India needs a resilient power sector: Lessons from the Covid-19 crisis

The case for power market reform is stronger than ever

India’s power system has undergone massive transformation, thanks to significant reforms by the Government of India. These reforms led to the creation of a single national power grid, boosted access to electricity for its citizens and promoted the dynamic growth of renewable energy. Renewables (including large hydropower) made up more than a third of today’s 370 GW of installed capacity and 25% of electricity generation in 2019. After years of scarcity, the system has been in surplus in recent years thanks to investment in generation, and the private sector now accounts for 50% of total capacity. But some of the toughest, but most-needed, reforms remain to be done.

By 2040 the IEA anticipates India’s power system to grow to an installed capacity of up to 1 500 GW (World Energy Outlook 2019 Stated Policies Scenario). This will push the scale of India’s power market beyond the size of the EU’s synchronised grid, which connects around 1 000 GW of installed generation across 27 countries, and bring it much closer to the size of China’s grid, which handled 2 000 GW in 2019. And India targets 450 GW to come from renewable energy, already by 2030.

India’s power sector has to be both financially and physically resilient to secure the investments it needs to meet the country’s electricity demand and shift to cleaner energy. However, in 2020, the coronavirus pandemic has exacerbated many of the existing challenges the sector faces to its financial and physical resilience. It is this crisis and the government’s response that could create the strongest momentum for power market reform in over a decade. 

Covid-19 is testing the physical resilience of India’s power system

India is suffering from the devastating impacts of Covid-19, raising health, economic and social challenges. At the same time, the fundamentals of India’s power system are being stress-tested as the country deals with the unprecedented health and economic crisis caused by Covid-19. The resilience of the electricity sector has become critical, as hospitals and residents need to rely on stable power. By exploring some of the impacts of the crisis on India’s power sector we can learn several lessons for completing the country’s reforms.

India saw one of the largest electricity demand destructions globally: Covid-19 caused power demand to fall by 28% up to the end of March 2020, according to the system operator POSOCO (IEA Global Energy Review 2020). Under the conditions of the strict lockdown which started on 25 March 2020, power demand from hospitals, essential services and the residential sector was on the rise, while industrial demand and commercial activity dropped substantially. By the end of August 2020, total power demand in India had not recovered to previous levels prior to Covid-19, according to the IEA latest data (IEA, Covid-19 impact on electricity, monthly updates).

Year-on-year change in weekly electricity demand, weather corrected, in selected countries, January-December 2020


The pandemic has also affected the generation mix. Thermal power plants are running at low capacity in the absence of industrial demand, while the share of renewables on the grid has been increasing, mostly because of their “must‑run” status. In some states, India’s system operators are already running a power system with very high shares of renewables. This situation is likely to continue into 2020/21, when older power plants will need to close down for maintenance and reburbishment to meet new environmental requirements.

During the Covid-19 crisis, India has showcased impressive emergency co‑ordination of system operation, management of reserves and line maintenance across India, demonstrating that no state can be an island. On 3 April 2020 India’s population responded to Prime Minister Modi’s appeal for “Challenging the darkness of Covid-19” and switched off their lights for nine minutes during the evening hours. The national system operator POSOCO successfully managed the event jointly with the regional system operators. POSOCO was even able to cater for a demand reduction of 31 GW versus an anticipated 12-14 GW, thanks to the co‑ordinated response between state and national dispatch centres. The event also highlighted the value of a diverse set of flexibility sources to the system security (see also IEA commentary on system flexibility).

The pandemic is compelling India to strengthen its ability to maintain security of supply, boost system flexibility and better integrate its power hardware and software for effective preparedness in the face of potential threats to electricity security. A steady, reliable power supply is a high priority for everyone in India and significant progress is still needed.

Covid-19 also attacks the power sector’s financial resilience

India’s state power distribution companies (discoms) are at the forefront of the crisis management as providers of an essential service. However, Covid-19 has exacerbated their long-standing financial distress. Discoms saw their revenue collection erode as they lost industrial consumers (and their cross-subsidies) and state government payments and transfers, while residential consumers increased their demand but not their payments. Meanwhile, power prices have collapsed at the exchanges. If we consider future demand erosion from a slow economic recovery, the situation could become a major challenge. This affects the entire industry, including renewables investment as discoms are the main purchasers of renewable electricity.

To address the immediate impacts of the crisis, the government has provided temporary relief measures. Discoms have been allowed to deposit letters of credit for only 50% of the cost of power they want to be scheduled, lowering their credit requirements. The government has also announced power sector reforms, notably the draft Electricity (Amendment) Bill 2020, and financial support through a recovery package worth USD 12 billion (INR 90 000 crore) to mitigate the harsh impacts of Covid‑19 on the sector’s solvency.  Past discom reforms provided substantial bailouts but have not resolved structural problems, notably the much-needed reform of electricity tariffs, an issue of social equality in India.

IEA data shows, India’s electricity prices for industry are among the highest in the world, on the basis of purchasing power parity. 

Industrial electricity prices in India and selected countries, 2005–2019


Residential electricity prices are similarly high, despite being subsidised, largely by industrial consumers. This was one of the findings of the IEA energy policy review of India, conducted in 2019 in collaboration with the NITI Aayog. Its findings on comparative prices are shown here using most recent data for India from the IEA world energy prices database.

Residential electricity prices in India and selected countries, 2005-2019


Three power market reforms are more important than ever

The pressing need for deeper power market reform is growing, as both public and private investment is critical for India’s power sector, which is itself at the heart of the economy.

The Covid-19 crisis highlights the benefits of closer co‑operation between relevant players at every level, including the discoms, the system and grid operators and the regulators through the Central Electricity Regulatory Commission. Greater national, regional and state-level collaboration are needed also for critical power market reforms to be a success. The IEA’s recent publication, India 2020 – Energy Policy Review, provides a range of recommendations to strengthen the power sector, including tariff reform and the creation of an India-wide electricity market. These structural reforms are now urgently needed to secure the long-term resilience of India’s power sector – a critical element in India’s economic recovery. In particular, IEA anaylsis highlights three structural market reforms could improve the power sector’s financial stability, economic efficiency and consumer benefits.

Reform the electricity tariff system: The IEA commends the government’s push for reforms towards cost-reflective tariffs and direct subsidy schemes. However, these principles have not yet been implemented in practice in the electricity sector. Step-by-step reforms can be effective: India’s governments could explore two measures: reducing cross-subsidisation from industrial demand, thus lowering the burden on industry, and providing direct transfers for vulnerable consumers, paid out of state budgets, instead of paying price subsidies for residential users to discoms.

Concerned by high cross-subsidy surcharges, industry demand has already left the grid in many cases and opted for self-generation and market-based pricing instead. However, in reality, open access to competitive electricity supply from the exchanges remains limited, due to the lack of transmission capacity and uncompleted market reforms in India. As part of the recovery package presented in May 2020, the central government asked large public companies to provide cost rebates to discoms that will be passed on to industrial consumers. A review of India’s energy costs could also help to identify the country’s potential for energy efficiency, competitiveness and export leadership.

India has already started implementing direct benefit transfers as a means of subsidy reform, for instance for LPG. Lessons learned in other jurisdictions, such as Turkey, confirm that successful reform of the distribution sector requires a roadmap towards retail electricity tariffs that recover the full cost of supply. This is a major driver for the financial solvency of the sector and a requirement for any potential privatisation. India is a unique country and its discoms have very large and diverse consumer groups and financial challenges ahead. Direct transfers for the most vulnerable consumer groups and streamlined electricity tariffs for all consumers are revenue-neutral for state budgets. The government should present new guidelines for tariff structures across India as models for state governments and regulators to follow.

Achieve an India-wide wholesale electricity market with efficient trades: India’s national grid has been built from regional grids. Market and system operations reflect this. POSOCO operates a layered system that reaches across one national, five regional and 33 state load dispatch centres. However, most of India’s generation is locked in at regional and state levels, notably renewables. Interstate trade, liquidity and competition remain weak and power procurement prices high. Power trading is largely a physical exchange of ancillary services to stabilise the synchronised system (deviation settlement mechanism). The wholesale market currently accounts for less than 3% of all power transactions.

Great hope is placed on India’s power exchange to organise more efficient trades, but liquidity is fragmented across different products and trading platforms. International experience from the United States and the European Union shows that market dominance at the state level can be reduced with regional trading across larger market areas, and that transmission and system operators are the drivers of such a process. A wholesale electricity market, based on common rules for dispatch and transmission capacity, would provide discoms with flexibility to meet demand in a reliable, secure and cost-effective way. As India is pursuing a very ambitious renewables target of 450 GW of installed capacity by 2030, the central government should boost a diverse set of flexibility options for the cost-effective integration of higher shares of variable renewables. The emerging real-time market is an excellent opportunity, as short-term markets are a driver for integration.

Seize the economic recovery as a major opportunity to boost the power sector resilience: The pandemic is acting as a catalyst for India’s power market reforms, which have been underway for some time. This is particularly true for the transformation of the discoms, which are at the forefront of fighting the pandemic, keeping the lights on and integrating variable renewables. The government needs to make sure that the governance of the distribution sector is adequate to meet those challenges and safeguard its physical and financial resilience. The recovery package plays a critical role, but structural measures are equally essential. Electricity tariff reforms can be a strong driver for restarting the economy. They will boost industrial demand, support small and medium-sized companies as well as manufacturing under the Make in India initiative, and help vulnerable consumer groups. Building on the successful UDAY scheme, the recovery package for the power sector already includes obligations for discoms to continue reducing their losses, ensure power quality and reliability, improve billing and support digital payment. These reforms need to be implemented alongside new measures under the recovery package to ensure any bail-outs foster future investment and a financially sustainable future.

The IEA is working with the central government and the state governments on these critical steps. Reforms will not only benefit India in weathering any future crisis, but will also foster investment in its energy sector. As India is becoming an increasingly important player in the global energy scene, the world is looking to India for leadership and solutions that can guide many other emerging economies. Find more detail on the IEA’s recommendations and analysis in the recent report: India 2020 – Energy Policy Review. The commentary reflects also ongoing work on energy prices and taxes with IEA colleagues in the Energy Data Centre, Mr Domenico Lattanzio and Mr Alexandre Bizeul and IEA India coordinator Ms Astha Gupta.