Why India’s Electricity Landscape Needs Urgent Structural and Regulatory Reforms

India’s energy sector is undergoing a pivotal transformation as the country seeks to balance its ambitious climate goals with the pressing needs of energy security and energy equity. With a target of achieving 50% of electricity generation capacity from non-fossil fuel sources by 2030 and a net-zero carbon emissions goal by 2070, India has made significant strides in renewable energy deployment. However, systemic barriers in the regulatory and structural framework of the electricity sector hinder the realization of these goals. The regulated tariff mechanism with a high Return on Equity (RoE) is a relic of the power-deficit era when India, desperate to attract investment, often resorted to offering lucrative incentives, including sovereign guarantees. While this approach was critical in addressing the energy scarcity of the time, it has been extensively leveraged, particularly by public sector entities that continue to exert significant influence on current policy decisions. However, the time has come to move away from this approach, as the role of public sector entities is expected to diminish in the clean energy transition. Instead, the focus must shift to the expanded role of the private sector, which thrives on innovation, operational efficiency, and the ability to attract and leverage diverse investments.

2. The Twin Pillars: Energy Security and Energy Equity

Energy security and energy equity are fundamental to India’s clean energy transition. Energy security entails providing a reliable, affordable, and sustainable energy supply, which becomes increasingly critical as India moves from a fossil-fuel-dominated system to one driven by renewables. This transition brings challenges like grid instability, intermittency of renewable sources, and dependence on imported fuels, requiring a robust regulatory framework to ensure uninterrupted access for all sectors.

Energy equity focuses on delivering affordable and inclusive energy access, particularly to marginalized and underserved communities. Despite achieving near-universal electricity access, disparities in quality, affordability, and reliability persist. Ensuring clean energy solutions are accessible to all is essential to prevent the transition from deepening existing inequalities.

Currently, with Variable Renewable Energy (VRE) contributing around 13% to the grid, issues such as curtailment are not yet prominent. Additionally, the predominance of regulated fixed tariffs on the retail side means challenges like Time-of-Use (ToU) pricing or negative pricing are not being encountered. However, as the share of VRE increases, the grid will inevitably face challenges related to high retail prices and stability, requiring proactive measures to address these emerging complexities.

To address critical technical and financial challenges of managing the grid such as dynamic pricing, demand-side flexibility/ DR/DM, curtailment, and structural reforms like carrier and content segregation, India urgently needs comprehensive structural and regulatory reforms. These reforms are essential to achieve the nation’s growth aspirations of Viksit Bharat while ensuring energy security, equitable access, and a sustainable clean energy transition.

4.Key Issues and Areas for Regulatory Reform

4(a) Structural Reforms: Carrier and Content Segregation

The current electricity market structure in India combines the functions of power distribution (carrier) and supply (content) under discoms. This integration creates inefficiencies, conflicts of interest, and barriers to competition, limiting private sector participation and clean energy adoption.

The Need for Reform:

• Unbundling Distribution: Separate the carrier and content functions to introduce competition and allow consumers to choose renewable energy suppliers. All other infrastructural sectors have progressed based on un-bundled structure like Telecom (spectrum & Voice/data), Television ( Spectrum & Content), Airways (Airports & Airlines) etc.

• Open Access: Ensure non-discriminatory access to the grid for all power producers, including decentralized renewable energy systems.

• Attracting Investment: Create a transparent and competitive framework to attract private investment in clean energy and distribution infrastructure.

4(b) Dynamic Pricing and Time-of-Use (ToU) Tariffs

With changing times, the traditional system of base load and peak load is no longer a sustainable model for tariff. The generation and load, both have to become flexible for a clean energy transition. India’s current flat or minimally tiered tariff structure discourages efficient energy use and fails to align with the availability of renewable energy. ToU tariffs, where electricity prices vary by time of day, can encourage energy use during periods of high renewable generation and reduce grid stress during peak hours.

The Need for Reform:

• Mandate ToU tariffs across consumer categories to optimize demand patterns.

• Deploy smart metering infrastructure to enable dynamic pricing and real-time energy consumption tracking.

• Introduce real-time markets to enhance grid flexibility and renewable energy integration.

4(c) Negative Pricing: The Economics of Oversupply

Negative pricing occurs when electricity prices drop below zero, effectively meaning that producers pay consumers to use energy. While this may seem counterintuitive, it reflects the complexities of managing a grid increasingly dominated by variable renewable energy (VRE) sources. Negative pricing typically arises during periods of excessive renewable generation coupled with low demand, exposing both challenges and opportunities within modern energy markets.

There are several causes of negative pricing. One of the primary drivers is VRE surplus, where high output from renewable sources, such as solar panels during sunny afternoons or wind turbines on breezy nights, exceeds grid demand. Another contributing factor is rigid generation. Conventional fossil fuel plants, particularly coal and nuclear facilities, often lack the flexibility to ramp down quickly or economically, continuing to generate power even when it is not needed. Policy incentives also play a role. Renewable energy subsidies or credits can make it economically viable for producers to keep generating electricity during periods of oversupply, further driving prices into negative territory.

The implications of negative pricing are multifaceted. On one hand, it presents an opportunity for consumers. Businesses and individuals with the ability to adjust their energy use to align with these low-cost or free periods can significantly reduce their energy bills or even earn revenue. This flexibility is particularly advantageous for energy-intensive industries and consumers with technologies like smart appliances or electric vehicles that can be programmed to charge during these periods.

On the other hand, negative pricing highlights grid challenges. It underscores the need for improved mechanisms to balance supply and demand more effectively. This includes integrating technologies such as energy storage, which can capture surplus energy for use during periods of higher demand and implementing demand management strategies that encourage consumers to align their usage with grid conditions.

Addressing the root causes of negative pricing requires a more flexible and responsive energy system. Investments in energy storage, grid infrastructure, and demand-side solutions can help mitigate the frequency and impact of negative pricing events. By doing so, the grid can better accommodate renewable energy's variability while ensuring economic efficiency and environmental benefits for all stakeholders.

4(d) Demand Response (DR) and Demand Management (DM)

4(d)(i). Demand Response (DR) involves short-term adjustments to electricity consumption, typically initiated by utilities or grid operators during peak demand or supply shortages. DR enhances grid reliability by reducing peak demand, preventing blackouts, and minimizing the need for expensive infrastructure upgrades. It is event-based, with utilities or aggregators notifying participants—usually large businesses or industrial consumers—to temporarily reduce or shift energy use, incentivized by payments or lower energy costs.

While effective, DR has limitations. Its reactive nature addresses immediate grid needs but does not proactively optimize energy consumption or integrate renewables. Additionally, it can disrupt operations when energy reductions conflict with business schedules.

Despite these challenges, DR is vital for managing increasingly variable grids as renewable energy grows. Coupling DR with proactive demand management strategies can create a more balanced, flexible, and sustainable energy system.

4(d) (ii) Demand Management (DM): A Proactive, Consumer-Centric Approach

Demand Management (DM) is a forward-looking, consumer-focused strategy designed to optimize energy consumption patterns over time. Unlike reactive solutions, DM aligns electricity demand with renewable energy availability and dynamic pricing, enabling consumers to actively participate in the energy market while supporting a sustainable and efficient grid.

DM is proactive and consumer-driven, leveraging technologies like smart appliances, electric vehicles (EVs), and energy storage systems to dynamically adjust consumption based on real-time pricing and renewable availability. It operates within a market-based framework, using transparent pricing models to incentivize energy use during periods of abundant, low-cost renewable energy.

The benefits of DM are significant. Economically, it reduces energy bills for consumers and lowers system costs by smoothing demand peaks. Environmentally, it minimizes fossil fuel reliance and ensures full utilization of renewable energy, reducing curtailment. Unlike short-term solutions like Demand Response (DR), DM reshapes consumption patterns sustainably over the long term.

By integrating DM, energy systems become more resilient and adaptable, while consumers gain greater control over their usage. This approach fosters a cleaner, more efficient, and cost-effective energy future.

4(e) Energy Storage Pricing for Multiple Purposes

Energy storage systems are crucial for renewable energy integration, grid stability, and peak load management. However, India lacks a clear framework to price and regulate storage solutions. While there are supply side limited actions like RE+BESS storage, but they are inadequate in dealing with the increasing share of VRE in the grid.

The Need for Reform:

• Develop pricing models based on the specific application of storage, such as energy arbitrage, ancillary services, and backup power.

• Mandate storage obligations for utilities to complement renewable energy portfolios.

• Create regulatory incentives for hybrid renewable-plus-storage projects.

4(f) Curtailment: A Barrier to Renewable Energy Optimization

Curtailment, the reduction of electricity generation or consumption to balance the grid, poses significant challenges for renewable energy utilization. It often occurs when supply exceeds demand or when transmission constraints prevent power delivery from generation sites to demand centres. VRE sources like wind and solar are particularly vulnerable to curtailment during periods of oversupply or when grid bottlenecks impede energy flow. Additionally, inflexible conventional baseload generators, such as coal and nuclear plants, exacerbate the issue by limiting the grid's capacity to accommodate variable renewable energy (VRE).

The implications of curtailment are profound. Economically, it reduces revenue for renewable energy generators, undermining the financial viability of clean energy investments and discouraging future development. Environmentally, curtailment wastes renewable energy that could otherwise displace fossil fuel generation and lower greenhouse gas emissions. This not only delays progress toward climate goals but also perpetuates reliance on polluting energy sources, weakening energy security.

Addressing curtailment requires urgent reforms and a multifaceted approach. Investments in grid modernization, including advanced transmission infrastructure and distribution management systems, are essential to accommodate higher renewable penetration and reduce bottlenecks. Improved forecasting and scheduling tools can help align demand and supply more effectively, minimizing curtailment. Additionally, introducing compensation mechanisms for unavoidable curtailment will protect the interests of renewable energy developers and sustain investor confidence.

Moreover, increasing grid flexibility through demand-side management can enable consumers to adjust their energy use in response to real-time supply conditions, absorbing excess renewable generation. Expanding energy storage solutions, such as batteries and pumped hydro, can store surplus energy for later use, further reducing reliance on curtailment.

By transitioning to a dynamic and flexible grid that prioritizes the efficient utilization of renewable energy, India can enhance energy security, accelerate its clean energy transition, and create a more sustainable and resilient energy future.

4(h) Ensuring Energy Equity Through Tariff Rationalization

Tariff structures must balance affordability with the need for cost recovery to ensure that clean energy remains accessible while supporting sustainable utility operations.

The Need for Reform:

• Introduce targeted subsidies for low-income households to ensure affordable access to renewable energy.

• Encourage utilities to design tariffs that incentivize energy efficiency without disproportionately burdening vulnerable consumers.

• Promote community energy projects to provide affordable and localized renewable energy solutions.

4(I) Wholesale Power Market Through Power Exchanges

A robust wholesale power market, driven by power exchanges, is essential for advancing India’s clean energy transition by fostering transparency, efficiency, and competition. Power exchanges provide platforms for real-time, day-ahead, and long-term electricity trading, enabling better management of renewable energy's variability. However, to fully integrate renewables and ensure long-term energy security, additional mechanisms like capacity markets and Contracts for Difference (CfDs) must complement the market design. The current range of products is limited to a maximum tenure of 3 months in the Term-Ahead Market, which needs to be significantly expanded to cover longer durations of at least 3 to 5 years.

4(I) (i) Capacity markets address the challenge of ensuring adequate generation capacity to meet peak demand and provide backup during renewable intermittency. By compensating generators for maintaining availability, capacity markets incentivize investment in flexible and dispatchable resources, including energy storage and hybrid renewable systems.

4(I) (ii) Contracts for Difference (CfDs) offer price stability for renewable energy projects by guaranteeing a fixed strike price. If market prices fall below this strike price, the government or regulator compensates the developer; if prices rise above it, the developer pays the surplus back. This mechanism reduces market risk for renewable developers, encouraging long-term investment and fostering price stability for consumers.

Integrating these mechanisms into power exchanges will not only improve renewable energy adoption and grid reliability but also attract private sector investment and create a sustainable pathway for India’s clean energy transition. These reforms ensure a market that balances affordability, equity, and sustainability while aligning with India's ambitious climate and energy goals.

5. Conclusion

India’s clean energy transition must prioritize energy security and equity, underpinned by structural & market reforms, dynamic pricing, grid modernization, and decentralized solutions. These steps are essential to create a resilient, inclusive electricity ecosystem and position India as a global leader in renewable energy and sustainable development.

Dynamic pricing is a cornerstone of this transition, enabling India to build a renewable-friendly energy system that benefits both consumers and the environment. By reflecting real-time supply and demand fluctuations, dynamic pricing ensures electricity consumption aligns with renewable generation, optimizing grid performance and supporting the nation’s energy goals.

Key benefits of dynamic pricing include:

• Reducing Curtailment: Introduces negative pricing to incentivize energy use during periods of renewable oversupply.

• Encouraging Demand Response (DR): Motivates consumers to shift usage from peak to off-peak times, improving grid reliability and lowering costs.

• Optimizing Renewable Integration: Aligns demand with variable renewable energy (VRE) generation, enhancing grid efficiency and sustainability.

• Empowering Consumers: Provides consumers with flexibility to manage energy use, leading to cost savings and greater energy efficiency.

• Enhancing Grid Stability: Promotes load flexibility, balancing supply and demand, reducing grid stress, and avoiding costly infrastructure upgrades.

Balancing renewable energy’s variability with consumer flexibility is critical to the modern grid’s success. Proactive, consumer-driven demand management (DM) offers a transformative approach to reshaping energy markets, reducing costs, and unlocking the full potential of VRE. By adopting these reforms, India can create a cleaner, smarter, and more resilient energy system that supports its sustainable development and climate goals.