Electricity subsidy and a just energy transition in Tamil Nadu

To address climate change, to promote adaptation and resilience, to eliminate energy poverty, and to ensure a just energy transition, countries and states will have to mobilise substantial financial resources. A recent study estimated that India will need to invest a 900 billion USD over the next 30 years to ensure a ‘just energy transition’ (Bushan 2023). While developed countries have pledged to provide climate finance to developing countries, these pledges have not been fulfilled, or are very slow to arrive, or are insufficient. Developing countries will need to find additional and alternative resources to accelerate the decarbonization of its economies and to invest into climate adaptation. The United Nations (2022) has outlined a few interventions that can help in accelerating a just energy transition. These include:

  • to make renewable energy technologies a public good,
  • to shift energy subsidies from fossil fuels to renewable energy,  and
  • to triple investments into renewables.

In 2009, G20 members committed to phasing out and rationalizing fossil fuel subsidies in the medium term (Reuters 2009). But as of 2022, fossil fuel subsidies have not been phased out, neither have they been reduced; instead, fossil fuel subsidies exceeded USD 1 trillion globally for the first time. This is largely due to governments’ increased subsidies to cushion consumers from rising energy prices (IISD 2023).

Energy subsidies are found in virtually every country. Justifications for their use range from social welfare protection, job creation, encouragement of renewable energy sources, promotion of economic development, to energy security. However, it may be worth examining some of the current energy subsidy schemes asking if and to what extent these subsidy schemes are contributing to a just energy transition and to what extent these subsidies align with the proposed three interventions by the UN.

Within the energy sector the electricity sector accounts for a major share of emissions, and  existing energy subsidy schemes in this sector often indirectly support the incumbent energy sources, which in the case of Tamil Nadu, are coal and lignite. In Tamil Nadu, the domestic consumers’ electricity tariffs are subsidized by the Government of Tamil Nadu. Other consumer categories such as agriculture, huts, power looms, hand looms and places of worship do receive electricity subsidy as well. This subsidy is currently provided by offering the consumers a reduced per kWh cost of electricity sourced from the public distribution licensee, TANGEDO, while the state government in return compensates TANGEDCO for a part of this cost reduction to the consumers.

In addition to the electricity subsidy provided by the Government, TANGEDCO, is mandated to cross-subsidise lower consumer tariffs. This is done by charging certain consumer categories, such as industries and commercial entities, a higher tariff for per unit of electricity, as it costs TANGECO to deliver the same. However, in the past years, the cross-subsidy provided was consistently and significantly higher compared to the extra charges levied. TANGEDCO was not able to recover its overall cost of supply from its revenue collection, resulting in a cumulative revenue gap of INR 1.25 lakh Crores as of March 2022 (TANGEDCO 2022). Which means that the current subsidy design – cross subsidising one consumer category to provide subsidised energy to others – compromises the financial health of TANGEDCO and jeopardises the long-term energy supply stability in the state. Financial bail outs for TANGEDCO, by both the central and state government, were required in the recent past.

Additionally, one may observe that the lion’s share of electricity supplied by TANGEDCO is sourced from emission intensive thermal power plants, fuelled with coal or lignite. Therefore, when the state government subsidises consumers that  procure energy from TANGEDCO it indirectly subsidises polluting power sources.

Lastly one may examine the current electricity subsidy scheme and assess to what extent it supports those that are most in need of it. Is the subsidy reaching low-income households? Does the subsidy mitigate energy poverty?

In Tamil Nadu electricity subsidy is currently provided to certain consumer categories. A reform of incumbent energy subsidy scheme for electricity could help in unlocking the much-needed financial resources required to support an equitable and just energy transition. It could also help reducing the states subsidy and TANGEDCO cross-subsidy burden. Alternative subsidy mechanisms could be considered. Such an approach may target multiple policy objective at the same time; it may accelerate the energy transition, increase the investment into renewables and reduce emissions, while supporting low-income households.

Subscribe To Our Newsletter