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Now is India’s chance to reform its electricity system—utilise the energy crisis

India’s states have vastly different electricity needs. Tamil Nadu has high wind penetration and Rajasthan has abundant solar irradiance. A one-size-fits-all procurement template cannot work.

The US-Israel strikes on Iran have triggered a serious energy crisis for India, which imports more than 85 per cent of its crude oil, and about 50 per cent of its natural gas. Brent crude has surged past $100 a barrel, and the Strait of Hormuz — through which over half of India’s crude imports and most of its LPG transit — is effectively closed to commercial shipping. The government has rationed gas supplies to hotels and restaurants. 

While we would have preferred to avoid this crisis, policymakers should use this opportunity to initiate systemic reforms to accelerate India’s energy transition. Getting there requires five reforms in India’s electricity system.

Free the price system

India has a long history of controlling energy prices. Petrol and diesel prices have been frozen for extended periods whenever global crude prices rise, as they have right now. The instinct is to shield consumers from price shocks. 

Similarly, India’s electricity sector is riddled with price distortions. Agriculture and domestic consumers are heavily subsidised, while commercial and industrial (C&I) users pay inflated tariffs. Costs do not disappear because the government chooses not to pass them on. They show up in the balance sheets of oil companies, ballooning discom losses, deferred infrastructure investment, low innovation, and fiscal deficits—ultimately financed by the very consumers the freeze (or the subsidy) was meant to protect.

More importantly, in the long term, real-time, cost-reflective tariffs are essential for a renewables-heavy grid. When the sun is shining, there is abundant solar power and electricity is cheap to produce. In the evening, when solar generation fades and demand peaks, expensive coal plants kick in and the cost of supply jumps. If prices reflected this variation in real........

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