With state-run electricity distribution companies (discoms) continuing to post heavy losses despite two decades of financial support schemes, the Union Power Ministry has proposed a series of legal amendments to introduce market competition and improve efficiency in the power sector.

The proposed changes to the Electricity Act, 2003 would allow industries to procure electricity directly from private suppliers, removing the obligation on discoms to serve all consumers within their jurisdictions. This would enable large “open access” consumers — businesses and industries using over one megawatt of power — to buy electricity at competitive rates, though they may need to pay premium tariffs during supply shortages to ensure uninterrupted service.

According to the ministry, the reforms are designed to unlock industrial power demand, improve discom revenue flows, and reduce tariff distortions, thereby strengthening the sector’s financial sustainability.

Key Provisions of the Proposed Amendments

The draft amendments propose allowing multiple private distribution companies to operate in the same area, sharing the existing network infrastructure. Currently, multiple licensees must build and maintain separate networks, which leads to duplicated costs and inefficiencies.

The changes also empower State Electricity Regulatory Commissions (SERCs) to determine tariffs independently, without waiting for proposals from power generation utilities. This aims to ensure that revised tariffs are implemented from 1 April each year, improving overall financial discipline and predictability in the sector.

At present, distribution licensees are bound by a Universal Service Obligation (USO), requiring them to supply power to all consumers, including those eligible for open access. The new proposal allows states to exempt licensees from this obligation for high-consumption industrial users. In such cases, SERCs may designate a distribution company to supply power at a premium over the cost of supply if alternative arrangements fail.

Financial Health of Discoms

Despite major reforms, most state-run discoms continue to face chronic financial stress as their tariffs fail to recover actual supply costs. According to a Power Finance Corporation (PFC) report for 2023–24, aggregate technical and commercial (AT&C) losses stood at 16.1 per cent, billing efficiency dropped to 86.9 per cent, and accumulated losses rose to Rs 6.9 trillion.

The Centre’s Revamped Distribution Sector Scheme (RDSS) — with a five-year outlay of over Rs 3 trillion from FY22 to FY26 — had targeted reducing AT&C losses to 12–15 per cent and closing the average cost-supply (ACS)–average revenue realised (ARR) gap to zero by FY25. However, progress has slowed, and the gap remains significant.

A report by Icra noted that the regulatory asset gap — the difference between revenue collected and cost of supply — remains elevated at around Rs 3 trillion, primarily due to losses in Tamil Nadu, Uttar Pradesh, Rajasthan, Maharashtra, Delhi, West Bengal, and Karnataka, with the first three states accounting for most of the deficit.

Currently, only a few regions — including the National Capital Region, Odisha, Maharashtra, and Gujarat — have privatised electricity distribution. Uttar Pradesh is also planning to privatise two of its discoms. Analysts have long argued that high cross-subsidies and surcharges inflate industrial tariffs, reducing manufacturing competitiveness and limiting MSME growth.

Outlook

The ministry’s open access framework aims to attract private participation, promote efficiency, and reduce state financial burdens. However, the implementation of these reforms will depend heavily on the concurrence of state governments and regulators.

If approved, the amendments could mark a turning point in India’s electricity distribution landscape, ushering in an era of competitive, transparent, and financially sustainable power markets.