For the first time in at least seven years, and possibly ever, electricity quarterly tariff adjustment is slated to be on the negative side. For the hearing scheduled today, the Central Power Purchasing Agency (CPPA) has submitted the detailed cost components pertaining to 2QFY24, and exceptional circumstances aside, power consumers are in line to enjoy a slash in tariffs in the range of Rs2-2.5 per unit for a three-month period, likely starting February 2025.
Following the annual rebasing exercise conducted in July 2024, periodic tariff adjustments were expected to be more moderate. The first outcome supported this expectation, with the adjustment amounting to just Rs8.7 billion. For context, the previous quarterly adjustment stood at Rs47 billion, while the five-year average has been Rs60 billion. For 2QFY25, the adjustment sought by the power purchaser is negative Rs52 billion, which is likely to be spread over the next three months across all consumer categories.
The adjustment requested for 2QFY25 highlights the significance of aligning base tariffs with actual market conditions. In previous years, especially in FY24, base tariffs were set based on overly optimistic assumptions, disregarding on-ground realities and underestimating the role of RLNG. This time, the tariff revision has been more grounded in the actual generation mix. While the base tariff increase was substantial, it has laid the foundation for more stable periodic adjustments throughout FY25—barring any exceptional circumstances.
Having smartly levied the previous adjustment to just one month instead of the usual three, the size of the negative adjustment for 2QFY25 will likely be rolled over three months, with the next adjustment due not before April 2025.
The relief in quarterly tariff adjustments (QTA) aligns with a series of negative monthly fuel charge adjustments, including a notable reduction of Rs1.1/unit for December 2024 to be levied in February 2025. With the monthly adjustments in the same period last year near historic highs of Rs7/unit and Rs5/unit applicable for March and April 2024 – a significant retreat this time around is on the cards. Combined with sharp negative periodic adjustments, the effective tariffs for most consumer categories will be lower year-on-year for much of 2HFY25. This will bring more respite to inflation that has already tapered off to a multiyear low.
The financial impact of terminating agreements with five IPPs is also likely reflected in the sought-after QTA for 2QFY25. That said the declining demand from the grid remains a concern and could offset the savings achieved through IPP negotiations and contract terminations.
For now, tariff adjustments appear to be manageable. It’s time for the government to seriously reconsider the base tariff revision timeline, shifting it from July to January. News reports suggest that this may well be in the works already but might require the Fund’s nod. This change would generate less public outcry, and any bill increases would have a softer impact due to lower consumption during that period. At the same time, a respite in monthly bills must not detract the authorities from tackling the real ills of the energy sector in the transmission and distribution sector.
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