Fixed vs Variable Electricity Tariff Rebalancing for Indian DISCOMs

CEA has recently proposed a restructuring of retail electricity tariffs aimed at increasing the share of fixed-cost recovery in consumer tariffs. Electricity tariffs in India broadly comprise two components: a fixed charge, payable irrespective of electricity consumption, and an energy charge, linked to the number of units consumed.

In principle, these two components are intended to reflect the underlying cost structure of electricity supply. Fixed charges are designed to recover costs that a DISCOM incurs simply to make electricity available to a consumer, regardless of actual consumption. These include costs associated with generation capacity commitments, transmission access charges, distribution network infrastructure, substations, transformers, poles, wires, service lines, meters, billing systems, employee and administrative overheads, interest and financing costs, depreciation, and a significant portion of operation and maintenance expenditure. These costs remain largely unchanged whether a consumer uses one unit of electricity or a thousand units.

Energy charges, by contrast, are intended to recover costs that vary with electricity supplied and consumed. These primarily include fuel and power procurement costs linked to energy dispatch, variable generation charges, market purchases, renewable balancing costs to the extent they vary with energy drawal, transmission losses, distribution losses associated with energy flow, and other consumption-dependent operating expenses.

However, in practice, tariff design in India has evolved in a manner where most DISCOMs recover only around 15–20% of their total revenue through fixed charges, even though nearly half of their aggregate cost base is fixed in nature. A large part of network and capacity costs is therefore embedded within volumetric energy charges.

This creates a structural imbalance. When revenues are predominantly linked to units sold while costs remain substantially fixed, any decline in electricity sales — arising from rooftop solar adoption, energy efficiency measures, demand moderation, open access migration, or economic slowdowns — can materially weaken a DISCOM’s financial position. The utility must continue to maintain the same network, honour long-term power purchase commitments, service debt, and meet employee and operational obligations, even as energy sales and revenue collections decline.

This dashboard analyses the implications of a gradual tariff rebalancing framework under which a DISCOM progressively increases fixed-charge recovery to 50% of total revenue, while proportionately reducing per-unit energy charges so that aggregate revenue remains unchanged. Since the discoms are allowed recovery of their Annual Revenue Requirement (ARR) based on their Cost of Supply including RoE, the exercise is therefore not a tariff increase, but has to be a revenue neutral redesign of tariff architecture to better align revenue recovery with the economics of electricity supply.

However, under such a framework, a consumer whose consumption is close to the system average would experience little or no change in the monthly bill. For the same level of electricity consumption prevailing prior to tariff restructuring, consumers with below-average consumption — particularly lifeline and low-income consumers — may experience an increase in bills, whereas higher-consumption consumers, especially C&I consumers, could benefit from some reduction in bills owing to lower per-unit energy charges.

The analysis models two representative consumer categories — 500,000 domestic consumers and 10,000 commercial and industrial consumers — and examines tariff impacts across different consumption levels, revised revenue composition, and the implications for DISCOM revenue resilience. It also explores wider policy questions relating to rooftop solar economics, electrification incentives, affordability, demand elasticity, and the political economy of tariff reform. Recognising the complexity and sensitivity of such changes, the analysis advocates a calibrated 4–5-year transition pathway, supported by targeted safeguards for low-income and vulnerable consumers rather than an abrupt restructuring.

Use the following interactive dashboard to explore different tariff scenarios. Navigate across the tabs, adjust the Fixed Charges (FC) and Energy Charges (EC) for Domestic and C&I consumers using the sliders, and observe the resulting changes in tariffs, bills, and revenue composition. You can also toggle off the revenue-neutral mode to manually modify FC and EC values independently and examine their impact.