Tariff rate populism has held India’s power sector back for too long: Policy reforms need to succeed

The National Electricity Policy (NEP) of 2026 has measures aimed at closing avenues for errant regulators and utilities under state governments to skirt consumer tariff revisions in line with their cost of power supply.

This sits well with the Centre’s evolving programme to curb unfunded populism. Traditionally, the Centre’s reform schemes tethered financial support to milestones such as price resets. They were not always effective.

Tamil Nadu did not revise tariffs for eight long years, for example, and when it finally did in July 2022, the state’s electricity minister lamented that the hike was necessary only because it was a precondition for borrowing a sizeable sum—about 0.5% of state-level GDP—for the upkeep and upgrade of utilities.

This implied that if Tamil Nadu found another way to secure funds, it would be ready to give up tariff discipline and expose its utilities to financial hazards again. In November 2025, the Union government had proposed legislative amendments that seek to raise the bar for such slidebacks.

To secure progress in the power sector, the Centre is focusing on its ‘engine-room’: state-level regulatory commissions. These regulators would quickly need to settle a utility’s tariff petition, taking no more than 120 days.

Delays will need to be explained and payment defaults could trigger the extreme step of a regulator being sacked by the state government.

Of course, there still remains the problem of a recalcitrant state that may collude with the regulator, resulting in a stalemate or a situation in which a tariff petition is not submitted at all.

To thwart such an eventuality, NEP 2026, through an index, seeks to automatically raise tariffs in line with rising costs.

This will boost the confidence of investors in the distribution business, especially since the proposed amendments would let power infrastructure be shared by multiple distributors, thereby lowering a key barrier to wider market participation.

Such safeguards need to be supported by a strong system of central incentives to the point where consumers across the country enjoy reasonably priced and reliable electricity supply, while the political class finds it hard to play populist games that result in poor service quality.

A well developed and efficient market for electricity is a foundational requirement for India to emerge as a global manufacturing hub. We also need an optimal mix of energy sources. Resource planning is of utmost importance in ensuring robust supplies amid a green shift in the profile of power production.

As renewables rise and we promote rooftop solar panels for decentralized electricity, this exercise involves ever more diverse stakeholders. Today’s stranded solar-generation capacity in western India, for example, reflects an inadequacy that NEP 2026 could help overcome by getting states to plan better.

Rising wind and solar electricity output means that states require battery storage capacity and other devices to tackle supply intermittency. To address such needs, NEP 2026 envisions a framework for closer coordination between the Central Electricity Authority and the relevant departments of state governments.

In all, we now have a set of proposals from which we can draw comfort over this sector’s direction. Success, however, will depend on Centre-state engagements at the highest level. Electricity, after all, is a concurrent subject under India’s Constitution.