Meeting the renewable revolution: A roadmap for electricity market design in India

Most of the world sees renewable electricity generation firstly as green power, a way to meet flat or declining demand while cutting greenhouse gas emissions. India, with rapid demand growth and an urgent need for new capacity, sees renewable electricity as power, which mitigates energy security risk and safeguards against environmental hazards. Hence the country has set an ambitious target of adding 175 gigawatts of generating capacity by 2022, equal to 63% of all grid capacity today and a six-fold increase in renewable generation.

How can this be done? Integration of renewables, with their high capital cost and intermittent generation, poses special challenges for India. The Indian power system has transitioned over the last two decades from being solely government-owned, to one characterised by increasing private ownership of assets, independent regulation, and market signals. Yet, this transition seems only partially complete, especially for the purpose of mainstreaming renewable energy generation.

To highlight two examples of why the current market design is under strain:

• Generators in India are paid based on their schedules, rather than on actual generation. This, the renewable generators claim, poses a challenge for them as they cannot stick to a schedule.
• Balancing, the supply of power close to real-time, is decentralised, unlike the centralized market mechanisms in other power systems, making it hard for the grid to respond to short-term variability.

These constraints are believed to raise the cost of power and decrease its reliability for all consumers. From time to time, the strain on the current design, especially from the decentralised balancing mechanism surfaces in a severe manner, such as with the grid collapse across northern India in 2012, which caused perhaps the largest blackout in history.

Given these realities, the choice faced by Indian policymakers is whether the current market design can be adapted to the challenge of renewables, or should be altered in favour of a more centralised model. This project has two goals:

• First, to quantify the gaps in the current Indian market model, with a focus on renewable integration, coping with short-term variability and the effect of power market design on the overall cost of electricity. This part of the research will include empirical analysis of the differences between optimal and actual dispatch in India and the effects of renewable policy on supply.
• Second, to propose a medium-term market-design roadmap for India that takes the best of the “power pool” models in the United States and Europe and adapts them to the social, political, economical, and technical situation in the country.