In today’s Finshots, we offer a simplified explainer on India’s proposed shift from fixed electricity tariffs to tariffs that change according to time.

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The Story

If you charge your electric vehicle during the day, you could end up paying 20% less on your regular electricity bill. That’s the carrot.

Crank up the air conditioning at night and it might add 20% to your bill. That’s the stick.

What’s going on, you ask?

Well, this carrot and stick approach is all part of the government’s audacious plan to introduce something called the Time of Day (TOD) tariff structure. See, at the moment, most of us pay a fixed electricity tariff. It’s typically based on how many units we consume. But from 2025*, the government wants us all to move to a pricing model that’s dependent on time!

Yup, the government has categorized our day into 3 buckets. We’ll have eight hours of solar time. And then we have the rest of the day split into peak hours and normal hours. This split will probably vary from state to state. But if you consume the bulk of your electricity during the solar hours, you pay less. And you pay more if you’re hogging electricity after the sun sets. That’s what TOD is all about.

Why is the government doing this, you ask? Isn’t everyone happy with a fixed tariff?

There are a couple of key things at play here.

Firstly, there’s the cost of supplying electricity. Think of this like any other industry that’s driven by demand and supply.

We have the power generators who use stuff like coal to create the electricity we use every day. But first they need to buy coal from the market. Some if it is based on long-term contracts but it could be short-term deals too. Now imagine trying to strike a purchase deal during times when electricity demand is at a peak. The coal sellers can crank up the prices. And producing electricity gets expensive.

But they can’t pass along all this cost to us since electricity is typically subsidized as a public good in India. And that could mean they suffer from losses.

Now imagine if we could regulate the demand. If we can get people to shift consumption to a later time, it would smooth demand. Electricity producers could get their raw material at a cheaper cost. And their cost of producing electricity could fall.

Also, we have the transmission companies. These folks take the electricity from the main power stations and get it to electrical substations across states. They need to set up the infrastructure to ensure that things don’t fail when electricity demand goes up. And they also need to add capacity just to cater to moments of peak demand. Mind you, this peak demand might just be for a few days in a year such as during the holiday periods but they still have to build capacity.

But if we can manage this peak demand through higher tariffs, we could lower the investments in setting up peak-hour infrastructure. It frees up capital for the companies.

Secondly, we also want to speed up the shift towards renewable energy.

You see, if we have reduced tariffs during the day, people might consume more electricity when the sun is out. We can rely on solar energy to power our grid. And this is crucial since we can’t store renewable energy all that well yet. It needs to be used quickly.

On the other hand, we can reduce using coal-based power to meet the peak demand. We can store it for the night time. Or even for periods when the wind doesn’t blow, the sun doesn’t shine, and renewables fail us.

Also, producing electricity using coal is 4 times more expensive than solar power. So when electricity distributors see that demand is peaking during solar hours, they might set up more renewable power units. Non-fossil fuels already account for nearly 45% of our installed capacity. Maybe this will help us improve the mix even more.

And the government’s hoping that all this will help to reduce electricity tariffs for customers at the end of the day.

Sounds good, right?

But in order to get this project up and running, we need to first get something else in order — we need smart meters.

See most meters in India are the manual kind. You need someone from the local electricity distributor to come and take a reading every month. Then they’ll print a bill and hand it over to you. You’ll see your consumption figure and sigh. On the other hand, smart meters automate this entire process. They’ll constantly send the reading to the power distribution company (discom) — the ones who bring the electricity to your doorstep. That’s how they can set the variable pricing. And you’ll probably get to see your usage on an app of some sort too. Maybe that way you can tweak your consumption and reduce your bills.

But replacing meters in homes is an arduous task.

See, in 2021, the government announced an ambitious plan to install smart meters across the length and breadth of the country. It was part of a scheme that was allocated a massive sum of ₹3 lakh crores to ensure success. And the goal was to install 250 million smart meters by 2026. But as of now, we’ve only hit the 6.5 million mark. That means, in order to achieve the goal, we need to install around 6 million smart meters a month.

We’re nowhere close to that run rate.

What’s stopping us?

Firstly, there’s the legacy systems — linking the billing software of discoms with the new infrastructure has thrown up some issues. Secondly, as per The Ken, another problem here seems to be the cost of installation. Apparently, each smart meters cost around ₹4,100. Now initially the cost is borne by the discoms. And the government will pass on some subsidies. But that means with discoms already strapped for cash, they’re not likely to go all guns blazing, right?

But hopefully, all of these creases get ironed out soon. Maybe we don’t hit the target in 2026. Maybe we reach it in 2030. And maybe that’s when we’ll see TOD tariffs roll out to everyone.

So the only question that remains is — can this actually lower electricity bills?

We pored through numerous research papers to find an answer. But the results seem to be a mixed bag. For instance, a pilot project in Germany pointed out that the expected savings doesn’t cover the cost of investing in smart meters. On the other hand, in the US, customers in Illinois actually decided to pre-cool their houses during the early morning hours. They capitalized on periods when the tariff was low. And this translated to savings of 15% on their bills.

So yeah, we don’t know how it’ll play out in India yet. And the only thing we can say is that if if people’s electricity bills start inching higher, it might be a bit of a problem. We’ll just have to wait and see what happens in 2025.

Until then…

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*If you already have a smart meter, you might be put on the TOD tariff immediately.