Power Market Flexibility: The Key to Renewable Energy Integration

As India moves toward its ambitious target of 500 GW of renewable energy by 2030, enhancing power system flexibility will be critical to maintaining grid stability and reliability. According to the International Energy Agency (IEA), India's electricity demand is expected to double by 2040, with renewables contributing a significant share. However, integrating renewables requires substantial upgrades in grid infrastructure, market design, and storage solutions. Flexible generation sources, grid modernisation, demand-side management, and efficient market structures will play a vital role in ensuring a smooth transition.
 
A key emerging challenge is India's reliance on coal-fired power plants to meet power demand. While coal currently provides the bulk of flexibility, future solutions must shift toward cleaner alternatives such as battery storage, pumped hydro, and demand response programs. Strengthening transmission networks and expanding real-time electricity markets will enable better regional balancing and reduce renewable energy curtailment. By adopting global best practices and accelerating policy reforms, India can unlock its full renewable energy potential while maintaining grid security and affordability.
 
The Importance of Flexibility in Power Market Design
Flexibility is crucial for managing the variability of renewable energy sources, particularly wind and solar, which fluctuate based on weather conditions and time of day. Unlike conventional power sources that can be ramped up or down as needed, renewables continue generating electricity even when demand is low, leading to supply-demand imbalances. Flexible power markets help mitigate these challenges by ensuring grid stability and a seamless balance between supply and demand.
 
Key mechanisms for achieving flexibility include capacity markets that reward power providers for maintaining reserve capacity, demand response programs that incentivise consumers to reduce or shift energy usage during peak demand periods, and ancillary services that support grid stability by managing voltage, frequency, and other real-time system requirements.
 
Restructuring Power Markets for Higher Renewable Penetration
As the share of renewables increases, power markets must undergo structural reforms that prioritise flexibility. One such reform is negative pricing, where generators are incentivised to reduce their output during periods of excess supply. This mechanism is increasingly common in regions with high renewable penetration, such as Germany and the US, where surplus renewable energy leads to grid imbalances, driving prices below zero. While this may seem counterintuitive, it allows grid operators to maintain stability while encouraging energy storage solutions and demand-side adjustments.
 
Enhanced grid digitalisation—through AI-driven forecasting, automated demand response, and smart grid innovations—can significantly improve the efficiency of renewable energy integration. Technologies such as distributed energy resources (DERs) and Virtual Power Plants (VPPs) offer new ways to balance grid fluctuations by leveraging decentralised power assets. India’s energy transition will require a holistic approach, combining policy-driven investments in storage, transmission expansion, and dynamic market mechanisms to ensure a reliable and resilient power system.
 
Global Examples of Market Flexibility in Action
Several regions have successfully integrated flexible market mechanisms to accommodate renewable energy. Germany, a global leader in renewable adoption, generates over 60 percent of its electricity from renewables during peak times. However, grid bottlenecks remain a challenge, which are being addressed through market-based flexibility tools. In the United States, the California Independent System Operator (CAISO) has implemented real-time pricing, demand response, and battery storage integration to manage significant solar capacity.
 
India is enhancing market flexibility through Real-Time Markets on power exchanges, allowing intraday electricity trading. As India works toward its 500 GW renewable energy target by FY 2030, these mechanisms will be crucial for balancing supply and demand effectively.
 
Evolution of Power Trading in India
Power trading through energy exchanges in India began in 2008 with the establishment of the Indian Energy Exchange (IEX), facilitated by the landmark Electricity Act of 2003, which opened power markets under Open Access. Power exchange transaction volumes have grown at an impressive compound annual growth rate (CAGR) of 22 percent from FY 2010 to FY 2024. The introduction of trading in green markets (GDAM/GTM) has further accelerated trade growth on power exchanges.
 
With a gradual shift from inflexible long-term contracts to trading through power exchanges and short-term bilateral routes, India’s power markets are in a transitional phase. This shift is driven by firm demand growth, an evolving energy mix, increasing grid intermittency due to renewable energy, and a growing emphasis on sustainability in energy procurement.
 
Recent and upcoming product introductions in power exchanges, such as Tertiary Reserves Ancillary Services (TRAS) trading, long-duration contracts, and the proposed Green RTM Markets, aim to enhance market responsiveness. Moving to five-minute scheduling, similar to international best practices, will further improve real-time grid management.
 
Expanding short-term and intraday trading, strengthening capacity markets, and integrating ancillary service mechanisms—including frequency regulation, voltage support, and system reserves—will be key to ensuring grid reliability. Market-based price signals, such as locational pricing, dynamic tariffs, and negative pricing, will encourage demand-side participation, storage investments, and flexible generation. Additionally, policies supporting green hydrogen, green ammonia, and electrified industrial processes will help absorb surplus renewable energy while providing additional grid stability. These measures will create a resilient and competitive power market, supporting India's transition to a high-renewable, low-carbon energy ecosystem while maintaining economic efficiency and grid security.
 
The Role of Advanced Technologies in Market Flexibility
A diversified set of flexibility solutions is necessary to manage renewable variability effectively. The expansion of battery energy storage systems (BESS), coupled with the development of pumped hydro storage, provides short- and long-duration balancing capabilities. Demand-side response programs, which incentivise industrial and commercial consumers to shift consumption during peak renewable generation hours, can enhance grid stability while reducing reliance on fossil-fuel-based peaking power. Additionally, grid expansion and reinforcement, including investments in smart grids, digital infrastructure, and transmission interconnections, will facilitate better renewable integration by reducing congestion and enabling seamless power transfers.
 
Market mechanisms like carbon pricing and contracts for differences (CfDs) are creating economic incentives to reduce emissions and integrate more renewables. These innovations, combined with smarter market designs, ensure that future power markets can accommodate increasing levels of renewables while maintaining affordability and reliability.
 
The Way Ahead
Projections indicate that nearly 3,700 GW of new renewable energy capacity will be added globally between 2023 and 2028. Power market flexibility is no longer a luxury but a necessity for the successful integration of renewable energy. Advanced technologies, combined with market-based mechanisms such as demand response, negative pricing, energy exchanges, and capacity markets, are shaping a grid that can effectively manage renewable energy intermittency.
 
With strong leadership from key markets like India, Europe, the US, and China, the global energy transition is progressing steadily. However, continued innovation and policy support will be essential to overcoming the challenges posed by renewable energy variability.

- Tarun Katiyar, CEO, Tata Power Trading Company Ltd.