Cross-Subsidisation in Electricity Tariffs

Cross-subsidisation in retail electricity tariffs is an internal redistribution among consumer categories. Some consumers are charged tariffs above the relevant cost benchmark so that others can be supplied below it. The resulting cross-subsidy is embedded in the tariff structure rather than paid directly from the government budget.

How it works

Retail tariffs are differentiated across categories such as households, agriculture, commercial establishments and industry. Revenue collected through relatively higher tariffs from some categories helps compensate the distribution licensee for relatively lower tariffs charged to others.

• Agricultural and low-consumption household users are commonly subsidised, while commercial and industrial consumers commonly bear higher tariffs.
• Cross-subsidisation can advance affordability and social objectives without requiring the entire support to appear as an explicit budgetary payment.
• Large cross-subsidies can weaken cost-reflective pricing, encourage inefficient consumption and raise electricity costs for paying categories.

Statutory framework

Under Section 62 of the Electricity Act, 2003, the Appropriate Commission determines tariffs for electricity supply. Section 61(g) requires tariffs progressively to reflect the cost of supply while reducing cross-subsidies in the manner specified by the Commission.

• Under Section 65, an explicit subsidy directed by a state government must be paid in advance to compensate the affected licensee.
• Under Section 42, open-access consumers may pay a cross-subsidy surcharge to compensate the distribution licensee for the existing cross-subsidy burden.

Why it matters for the power sector

Cross-subsidisation balances affordability against the financial viability of distribution companies. If tariffs for subsidised categories remain far below cost, or revenue from paying categories is inadequate, the resulting revenue gap can worsen distribution-sector finances.

• Very high tariffs can reduce the competitiveness of industrial and commercial consumers and encourage them to seek alternative supply arrangements.
• Transparent, targeted fiscal subsidies are generally easier to identify in government budgets than subsidies concealed within tariff design.