Price vs. Value of Electricity in Indian CONTEXT 

  20 January 2025

In India’s rapidly evolving electricity sector, making a clear distinction between the price of electricity and its value is increasingly critical for effective decision-making by policymakers, utilities, and consumers. The price of electricity is a straightforward metric that reflects the monetary cost of generating, transmitting, and delivering a unit of electricity. However, this metric alone fails to capture the broader role electricity plays in ensuring a stable and resilient grid. The value of electricity goes beyond price, encompassing its ability to meet specific needs such as ensuring grid reliability during peak demand, integrating renewable energy, and providing flexibility to address fluctuations in supply and demand. This distinction is particularly significant in India, where the power system is transitioning to accommodate ambitious renewable energy targets, increasing electrification, and regional variations in energy generation and demand. By understanding both price and value, one can make informed choices that optimize system efficiency and sustainability. Let’s delve into these concepts in greater detail and analyze their relevance in the Indian context.

Price of Electricity

The price of electricity is the monetary cost that consumers or utilities pay for electricity generation, transmission, and distribution. It is determined by several factors:

1. Generation Costs: The cost incurred to produce electricity using various resources like coal, natural gas, hydropower, solar, or wind.

Example: The average cost of electricity generation from coal in India is around INR 3.50 per kWh, whereas solar generation costs have dropped to around INR 2.50-3.00 per kWh.

2. Transmission and Distribution Costs: Charges for transporting electricity from generating stations to end-users, including infrastructure investments and maintenance.

3. Market Dynamics: Prices in wholesale markets are influenced by supply and demand conditions. For example, during peak demand, electricity prices on the power exchanges often surge.

4. Subsidies and Cross-Subsidization: In India, domestic and agricultural consumers often pay subsidized rates, with industrial and commercial consumers cross-subsidizing these segments.

Example: A domestic consumer in might pay INR 4-5 per kWh, while an industrial consumer pays INR 7-9 per kWh to account for cross-subsidies and higher service charges.

 Value of Electricity

The value of electricity goes beyond its price and reflects its contribution to the overall effectiveness and sustainability of the power system. Electricity’s value varies based on factors such as the time of delivery, location of generation and consumption, and its role in supporting grid stability and renewable energy integration. For instance, electricity supplied during peak demand periods, such as evening hours, holds greater value as it addresses critical load requirements and prevents outages. Similarly, power generated from renewable sources like solar and wind is highly valued for reducing carbon emissions and dependence on fossil fuels. Additionally, resources like battery storage add significant value by enhancing grid flexibility, providing frequency regulation, and enabling load shifting. In a diverse and growing electricity market like India’s, recognizing the value of electricity is pivotal to achieving energy security, environmental sustainability, and economic efficiency. The value of electricity goes beyond its price and reflects its contribution to meeting the diverse needs of the power system. It considers:

1. Time-Based Value: The importance of electricity varies based on the time of delivery.

Example: Electricity supplied during evening peak hours in India has higher value due to increased demand, even if its generation cost is like off-peak hours. However, dynamic pricing like ToD and ToU are yet to be mainstreamed in Indian regulated tariff mechanism.

2. Location-Based Value:  The value of electricity is significantly influenced by its location of consumption or generation. This is typically reflected in the locational marginal price (LMP), which accounts for network constraints and the cost of delivering electricity between generation and consumption points.

Example: Power generated in remote areas with limited grid infrastructure (e.g., solar in Ladakh) may have a lower immediate value unless supported by transmission upgrades.

3. Resource Attributes: Flexible and renewable resources have additional value in reducing emissions and integrating variable renewable energy (VRE).

Example: Solar power’s value is high in sunny regions like Rajasthan, especially when combined with battery storage to supply evening loads.

4. Grid Services and Reliability: Electricity’s ability to stabilize the grid during emergencies or provide ancillary services adds value.

Example: Battery storage systems providing frequency regulation

Examples in the Indian Electricity Landscape

Solar power tariffs of INR 2.50 per kWh, offer significant value when paired with battery storage or replacing diesel generators in remote areas. Coal power, at INR 3.50–4.50 per kWh, becomes crucial during peak summer demand, ensuring grid reliability when solar generation dips in the evening. Demand response programs, while not directly tied to generation costs, reduce peak loads and prevent urban blackouts. Battery Energy Storage Systems (BESS), despite high upfront costs, provide valuable services such as arbitrage, ancillary grid stability, and peak load management. For instance, a 50 MW BESS in Tamil Nadu uses surplus solar for evening demand, while systems in Gujarat support frequency regulation, enhancing grid stability during renewable energy integration.

The value of a Battery Energy Storage System (BESS) varies significantly with its application due to differences in technical requirements, operational profiles, revenue potential, and system benefits, much like land, which derives its value from both intrinsic attributes and use-specific applications. For BESS, applications such as energy arbitrage and renewable integration demand high energy capacity, while ancillary services like frequency regulation require quick response times and high-power output. Similarly, land's base value is influenced by attributes like location, size, soil quality, and access to infrastructure, while a BESS’s foundational value comes from characteristics such as energy capacity, power output, efficiency, cycle life, and response time.

The use value of both land and BESS depends on how they are utilized. Land used for agriculture, commercial development, or residential purposes yields varying benefits, just as a BESS’s value shifts depending on its application—energy arbitrage, renewable integration, frequency regulation, or backup power. External factors further influence the value of both; proximity to markets or infrastructure enhances land’s worth, while electricity price volatility, renewable energy penetration, and policy incentives amplify the value of a BESS.

Additionally, both land and BESS possess long-term potential that evolves with changing conditions. Land appreciates with urbanization or shifts in land-use patterns, while a BESS grows in utility and worth as grid dynamics change, renewable energy adoption increases, and energy market structures evolve. Ultimately, the value of both land and BESS is determined by the interplay of their inherent attributes, external conditions, and specific applications, highlighting their adaptability and potential to meet future demands.

The value of energy sources like coal, hydro, nuclear, solar, and wind depends on various factors, with no single option being universally "better." Instead, their value is influenced by economic, environmental, and situational considerations, such as location, energy demand patterns, and government policies.

Coal offers reliable base-load power and is widely available in many regions, but its high greenhouse gas emissions limit its value to areas with abundant reserves and minimal environmental regulations, although its global appeal is declining due to climate concerns.

Hydro power is renewable, has low operating costs, flexible output, and long operational life, but its high upfront costs, environmental impact on ecosystems, and location dependency make it most valuable in regions with significant water resources and suitable terrain.

Nuclear energy provides low emissions, reliable base-load power, and high energy density, but its high construction and decommissioning costs, safety concerns, and waste disposal challenges restrict its value to areas with stable political conditions and a need for clean, consistent energy.

Solar energy, being renewable, scalable, and having low operational costs, is highly suitable for sunny regions, despite its variable output and reliance on storage for reliability. Similarly, wind energy is renewable, scalable, and cost-effective to operate, but its intermittent output, need for backup systems, and potential impact on local ecosystems make it most valuable in regions with strong and consistent wind resources.

Each energy source's value ultimately depends on its alignment with local conditions, policy frameworks, and the specific energy needs of the region.

Implications for Policymakers and Stakeholders

1. Tariff Design: align tariffs with the value of electricity by introducing time-of-use pricing, encouraging demand-side management, and incentivizing flexibility.

2. Investment in Flexible Resources: Resources like battery storage, pumped hydro, and demand response should be prioritized for their ability to add system value.

3. Balancing Cost and Value: ensure that low-cost electricity options do not undermine investments in resources that provide high grid value (reliability, inertia etc.)

4. Regional Planning: Investments in transmission infrastructure and renewable integration must consider location-specific value to maximize benefits.

Conclusion

In India’s evolving electricity market, focusing solely on the price of electricity can lead to suboptimal investments and inefficiencies. It is crucial to recognize the broader value of electricity, which includes time, location, and resource attributes, to build a sustainable, reliable, and efficient power system. The "better value" of electricity depends on local conditions such as resource availability, infrastructure, and societal priorities, including cost-effectiveness, sustainability, and energy security. While renewables like solar and wind are increasingly favoured for their low environmental impact and improving economics, hydro and nuclear remain vital for regions requiring reliable, large-scale power. Coal's role, although still significant in India, is gradually diminishing globally due to environmental concerns. The Indian power market is gradually adopting a value-based approach, focusing on segments such as ancillary services, FDRE- Battery Energy Storage Systems (BESS), and peak power management. By adopting value-based planning and pricing mechanisms, India can better navigate its energy transition and achieve its ambitious renewable energy targets.