Cost of Free Power

Context

• Ongoing assembly elections in five states have seen a flurry of promises from political parties.
• The prominent one amongst these is the promise of free or subsidised power for farmers and domestic consumers.

The Lure of Free Electricity

• Free or subsidized power to farmers (sometimes accompanied to the farm loan waiver) is present in election manifestos of each political parties during elections.
• According to a report:
  1. Free power to farmers accounts for 70% of total subsidies.
  2. Free power to the Scheduled Caste, backward caste and BPL families contribute 14%.
  3. Subsidized power to industrial consumers constitutes 16% of total subsidies. 

Why free electricity is an issue?

• Cost bared by the States: 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.
• Burden on exchequer: Due to free power in Delhi, the total state subsidy amounts to 11% of the total expenses.
• States incapacity to pay back: 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.
• DISCOM failure due to poor finances: As the Discoms suffer from financial shortage their ability to provide service is affected, especially in rural and far-flung areas.
• Shortage and outages: This is a key reason for the limited electrification of the industrial and commercial sectors.

Necessity check

• Unaffordability: Providing subsidised low tariffs for small consumers is necessary, considering the rising costs of the electricity supply.
• Relief in distress: Free or low-tariff power is at best a short-term relief, which should be provided to those who desperately need it.

Long term impact

Free power distorts demand, discourages efficient use and resource management.

• Impact on power generation: This makes Discoms unable to pay the generators who are dependent on these finances for the procurement of coal.
• Financial burden on end-customers: It leads to industrial and commercial consumers paying cross-subsidy in terms of higher power tariffs to compensate for the under-recoveries of Discoms.
• Burden on Banks: Banks are also affected as power generators can’t pay the interest due to which the costs of borrowing also increases.
• Tariff Issues: The high tariff also makes the states and the country uncompetitive against the other countries in the global market.
• Ignorance to critical issues: The financial implications are immense, undermining a state’s ability to provide critical services such as health, education and basic infrastructure.

Consequences of free power

The free/subsidized power supply is provided for improving the financial condition of farmers. However, this has led to certain dysfunctions:

• Overuse of Power and Wastage
• Wastage of water through overt irrigation
• Land degradation due to Water Logging
• Such cultivation often leads to Crop Failure

Giving free power imposes intergenerational costs in terms of exacerbating water scarcity and deterioration of air quality.

Policy alternatives: PM-KUSUM

• Pradhan Mantri Kisan Urja Suraksha evam Utthan Mahabhiyan (PM-KUSUM) is an Indian central government-sponsored scheme led by MNRE.
• The PM-KUSUM scheme helps Indian farmers in installing solar pumps as well as solar power plants in India.
• Under KUSUM yojana, you will have to bear only 10% of the total cost. The remaining 30% will be provided by the central government and 30% by the state government as solar pump subsidies.
• In that way, you’ll receive a total 60% subsidy on your solar water pump. The remaining 30% will be financed.

Way forward

• DBT: Eschewing free power is not anti-poor. Electricity-poor households can be supported through direct benefit transfers or prepaid meters.
• Cap on usage:  The subsidies should be given for a limited number of units and be given in increasing slabs to avoid overconsumption and wastage.
• Subsidization: Currently, the subsidies are also extended to the large cultivators who grow cash crops, vineyards, sugarcane and make huge profits.
• Concessional tariffs: Fixing concessional tariffs (not below 50% of the discom’s average cost of supply) for consumers with monthly consumption below 50 kWh and connected load up to 1 kW.   
• Extensive eligibility: Rather than giving the subsidy to the discoms, the expert group proposed the subsidy be paid as a direct benefit transfer to eligible consumers.
• Feeder separation: Separation of agricultural meters from non-agricultural meters should be implemented throughout the country.

Conclusion

• India needs greater electrification of its economy. It must create the conditions that encourage this.
• The reckless and indiscriminate promise of free power prevents that transition.