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A study of cross subsidy impact on electricity demand of DISCOMs in India

Student Name: Mr Naveen Agarwal
Guide: Dr Naqui Anwer
Year of completion: 2021

Abstract:

In Indian power distribution sector, tariff rationalization has been a big issue. Historically, across most of the utilities, industrial and commercial consumers have been paying a higher tariff, whereas domestic and agricultural consumers pay lower tariff than their cost of supply. It is this difference between the applicable average tariff of a consumer category and the cost of supply to that consumer category that is generally referred to as Cross-Subsidy. The current research is focused on a comprehensive study on understanding the cross subsidy in electricity system in India and how does it impact the revenue of Distributed Companies (DISCOMs) which are very important part of overall Indian power sector. This study measures the impact of cross subsidy on electricity demand of the utility using data of 14 states, which covers around 70% of the electricity demand of the utility. Using panel data techniques, it was found that elasticity of electricity demand of industrial consumers is less than 1 which suggest that cross subsidy has very less negative impact on electricity demand of the DISCOMs. To understand the factors which would impact this elasticity, a survey was done of companies from two states of India - Rajasthan and Haryana. Survey results highlight the different factors which are obstructing companies to move out from the utility even if they are not satisfied because of cross subsidy. Out of these factors, high cross subsidy surcharge and high cost of alternate power sources are two major factors. The survey results are statistically tested to, estimate the impact of cross subsidy surcharge on the electricity demand in short term electricity market and as per results cross subsidy surcharge has a negative impact on the electricity demand in short term electricity market.