Cross-subsidized electricity prices are common across India. A recent Indian Forum of Regulators report surveyed prices in 23 states, and found that the commercial and industrial sectors were cross-subsidizing the residential and agricultural sectors in all but five states (each of which has prices below the cost of supply for all groups). This pricing scheme ﬂies in the face of the basic economics of electricity pricing: all customers should pay the same per-unit price for power (equal to the marginal cost of supply).
Why this study
The most recent national government move to improve discoms’ ﬁnancial health, UDAY, ended in March of 2019, largely having failed to deliver on its promises of reforming the power sector. There have been a series of calls for ending electricity cross-subsidies in recent years, but these proposals lacked serious empirical evidence.
This project seeks to ﬁll this gap and empower distribution companies and regulators to reform electricity pricing towards more economic eﬃcient schemes on (A) the basis of economic theory, (B) estimates of welfare consequences, and (C) calculations of the implications for utility revenue recovery.
This project will estimate the welfare consequences of cross-subsidized electricity prices in Delhi by producing experimental evidence on the price elasticity of demand among residential and commercial power customers in partnership with the Tata Power Delhi Distribution Limited. Preliminary evidence from the researcher’s ongoing work suggests that residential customers are extremely inelastic, suggesting that this pricing scheme may be strongly welfare-reducing.