Unleashing Power Sector of India: To Help India’s Economy

Syllabus: GS3/Energy Infrastructure

Context

• India’s power sector is grappling with technical and administrative hurdles, compounded by macroeconomic constraints that could shape the nation’s economic trajectory.

About Power Sector of India

• Installed Capacity and Energy Mix: As of mid-2025, India’s total installed power capacity has reached 476 GW, with non-fossil fuel sources contributing 49% of this mix. It includes:
  • Thermal (Coal, Gas, Diesel): 240 GW; ~50.5 %
  • Solar: 110.9 GW; ~23.3%
  • Wind: 51.3GW; ~10.8%
  • Hydro: 46.9GW; ~9.8%
  • Nuclear: 8.8GW; ~1.8%
• Surge in Renewable Energy: Installed renewable capacity tripled — from 76 GW to over 226 GW between 2014 and 2025.
  • Solar power alone grew more than 39-fold, and wind energy continues to expand, especially in onshore installations.
  • India’s target of 500 GW of non-fossil fuel capacity by 2030 is ambitious but achievable, with over 176 GW of renewable projects under implementation.
• Demand and Future Projection: India’s electricity demand is growing at 7–9% annually, with peak demand rising even faster.

How India’s Power Sector Impacting the Economy?

• GDP Growth and Industrial Expansion: Reliable power supply is essential for manufacturing, services, and emerging tech like data centers and electric vehicles.
  • Industrial and commercial power demand rose by over 3× and 4.5× respectively between 2001 and 2022, reflecting modernization across sectors.
• Employment and Investment: The sector supports millions of jobs across generation, transmission, distribution, and renewables.
  • Infrastructure investments — like ₹6.4 lakh crore in transmission and distribution projects under the National Infrastructure Pipeline—stimulate local economies and create skilled employment.
• Rural Development and Electrification: Universal household electrification has unlocked latent demand in rural areas, improving productivity, education, and healthcare outcomes.
  • Over 2.8 crore households were connected to the grid under schemes like Saubhagya and DDUGJY.
• Energy Security and Trade: India now exports electricity worth over USD 1.5 billion annually, with plans for undersea transmission links to the Middle East.
  • Diversification into renewables enhances energy independence and reduces import bills for coal and gas.
• Climate and Sustainability Goals: India’s commitment to 500 GW of non-fossil fuel capacity by 2030 supports its pledge to reduce carbon intensity by 45%.
  • Transitioning to clean energy reduces long-term environmental costs and aligns with global climate finance opportunities.

Major Challenges in India’s Power Sector

• Electricity as a Hidden Tax on Manufacturing: Indian firms effectively pay twice the efficient cost of power, imposing a ‘100% tax’ on production.
  • Half of this stems from distribution inefficiencies, while the other half arises from cross-subsidisation, where industries and commercial users subsidize households and agriculture.
  • Large firms escape this burden through captive power or negotiation, and Small and medium enterprises (SMEs) limit their ability to expand, create jobs, and compete globally.
• Subsidies Shift from Agriculture to Households: Electricity subsidies consume about 1.2–1.3% of GDP.
  • Earlier, agriculture was the main beneficiary, but now households account for nearly half, and parity is approaching.
  • Between 70–85% of subsidies flow to middle-class and rich households.
• Global Stakes: China is rapidly becoming an ‘electro-state’, electrifying its economy with renewables and positioning itself to dominate future industries like AI, electric vehicles, and data centers.
  • If India fails to reform its power sector, it risks falling behind in this global race.

Other Challenges in India’s Power Sector

• Distribution and Grid Challenges: Distribution Companies (DISCOM) have accumulated losses exceeding ₹6.77 lakh crore by 2022–23.
  • DISCOMs suffer from inefficiency, political interference, and chronic bailouts.
• High Aggregate Technical & Commercial (AT&C) Losses: National average AT&C losses hover around 25%, compared to 6–7% in developed countries.
  • These losses stem from outdated infrastructure, theft, and poor metering.
• Fuel Shortages and Supply Gaps: Coal remains a dominant energy source, but domestic production hasn’t kept pace with demand.
  • It leads to underutilization of generation capacity and increased reliance on imports.
• Tariff Distortions: Electricity tariffs are often politically manipulated, with cross-subsidies burdening industrial users.
  • Delays in tariff revisions and differential pricing structures discourage investment and efficiency.
• Low Capacity Utilization: Despite increased installed capacity, actual generation lags due to fuel shortages and unviable Power Purchase Agreements (PPAs).
• Regulatory and Policy Fragmentation: Overlapping jurisdictions between central and state governments complicate reforms.
  • Implementation of progressive policies like open access and subsidy targeting remains uneven.
• Renewable Integration Challenges: While India has committed to 500 GW of non-fossil fuel capacity by 2030, grid modernization and storage solutions lag behind.
  • Balancing intermittent renewable sources with base-load demand is still a technical hurdle.

Key Policies and Reforms in India’s Power Sector

• Electricity Act, 2003: Introduced competition, open access, and consumer protection.
  • Enabled license-free generation and distribution, power trading, and mandatory metering.
  • Established State Electricity Regulatory Commissions (SERCs) and promoted rural electrification.
• National Electricity Policy (NEP) & Tariff Policy: It laid the foundation for affordable, reliable electricity for all.
  • Tariff Policy (2006, revised in 2016) emphasized cost-reflective tariffs, renewable integration, and efficiency.
• Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY): Focused on rural electrification and feeder separation for agricultural and non-agricultural loads.
  • Strengthened sub-transmission and distribution infrastructure in villages.
• SAUBHAGYA Scheme: It aims to achieve universal household electrification.
  • Over 2.8 crore households were connected to the grid, improving rural productivity and welfare
• Ujwal DISCOM Assurance Yojana (UDAY): Aimed at financial turnaround of state-owned distribution companies (DISCOMs).
  • Focused on reducing AT&C losses, improving billing efficiency, and eliminating the gap between cost and revenue.
• National Power Portal: Centralized data and analytics for generation, transmission, and consumption.
• One Nation, One Grid: Unified national grid enables seamless power flow across regions.
  • Enhances reliability, efficiency, and market integration.
• Revamped Distribution Sector Scheme (RDSS): Launched to modernize DISCOMs with smart meters, feeder automation, and loss reduction targets.
  • Linked financial support to performance metrics.

Way Forward: Toward an Electricity Revolution

• Breaking the Cycle of Inefficiency:
  • Radical simplification of electricity tariffs, based only on technical factors.
  • Elimination of cross-subsidies, ensuring users pay only efficient costs.
  • Targeted subsidies for genuinely poor households, ending benefits for the rich.
  • Shared transition costs between the Centre and states to finance reforms.
  • Orderly exits for unviable discoms to increase reform pressure.
• India’s power distribution remains one of the last monopolistic bastions of the public sector. Telecommunications reform in the 1990s sparked the IT revolution; similar competitive reforms in electricity could unleash a new wave of productivity and growth.

Source: IE