It's time to sunset the ISTS waiver 

Introduction

India’s rapid push for renewable energy has been commendable, supported by incentives like viability gap funding, must-run status, and the waiver of Inter-State Transmission System (ISTS) charges. These waivers, originally intended to accelerate renewable deployment, are set to expire for new projects commissioned after June 30, 2025. There is growing discussion about extending these waivers. While well-intentioned, such an extension could impose hidden costs and structural distortions that threaten long-term efficiency and equity in the power sector.

What is Free ISTS?

Under the Ministry of Power’s policy, renewable energy projects (solar & wind) commissioned before 30th June 2025 are exempted from paying ISTS charges for a period of 25 years. This provision helped bring down the cost of delivered RE and promoted investment across the country, especially in resource-rich states like Rajasthan, Gujarat, Karnataka and Tamil Nadu.

Why Extending Free ISTS is a Bad Idea

1. Artificially Distorts Market Signals

The provision of free Inter-State Transmission System (ISTS) charges for renewable energy projects acts as a distortionary subsidy that conceals the true economic cost of transporting electricity over long distances. As a result, renewable energy (RE) developers are incentivized to establish generation facilities in regions with high solar or wind potential — often located far from major demand centers — without factoring in the full cost of delivering power to consumers.

This spatial mismatch between generation and consumption leads to an inefficient allocation of resources. Instead of encouraging the development of RE capacity closer to where electricity is consumed (e.g., urban centers or industrial hubs), the ISTS waiver promotes concentration of projects in already generation-rich zones like Rajasthan or Gujarat. Consequently, this creates avoidable strain on the transmission network, necessitating additional investments in long-distance transmission infrastructure, which may ultimately be socialized and borne by all users, including discoms and end consumers.

Moreover, by distorting the locational price signals, the waiver weakens the economic case for distributed generation solutions such as rooftop solar, open access renewables near industrial clusters, and decentralized energy systems that could otherwise reduce grid congestion, enhance reliability, and lower overall system costs.

In essence, while the waiver benefits individual project developers in the short term, it undermines long-term power sector efficiency by encouraging geographically sub-optimal investment decisions and skewing market behavior away from least-cost system development.

2. Cross-Subsidization by Non-Beneficiaries

ISTS charges are socialized  across all entities using the national grid. When RE generators are exempted, the burden shifts to DISCOMs and ultimately, consumers—even those not using or accessing the RE power and are located in different  non-beneficiary states.

3. DISCOMs Bear Hidden Costs

While RE developers benefit from cost-free transmission, DISCOMs face rising costs due to:
- Higher demand charges for transmission capacity they don’t fully use

- Significant energy loss from long-distance power transfer
- Reduced flexibility as they must accommodate RE from distant sources under 'must-run' status
- Backloading of costs due to expensive grid balancing, ramping, and storage requirements, which are not covered in the ISTS waiver.

4. Disincentivizes Local Renewable Development

The provision of free ISTS (Inter-State Transmission System) charges makes it financially more attractive for developers to set up renewable energy (RE) projects in resource-rich states like Rajasthan, Gujarat, Karnataka, and Tamil Nadu, where solar and wind yields are high. While this may appear cost-effective from a project-level perspective, it discourages the development of RE capacity in states with comparatively lower resource intensity — such as Bihar, Uttar Pradesh, West Bengal, and parts of North-East India — even when local demand is high.

This leads to several adverse consequences:

Regional Imbalances: Power is increasingly generated in a few western and southern states, while northern and eastern states remain net importers, deepening their dependence on long transmission corridors. This not only burdens the national grid but also increases vulnerability to congestion and transmission losses.

Underutilization of Local Potential: Many states have untapped solar and biomass potential suited for small-scale or distributed generation. However, with developers chasing ISTS-free central projects, these opportunities are overlooked, leading to sub-optimal national deployment of renewable capacity.

Hindrance to Grid Decentralization and Rural Empowerment: Programs like PM-KUSUM aim to decentralize energy access by promoting installation of small-scale solar pumps and grid-connected renewable plants at the distribution level. These decentralized solutions are crucial for agricultural feeders and rural consumers, especially in states with large agrarian populations. However, the policy bias created by ISTS waivers draws attention and investment away from such grassroots initiatives, making it harder for local RE-based livelihood and energy access programs to scale.

For instance, a 2 MW solar project under PM-KUSUM in eastern Uttar Pradesh may have a slightly lower CUF (capacity utilization factor) than a project in Rajasthan, but it provides local employment, reduces feeder losses, improves voltage conditions, and supports daytime agricultural load — all without adding stress to the interstate grid. Unfortunately, when ISTS is free, developers gravitate towards the Rajasthan project, leaving schemes like KUSUM under-subscribed and regionally skewed.

In summary, while free ISTS may accelerate centralized RE capacity addition, it inadvertently disincentivizes the more balanced and inclusive growth of renewables across all regions. It undermines local initiatives that could strengthen distribution networks, empower rural communities, and contribute meaningfully to a decentralized, resilient power system.

5. Undermines Long-Term Grid Planning

The free ISTS policy disconnects infrastructure usage from cost accountability, leading to inefficient grid planning. Developers are incentivized to site projects in remote, resource-rich areas without considering transmission congestion, losses, or redundancy. This results in suboptimal project locations, overburdened corridors, and reactive, costly grid expansions. Since transmission costs are socialized, users who don’t benefit still bear the burden, weakening cost-reflective pricing and reducing overall system efficiency.

6. Locks in Policy Risk and Regulatory Uncertainty

Extending the free ISTS policy beyond its current deadline hampers the power sector’s shift toward market-based, cost-reflective pricing. By masking true transmission costs, it creates a false sense of affordability and delays critical adjustments by developers, investors, and DISCOMs.

Developers continue setting projects without accounting for actual delivery costs, while DISCOMs postpone refining procurement strategies based on total landed cost. This fosters policy dependency and leaves stakeholders unprepared for a future where ISTS charges are reinstated — increasing the risk of tariff shocks, contract disputes, and financial instability.

Moreover, repeated extensions distort long-term grid planning and tariff design, making it harder for regulators and planners to signal and recover investment costs. A gradual phase-out is essential to build a resilient, cost-aware market ecosystem.

Who Really Benefits?

- RE developers: Better project IRRs, lower LCOE, more viable in bids.
- DISCOMs: Higher system costs, reduced bargaining power.
- Consumers: Pay more in aggregate due to hidden cross-subsidies.
- System operators: Increased grid complexity and balancing challenges.

The Way Forward

1. Gradual Phase-Out: Stick to the June 2025 deadline. Do not extend waivers for new projects.
2. Zonal Pricing and Transmission Charges: Introduce location-based pricing to internalize transmission costs.
3. Encourage Localized RE Development: Provide incentives for projects near demand centers and reduce losses.
4. Promote Storage and Demand Flexibility: Instead of only supply-side push, focus on grid balancing from demand and storage.

Conclusion

The free ISTS waiver served a valuable purpose—but extending it now is regressive and unsustainable. It may seem pro-renewable on the surface but is anti-consumer, anti-efficiency, and anti-DISCOM in the long run. The sector must graduate to cost-reflective and market-aligned frameworks, enabling both growth and resilience.
Let’s not let a well-intended subsidy become a systemic inefficiency.