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The draft National Electricity Policy 2026 proposes automatic, index-linked tariff revisions if state regulators delay orders
The Centre says the move is aimed at reducing losses and debt at state-run power distribution companies
Power minister Manohar Lal has warned against populist pricing and unpaid subsidies
The proposal marks a shift towards predictable pricing and cost-reflective tariffs
The Union government has proposed an index-linked annual revision of power tariffs if state regulators fail to issue tariff orders on time, a move that could lead to higher electricity bills across several states.
The proposal is contained in the draft National Electricity Policy (NEP) 2026, released on January 21, 2026, and marks a significant shift from the current system. At present, electricity tariffs are revised by state electricity regulatory commissions after distribution companies, or discoms, file petitions seeking changes. In practice, these revisions are often delayed for years, contributing to mounting losses and rising debt in the distribution sector.
Speaking at an industry event on January 21, Union Power Minister Manohar Lal said distribution companies needed to move towards cost-reflective tariffs and cautioned against populist promises. “Free power should not be promised unless the state government pays subsidies to utilities on time,” he said, pointing to tariff under-recovery as a key reason for the sector’s financial stress.
The draft NEP 2026 is intended to replace the existing National Electricity Policy notified in 2005, which focused on tackling shortages, expanding access and building basic infrastructure. Since then, India’s installed power capacity has increased fourfold. The central government claims to have achieved universal electrification in 2021, and per capita electricity consumption rose to 1,460 kilowatt-hours in 2024-25.
Despite this progress, structural weaknesses remain, particularly in electricity distribution. Discoms continue to report high accumulated losses, tariffs in several states do not reflect actual costs, and cross-subsidisation has pushed industrial power prices well above global benchmarks, affecting competitiveness.
Against this backdrop, the draft policy proposes automatic indexation of tariffs as a backstop mechanism, designed to prevent financial slippages when regulators delay tariff orders.
At the centre of the new policy is resource adequacy planning. Discoms and state load dispatch centres would be required to prepare forward-looking plans aligned with state regulations, while the Central Electricity Authority would coordinate a national-level adequacy plan.
On tariffs and finances, the draft policy proposes:
Annual tariff revision linked to an index if regulators fail to act
Progressive recovery of fixed costs through demand charges
Phased reduction of cross-subsidies
Exemption of manufacturing units, railways and metro systems from cross-subsidy surcharges to boost economic competitiveness
The policy also allows regulators, in consultation with state governments, to exempt distribution licensees from universal service obligations for consumers with contracted loads above one megawatt.
With renewable energy now accounting for more than half of India’s installed power capacity, NEP 2026 calls for parity between renewable and conventional power in scheduling and deviation norms by 2030. It pushes for market-based deployment of energy storage, including battery energy storage systems and pumped hydro projects, supported by domestic manufacturing and targeted incentives.
The draft policy also proposes allowing consumers to trade surplus power from distributed renewable energy and storage systems, either directly with other consumers or through aggregators.
Thermal power continues to be recognised as essential for grid stability. The policy encourages flexibility upgrades, the repurposing of older plants and greater integration with storage to support higher levels of renewable energy.
Distribution reforms remain a central focus of the draft policy. NEP 2026 proposes shared distribution networks, the creation of distribution system operators, prepaid smart metering and measures to bring aggregate technical and commercial losses down to single-digit levels.
To deepen competition, the policy also seeks to expand power markets beyond their current reliance on short-term trading. It proposes the introduction of new market products and stronger surveillance to prevent gaming and collusion.
Several proposals in NEP 2026 mirror provisions under discussion in the proposed Electricity (Amendment) Bill, 2025, including measures on tariff discipline, payment security and faster dispute resolution. Government officials argue that legislative backing is necessary to enforce reforms, particularly as India’s power sector is expected to attract cumulative investments of around Rs 4.5 trillion by 2032.