National Electricity Fund

The National Electricity Fund (NEF) is a Central Sector interest-subsidy scheme established by the Government of India under the Ministry of Power to promote investment in the power distribution sector. It provides interest subsidies on loans taken by state and private power utilities for strengthening and upgrading the distribution network. The scheme aims to improve the financial viability, efficiency, and reliability of electricity distribution across the country.

Background and Purpose

During the late 2000s, India’s power distribution sector faced persistent challenges such as high transmission and distribution losses, inadequate infrastructure investment, and limited access to affordable finance. To address these issues, the Cabinet Committee on Economic Affairs (CCEA) approved the creation of the National Electricity Fund in December 2011.
The NEF was conceived to bridge the financing gap in the distribution network by making loans to utilities more affordable through interest subsidy support. It was also intended to complement ongoing schemes such as the Restructured Accelerated Power Development and Reforms Programme (R-APDRP) and Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) by focusing on distribution projects not covered under those programmes.

Objectives of the NEF

The main objectives of the National Electricity Fund are:

• To provide interest subsidies on loans for capital investment in distribution infrastructure.
• To encourage state and private distribution utilities to invest in strengthening their networks.
• To promote loss reduction and performance improvement among power distribution companies (DISCOMs).
• To enhance reliability, quality, and accessibility of power supply.
• To ensure financial sustainability of the power distribution segment.

Implementation and Nodal Agency

The NEF is administered by the Rural Electrification Corporation (REC), which acts as the nodal agency under the supervision of the Ministry of Power. The REC is responsible for:

• Receiving and evaluating loan proposals.
• Monitoring project implementation.
• Disbursing the interest subsidy based on progress and compliance.

Eligibility and Scope

The NEF covers both public sector DISCOMs and private sector utilities engaged in power distribution across India. To qualify for assistance:

• The projects must involve capital expenditure for new or upgraded distribution infrastructure.
• Loans must be taken from approved financial institutions or banks.
• Projects already covered under other central government assistance schemes are excluded.
• Utilities are required to meet reform-linked performance criteria, such as achieving specific loss reduction targets, improving billing and collection efficiency, and enhancing network reliability.

Financial Structure and Subsidy Pattern

The NEF operates as an interest-subsidy fund, not as a grant mechanism. The total financial outlay of the fund was around ₹25,000 crore at the time of approval.
Key features include:

• The interest subsidy is provided on the loans taken by eligible utilities for approved projects.
• The rate of subsidy varies depending on the performance and reform status of the utility, with higher-performing states receiving greater benefits.
• The duration of the subsidy corresponds to the loan repayment period, subject to periodic review and monitoring.
• The subsidy is released annually to the lending institution, which adjusts it against the borrower’s loan account.

Projects Covered

Typical projects eligible for interest subsidy under the NEF include:

• Strengthening and augmentation of distribution networks.
• Modernisation of substations and transformers.
• Feeder separation for rural and urban consumers.
• Upgradation of metering systems and energy accounting.
• Loss reduction and system improvement works.

These investments aim to improve operational efficiency and reduce aggregate technical and commercial (AT&C) losses in the power sector.

Significance and Impact

The National Electricity Fund plays an important role in India’s power sector reform strategy:

• It encourages capital investment in a financially stressed sector by lowering borrowing costs.
• It supports the government’s objective of 24×7 reliable power supply.
• It complements other central initiatives focused on universal electrification and distribution reforms.
• It promotes accountability and reform by linking subsidy benefits with measurable performance outcomes.

By incentivising utilities to invest in modern distribution systems, NEF contributes to improved service quality, voltage stability, and consumer satisfaction.

Challenges and Limitations

Despite its potential, the NEF faces several challenges in implementation:

• Many DISCOMs have weak financial positions, affecting their capacity to borrow and invest.
• The subsidy’s effectiveness depends on strict adherence to reform milestones, which vary across states.
• Coordination among central, state, and financial institutions remains complex.
• Monitoring and verification of outcomes require strong institutional mechanisms.

To achieve full impact, the NEF must be supported by broader sectoral reforms, including tariff rationalisation, reduction of technical losses, and improved governance in utilities.

Recent Developments

In recent years, the NEF has continued to support distribution system strengthening and modernisation projects across several states. The government has reaffirmed its commitment to using the Fund as a tool for promoting financial discipline and infrastructure investment in the power sector. The scheme has been aligned with ongoing reforms such as the Revamped Distribution Sector Scheme (RDSS), which aims to improve operational efficiency and reduce losses through financial support and performance-based incentives.