A Systemic Shift

DBT to achieve better targeting of power subsidies

The issue of power subsidies for the agricultural sector has engaged Indian policymakers for a long time. According to the World Bank’s estimates, almost 14-42 per cent of power sold in India is accounted for by agricultural consumers in nine states. The power subsidy doled out for agriculture for all states, at the national level, is a significant Rs 910 billion.

A number of water-stressed states face serious challenges of declining groundwater, excessive electricity consumption by agricultural consumers, and an unsustainable fiscal burden. The problem gets exacerbated for the power sector, as many state governments do not release timely subsidies to discoms, thereby creating liquidity stress across the value chain of the power sector.

To address these issues at the policy level, the central government is contemplating a few changes. The Draft Electricity (Amendment) Bill, 2020, which is currently in the last leg of finalisation, plans to introduce a direct benefit transfer (DBT) mechanism, wherein electricity tariffs will be determined by the state electricity commissions without taking subsidies into account. The upfront cash amount will be given by the government directly to the intended consumers. According to the power ministry, this will help ensure that the discoms get paid for the electricity supplied to the consumers, while allowing the state governments to give any quantum of subsidy they want, to whichever section they want to. The DBT provision is also said to be included in the new tariff policy, which is under finalisation.

On a promising note, even as these changes get finalised into legislation at the central level, a few states have already begun experimenting with DBT. Punjab is a shining example, having launched a pilot DBT scheme almost two years ago. This scheme is a voluntary one, with the purpose of saving groundwater and incentivising farmers monetarily to save power. Other states such as Andhra Pradesh and Madhya Pradesh have also firmed up plans to launch DBT pilots shortly.

A closer look at the new DBT mechanism under the Draft Electricity (Amendment) Bill, 2020, the DBT plans and progress in different states, and the challenges and concerns in implementing them…

DBT under the draft amendment  bill

The DBT scheme under the Draft Electricity (Amendment) Bill will be a significant departure from the current practice. Currently, the subsidy is given as a lump sum payment to utilities, and this amount is deducted from the annual revenue requirement of utilities. Thus, the tariff is fixed for rural consumers.

Under the new structure, the state government will have to decide what subsidy will be given to which consumer category, and the amount will be credited accordingly to the respective accounts. With this change, a section of households, other subsidised consumers and those identified by the state for relief will continue to pay a lower tariff, as is the case now, while the gap between the average cost of supply and the actual tariff will be credited by the state governments into consumers’ accounts with the discoms. As this payment is proposed to be made in advance, the discoms’ books could remain in the green.

Explaining the benefits of the move, Deepto Roy, partner, Shardul Amarchand Mangaldas & Co., says, “The present central government has long supported the concept of DBT replacing mass subsidies, and the principles of DBT were incorporated in the Tariff Policy of 2018. Additional provisions with respect to DBT are now sought to be implemented through amendments to the Electricity Act, to provide statutory sanction to the mechanism.”

The Ministry of Power (MoP) had clarified earlier this year that under this new structure, there will be no restrictions on states for providing subsidy – states can provide as much subsidy as they want, but they must pay it upfront through DBT so that discoms remain healthy and are able to maintain and improve distribution infrastructure like transformers and distribution lines, pay for the power purchased, and provide quality electricity to the people. The MoP also clarified in the new tariff policy that electricity supply should not be discontinued even if a state government is unable to pay the subsidy in time, even for as long as three to four months. Therefore, the consumer’s interest will be duly protected. It is, of course, expected that the state government will pay the subsidy in advance to the discom/consumers as stipulated in the law.

Punjab’s DBT pilot

As an agrarian state, Punjab contributes significantly to the country’s agricultural output; however, it faces a serious challenge of groundwater depletion. Around 25 per cent of power consumption in the state is accounted for by the agricultural sector. There are 1.5 million tube wells in the state, and their deepening by farmers leads to higher power consumption. Free power to the farm sector has resulted in excessive water and power consumption. The state government pays around Rs 68 billion in power subsidies to the state discom, Punjab State Power Corporation Limited (PSPCL), under its free power scheme.

In the context of these challenges, Punjab introduced a DBT pilot scheme, Paani Bachao Paise Kamao (PBPK), to incentivise farmers to use water and electricity more efficiently, while maintaining the public policy choice of free power to agriculture.

Under the PBPK scheme, electricity consumption entitlements have been fixed for every feeder. So, while farmers still get free power, any electricity saved by a farmer or agricultural consumer is monetised at the rate of Rs 4 per unit saved, and the cash is transferred to the bank account of the consumer. Excess consumption is not charged.

Phase I of the scheme was announced in June 2018 for six feeders in three districts. The World Bank has been providing field-based implementation support for three feeders in Jalandhar and Hoshiarpur districts since July 2018 through a consortium comprising the Energy and Resources Institute, Punjab Agriculture University, and IT Power India.

Phase II, announced in June 2019, extended the scheme to 250 feeders in 11 districts, covering 52 per cent of consumers under these feeders. During Phase  I, 287 consumers enrolled under the scheme and a cash incentive of Rs 4.8 million was transferred directly into consumers’ bank accounts. In Phase II, about 1,789 agricultural pump set consumers have enrolled under the scheme and a cash incentive of Rs 900,000 has been transferred into their bank accounts.

To implement the scheme, automatic meter reading devices are being installed on the feeders of the enrolled farmers, so that they can monitor their electricity consumption. Monthly electricity savings are being communicated to farmers through WhatsApp and SMS.

According to PSPCL, overall, around 5 per cent of farmers have enrolled under the scheme so far. Covid-19 has hampered the efforts of PSPCL in creating awareness about the scheme among farmers. But the discom is confident that the enrolment rate will increase over time and that the scheme will subsequently be extended to cover the entire state.

Some of the key learnings from the scheme, according to the World Bank, are that regular communication with farmers and on-time transfer of cash incentives is essential to maintain their interest and build trust. Further, even though the scheme is being administered by the discom, a coordinated approach between the power and agricultural sectors is necessary.

Initiatives by other states

In September 2020, the Andhra Pradesh cabinet approved the DBT of free power subsidy for agricultural connections and resolved to implement it on a pilot basis in the Srikakulam district, before expanding it to the rest of the state from April 1, 2021.

DBT is being implemented by Andhra Pradesh in order to meet the centre’s conditions for increasing the borrowing limits under the Fiscal Responsibility and Budget Management (FRBM) Act to avail of loans under the Atmanirbhar Bharat Abhiyan. As per the FRBM rules, the state has to bring in reforms to the free power scheme for the farm sector.

According to estimates, the state government’s free power bill for about 1.75 million agricultural connections amounts to almost Rs 83.53 billion. The annual consumption by these connections is 12,232 MUs. Under the proposed DBT plan, a separate escrow account will be opened in the name of the consumer (farmer), where free power subsidy in the form of DBT will be credited. The amount credited to the escrow accounts of the farmers would be paid to the discoms and power subsidy dues would not be kept pending. Earlier, discoms used to supply free power and the government released the subsidy amount to the power companies.

Further, to implement the scheme in Andhra Pradesh, smart meters will be installed for agricultural connections wherever possible. In other places, IRDA meters will be installed. Committees at the village, mandal, division, discom and state levels will be constituted for the smooth implementation of the initiative. These committees, besides creating awareness and redressing grievances, will also be responsible for conducting enrolments for new connections. Andhra Pradesh also plans to set up 10,000 MW of solar capacity to supply power to rural consumers. The state plans to provide Rs 410 per annum subsidy per consumer. Around Rs 17 billion has been earmarked for feeder segregation and meter installation in the state, and the remaining requirement will be funded through debt.

Another state that is looking at implementing DBT is Madhya Pradesh. In this state, there are more than 3 million agricultural farmers who are registered consumers of the discoms. Almost 100 per cent of the farmers are getting subsidised electricity under different subsidy schemes of the state government. The subsidy component varies from 88-100 per cent of the electricity bill amount. Under the present structure, a subsidy demand is raised by MPPMCL on a monthly basis from the government. The subsidy claims are consolidated by MPPMCL on behalf of the three discoms and raised to the state government, which, based on the budget provisions, releases the subsidy amount to MPPMCL.

For Phase I of the pilot, about 130,000 consumers in three districts have been selected for rolling out the DBT – Seoni under the east discom, Vidisha under the central discom and Jhabua under the west discom, with a cumulative annual subsidy bill of around Rs 6.5 billion.

Issues and concerns

DBT can help remove the incentive to overuse electricity and, if implemented correctly, could lead to win-win outcomes, with consumers too saving money. However, several concerns will need to be addressed to ensure its success.

Some of the implementation challenges for DBT are non-availability/partial availability of bank details of the targeted rural consumers, who likely have accounts with various banks and branches. Also, innovative digital platforms will be needed for ease of transactions in a secured manner. Discoms, moreover, face challenges in collection in rural areas where the meter reading system is at times imperfect.

There are other ambiguities to resolve as well, adds Roy. “It is not clear whether the discoms would have the power to discontinue services to consumers who have not paid the bill amounts. If that were to be the case, there would be significant prejudice to consumers, who would clearly be at the mercy of the state government’s disbursement of the DBT amounts.”

A larger issue is that not many states are supporting or planning to come up with the DBT scheme as of now, as many states are providing a lump sum payment to the discoms as subsidy and these payments are used towards the payment of power procurement. Further, the political leadership has not been inclined to consider the scheme in many states, given that agri-consumers are considered a sensitive user category. The bureaucracy will need to be prepared to take such initiatives.

In Tamil Nadu, the state government recently underlined several concerns relating to the proposed amendment to the Electricity Act, including the DBT programme. The state has some 2.14 million unmetered agricultural power connections. Subsidy for free power for farmers stood at Rs 2.92 billion in 2011, which increased to Rs 41.72 billion in 2019-20. The state government has stated that the DBT principle should not be applied to the agricultural sector. Further, since it has been providing 100 units of power free to all domestic consumers, for which it provides subsidy to Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO), it has asked that this programme be kept outside the scope of the DBT system.

Another issue raised by experts on the implementation of the DBT scheme is that there has been no real effort by discoms to assess the actual expenditure/ cost incurred/subsidy required in supplying power to rural/agricultural consumers until now. A recent industry report by Emkay equity research notes that in the case of Uttar Pradesh, as against a cost of Rs 7.50 per unit, the tariff charged is Rs 1.30 per unit for agricultural consumers and Rs 5 per unit for LT consumers. Thus, the tariff is much below the cost of electricity. No actual calculation is done by the state government in analysing the subsidy amount to be provided to discoms for the 18-hour supply of power to these consumers. The state government provides roughly Rs 100 billion per annum as subsidy to the state discoms without any assessment.

So how can this work? One of the solutions could be that the central government funds are used to directly make the DBT transfers, says Roy. “This would ensure that the discoms are not entirely dependent on the state government for payment. The other option would be to transfer the funds directly to the consumer, without the intervening escrow, similar to the LPG DBT, and without linking the initial DBT payments to actual consumption. As long as the consumer receives funds on time, this step would have a far greater impact in terms of ‘nudging’ consumer behaviour, changing pilferage patterns, encouraging compliance and improving energy efficiency.”

Clearly, implementing DBT is a long-term effort and much ground remains to be covered. Nonetheless, the policy reforms proposed under the Draft Electricity (Amendment) Bill and state-level initiatives are a good starting point for the transformation process for the distribution segment.

Reya Ramdev



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