Why India’s Clean Energy Transition Now Hinges on Power Market and Distribution Reforms

India’s renewable energy transition has crossed a crucial milestone. With over 180 GW of installed solar and wind capacity, clean energy is no longer the constraint. Renewables are among the cheapest sources of new power generation. The real question now is not how much green electricity India can produce, but how efficiently the power system can absorb, distribute and use it. That challenge places distribution companies, retail tariff design and wholesale power markets at the centre of India’s energy transition.

Why distribution reform has become the decisive bottleneck

At the heart of the power system sit distribution companies, or discoms. Their financial and operational health determines whether clean electricity reaches consumers reliably and affordably. Yet national aggregate technical and commercial losses remain close to 16%, and many discoms continue to face chronic cost under-recovery despite past reform efforts such as UDAY and the Revamped Distribution Sector Scheme (RDSS).

As renewable penetration rises, these stresses intensify. Solar and wind introduce variability, make forecasting and balancing more complex, and shift the cost structure of power procurement. However, discom incentives remain tied largely to selling more electricity, not to running the system more efficiently. Measures essential for the energy transition — energy efficiency, rooftop solar and demand response — can therefore appear financially threatening rather than beneficial.

The cross-subsidy trap and shrinking high-value consumers

A structural weakness of India’s distribution sector lies in tariff design. In many states, commercial and industrial consumers pay well above the cost of supply, effectively cross-subsidising households and agriculture. As these high-paying consumers invest in energy efficiency, rooftop solar or shift to open access, discoms lose their most profitable sales while retaining the obligation to serve subsidised users.

This dynamic worsens as fixed costs dominate discom finances. Network maintenance, staffing and long-term power purchase agreements do not shrink when demand falls. If tariffs are primarily volumetric, fewer units sold means less revenue to cover the same fixed obligations — even when overall system costs do not fall proportionately.

Rooftop solar and the limits of existing tariff models

Rooftop solar highlights the mismatch between old tariff structures and new technologies. Under net metering, consumers are often credited for exported solar power at or near the retail tariff — even though that tariff includes network charges and cross-subsidies. Consumers buy less power during the day but still depend on the grid at night.

Without reform, discoms increasingly resemble backup providers, bearing network costs without being adequately compensated. This is not an argument against rooftop solar, but against tariff frameworks that fail to evolve alongside it.

Why time-of-day tariffs need smart automation

India has taken a major step by mandating time-of-day tariffs and accelerating smart meter deployment. Around 49 million smart meters have already been installed. But price signals alone are not enough.

For time-varying tariffs to work, consumers must know when electricity is expensive, which appliances drive peak demand, and how to respond. Expecting households to manually manage consumption in real time is unrealistic. Tariff reform must therefore be paired with smart technologies — automated cooling controls, smart EV charging, appliance-level switches — that allow demand to respond without constant user intervention.

Well-designed demand response can often deliver flexibility more cheaply than new grid infrastructure or storage, particularly for managing short-duration peaks.

The wholesale market problem: power flows, markets don’t

India’s renewable challenge is also geographic. Renewable resources are concentrated in certain states, while demand is clustered in urban and industrial centres. Although the physical grid allows electricity to move across regions, market design remains fragmented.

Most electricity is locked into long- and medium-term contracts, with discoms self-scheduling generation from their portfolios. Organised power exchanges account for only about 7–9% of total supply. This limits the system’s ability to dispatch the cheapest power — often renewables — across the country.

Market-based dispatch and captive power: two key reforms

Two wholesale reforms stand out. The first is a transition to nationwide market-based economic dispatch. Under such a system, the cheapest available power would be scheduled first, regardless of state boundaries or legacy contracts. Estimates by the “Central Electricity Regulatory Commission” suggest this could cut annual procurement costs by about $1.6 billion while reducing renewable curtailment.

The second is integrating captive power plants into wholesale markets. Captive generation represents a large, underutilised pool of flexible capacity. Bringing it into markets would deepen liquidity, increase competition and lower overall system costs.

Redefining the role of discoms in a clean power system

Taken together, retail and wholesale reforms could transform discoms from passive intermediaries into active system optimisers. With the right incentives, discoms could earn returns for reliability, loss reduction and flexibility — rather than simply for selling more units of electricity.

If renewable integration leads to better service quality and lower system costs, public support for the energy transition will deepen. If it instead produces uncertainty and financial stress, resistance will grow. India’s clean energy future, in other words, now depends less on building new solar parks and wind farms — and far more on fixing how electricity is priced, traded and delivered.