Electricity is a major enabler of economic and social development. India’s per capita consumption is only a little over a third of the world average and, hence, as we seek strive to become a developed country by 2047, managing our electricity needs is a key challenge, especially given the climate imperatives. Decarbonization efforts will require even more electricity as we shift transportation and industry away from fossil fuels. The issue becomes not just about quantity but also quality—what are the right fuels and regulatory frameworks under which a just and viable transition is undertaken?
Central to this predicament is the fundamental challenge of trade-offs that need to be made by policymakers. These necessitate balancing multiple and often competing objectives of energy, spanning energy security, low cost, environmental impacts, equity, consumer choice, jobs, etc. No doubt, such trade-offs were ever-present, but now there are three specific additional challenges we must address as we grow our power system with environmental objectives in mind.
First, we will have to live with far greater uncertainty than before. Unlike where only demand varied over the day or by season, going forward, even a large share of supply will be variable in nature due to the rise of intermittent renewable energy (RE) like wind and solar. In this emerging environment, Least-cost resource planning, key to keeping energy costs down, becomes difficult with consumer owned and “invisible” (unmonitored) supply like rooftop solar, and the fact that technologies are also evolving rapidly, including batteries, electric vehicles, smart grids and smart appliances.
Even something as simple as capturing the growth in demand and its profile is fraught with enormous uncertainty and bears serious economic consequences. For example, at the consumption end, given a warming planet, cooling needs will be one of the biggest drivers. How, then, will commercial AC use compare with that by household consumers? This matters since the latter rises towards the evening or overnight, which doesn’t align with supplies from the fastest growing cheapest renewable, namely solar power.
Second, our regulatory frameworks will need to be upgraded. For instance, we mostly have ‘cost-plus’ regulation, and power markets are shallow, handling under 10% of electricity transactions. For the most part, distribution of power, the last leg in the chain, is still with state-owned distribution companies (discoms), which are in the grips of regulatory capture which makes it difficult to optimize efficiency. Many countries in the West already have market systems that handle higher RE and greater variability—and these often show negative prices during high RE periods, which means you get paid for consuming electricity or charging a battery!
Third, the present system of social welfare redistribution through both subsidies and cross-subsidies, where commercial and industrials users overpay to offset underpaying residential and agricultural consumers, cannot sustain. By design, it raises costs for job-creating industry/commercial users, hurting their global competitiveness. More importantly, these higher-paying consumers are the ones who will disproportionately leave discom supply (and already are), both through rooftop solar and third-party suppliers, a process that will accelerate with cheaper storage technologies. This, in turn, raises the costs for other consumers.
Addressing these issues requires a renewed approach to incentive signalling (notably, prices) through a mix of incremental and big bang changes. The current development model, dominated by top-down targets, is attractive and helpful up to a point, but does a poor job of tackling uncertainty, fairly allocating risk, and avoiding distortions or poor trade-offs. Instead of merely responding to targets, we need the right frameworks for our desired objectives, which could unleash more capital and innovation (and risk-sharing).
Fundamentally, we need to stop treating all electricity supplies as being ‘equal’. It’s not a basket of fruit (say, ₹5 per kilo, or ₹5/kWh!), rather a basket of diverse fruits with varied costs, controllability, etc. Time-of-day pricing is a first step – for retail consumers this needs appropriate metering hardware (ultimately, smart meters) but even wholesale time-of-day pricing means we must move away from the dominant static power purchase agreements (PPAs) that treat all electricity the same. With dynamic pricing and more markets, we are likely to have enormous time-of-day spreads in prices, with dirt-cheap power during the day aligned with solar production.
Regulation needs to evolve and move away from today’s dominant approach of comparing new generation based on the levelized cost of energy (LCoE). LCoE ignores time of day issues and system level costs. For example, reducing thermal plants’ output to prioritize RE, hurts their efficiency, or the prevailing practice of free transmission for RE power. “Free” here only means someone else is paying for it.
Ultimately, poor pricing leads to wasteful allocation of resources, and removes incentives to save energy. This is why farmers don’t bother with efficient irrigation pump sets, and even households are beginning to enjoy “free power”, risking them becoming profligate. Most freebies are in the name of the poor but are poorly directed. For example, most farmers are landless labourers, so free or subsidized farm power only helps the well-to-do lot, and in the case of household supply, most beneficiaries are the middle class or even the rich (e.g., subsidy coverage is over 90% of homes in Delhi, and even higher in Karnataka).
The biggest change we need is one of mindset. Public views diverge on whether electricity is a commodity – thus best handled by markets – or a public good. This is a false dichotomy. Electricity will always have aspects of both, and it should be treated like a well-regulated public utility. In this regard, our biggest gap is in the states’ regulation of electricity, where consumer tariffs don’t match costs.
The traditional narrative on the failure of publicly-owned distribution companies blames the ‘catch-all’ measure of AT&C (aggregate technical and commercial) losses. While AT&C losses are high, research at CSEP has shown that the sizeable part of financial losses aren’t the discoms’ fault. Efficiency improvements are important, but we will also need higher tariffs to cover even prudent discom costs. Keeping the transition as one major objective, this requires us to change the question from “are you paying more?” to “are you paying more than you should—for quality and clean supply?”
Rahul Tongia is a senior fellow with the Centre for Social and Economic Progress in New Delhi.
