Page 2 - Charging Power - Understanding Electricity Pricing and the Willingness to Pay for Electricity in India
P. 2
Policy Brief
Interestingly, in some cases consumers expressed lower be the sole contributing factor to reducing a discom’s
willingness to pay for better grid-connected services. This revenue gap. In the case of MVVNL, the per unit WTP for
appears to be due to a sense of consumer entitlement, grid electricity expressed by lifeline category consumers,
leading to an expectation of receiving electricity services `3.33, was significantly lower (approximately 56%) than the
at a nominal cost from the government. If cost-reflective approved average grid tariff of `5.16 for 2015–16. Therefore,
tariffs are to be charged, the expectation of the state as a based on the existing WTP assessments in the state, the per
low-cost / nearly free provider needs to be changed by: unit gap between the actual average cost of supply and
Helping consumers understand the true cost of realized revenues (for 2015–16) would not be “bridgeable”
if WTP was the only factor considered.
supplying electricity
Making electricity pricing of consumers more Therefore, other simultaneous measures are also required
to reduce the gap. These include:
independent Significant improvements in operational efficiency
Making subsidy policies more transparent and better
and reduction in AT&C losses
targeted Conversion of unmetred connections to metred ones
Increase in the hours of supply
In the case of MVVNL, after accounting for subsidies, a per
unit gap of `1.98 between the average cost of supply and
revenue in 2015–16 will still remain, see Table 1. If MVVNL
can reduce its AT&C losses to below 11%2, the revenue
gap can be reduced significantly, effectively meeting 60%
of the existing gap between average cost of supply and
average revenue (row 4).
Table 1 Estimated Reduction in Gap for MVVNL, UP
2013-14 2014-15 2015-16
Discussions with the electricity sector regulators revealed Parameter `/kWh `/kWh `/kWh
that the consumer’s willingness to pay is not currently
considered whilst setting tariffs. Instead, pricing is done 1 Average Cost of Supply (ACS) 6.18 5.49 6.46
on a ‘cost-to-serve’ basis, using data provided by electricity
distribution companies (discoms) and/or on studies 2 Average Revenue (without subsidy) 3.32 3.37 5.16
undertaken by regulators. When these WTP findings were
shared with sector stakeholders they agreed that WTP 3 Gap (actual realized revenues + subsidy) 1.87 1.80 1.98
assessments would be very relevant inputs for pricing if 4 Gap after reduced AT&C Losses* 1.75 0.98 0.78
they were designed in consultation with the regulators.
This would enable evidence-based pricing decisions, better 5 Gap after unmetred to metred 1.31 0.38 0.06
targeting of subsidies to needy consumer groups, and
increase the ownership and acceptance of future pricing 6 Gap after increased hours of supply 1.37 0.41 -0.09
reforms and policies.
7 % reduction in Gap 26.79% 77.31% 104.56%
Bridging the Gap: The Case of MVVNL
Source: Power Finance Corporation Report on Performance of State Power Utilities, 2015
To understand how consumer willingness to pay can Note: * MVVNL’s AT&C losses in 2013–14, 2014–15, and 2015–16 were 14.32%, 35.18%,
contribute to closing the viability gap between cost of and 21.03%, respectively.
service and revenue for distribution companies, a discom
in Uttar Pradesh (MVVNL1) was chosen for analysis, as a The conversion of existing unmetred connections
number of WTP studies have been conducted in the State. to metred ones can also enable discoms to recover
nearly three times the revenue it gets from unmetred
The estimated WTP range in Uttar Pradesh shows that connections. In the current scenario, for 5 hours of supply,
the domestic consumer’s willingness to pay cannot flat-rate charges recover only approximately `1.20 per unit,
whereas, metred connections would recover `3.60 per
1 Madhyanchal Vidyut Vitran Nigam Ltd. is a government discom unit—enabling a further 92% reduction in the gap (row 5).3
in Uttar Pradesh
2 This benchmark is based on DGVCL’s performance standards
(a discom in Gujarat), taking a realistic estimation of possible
percentage reduction in AT&C losses.
3 Calculated WTP is `3.33 and it appears that consumers would
be willing to pay `3.60 per unit if metres were installed.
2 FEBRUARY 2017
Interestingly, in some cases consumers expressed lower be the sole contributing factor to reducing a discom’s
willingness to pay for better grid-connected services. This revenue gap. In the case of MVVNL, the per unit WTP for
appears to be due to a sense of consumer entitlement, grid electricity expressed by lifeline category consumers,
leading to an expectation of receiving electricity services `3.33, was significantly lower (approximately 56%) than the
at a nominal cost from the government. If cost-reflective approved average grid tariff of `5.16 for 2015–16. Therefore,
tariffs are to be charged, the expectation of the state as a based on the existing WTP assessments in the state, the per
low-cost / nearly free provider needs to be changed by: unit gap between the actual average cost of supply and
Helping consumers understand the true cost of realized revenues (for 2015–16) would not be “bridgeable”
if WTP was the only factor considered.
supplying electricity
Making electricity pricing of consumers more Therefore, other simultaneous measures are also required
to reduce the gap. These include:
independent Significant improvements in operational efficiency
Making subsidy policies more transparent and better
and reduction in AT&C losses
targeted Conversion of unmetred connections to metred ones
Increase in the hours of supply
In the case of MVVNL, after accounting for subsidies, a per
unit gap of `1.98 between the average cost of supply and
revenue in 2015–16 will still remain, see Table 1. If MVVNL
can reduce its AT&C losses to below 11%2, the revenue
gap can be reduced significantly, effectively meeting 60%
of the existing gap between average cost of supply and
average revenue (row 4).
Table 1 Estimated Reduction in Gap for MVVNL, UP
2013-14 2014-15 2015-16
Discussions with the electricity sector regulators revealed Parameter `/kWh `/kWh `/kWh
that the consumer’s willingness to pay is not currently
considered whilst setting tariffs. Instead, pricing is done 1 Average Cost of Supply (ACS) 6.18 5.49 6.46
on a ‘cost-to-serve’ basis, using data provided by electricity
distribution companies (discoms) and/or on studies 2 Average Revenue (without subsidy) 3.32 3.37 5.16
undertaken by regulators. When these WTP findings were
shared with sector stakeholders they agreed that WTP 3 Gap (actual realized revenues + subsidy) 1.87 1.80 1.98
assessments would be very relevant inputs for pricing if 4 Gap after reduced AT&C Losses* 1.75 0.98 0.78
they were designed in consultation with the regulators.
This would enable evidence-based pricing decisions, better 5 Gap after unmetred to metred 1.31 0.38 0.06
targeting of subsidies to needy consumer groups, and
increase the ownership and acceptance of future pricing 6 Gap after increased hours of supply 1.37 0.41 -0.09
reforms and policies.
7 % reduction in Gap 26.79% 77.31% 104.56%
Bridging the Gap: The Case of MVVNL
Source: Power Finance Corporation Report on Performance of State Power Utilities, 2015
To understand how consumer willingness to pay can Note: * MVVNL’s AT&C losses in 2013–14, 2014–15, and 2015–16 were 14.32%, 35.18%,
contribute to closing the viability gap between cost of and 21.03%, respectively.
service and revenue for distribution companies, a discom
in Uttar Pradesh (MVVNL1) was chosen for analysis, as a The conversion of existing unmetred connections
number of WTP studies have been conducted in the State. to metred ones can also enable discoms to recover
nearly three times the revenue it gets from unmetred
The estimated WTP range in Uttar Pradesh shows that connections. In the current scenario, for 5 hours of supply,
the domestic consumer’s willingness to pay cannot flat-rate charges recover only approximately `1.20 per unit,
whereas, metred connections would recover `3.60 per
1 Madhyanchal Vidyut Vitran Nigam Ltd. is a government discom unit—enabling a further 92% reduction in the gap (row 5).3
in Uttar Pradesh
2 This benchmark is based on DGVCL’s performance standards
(a discom in Gujarat), taking a realistic estimation of possible
percentage reduction in AT&C losses.
3 Calculated WTP is `3.33 and it appears that consumers would
be willing to pay `3.60 per unit if metres were installed.
2 FEBRUARY 2017
