brought the promises of free or subsidized power by the political parties to the limelight.

Free or subsidized power

• Free or subsidized power is generally given to farmers and domestic consumers.
• A few states limit the number of units of power consumed that can be availed for free and a few other states do not impose any limits. 
• According to a report, 
  • Free power to farmers accounts for 70% of total subsidies.
  • Free power to the Scheduled Caste, backward caste and BPL families contribute 14%.
  • Subsidized power to industrial consumers constitutes 16% of total subsidies. 

Agri consumers in the states

• Uttar Pradesh has 5 state Discoms and amongst them, Paschimanchal Vidyut Vitran Nigam and Dakshinanchal Vidyut Vitran Nigam have the highest share of Agri consumers of about 20%. 
• In Punjab, agri-linked consumers account for 24% of total consumers.

Problems with free power

• The entire cost of electricity that includes the cost of production, the purchase price of power, the cost of distribution and collection is bound by the state government.
• The State governments have to reimburse the Discoms, but given the financial state of the governments, they either defer the payments or delay the payments.
• As the Discoms suffer from financial shortage their ability to provide service is affected, especially in rural and far-flung areas.
• This makes Discoms unable to pay the generators, leading to load shedding.
  • In Feb 2022 the Discoms paid only Rs. 4510.48 crores as against a bill of Rs. 13958.52 crores 
• Current outstandings of the generators stands at 1.4 lakh cores across the country.
• This results in the increase in the price of production.

Industry’s View

• Experts also point out that free power not only erodes the financial viability of the electricity distribution sector but also leads to industrial and commercial consumers paying cross-subsidy in terms of higher power tariffs to compensate for the under-recoveries of Discoms.
• Due to the bad ratings on the generators, the new capacity investments which play a crucial role in the growth and creation of new jobs are affected.
• Banks are also affected as power generators can’t pay the interest due to which the costs of borrowing also increases
• The high tariff also makes the states and the country uncompetitive against the other countries in the global market.

Discrepancies in power tariffs

As seen in Gujarat in 2021,

• The average cost of supply is Rs 5.90.
• Large industrial consumers contribute about 56% of revenue and they pay about Rs. 7.30 as against Rs 5.90.
• Whereas the agricultural consumers pay an average of Rs. 3.42.

Impact on Agriculture

Though the free or subsidized power supply is aimed at improving agriculture, it has also been associated with problems such as,

• Overuse of power and wastage.
• Due to the availability of irrigation facilities round the clock, there has been large-scale cultivation of crops that are not viable in the regions. 
  • For example: Rice in the Punjab and Haryana regions. 
• Overuse of irrigation also impacts the quality of the land.

Recommendations

• Direct Benefit Transfers (DBT): Rather than giving free or subsidized power, the governments should use DBT that could be used by the consumers based on their requirements.
• Limits on usage: The subsidies should be given for a limited number of units and be given in increasing slabs to avoid overconsumption and wastage.
• Feeder separation: Separation of agricultural meters from non-agricultural meters should be implemented throughout the country to know how much energy is actually required for agriculture purposes.
• Net metering: Net metering is a billing mechanism that credits solar energy system owners for the electricity they add to the grid. 
• Subsidizing only those who require: Currently, the subsidies are also extended to the large cultivators who grow cash crops, vineyards, sugarcane and make huge profits.

Conclusion

The concept of free power or subsidized electricity supply to the consumers of certain sectors comes with a cost and there is a need for immediate innovative solutions for addressing the challenges faced by the power industries.