Delhi’s inefficient electricity subsidies

Who doesn’t like discounts or freebies, especially from the government? Subsidies aren’t inherently wrong—they can help keep goods and services affordable, and encourage “good” things like education. The challenge is making them efficient and focused, so that they help the poor and deserving the most.

The Delhi government offers substantial subsidies to household consumers of electricity, and a Brookings India study shows these turn out to be the most generous in India. They are also highly regressive in the current form, i.e. the richer benefit far more. Tweaking the subsidy policies can maintain much of the coverage (and increase it for the most deserving) but save enormous taxpayer money, perhaps around Rs1,000 crore annually.

Delhi’s electricity tariffs are set by an independent regulator, the Delhi Electricity Regulatory Commission (Derc), which found the average cost of supply per kilowatt-hour (kWh, or unit) is roughly Rs7.3 for Delhi’s three major utilities (discoms). Derc has set average residential (domestic) tariffs at only about 75% of this cost, with commercial and industrial users overpaying to compensate (a cross-subsidy). Within the residential segment, smaller users pay less than this discounted average tariff, with rising tariffs for higher consumption based on slabs or tiers, a progressive system. The lowest (or entry) pricing slab is for a monthly consumption of 0-200 units, and only a small subset of consumers sees tariffs equal to or higher than the average cost.

On top of this, the government promised a third discount, a 50% taxpayer subsidy on energy consumption charges (but not fixed charges) for all consumers below 400 units per month.

This subsidy mechanism is so generous that over 80% of homes get the subsidy, on average. Due to its monthly nature, outside the extended summer, some 90-96% of consumers qualify. This is not just the common man, but even the rich!

Lower consumers (0-100 units, ostensibly the poor) only get a subsidy of about Rs1,000 annually, while the highest bucket (300-400 units) get around Rs9,000 average subsidy. Worse, the design is regressive, in part since it doesn’t cover fixed costs and in part because the absolute subsidies increase with rising consumption. Thus, the net subsidy for the poorest is only about 33%, while the rich get about 40% subsidy.

The subsidy is enormous, budgeted at Rs1,600 crore in 2016-17 (6.15% of Delhi’s non-plan expenditure). In contrast, the water subsidy is only Rs250 crore, hitting a peak at a theoretical limit of about Rs287 per month (for a full 20,000 liters of free water consumption).

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