Growth needs more electricity

Source– The post is based on the article “Growth needs more electricity” published in the “Business Standard” on 18th September 2023.

Syllabus: GS3- Infrastructure

News– The article explains the issues related to the electricity sector in India.

What are the challenges faced by the electricity sector in India?

The growth of thermal electricity capacity has come to a halt. Data from the Central Electricity Authority indicates that thermal capacity increased from 100 GW in 2005 to 300 GW in 2018 but has since stagnated.

The Centre for Monitoring Indian Economy (CMIE) data on capital expenditure projects also shows a similar stagnation since 2019.

Obtaining funding for new thermal power plants is no longer feasible. The ESG revolution has closed off avenues for financing new carbon-intensive electricity generation projects worldwide.

India is at a critical juncture where all capacity growth in the electricity sector must come from renewable sources.

There is growth in solar and wind capacity. The CMIE capex data shows that identifiable projects completed between 2015 and 2023 amount to approximately 4 GW per year for solar and 2 GW per year for wind.

This raises concerns about whether the electricity sector is aligning with the requirements for robust economic growth.

The existing electricity sector infrastructure is tailored to the old paradigm of thermal dominance. This presents challenges.

There is substantial variation among Indian states. States like Gujarat and Rajasthan have made significant progress in adding solar capacity. Other important consumption states like Karnataka, Maharashtra, and Tamil Nadu have not performed as well.

In several Indian states, electricity policy doesn’t receive the necessary attention, as there are more fundamental challenges to tackle.

Overhaul of the grid to achieve decarbonization also presents a challenge. Renewables pose challenges to the conventional electricity grid and market structures. Many grid operators are not enthusiastic about incorporating more renewables.

Another issue is the level of trust from private investors. A power generation project necessitates a trusted and predictable environment over a 20-year span.

The Indian electricity sector faces significant government failure like unpaid bills, contract breaches, and interference in private professional transactions, such as restrictions on “open access.”

The Indian private sector is willing to invest in renewables in states like Gujarat and Rajasthan, it remains cautious in most other states.

What should be done?

Economic policymakers in each Indian state must outline a clear plan for the transformation of distribution, transmission, and market structures required for renewables

Without addressing the fundamentals of distribution and electricity market structure, the grid won’t be prepared for decarbonization. A substantial amount of policy work and financial investment is needed for this one-time transition.

Significant changes in distribution and market structure are necessary. It involves solutions like transitioning to private distribution companies for urban regions.

Market mechanisms should be designed to encourage private-to-private contracts. Private generators prefer dealing with industrial buyers or private distribution companies rather than relying on long-term power purchase agreements.

Implementing market mechanisms with time-of-day pricing can incentivize storage and demand-side responses.

Distribution companies operate as monopolies. It requires regulation to prevent monopolistic pricing.

Establishing regulatory capacity is crucial. A weak regulatory framework will lead to private sector demands for higher risk premiums.