Trade bodies have sharply criticized the Karnataka Electricity Regulatory Commission’s (KERC) decision to revise electricity tariffs for FY 2025-26, raising charges for commercial and industrial (C&I) consumers to help bridge a subsidy gap arising from free power for farmers.

The decision has revived the long-standing debate over cross-subsidies in India’s electricity sector, where C&I consumers effectively pay higher tariffs to offset subsidies for other categories, such as agriculture and low-income households.

The revision follows a review petition filed by the state’s electricity distribution companies (ESCOMs), which argued that the earlier tariff order created a mismatch between the subsidy allocated by the state government and the actual cost of supplying electricity to farmers.

The state government had earmarked ₹160.21 billion (~$1.74 billion) in the FY 2025-26 budget to subsidize electricity for agricultural pump sets. However, the subsidy requirement under the tariff order was estimated at ₹206.40 billion (~$2.24 billion), leaving a gap of about ₹46.20 billion (~$501 million) for the utilities.

Because farmers in the LT-4a category receive free electricity, distribution companies cannot directly recover the difference from them. ESCOMs warned that unless the gap was addressed, utilities could face financial strain or be forced to bill farmers for the balance amount, which would undermine the state’s free power policy.

To address the deficit, the review petition proposed a combination of additional government support, other revenue sources, and revised tariffs for commercial and industrial consumers. The Commission accepted this approach, noting that it would help protect agricultural consumers while ensuring that utilities can recover the cost of electricity supply.

Under the revised framework, the Karnataka government will provide an additional subsidy of ₹23.62 billion (~$256 million), while distribution companies are expected to mobilize about ₹11.07 billion (~$120 million) through miscellaneous revenue sources. The remaining shortfall of around ₹12.54 billion (~$136 million) will be recovered through higher tariffs on commercial and industrial consumers.

The revised tariff structure reflects this adjustment.

Risk of Slowing Industrial Growth

Under the Electricity Act, regulators are required to progressively reduce cross-subsidies while ensuring that electricity remains affordable for vulnerable consumers. However, the economic realities of the power sector, particularly in states with extensive agricultural subsidies, have meant that industries continue to bear a significant share of the cost burden.

Shivraj V. Inginshetty of the Kalyana Karnataka Chamber of Commerce and Industry (KKCCI) said industry bodies had submitted objections to the proposed revisions but felt their concerns were not adequately considered.

He said that while businesses recognize the need to support farmers, raising tariffs on industries could weaken segments that play a key role in processing agricultural produce and bringing it to market.

Inginshetty also highlighted regional disparities within the state, noting that the Kalyana Karnataka region remains less economically developed than other parts of Karnataka. According to him, policies that raise electricity costs for industries in the region risk slowing industrial growth and could undermine efforts to achieve balanced regional development.

Another stakeholder said the issue also concerns regulatory predictability. “The MYT tariff order for FY2025-26 to FY2027-28 was already issued last year after due consultation, and industries had factored those tariffs into their cost planning. Revising it within a year raises questions about the predictability of tariffs. At the same time, if the government wants to provide subsidized or free power to certain consumer categories, that cost should ideally be borne through the state budget rather than shifting it onto commercial and industrial consumers through higher tariffs.”

“When power costs become unpredictable and increasingly cross-subsidized, it directly affects business competitiveness and could influence future investment decisions in the state,” the stakeholder added.

The Federation of Karnataka Chambers of Commerce and Industry (FKCCI) also expressed concern about the impact of the tariff revision on the state’s manufacturing ecosystem.

“Power is a critical input cost for industries, particularly for micro, small, and medium enterprises (MSMEs). Repeated increases in electricity tariffs erode competitiveness, making Karnataka’s products less attractive compared to those from other states. This threatens to discourage new investments and may even compel existing industries to relocate to regions offering more stable and affordable power tariffs,” said Uma Reddy, President of FKCCI.

Large Industrial Power Consumer Base

According to FKCCI, Karnataka’s manufacturing sector plays a key role in employment generation and economic growth. The state has nearly 600,000 MSMEs, which consume about 3.5% of its electricity and provide direct employment to around 4 million people, supporting the livelihoods of nearly 16 million citizens.

For these enterprises, the association noted, grid power remains indispensable. “Rising tariffs jeopardize their sustainability, while larger industries may increasingly migrate to open access or captive generation models.”

Karnataka currently has around 15,000 high-tension industrial consumers, accounting for 13.63% of electricity consumption.

FKCCI also argued that industries are already bearing a disproportionate share of the subsidy burden in the power sector. “While social welfare objectives are important, cross-subsidization must not come at the cost of industrial growth. The government should directly fund subsidies through the state budget rather than recovering them via higher industrial tariffs.”

It added that the ₹190 billion (~$2.06 billion) budget provision for FY2026–27 for irrigation pump set subsidies remains insufficient, with the actual requirement estimated at ₹220 billion (~$2.39 billion) –₹230 billion (~$2.50 billion). The resulting gap of ₹30 billion (~$325 million) –₹40 billion (~$$434 million) could lead to supplementary grants or delayed payments to ESCOMs. “Past experience shows that such deficits as the staff pension shortfall have ultimately been passed on to industry. This practice is unsustainable and unfair.”

Shift Toward Renewable Procurement

The tariff revision also comes at a time when industries across India are increasingly exploring alternative electricity procurement options such as captive solar projects, group captive renewable projects, and open-access power purchases. Higher grid tariffs could accelerate this shift, particularly for energy-intensive sectors seeking to manage operating costs.

Industry associations warned that higher grid tariffs could push more businesses to explore alternative electricity procurement options. Inginshetty noted that regulatory changes allowing consumers with a connected load of 100 kW or more to source renewable energy through open access could accelerate this shift if grid power becomes more expensive.

“If tariffs continue to rise like this, industries will inevitably start exploring renewable procurement options,” Inginshetty said. “The new rule allowing consumers with a connected load of 100 kW or more to procure renewable energy makes it easier for many businesses to move away from grid supply. Even smaller players with lower connected loads may begin looking at rooftop solar to reduce their electricity costs.”

FKCCI echoed similar concerns, noting that while large industries may transition toward captive solar and open-access renewable procurement, MSMEs often remain dependent on competitively priced grid power.

“A balanced energy ecosystem requires that grid tariffs remain affordable, predictable, and aligned with the actual cost of supply,” it said.

Higher electricity costs for commercial and industrial consumers in Karnataka make a strong case for businesses to adopt renewable energy. Businesses still on the fence should strongly consider adopting renewable energy to reduce their power costs.