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Odisha Must Balance “free power” and “market pricing”

Tamil Nadu’s newly elected Chief Minister, C. Joseph Vijay, began his first innings by announcing free electricity for household consumers in the state. Whether this announcement is driven by electoral strategy or genuine welfare concerns, only time will tell. One may see the impact of such a decision after some time. But such announcements travel quickly across state borders. No wonder, the citizens in Odisha started asking a simple question: if consumers elsewhere can receive free electricity, why not us, when we have surplus electricity? In fact, the expectation of free electricity is not entirely new. During recent elections in Odisha, most of the  parties made various promises related to welfare benefits, including free electricity.

This question becomes particularly relevant because electricity tariffs remain a sensitive issue for households in Odisha. For lower-income families, rising costs of food, education, healthcare, and transportation have already stretched monthly budgets. Electricity is no longer a luxury. It has become a basic necessity. 

Learn from history

Odisha was the first state in India to embark on power sector reforms in the 1990s. It unbundled its electricity board, corporatized it, invited private participation, and established a regulatory framework based on commercial principles. The underlying philosophy was clear: electricity is an economic good, and its pricing must reflect the cost of generation, transmission, and distribution. The creation of the Odisha Electricity Regulatory Commission was meant to ensure that tariffs would be determined through an independent process rather than electoral announcements.

After more than 3 decades of reforms, we don’t think anyone has to tell the people of Odisha that electricity is an economic good. They know power plants must be paid, transmission involves cost, and distribution companies need money to reduce losses and improve service quality. They also know that if tariffs are disconnected entirely from costs, the sector can quickly slide into financial distress.

Recognizing electricity as an economic good does not mean consumers must necessarily bear the burden directly. It is time to design a system that protects both consumers and suppliers of electricity. Odisha, as the pioneer of power sector reforms, now has an opportunity to create a model where “free power” and “market pricing” coexist.

The Model: Combine Regulation and Responsibility

The state should preserve the current mechanism of tariff determination. The Odisha Electricity Regulatory Commission must continue to independently determine tariffs through public hearings, stakeholder consultations, and transparent cost assessments. This ensures that the real economic cost of electricity remains visible.  Let the Commission create a mechanism whereby the government can pay a part of the tariff to the distribution companies. Such a system can also provide policy flexibility to gradually redesign state support to the other initiatives in the sector over time.

Every month, consumers should continue receiving electricity bills that clearly show: Units consumed, applicable tariff, total bill amount, government subsidy provided, and the final payable amount. For eligible households, the final payable amount may be zero. Transparent accounting of subsidies can help the state better assess both the fiscal burden and the long-term effectiveness of different forms of state support.

This model offers three important advantages. First, it preserves price signals. Consumers can still see the actual cost of the electricity they consume. This avoids the dangerous illusion that electricity is a “free good”.

Second, it ensures that subsidies remain transparent. Instead of forcing distribution companies to absorb losses, the model makes the state government directly reimburse them, ensuring that they remain financially viable.

Third, it creates an opportunity for the state to rethink the public support and gradually shift from consumption subsidies towards energy infrastructure such as rooftop solar and energy-efficient systems, reducing the long-term subsidy burden.

Fine-tuning the model

The basic model of providing a subsidy to recover costs can be further improved with additional features.

  • Define the eligible households. Subsidy need not be given to all consumers. Eligible households can be defined based on consumption. Since the purpose is to reduce the financial burden on people who can’t afford it, let the scheme be made available to consumers with annual consumption of less than 1200 kWh.
  • Make the tariff reflect the cost to serve. If the state government chooses to subsidize household consumption directly, then retail tariffs should still reflect the actual cost of supply, as envisaged under the Electricity Act, 2003. If domestic tariffs are transparently cost-reflective and household subsidies are directly funded by the government, the burden of cross-subsidization on High Tension (HT) and Extra High Tension (EHT) consumers could gradually reduce.  The reduction in cross subsidization will help Odisha’s industries, particularly the MSMEs, to be competitive in the global market. Affordable and rational industrial tariffs can encourage investment, generate employment, and support long-term economic growth.
  • Encourage people to voluntarily surrender the subsidy. Such consumers may be recognized with a letter of appreciation, and their names may be published in the local newspapers.
  • Focus on infrastructure support alongside consumption subsidies. For the long-term sustainability of the sector, the state should gradually increase support for energy systems such as rooftop solar and energy-efficient systems. Odisha has already taken important steps in this direction, and, with greater policy focus and financial commitment, it can emerge as a frontrunner.

Role of the Government

The government cannot wash its hands of the electricity sector by treating it merely as a regulatory issue. The regulator must continue to determine tariffs transparently, but the government must take explicit responsibility for the social consequences of its pricing decisions. If it wants to provide relief, it should do so openly through the regulatory process.

Let Odisha lead the way once again.

Let every consumer know the actual cost of electricity, while governments transparently subsidize vulnerable households. Let tariffs reflect the true cost of service so that industries can benefit from reduced cross-subsidization. At the same time, the state should prioritize investment in energy infrastructure rather than merely subsidizing consumption. The state also needs to accept responsibility for ensuring that the electricity sector remains both financially sustainable and socially equitable.

Odisha pioneered electricity reforms once. It now has an opportunity to pioneer the next generation of electricity reforms by combining transparency, competitiveness and compassion.