Two reforms that rewired the power distribution sector

‘The near-magical turnaround in India’s electricity distribution sector — the power industry's main revenue pillar — is almost entirely attributable to one government action taken three years ago: the automatic passthrough of fuel costs for distribution companies (discoms).

- SUDHEER PAL SINGH

Implemented in December 2022, this single move addressed the longstanding issue of non-cost-reflective tariffs and helped discoms return to profitability in 2024-25 (FY25) after more than a decade.

Power procurement costs — with fuel as the largest component — account for 70-80 per cent of the total average cost of supply (ACS) and have long been the biggest obstacle in narrowing the gap between ACS and average revenue realised (ARR). That changed in December 2022, when the power ministry amended Rule 14 of the Electricity Rules, 2005, mandating adjustments to fuel and power purchase costs. The rule allows automatic monthly passthrough of fuel and power purchase adjustment surcharges to consumers, depoliticising tariff revisions. Since then, the number of states implementing automatic fuel-cost passthrough has risen sharply. By the end of FY25, 30 of 36 states and Union Territories had adopted the change, issuing regulations aligned with Rule 14. This was up from 24 states a year earlier. Power costs accounted for 75 per cent — or ₹5.38 per unit — of the ACS of ₹7.1 per unit for all rated power discoms in FY25.