Power Electricity Prices in India and the Way Forward

As the world’s third largest producer and consumer of electricity, India holds a critical position in the global energy market. The last ten years have witnessed a paradigm change in the Indian electricity sector characterised by great deal of investments in infrastructure creation across the value chain with focus on sustainability, competitiveness, and energy security. From having approximately 132 GW of installed capacity in the year 2002, India’s installed capacity has seen exponential growth and reached 373 GW as of December 2020. From being a power deficient nation in the year 2002, India has grown into an energy surplus nation exporting electricity to its South Asian neighbours.

In a significant move, the Electricity Act 2003 was enacted to transform the power sector value chain covering generation, distribution, transmission, and creation of power markets with competition as its cornerstone. The Act 2003 enabled inception of the Power Exchanges in the year 2008 which have primarily facilitated electricity demand-supply equilibrium and optimum usage of our energy resources spread across the country through discovery of the most competitive and indigenous price benchmarks. Energy markets brought about an exemplar shift in the power sector, facilitated competitiveness and reduced prices over the years. The price signals from the market also facilitated India to leapfrog in setting up generation and transmission capacity, address energy shortages and evolve from a net importer of electricity into generating surplus. With robust growth in generation capacity, energy shortage has reduced from 42,428 MU (4.2%) in 2014 to 7,459 MU in 2017 (0.7%). The average spot power prices discovered in the Exchange power markets have seen a great correction over the last twelve years. In the year 2011 the spot power price at Rs 3.6 per unit have corrected to as low as Rs 2.6 per unit as of November 2021.

In accordance with the Paris Agreement signed in 2015, the Government of India is committed to reducing carbon footprint and emission intensity and has made significant progress in recent years in increasing share of renewable energy in the energy mix, thus moving towards a more sustainable green economy. India targets 175 GW of renewable energy by 2022 and 450 GW of renewable energy by the year 2030.

Let us have a look at the power value chain - generation, transmission, power markets, and the pricing dynamics related to it as well as what seems to be the way forward.

Generation & Transmission Value Chain: The accelerated pace of generation capacity addition since 2003 has led to a situation wherein the installed capacity at 373 GW as of December’20, significantly exceeds the peak demand at about 190 GW, a scenario never witnessed before in the history of the sector.

Coal based thermal power has a significant share in India’s present day energy mix. To meet India’s increasing energy requirement, coal is expected to retain atleast 40-50% share in the energy mix by the year 2030. The government aspires too significantly ramp up the country’s coal production and consumption and further reduce the coal imports of the order of about 250 million tonnes. The central government’s push for increasing the country’s coal production to 1 billion tonnes by 2025–26, opening up of commercial mining encourages thermal power plants to use domestic instead of imported coal. Therefore, the cost of coal energy is highly likely become even more competitive over the price benchmarks achieved of late.

With an enhanced policy focus on climate change, sustainability, competitiveness and energy security concerns, etc. the energy mix has been changing rapidly and is tilting in the favour of renewable energy. India is now the 4th most attractive RE market in the world. The share of renewable energy has increased from 3.7% in 2008-09 to 10.7% in 2020-21. The present installed renewable capacity base at 90GW represents 24% of the total installed capacity and 15% in terms of energy produced. These developments are altering electricity price dynamics quite dramatically. India has been adding almost 9000MW generation capacity for the past 3 years out of which 75% is renewable and 25% is thermal power. On cost of energy basis, today, the renewable energy is more competitive over thermal, hydro and nuclear energy. From Rs 12 per unit in year 2010, the prices discovered in the recent auctions have crashed 90% and reached lower than Rs 2 per unit. This price trend will become even more competitive as India and other countries across the globe continue to orient their energy mix towards sustainable energy resources.

Power transmission is an integral part of the power sector and is as vital as power generation. The huge amount of power generated in power station is to be transported over a long distance to the load centres to cater to the consumers with the help of transmission lines and transmission towers. To achieve a target of affordable electricity for all by, India has built robust power transmission network. In the last decade, the power transmission sector has been getting substantial investments to scale up the infrastructure and establishing more inter- and intra-state transmission networks, with an aim to provide an uninterrupted access of electricity at affordable prices to the end user. Further, there are plans to build green energy corridors to support easy transportation of power from one region to another.

Power Markets & the Role

They Play The Electricity Act 2003, brought about the establishment of the Power Market, paving way for setting up of the Indian Energy Exchange in the year 2008. IEX is a robust pan-India wide market ecosystem comprising of over 6500 participants and regulated by the Central Electricity Regulatory Commission (CERC). The Exchange pioneered retail open access for 1 MW and above in 2011. The competitive power prices discovered through the Exchange helped build about 20 GW of merchant capacity out of 370 GW of installed capacity in the country. This capacity is not committed under 25-year agreement and essentially sells on competitive prices through the short-term market. One Nation, One Grid, One Price could become a reality due to price signals from the market which led to considerable investments towards augmentation and reinforcement of the transmission system. Besides, the technology enabled marketplaces, it ensures social welfare maximization creating savings of the order of billions of rupees for the consumers. For instance, more than Rs 15,000 crores of Social Welfare was created in FY 19-20 itself. The State of Andhra Pradesh alone saved about Rs 1,000 crores in last one year by way of power procurement through Exchange. Likewise, utilities across the country have saved immensely procuring electricity through Exchange over the last 12 years. Consequently, the electricity volumes on Exchange have grown at a CAGR of 14% over the last five years. The market prices have also helped to undertake several policy and regulatory developments in power, coal, gas, and renewable energy.

The Way Forward

Competition across the power value chain has been playing a key role in increasing India’s energy competitiveness. The sustainability prospects coupled with energy access and security have been supporting and competitive affordable cost of energy. The short-term power market also has a huge role to play to further enhance power price competitiveness. As of FY20, India’s short-term power market constitutes about 11% of larger electricity market of about 1300 billion units. Equipped with the new market segments such the real-time electricity market and the green market, the exchange markets, as per the CERC market reports, now represent 53% of the short-term power market. The government and the regulators have been actively discussing to deepen India’s Exchange markets based on successful development of power markets in other developed economies across the globe like the Nordic countries (90% through markets), Germany and UK (50%), Netherlands and Switzerland (35%). Going forward, the technology-led energy marketplace will play a pivotal role in ushering India’s energy shift and building an energy order which is underpinned by competitiveness, efficiency, and sustainability.

- Shruti Bhatia VP - Corporate Communications and CSR,  Indian Energy Exchange