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By Fatima Mumtaz

Abstract

This paper examines India’s opportunities and challenges in unlocking its clean energy transition. While the country has made significant advancements in expanding its renewable energy capacity, structural inefficiencies within the electricity sector continue to hinder progress. A key barrier is the cross-subsidy pricing mechanism, which charges commercial and industrial users higher electricity tariffs to subsidize power for agricultural and residential consumers. Although originally intended to promote equity, this mechanism has, over time, contributed to mounting debts for power distribution companies, ultimately weakening the financial health of the electricity grid. This paper provides an analysis of the consequences of the cross-subsidy electricity pricing mechanism. It further explores how a phased approach to reforming this pricing structure could offer a viable pathway to address the financial instability of the power distribution companies.

INTRODUCTION

With India poised to account for 12 percent of global energy demand by 2050, India’s role in shaping the energy transition is both pivotal and unavoidable (BP 2024). However, India’s clean energy transition is constrained by a structurally weak electricity grid, largely due to the entrenched cross-subsidy pricing mechanism that undermines the financial health of power distribution companies. A resilient, modern grid is essential for integrating renewable energy, which is inherently intermittent. This paper recommends an incremental approach to phase out the cross-subsidy pricing mechanism, which is both economically and politically viable.

Developing countries today face a pivotal decision in determining their energy transition pathway: should they follow the traditional trajectory taken by today’s developed countries, or adopt a new development paradigm built upon modern, sustainable technologies? The traditional energy development path followed by advanced economies involved a sequential evolution of energy sources. In the pre-industrial era, these economies relied on renewable resources such as wind, watermills, and biomass. By the time of the Industrial Revolution, coal had become a dominant energy source, driving rapid industrial and economic growth (Allen 2012, 17-23). Throughout the 20th century, advanced economies transitioned further to petroleum and natural gas as primary energy sources, supplemented by nuclear power from the mid-20th century onwards (United States Energy Information Administration 2013). Today, these economies are moving away from heavy reliance on fossil fuels toward Renewable Energy (RE) sources. 

For developing countries, this historical pathway not only offers useful lessons but also presents an opportunity to bypass intermediate stages and directly adopt RE systems. By doing so, they can avoid the economic and environmental costs associated with legacy energy systems. 

Between 2019 and 2040, 88 percent of the growth in global electricity demand is expected to be in emerging markets (World Economic Forum 2024). As illustrated in Figure 1, they are at varying stages of energy transition, and the success of these programs will depend on a favorable political and economic environment. 

This paper examines the case for the energy transition of one of the emerging markets - India, by exploring three key aspects: the challenges and opportunities involved, the country’s vision for the future, and the systemic challenges that must be addressed. Given the persistent structural issues, particularly within India’s electricity grid, the paper provides a detailed analysis of these obstacles as well as recommendations to support India’s transition towards a sustainable and resilient energy future.

OPPORTUNITIES AND CHALLENGES IN INDIA’S ENERGY TRANSITION

India has compelling economic, technological, and political reasons to transition from traditional fossil fuel systems to RE systems. However, this transition involves several trade-offs, which provide an understanding of India's energy transition potential.

Economic drivers

Over the past decade, RE has grown to offer low-cost electricity generation in the long run (Armstrong 2021). However, at the same time, it requires considerable upfront capital investment and places a strain on public finances (Aydos et al. 2022).

The economic trade-off lies in cost distribution: RE projects have high fixed costs (e.g., land acquisition, solar panel installation, grid integration) but minimal variable costs (e.g., no fuel expenses, lower maintenance costs). In contrast, fossil fuel plants have lower initial capital costs but high variable costs, as they depend on ongoing fuel purchases and incur higher maintenance costs. Additionally, the existing electricity grid was designed for centralized coal-based generation and requires substantial upgrades to adapt to renewable energy sources. Further, investments in battery storage, smart grids, and transmission infrastructure are necessary to ensure grid stability and maximize RE integration in existing infrastructure (Aydos et al. 2022). 

Despite higher upfront costs, the long-term economic benefits, which include lower electricity costs, reduced import dependency, and risk of stranded fossil fuel assets, make RE a financially sustainable and resilient choice for India’s energy future (Semieniuk et al. 2022, 532-538). Thus, by investing in renewables now, India can avoid locking itself into unsustainable infrastructure and ensure energy resilience.

Technological motivations

Although adopting cutting-edge technologies may involve higher initial costs, early adoption can position India as a leader in renewable technology development. This first-mover advantage can drive cost reductions and create export opportunities in renewables, further boosting India’s economic growth and industrial competitiveness (McKinsey & Company 2024).

Further, given current (such as declining cost, improvements in battery storage efficiency) and projected advancements (such as expected lowering of cost for scalable energy storage, advancement in technology efficiency) in renewable technologies for future upgrades, the option value [2] of this technology is higher than that of saturated advancements in coal infrastructure. Thus, RE systems will offer the flexibility to upgrade as technology advances.

Political considerations

Energy transition in India has the potential to address two critical domestic political issues - pollution and job creation. India’s cities face severe air pollution, with fossil fuel emissions being a major contributor (World Bank 2024). Transitioning to renewables will reduce greenhouse gas (GHG) emissions. Additionally, RE projects create more local jobs than fossil fuels, helping to address employment inequities (World Resources Institute 2021). On an industrial level, RE development complements existing government initiatives like ‘Make in India’ [3] by fostering local manufacturing and increasing exports of clean energy technologies.

Nevertheless, these benefits come with trade-offs. Fossil fuels currently provide immediate employment and energy security, whereas renewables require workforce reskilling and substantial upfront investments. Further, the fossil fuel industry’s entrenched role in India’s economy makes the transition politically sensitive, adding to delays in policy implementation due to resistance from the industry’s key stakeholders. Despite these challenges, the renewable sector’s long-term potential to generate localized jobs and enhance domestic energy security is high, offering a sustainable path forward for India’s economic and environmental goals.

At the international level, India has committed to achieving net-zero emissions by 2070, with ambitious targets outlined in its Nationally Determined Contributions under the Paris Agreement. These include reducing emissions intensity by 45 percent and achieving 50 percent of cumulative electric power capacity from non-fossil fuel sources by 2030 (Press Information Bureau 2024). Additionally, India’s leadership in the International Solar Alliance has established it as a key player in the global RE transition, attracting climate finance and foreign investment (CSEP 2023).

INDIA’S VISION FOR ENERGY TRANSITION

India’s vision for complete energy independence is reflected in the government’s Energy Vision 2047 document, which is a key tenet of its Aatmanirbhar Bharat (self-reliant India) initiative (Abhyankar et al. 2023). This vision demonstrates a strong political commitment to transitioning away from traditional energy systems and building a sustainable and self-sufficient energy infrastructure.

The key targets identified for the three largest energy-consuming sectors, along with their corresponding electricity grid-related challenges, are detailed below:

Power Sector: Achieve a 90 percent clean electricity grid by 2047

India has made remarkable strides in expanding last-mile electricity access and significantly scaling up renewable energy adoption since 2015 (IRENA 2024). Despite this progress, unmet electricity needs remain high. Much of this stems from the country's low per capita electricity consumption, which remains below the global average (IEA 2021). This indicates a substantial latent demand that is yet to be fully realized, presenting a key opportunity for India to meet this new energy demand from RE.

Currently, 70 percent of India’s electricity is coal-based (Ministry of Coal 2024). India has set ambitious targets, aiming to install 500 GW of non-fossil capacity by 2030, enabling a grid that is nearly 50 percent clean (Ministry of New and Renewable Energy 2024). However, achieving a 90 percent clean grid by 2047 will require considerable grid modernization, such as expansion of transmission infrastructure, smart grids, and energy storage solutions to manage RE intermittency. The electricity grid serves as the backbone of the power sector transition, ensuring reliable distribution of clean energy across urban and rural areas while integrating varying RE sources efficiently.

Transport: Ensure 100 percent of new vehicle sales are electric by 2035

Currently, India’s passenger vehicle fleet is dominated by two-wheelers, the demand for which is projected to peak in 2035. Further, while currently only 7.5 percent of Indian households own a car, the demand for four-wheelers has been growing and is projected to considerably shoot up by 2050 (Kamboj et al. 2022; MoHFW 2022). 

Attaining the ambitious target of 100 percent new vehicle sales being electric by 2035 will require efforts to change consumer preferences, strengthen Electric Vehicles (EVs) charging infrastructure, and research and development investments to make efficient batteries (Chateau et al. 2023). However, research has found that solely promoting EVs uptake without due consideration for the sources of electricity powering the EVs would not go far in reducing GHG emissions (Kurien and Srivastava 2019, 234-244; Peshin et al. 2022, 9569-9582; Valera and Agarwal 2019, 89-123). With India’s electricity grid majorly dependent on coal, demanding electricity for EVs from a grid operated over coal would lead to GHG emissions in the electricity generation process. Further, without investment in grid capacity and reliability, achieving 100 percent new car sales to be EVs by 2035 will be difficult, as a weak grid could create bottlenecks in power supply for transportation needs.

Industry: Transition industries to be powered by green hydrogen and electrification

The industrial sector accounts for 36 percent of India’s energy consumption and contributes 30 percent to its gross domestic product (GDP). Over the past three decades, industrial energy demand has tripled, and India is expected to drive one-third of the global industrial energy demand growth by 2040. Opportunities for energy transition in this sector are many. Electrification of industrial processes offers a cost-effective and energy-efficient solution to reduce reliance on fossil fuel imports while meeting energy needs. Additionally, India’s Green Hydrogen Mission provides a pathway for decarbonizing high-heat, energy-intensive industries such as steel and cement through green hydrogen (World Economic Forum 2024). 

A modernized electricity grid is essential for industry electrification. Industries shifting to electric heating and energy-efficient processes will require a stable and high-capacity electricity supply. Grid reliability and transmission expansion will play a pivotal role in supporting decarbonized industrial operations, ensuring that energy-intensive sectors can transition seamlessly without disruptions to productivity.

Therefore, the shift toward renewables, the wide adoption of EVs, and the decarbonization of industry all hinge on a modern, resilient, and expanded grid capable of managing growing demand, integrating RE efficiently, and maintaining system reliability. In light of this, it is crucial to explore the structural challenges facing India’s grid infrastructure and the reforms needed to enable a sustainable energy future.

THE SYSTEMIC CHALLENGES OF A WEAK GRID

India's Power Value Chain: An Overview

India’s power value chain, deregulated by the Electricity Act of 2003, comprises three key stages: power generation, electricity transmission, and electricity distribution (Nirula 2019). The process begins with fuel extraction companies, with Coal India Limited, a government-owned coal producer, being the primary player in coal extraction (Coal India 2025). Next are the generation companies (GENCOS), which convert fuel into electricity. The electricity is then distributed by distribution companies (DISCOMs) via a transmission and distribution grid to consumer locations. Finally, electricity is traded through energy exchanges or electronic platforms, reaching regional suppliers and end users.

The three major players—Coal India, the GENCOS, and the DISCOMs—face significant payment delays. Coal India is owed $2.5 billion USD by power generation companies (Mint 2021), which in turn are owed over $9 billion USD by DISCOMs (Ministry of Power 2025). DISCOMs have accumulated massive losses, totaling over $74 billion USD [4], despite five government bailouts (NITI Aayog 2023).

Three systemic inefficiencies that contribute to this crisis are:

• High aggregate technical and commercial (AT&C) Losses: India’s AT&C losses stand at 15 percent, much higher than the global average of 8 percent (Ministry of Power 2025; World Bank 2018). This is due to theft, billing inefficiencies, and outdated infrastructure.
• Outdated Metering Systems: An outdated metering system results in billing and operational inefficiencies. Replacing outdated meters with smart meters can significantly improve performance, as demonstrated by smart meter installation in Bihar, India, where upgrading 1 million meters boosted annual revenue by $350,000 USD, leading to efficiency in billing and revenue collection (The Times of India 2022).
• Cross-Subsidization Policy: The government subsidizes electricity for agriculture and domestic consumers, shifting the financial burden to commercial and industrial consumers. This policy has significant implications for the financial viability of DISCOMs. 

This paper focuses on one of the three systemic inefficiencies discussed above, namely, the cross-subsidy mechanism. Cross-subsidies play a pivotal role in shaping the financial viability of DISCOMs and influence energy consumption across sectors. Unlike high AT&C losses and outdated metering systems, which fall largely within the operational domain of DISCOMs, cross-subsidies are rooted in deliberate policy choices and reflect deeper political and economic trade-offs. Reforming this pricing mechanism requires navigating the complex relationships between DISCOMs, state governments, and consumers, all of whom are embedded in the broader political economy of electricity in India. Moreover, addressing technical inefficiencies within DISCOMs is unlikely to be sustainable unless the financial health of DISCOMS is made more resilient. The next section delves into the discussion on the cross-subsidy policy and how that impacts the revenue and costs for the DISCOMS.

Cross-Subsidization Policy

Cross-subsidies in India’s electricity sector involve charging higher tariffs to industrial and commercial users to subsidize residential and agricultural consumers. This mechanism is justified under the principle of “energy for all”, which aims to promote energy justice by ensuring affordable and clean energy access for farmers and low-income households (Mehta and Sarangi 2022).

However, this approach faces significant challenges. Universal targeting within these categories disregards consumers' ability to pay, leading to inefficiencies where benefits are often captured by wealthier households. Moreover, price distortions create suboptimal electricity consumption patterns, as industrial and commercial users migrate away from grid electricity, further straining utility finances. This results in an imbalance, with overuse in agricultural and domestic sectors and underuse in industrial and commercial sectors. Additionally, patronage politics has inflated subsidies to unsustainable levels, exacerbating financial pressures on utilities (Mehta and Sarangi 2022).

Figure 2 illustrates the aggregated estimate of consumer group-wise electricity subsidies across India for the financial year 2020. Of the total subsidies, 75 percent are allocated to agricultural users and 20 percent to domestic users, together accounting for 95 percent of the total. While the industrial sector primarily subsidizes agriculture and domestic users, 4 percent of subsidies are also directed to the industrial sector. These subsidies are allocated to industries the government seeks to promote strategically (Aggarwal et al. 2020).

In India, the State Electricity Regulatory Commissions (SERCs) are primarily responsible for setting consumer tariffs with two key objectives: covering the costs of DISCOMs and promoting social welfare by protecting low-income consumers. To achieve this, SERCs issue tariff orders ex-ante based on projected revenue and costs of DISCOMs, with the objective to ensure that the expected revenue matches the anticipated costs.

However, ex-post analysis (conducted after the actual delivery of electricity services) reveals significant deviations from these projections. On average, the DISCOM costs increase by 19 percent compared to ex-ante estimates (Tyagi and Tongia 2023). Simultaneously, the average billing rate (ABR) [6], representing revenues, declines. Consequently, the financial position of DISCOMs shifts from a projected break-even to a substantial gross financial gap. To address these discrepancies, a True-Up process [7] is implemented. SERC reconciles the deviations and compensates DISCOMs for legitimate revenue gaps. In order to understand the tariff setting and reconciliation process better, this section will further detail the ex-ante and ex-post processes

As part of the ex-ante tariff setting, according to the National Tariff Policy, the SERCs are supposed to limit cross-subsidies to ±20 percent of the Average Cost of Supply (ACoS) [8] and to progressively reduce cross-subsidies over time. However, the trend reveals that cross-subsidies offered by states through their DISCOMs neither adhere to the ±20 percent ACoS limit nor show any significant reduction over time. This underscores how, despite clear guidelines, states continue to use cross-subsidies as a tool for patronage politics.

Figure 3 illustrates the estimated financial gap in consumer tariffs across various compliance scenarios (Tyagi and Tongia 2023). Under the current tariff structure (the "as-is" scenario), which violates the ±20 percent ACoS limit, there is an observed gap of $ 1.6 billion USD crore in ex-ante consumer tariffs. It is important to note that this gap pertains solely to consumer tariffs, as net tariffs would show a surplus due to additional revenue streams for DISCOMs.

In a scenario where compliance with the ±20 percent ACoS limit is enforced, tariffs for consumer groups paying below 80 percent of ACoS would need to rise, while tariffs for groups paying above 120 percent of ACoS would fall, albeit at a relatively lower rate due to their higher base. Owing to volume disparities between underpaying and overpaying groups, adjustments for compliance often necessitate disproportionately higher increases in tariffs for underpaying groups. Consequently, while this compliance would reduce underpayment (as prices for heavily subsidized sectors increase) and overpayment (as prices for highly subsidized sectors decrease), it would not fully eliminate the financial gap.

What, then, constitutes a revenue-maximizing scenario? If subsidies to heavily subsidized sectors are reduced (thereby narrowing underpayment) while maintaining the same tariff levels for heavily subsidized sectors, this one-sided adjustment would generate a surplus in consumer tariffs. However, when this surplus is reconciled with ex-post calculations accounting for losses and added costs, the realized surplus diminishes significantly, leaving limited room to reduce tariffs for subsidizing sectors.

Figure 4 illustrates the financial gap change based on the ex-post reconciliation, and finds that the net ex-ante financial gap (planned costs minus revenue - including all revenues and costs, not just consumer tariffs), which should have been a small surplus, turned into a large loss gap (Tyagi and Tongia 2023). These gaps can be divided into two buckets: losses that are under the purview of DISCOMs and legitimate losses that should be covered using the True-Up process. The largest change in absolute terms comes from the increase in power purchase costs, followed by financial and operational costs. Distribution network losses higher than the normative levels specified in Tariff Orders also raise costs. Due to such distribution losses, which are a subset of the AT&C losses, the DISCOM needs to procure more power than planned to supply a given load. 

Based on the financial gap post reconciliation of ex-ante estimates to ex-post realised costs, the DISCOMS file a True-Up petition to recover allowed changes in costs or revenues (changes in power procurement costs and ABR). However, actual True-Up levels reimbursed by the government have historically been lower than recoverable gaps. Thus, after correcting for DISCOM performance, such as collection failures, cross-subsidies are far higher than originally planned, eventually leading to the accumulation of losses for DISCOMs. 

Pricing electricity tariffs – The “ideal” vs the “real”

Using the Ramsey Pricing Model, we analyze how electricity tariffs can be set to minimize dead-weight loss (DWL) [11] by distributing the fixed cost burden among consumer groups based on price elasticity. Residential electricity demand is more inelastic compared to industrial demand, meaning residential consumers are less responsive to price changes. In contrast, industrial users are more price-sensitive and may bypass the grid by generating their own power if tariffs are increased significantly. To minimize DWL, the model suggests shifting more of the fixed cost burden to residential users, as their inelastic demand results in smaller efficiency losses. This approach reduces overall economic inefficiency as depicted in Figure 5.

In India, cross-subsidy pricing is used to determine tariffs for each consumer group. This approach attempts to recoup the producer surplus lost in subsidized sectors (e.g., residential) through the producer surplus gained in subsidizing sectors (e.g., industrial). 

An analysis calculates the DWL in the Indian context, considering the cross subsidies, which is discussed below (Chattopadhyay 2004, 673-684). As demonstrated in Figure 6, assuming that the producer surplus lost by reducing residential tariffs is entirely offset by the producer surplus gained from increasing industrial tariffs (i.e., area(Pi,nPca) = area(PPR,nfe)), the net loss in consumer surplus can be calculated as follows:

Net loss in consumer surplus = area(Pi,nPcba) – area(PdfPR,n) = [area(Pi,nPca) + area(∆abc)] – [area(PPR,nfe) – area(∆def)] = area(∆abc) + area(∆def)

Thus, the net loss in consumer surplus, which also represents the loss in social welfare, is the sum of the colored triangles. This calculation highlights that DWL is introduced in both sectors. Moreover, the extent of this loss increases if the price elasticity of demand in either the residential or industrial sector is higher. Hence, price setting is not set in an economically efficient manner as it does not consider the minimization of net DWL.

Impact of cross-subsidy policies on India’s energy transition

The primary distortion caused by subsidies lies in diminishing incentives of utilities to upgrade their systems over the long term (McRae 2015, 35-66). This creates a low-quality infrastructure equilibrium [12] that persists over time. In India, the grid's inability to manage the intermittent nature of RE underscores the urgent need for grid modernization to fully leverage this clean and cost-effective energy source. However, decades of payment challenges in the electricity sector have led to chronic underinvestment in grid upgrades. Addressing DISCOM payment issues driven by cross-subsidy pricing is, therefore, a critical prerequisite for enabling the necessary modernization of the grid. The following section outlines a phased strategy to address these barriers to ensure a transition toward a renewable-powered grid. [13]

RECOMMENDATIONS TO TRANSFORM THE EXISTING ELECTRICITY PRICING STRUCTURE

Addressing the financial shortfall in India’s electricity sector requires careful consideration of cross-subsidy removal, which carries significant economic and social implications. Food price inflation is likely to be the most pronounced consequence of removing cross-subsidies, as agricultural subsidies are eliminated (Bhattacharyya et al. 2016, 181–190). This inflation disproportionately affects poorer households and rural areas, leading to a steep decline in real household incomes. However, the study also finds that general inflation (aggregate price index) decreases as industrial production costs fall. This reduction in costs enhances the competitiveness of Indian industrial goods in international markets, potentially boosting exports. Thus, the critical challenge associated with cross-subsidy removal lies in dampening the effect of the decline in household incomes.

Given these implications, and with universal electrification being a key priority for India, entirely removing subsidies would undermine this goal and create additional financial burdens, either on the government (through higher subsidy payments) or on consumers (through increased costs). A phased approach to reducing cross-subsidies is therefore necessary to balance economic efficiency with social equity. The proposed phased strategy is evaluated using the feasibility-viability model by assessing its feasibility (how easily reforms can be implemented) and viability (how practical and sustainable reforms are over time).

Short Term

• Enforce existing national tariff policy: The National Tariff Policy already mandates a ±20 percent limit on cross-subsidies, but this guideline is frequently overlooked by SERCs. Strict implementation of this policy is the first step toward reducing subsidies. Robust data systems must be developed to enable accurate ex-ante estimations of revenues and losses, reducing inefficiencies in the subsidy system. This is highly feasible and immediately viable, as it requires regulatory enforcement rather than major infrastructure changes.
• Improve revenue collection mechanisms of DISCOMs: Strengthening transparency and efficiency within DISCOMs revenue collection mechanisms is essential to reducing the reliance on cross-subsidies. Measures such as prepaid smart metering and strict enforcement against non-payment can enhance financial sustainability of DISCOMs and reduce their dependence on subsidies. This reform has high feasibility due to existing technological frameworks. The viability of this recommendation depends on the mandatory requirement for DISCOMS to upgrade all customers to smart meters within a particular time frame.
• Conduct Comprehensive Impact Studies: Further studies are needed to assess the broader economic impacts of cross-subsidy removal, including effects on household incomes, local economies, and national competitiveness. These studies will help guide future policy decisions and mitigate potential negative consequences. The feasibility is high as data collection mechanisms exist, and the viability is strong as these studies will provide critical policy direction for a just transition to a reduction of cross-subsidies.

Medium Term

• Direct transfer of electricity subsidies to bank accounts of targeted beneficiaries: Over the medium term, cross-subsidy removal should be accompanied by the implementation of a transfer of electricity subsidies directly to bank accounts for vulnerable groups. The PM-Kisan Samman Nidhi program, which provides direct cash support to small farmers, could be expanded to include electricity subsidies. This existing infrastructure for cash transfer to beneficiary bank accounts (called Direct Benefit Transfer or DBT) and the beneficiary registry can be utilized to streamline subsidy delivery, minimizing administrative duplication. Similarly, other beneficiary databases can be leveraged to ensure targeted and efficient subsidy allocation. Such a direct subsidy transfer mechanism can not only help in easing the burden on the highly subsidized sectors but also increase the revenues for the DISCOMs. This is moderately feasible given the need for creation of a mechanism for identification of beneficiaries as well as electricity subsidy allocation rates based on beneficiary profiles, but increasingly viable as successful direct cash transfer implementation in other sectors indicates strong potential for adaptation.
• Incrementally increase tariffs for subsidized sectors: As per the recommendation in the National Tariff Policy, gradually increasing tariffs and lowering subsidies for highly subsidized sectors (e.g., agriculture and domestic households) will help reduce overburdened industrial tariffs and minimize economic shocks as the transition can be spread over multiple years. This is moderately feasible, requiring stakeholder engagement, but is increasingly viable as the energy market matures.
• Investment in grid modernization and smart infrastructure: A modern, resilient grid is critical to sustaining a competitive and subsidy-free electricity market. Investments should focus on grid modernization and improving energy storage solutions to ensure grid stability in a post-subsidy era. While this requires significant investment and planning, it is viable in the medium term through policy support and financing mechanisms.

Long Term

• Complete transition to market-based tariffs: Over time, electricity tariffs should be set based on market dynamics, eliminating distortions caused by artificial cross-subsidization. While politically challenging in the short term, this is highly viable in the long run as energy markets mature and consumer adaptability increases.

CONCLUSION

India’s energy transition presents a unique opportunity to transition from traditional fossil-fuel-based development to RE-powered development and embrace a cleaner, more sustainable future. This paper has examined the motivations behind India’s transition, the challenges it faces, and the critical role of systemic inefficiencies, particularly within the electricity grid and cross-subsidy pricing mechanism, in shaping the trajectory of this transition. While India has strong economic, technological, and political incentives to accelerate its shift towards renewable energy, the financial instability of DISCOMs, outdated grid infrastructure, and the distortionary effects of cross-subsidies pose significant barriers. These challenges not only impact the affordability and accessibility of electricity but also hinder the integration of renewables, making grid modernization and financial reform essential for long-term sustainability.

Addressing these barriers requires a phased approach to reducing cross-subsidies, improving DISCOM financial health, and investing in smart grid infrastructure. Policy reforms that enforce existing tariff regulations, introduce targeted direct subsidy transfers for vulnerable consumers, and enhance revenue collection mechanisms can help create a more balanced and financially sustainable electricity market. Additionally, strategic investments in energy storage and transmission infrastructure will be crucial to ensuring grid stability in a post-subsidy era.

India’s success in the energy transition will not only determine its own economic and environmental future but also set a precedent for other emerging economies. By implementing reforms that balance economic efficiency with social equity, India can establish itself as a global leader in clean energy while ensuring a just and inclusive transition. The ability to address systemic inefficiencies today will define the nation’s energy security, economic competitiveness, and climate resilience in the decades to come.

*This article was edited by Prachi Mishra (Georgetown University) and Stefan Tobias (Princeton University).

About the Author

Fatima Mumtaz is a Master in Public Affairs candidate at the Princeton School of Public and International Affairs, with a focus on international development. Born and raised in India, she is an engineer-turned-policy professional with five years of experience across both the public and private sectors. Prior to Princeton, Fatima served as a Data Science Lead at the Development Monitoring & Evaluation Office, NITI Aayog, Government of India. In this role, she contributed to institutionalizing data-driven monitoring systems and evaluations to assess the performance of government policies. Fatima is particularly interested in leveraging emerging technologies and data to drive evidence-based policymaking, with a focus on digital empowerment and climate change.

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AI Statement

I used ChatGPT for sentence phrasing, grammatical refinement, and assistance in identifying relevant literature. 

Wednesday, February 19th, 2025
Fatima Mumtaz

Notes

[1] The current state of the electricity market in a country is illustrated using the tail of the arrow. The arrow's head represents the ideal future state, where the country transitions toward renewable energy sources. The figure highlights that each country follows a unique energy transition pathway, influenced by its starting conditions and factors such as political economy. 

[2] ​Option value refers to the inherent flexibility and future adaptability of a technology, allowing it to benefit from ongoing innovations and cost reductions over time. According to the literature, advancements in renewable energy technologies provide greater flexibility for future upgrades compared to coal infrastructure.

[3] Make in India is an initiative of the Government of India with a vision to boost domestic manufacturing and employment.

[4] As of March 31, 2023.

[5] The aggregate consumer group-wise subsidy share was calculated using tariff orders from the State Electricity Regulatory Commission (Aggarwal et al. 2020). The subsidy refers to state government-provided tariff support that enables DISCOMs to supply electricity at prices lower than the actual cost of production and distribution. The analysis is based on data from the financial year 2020, except for Mizoram and Telangana, where data from financial year 2019 were used. The authors note that the "Others" category includes public lighting, public waterworks, signboards, hoardings, railway traction, airports, and similar sectors.

[6] Average Billing Rate (ABR) indicates the expected income from each customer category, based on a combination of fixed and variable charges.

[7] True-Up process is the periodic adjustment carried out by State Electricity Regulatory Commissions to align the discoms’ actual expenses and revenues with the projections approved in the tariff order. This ensures that any shortfall or surplus is accounted for, usually in subsequent tariff revisions.

[8] Average Cost of Supply: Total cost of production of electricity divided by the total number of electricity units produced.

[9] The estimated financial gap is calculated based solely on consumer electricity tariffs. The labels used in the figure are explained below:

• ‘Underpayment’ represents the amount paid less than expected (without cross-subsidies) by categories benefiting from subsidies, such as agricultural and domestic consumers.
• ‘Overpayment’ represents the amount paid more than expected (without cross-subsidies) by categories subsidizing others, including commercial and industrial users.
• ‘Gap’ indicates the financial shortfall in ex-ante tariffs.
• ‘As-is’ scenario depicts the underpayment, overpayment, and gap based on the tariff structures in the financial year 2019 at the aggregate all-India level.
• ‘20% bounds capping’ scenario shows these elements assuming all state DISCOMs adhered to a ±20% limit on the Average Cost of Supply at the all-India level.
• ‘Revenue-maximizing (one-side capping)’ scenario models the case where tariffs for underpaying categories are raised to fall within the ±20% bound on the Average Cost of Supply, while overpaying categories' tariffs remain unchanged.

[10] The figure illustrates losses in the per kWh electricity tariff, represented by red bars. The total ex-post gap amounts to $0.019 USD/kWh. The "Other Support" bar highlights income and revenue grants that help reduce the financial gap, bringing the final gap to $0.012 USD/kWh. 

The grey bar on the extreme left, labeled "Ex-ante Gap," shows that, in contrast to the ex-post scenario, the initial expectation was that the financial gap (i.e., cost minus revenue) would be negative, implying that DISCOMs were expected to be profit-making.

The losses labeled in the figure are explained below:

• Losses under ‘DISCOM Purview’: These losses stem from inefficiencies in DISCOM processes and are not eligible for recovery under the true-up process. These include the (1) ‘excess consumer collection loss’, which is the revenue loss due to non-payment by consumers, and the (2) ‘excess distribution loss’, which is the loss from billing inefficiencies.
• Unpaid Subsidy: Revenue loss due to the non-payment of subsidy amounts by the state to the DISCOM.
• The four losses that are supposed to be recovered through the True-Up process include the (1) ‘change in power purchase cost’ that captures the deviation in electricity procurement costs from ex-ante to ex-post, (2) ‘change in other costs’ which includes financial charges, operational expenses, and employee costs, (3) ‘change in consumer billing rate’ the captures variations due to changes in the consumer mix (e.g., selling more or less to different types of consumers affects total billing amounts) and (4) ‘change in other operational revenue’ which includes the unexpected operational costs incurred.

[11] Deadweight loss (DWL) is the loss of total surplus that occurs when the costs of a transaction or policy exceed its benefits, leading to an inefficient allocation of resources (Autor 2016, 2).

[12] A low-quality infrastructure equilibrium refers to a situation where a utility under invests in grid upgrades due to insufficient revenue generation, resulting in persistently poor infrastructure quality.

[13] Please note that while multiple challenges need to be addressed, including power purchase costs for DISCOMs, AT&C losses, and the need to streamline the True-Up process, this section only considers cross-subsidies. This is because each of these issues requires considerable discussion, and I could not justify the discussion within the word limit of this paper.

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