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Subsidy, Information Asymmetry and Energy Transition in India



 

Author: Mini Govindan, Rashmi Murali and Amit Kumar Thakur

Energy Review, Vol 5. Issue 05. 2023


As the call for climate action intensifies, just energy transitions no longer remains a buzzword, but a potential pathway to achieving the broad objectives of net zero and green economy, whilst contributing to regional and global sustainability parameters like Nationally Determined Contributions (NDCs) and Sustainable Development Goals (SDGs). Just energy transition initiatives have long received support from the government, industry, consumers and civil society organisations, which have promulgated relevant laws and regulations concerning energy transitions, which push forward the development of a low-carbon economy. The MSME sector, which is a critical player in the economy of developing nations like India, presents immense potential to drive energy transitions. However, the sector faces structural challenges such as limited access to finance, inadequate technical skills, and insufficient information for leveraging market opportunities, which not only hinder their business growth but also constraints them from greening their businesses.


Electricity being a key requirement for ensuring seamless production in most manufacturing enterprises, affordable access to a reliable supply of electricity becomes crucial. It is generally agreed that the provisioning of electricity subsidies will alleviate energy poverty in the MSME sector, which has been a major employer and plays a crucial role in economic growth, hence different electricity subsidy strategies are also being offered to the different MSMEs. While it has been an important influencing factor in social welfare too, electricity subsidies are contested for poor signalling of true costs, leading to wastage, subsidy leakages, flawed targeting of beneficiaries, over-charging some users and financial losses for the utilities. It also leads to market distortions by encouraging rent-seeking behaviour and thus results in excessive production or consumption.


However, there is another aspect that warrants attention, which is the damaging influence of information asymmetry with regard to electricity subsidies, when seen from a lens of decision-making of consumers, regarding the choice of clean energy over conventional grid connections. In order to demonstrate the potential reparations caused by asymmetric information, we cite the example of an ongoing project in Varanasi, Uttar Pradesh, where interventions are being made to integrate clean energy to power looms to improve the productivity of silk weaving micro enterprises. The hybrid energy system utilises solar energy to supplement the erratic grid power supply, accompanied by battery backup for days when both solar energy generation and grid supply are unavailable. A significant aspect of the intervention is ensuring the acceptance and endorsement of the weavers and entrepreneurs, and for this, they are encouraged to contribute to the system cost, thus, becoming owners of the system.


However, it is recognised that the present subsidised electricity connections would be a determining factor in their decision to adopt solar. The state government of Uttar Pradesh, in 2006, heavily subsidised the electricity connections through flat rates for registered weavers, bringing down electricity bills significantly. This, however, changed with the change in regime, leading to the flat rate being abolished and consumption-based subsidies being introduced. Bills that were less than Rs.150 per month, now increased to around Rs. 1500 to 2000 a month.


Motor Capacity

Flat Rate (old)

2019 order

Flat Rate (new)

0.5 HP

Rural- Rs. 37.5

Urban- Rs. 75

Rs. 3.50/unit up to

-120 units for 0.5 HP

-240 units for 1 HP

Rural- Rs. 300

Urban- Rs. 400

1 HP

Rural- Rs. 65

Urban- Rs. 130

Rural- Rs. 400

Urban- Rs. 800

Large systems

Rural- Rs. 75/ HP/ month

Urban- Rs. 130/ HP/ month

Rs. 700/ HP/ month

The widespread resistance to the new system from the weavers was based on the sudden higher electricity bills, low returns and the fear of businesses shutting down. With the upcoming general elections in 2024, the state government announced the return of the flat rate system. The changes in tariff structures for the weaving industry, from a flat rate in 2006 to consumption-based subsidy in 2019, and a return to flat rates in 2023 are shown in the table above.


Discussions with weavers reveal that though the announcement comes as a much-awaited relief, there is still no clarity on its actual implementation. Weavers expressed a sense of disjointed coordination between the electricity department and the government when it comes to availing the subsidy. As such, in the last year, due to uncertainty on the status of the subsidy, weavers were not able to understand whether the electricity bill received them was subsidised or not. In addition, the delay in receiving bills in some areas, added to the apprehension. Before the cabinet approval for a flat rate in April 2023, there was an announcement in December 2022, wherein the government promoted subsidised solar systems for power looms. However, our interactions with concerned state officials revealed that the scheme was still being worked out and it was unclear to the concerned government departments as well. Between these varying sources of information, weavers of Varanasi silk clusters found it difficult to take decisions regarding augmenting or supplementing their power sources with options such as solar, which is key to achieving the larger goals of just transition and clean energy access.


While government electricity subsidy policy for weavers is an important external boosting factor, incomplete and disjoint information asymmetry regarding the modalities of subsidy implementation between the government and the weavers has become a common occurrence in this information age mainly due to political reasons. There are numerous big promises and assurances in the budget speech, print media and political rallies with no clarity on the duration of subsidy, eligible beneficiaries, subsidy slab and actual benefits accrued among other issues. Further, in parallel Ministry of MSME has introduced the Technology and Quality Upgradation Support to Micro, Small and Medium Enterprises (TEQUP) scheme which encourages MSMEs to adopt energy-efficient technologies to improve product quality. Under this scheme, a capital subsidy of 25 per cent of the project cost subject to a maximum of Rs. 10.00 lakh shall be provided to the registered MSME units.

These kinds of policies/schemes encourage MSMEs (weavers in this case) to switch to cleaner technologies like solar power for power looms on one hand, while also providing subsidized electricity for power looms on the other hand. However, the lack of factual information on the actual costs and benefits of both options sends confusing signals to the weavers. This information asymmetry not only affects the strategic decisions of the weavers but also undermines the efficiency of government subsidy policies. Furthermore, the high cost of renewable energy technologies and the uncertainty of long-term returns impose significant financial pressure on weavers, weakening their motivation to engage in the energy transition. Therefore, it is crucial for policymakers to improve the system of subsidy information and demonstrate a working model that clearly defines the relative cost-effectiveness of solar-powered power looms. Such efforts can help weaving communities make informed decisions.


(Ms. Mini Govindan is a Senior Fellow, Ms. Rashmi Murali is an Associate Fellow, and Mr. Amit Kumar Thakur is an Associate Director and Senior Fellow at The Energy and Resources Institute (TERI), New Delhi.) ■□■


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