The AAP government’s decision to supply subsidised power in Delhi is adversely affecting the financial health of discoms

Since the financial year (FY) 2019-20, the AAP government in Delhi led by Arvind Kejriwal has been subsidising the distribution of electricity to household (HHs) consumers. Whereas, HHs consuming up to 200 units per month are fully exempt from paying any charges, those with consumption between 201-400 units per month get 50 per cent of the bill amount as a subsidy subject to a cap of Rs 800. During FY 2019-20, the government spent Rs 2405 crore on subsidizing these consumers. The expenditure increased to Rs 2940 crore during FY 2020-21. It further increased to Rs 3090 crore during FY 2021-22.   

In June 2022, based on the feedback received from a large section of the HHs that they were not interested in availing of the subsidy (as the Chief Minister put it) he came up with a proposition that ‘from October 1, 2022, electricity subsidy will be given only to those households who ask for it’. The expectation was that HHs who were well off and could afford to pay full cost-based tariffs wouldn’t ask for it.     

The households were asked to give their written consent through multiple online and offline methods for availing subsidy on consumption of up to 400 units per month. The expectation that a good chunk would opt out - leading to a significant reduction in subsidy outgo - didn’t materialise. During FY 2022-23, the government spent Rs 3162 crore on power subsidies even higher than in the previous year. But, the new dispensation came into force from October 1, 2022; so the comparison is not on all fours. For proper comparison and to gauge the full-year impact, we need to look at FY 2023-24.

For the current year, the government has made a provision of Rs 3250 crore in the budget. Now, it has made an additional allocation of Rs 100 crore taking the total to Rs 3350 crore. It means, things haven’t panned out the way Kejriwal thought it to be. In June 2022 (then, the new scheme wasn’t in force), 4.7 million consumers had availed of subsidy for consuming up to 400 units a month. Come November 2023, 5.1 million availed of subsidy - up by 0.4 million. There was an inherent flaw in Kejriwal’s thinking.

If the government asks the consumers ‘Do you want subsidized power?’ A natural response by almost everyone will be ‘Yes’. This is amply corroborated by the increase in the number of consumers availing of subsidies. Not just that, the consumers getting ‘full waiver’ on consumption up to 200 units increased from 3 million in June 2022 to 3.8 million in November 2023 even as those availing of 50 percent waiver for consumption between 201 and 400 units decreased from 1.7 million in June 2022 to 1.3 million in November 2023.  

Such an outcome is inevitable when instead of making a decision based on a rational criterion (say, only poor HHs are eligible to receive subsidy), the government leaves the choice entirely to the consumers. This also gives rise to manipulative practices and corruption. How else, one would explain a whopping increase of 800,000 in the number of consumers availing of the complete waiver on consumption up to 200 units?                    

This tendency has been seen in Punjab too where the AAP government had promised a full waiver of electricity bills on consumption up to 300 units a month. Thus, consumers whose ‘actual’ consumption is higher than 300 units have applied for multiple connections within the same HH. For instance, a household consuming 900 units a month, gets three meters installed to keep consumption of each under 300 units thereby ensuring zero bill.

Reportedly, more than 100,000 meters have been bifurcated or trifurcated enabling even high-end consumers to avail of the free bonanza. As a consequence, currently almost over 95 per cent of power consumers in Punjab avail of subsidies. The swelling number of connections has increased the subsidy by Rs 125 crore per month on average. As a result, the total domestic subsidy for the FY 2023-24 is now expected to be Rs 8,813 crore - Rs 1,500 crore higher than the initial estimate of Rs 7,313 crore.

The cost of this indiscriminate subsidy to whoever comes forward is much more than what is evident from a plain reading of the numbers. For instance, in Delhi the subsidy of Rs 3350 crore (FY 2023-24) is arrived at by multiplying monthly consumption say 200 units with the applicable tariff - as per the prescribed slab - approved by the Delhi Electricity Regulatory Commission (DERC). That tariff of Rs 3 per unit itself is just about half of the average cost of purchase, wheeling and distribution.

Taking into account a plethora of levies viz. power purchase adjustment charge (PPAC) @31.6 per cent, surcharge @8 per cent and electricity tax 5 per cent – adding to 44.6 per cent – the under-recovery comes to Rs 4.3 per unit (3x1.446). On 200 units of monthly consumption, this is Rs 860 or Rs 10,320 per annum. For 3.8 million consumers, this comes to Rs 3922 crore. 

Likewise, for those consuming between 201 and 400 units, the applicable tariff is Rs 4.5 per unit implying an under-recovery of Rs 1.5 per unit. Including the impact of charges @44.6 per cent, this comes to Rs 2.2 (1.5x1.446). On monthly consumption of 200 units, this will be Rs 440 or Rs 5280 per annum. For 1.3 million consumers, the under-recovery would be around Rs 686 crore.      

Putting the two together, the total under-recovery would be Rs 4608 crore. This is cross-subsidized by charging more from industrial and businesses (besides HHs in higher consumption slabs) for which the tariff can go up to a high of Rs 16 per unit. But, for this cross-subsidization, the Delhi government would have to spend that much more in addition to the budget provision of Rs 3350 crore. Meanwhile, the industries and service establishments continue to suffer due to the prohibitive cost of electricity leading to a high cost of production in turn, affecting their ability to compete in the domestic and international markets. 

The populist policies of the AAP government also affect the financial health of power distribution companies or discoms. While raising their bills, the discoms don’t charge anything from HHs consuming up to 200 units a month whereas from consumers in the 201-400 range, they reduce the bill amount by 50 per cent subject to a cap of Rs 800. The Delhi government is expected to reimburse them for these under-recoveries as a subsidy. But, the former often delays reimbursement and it isn’t full. 

The Discom stress could be prevented if only the government gave subsidies directly to the beneficiaries under the direct benefit transfer (DBT) scheme. In 2018, the DERC issued an order requiring the Delhi Government to follow the DBT mode for giving subsidies. But, the order was never implemented and was quietly withdrawn early this year. So, it is business as usual. 

Routing subsidy through discoms helps the government in shielding its fiscal profligacy by letting reimbursement dues pile up, making payments at its sweet will or not paying at all. It also comes in the way of reforms such as dismantling bureaucratic controls on the discoms, allowing more players in the electricity distribution business, fostering competition and lowering tariffs.

(The writer is a policy analyst, views are personal)