The Distribution Effects of Increasing Block Prices for Electricity Consumption in India

This paper examines the distribution effects of the existing increasing block price (IBP) system that governs the Indian residential electricity sector. By taking advantage of the observed customer heterogeneity (rural-urban divide, user size), IBP is possible to generate higher revenues while protecting poor users. Using NSSO micro-data from 2012 and published electricity tariffs, we propose an ad hoc analytical framework to include the IBP structure in a modified LA-AIDS model and compute Marshallian, Hicksian and unconditional demand elasticities with respect to marginal price and income. First, the income and own price elasticities for electricity demand respectively are 0.78 and -0.61 with considering IBP in our analytical framework, in comparison to 0.67 and -0.42 when average prices are used. Second, tariffs should be differentiated between rural and urban sectors, as rural consumers are more sensitive to price change while less sensitive to income change. Third, targeting large users with price increases would be effective in revenue collection, because their demand is more inelastic, and would reduce subsidy leakage to rich households. Price increases applied uniformly and/or compensating poor users by direct cash transfer tend to benefit urban and large users disproportionally