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Cross Subsidy Surcharge
Cross subsidy surcharge is the difference between the tariff applicable to the relevant category of consumers and the cost of the distribution licensee to supply electricity to the consumers of the applicable class and the surcharge is applicable to open-access consumers as per Electricity Act, 2003 Section-42.

Embedded Cost
An embedded cost is an expenditure that a company or a firm has already incurred as part of a project and has no hope of retrieval. These costs can play an important role in financial planning activities which are to be essentially considered by decision makers.

Here, while determining the cost incurred for each consumer category, we may differentiate the cost attributable to each class of consumer based on load factor, power factor, supply voltage, total consumption of power during any specified period or the time at which the supply is required or the geographical position of consumer area, the nature of supply and the purpose for which the supply is required etc,. The cost of service for each consumer category has been worked out through allocating the approved aggregate revenue requirement (ARR) based on any of the above parameters. The revenue from tariff for each consumer category is the sums of revenue from demand/fixed charges, energy charges and customer charges, etc. The revenue in excess of the cost of service (for each consumer category) is considered as Cross-subsidy.

There are two types of cross subsidy surcharge calculation methods presently in Indian electricity sector viz., Embedded Cost Methodology & Avoided Cost Methodology (National Tariff Policy).

Merits and De-merits


ItemEmbedded Cost MethodologyAvoided Cost Methodology *Calculation MethodS = T – C

‘S’ is the surcharge
‘T’ is the Average revenue realization of particular category of consumer
‘C’ is the cost of service of particular category of consumer

S = T–[C(1+L/100)+D]

‘S’ is the surcharge
‘T’ is the Tariff payable by the relevant category of consumers
‘C’ is the Weighted average cost of power purchase of top 5% at the margin excluding liquid fuel based generation and renewable power
‘D’ is the Wheeling charge
‘L’ is the system Losses for the applicable voltage level, expressed as a percentage

Tariff DeterminationBased on category wise COS arrivedBased on average COS methodologyImpact on Cross Subsidy from Short Term Open Access HT ConsumersHigher Cross Subsidy expectedLower Cross Subsidy expected

* The underlying assumption in this methodology is, if a consumer opts for open access, the marginal stations of the distribution licensee will not be dispatched to the extent of open access load and the licensee will avoid these costly marginal stations.

By Er. Krishna Rao & Team
Regulatory Affairs Cell