In the run-up to assembly elections in a few months, the promise of free or subsidized electricity provides enough fodder to political parties.
This year, seven states will be holding assembly elections, five of which – Uttar Pradesh, Punjab, Goa, Manipur and Uttarakhand – will be held in the first half of 2022. The other two – Himachal Pradesh and Gujarat – towards the end of the year.
Samajwadi Party President Akhilesh Yadav made his first major poll promise “This week ahead of the 2022 assembly elections in Uttar Pradesh:” We will provide 300 units of free electricity to households and free irrigation electricity to farmers if we are elected.”
A few days later, the Uttar Pradesh government announced a 50 per cent reduction in farmers’ electricity bills for running tube wells. Over 13 lakh users in rural and semi-rural areas would benefit directly from this move.
In UP, there are five state DISCOMS, and PaVVNL and Dakshinanchal Vidyut Vitran Nigam (DVVNL) have the highest share of Agri consumers, close to 20%. This leads to the vicious cycle of higher state government support and delayed payments to creditors.
Historically, Most DISCOMS have increased rates for industrial consumers to cover up for these losses partially and ended up reporting net losses as a result.
As a result, their financial situation deteriorates, which results in a sharp increase in debt,” says Hetal Gandhi, Director, CRISIL Research.
Similarly, power freebies are being distributed in Punjab ahead of the assembly elections scheduled for March 2022. 24% of Punjab’s consumers are agri-linked. Based on data collected by Prayas Energy Group, Farmers receive 70% of total subsidies, free power provided to
Scheduled Castes and backward caste, and BPL families account for 14 per cent of total subsidies. In contrast, subsidies to industrial consumers account for 16 per cent.
How does the freebie work?
Farmers and households receive a significant portion of electricity at a fraction of the cost, sometimes even for free. The state directs the power distribution company (Discom) to impose a low or zero tariff on these consumers but promises to reimburse it.
Unfortunately, most states don’t pay the difference or delay these payments, which is why discoms are always in losses or debt. Now, the discoms have to make up at least some of these losses, and they do so by charging more for power to industries and businesses.
Nevertheless, despite multiple restructuring attempts and cross-subsidies, most discoms now have outstanding dues of between six and 12 times their monthly bills. owe six to twelve times their monthly bills in unpaid dues.
“Providing free or subsidized electricity to ‘vote banks’ achieves the short-term goal of winning elections.
As a result, the electricity distribution sector suffers from a long-term loss of financial viability.
In an ORF report, energy expert Akhilesh Sati stated that this is not a discom inefficiency problem but rather political expediency.
Who bears the cost of these freebies?
Delhi residents receive free electricity up to 200 units a month, which means several citizens have no electricity bills. Tamil Nadu offers free electricity consumption of up to 100 units.
To keep a promise made in a campaign, an elected government must compensate the power distribution company for the difference. State governments either subsidise or take over the debt of Discoms.
An example was the Ujjwal Discom Assurance Yojna (UDAY) scheme, when state governments issued bonds to pay off the debt of Discoms.
The second option is cross-subsidization, which means they raise the power price for other consumers such as businesses and industries. However, most of the time, power distribution companies suffer massive losses.