India exports electricity. So why do we still have power cuts?

India exports electricity. So why do we still have power cuts?

In today’s Finshots, we take a look at India’s paradox of power: even as transmission lines carry electricity across borders, many Indian homes still face outages.

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The Story

If you studied economics in school, you probably learned that countries export goods only when they have more than enough for themselves. And it makes sense, right? You wouldn’t sell your surplus wheat or steel abroad if you had a shortage at home. So, by that logic, one would expect India to export electricity only if all of us enjoyed 24x7, uninterrupted power. However, reality paints a different picture.

You see, over the last few months, power cuts are becoming more frequent. And this number is only expected to grow until at least 2027.

Yet, we’ve been exporting substantial electricity to our neighbors like Bangladesh, Nepal, and Myanmar for years. How does that make sense? Why would a net exporter still have power cuts for its own citizens?

Well, to answer that question, we should first understand why power cuts happen. 

At first thought, you might assume it’s because we don’t produce enough electricity. But that’s not the case. India has built up a sizeable electricity generation capacity over the past two decades. So much so that we now produce more power than we consume. In fact, by 2017, India had officially become a net exporter of electricity. And in recent years, we’ve even signed new cross-border power deals, including an ambitious one with Saudi Arabia to eventually export electricity across the Arabian Sea.

So, if power supply isn’t the issue, what is?

The short answer: power cuts today are less about generation and more about distribution.

Let me explain.

In India, electricity reaches your home through state-run power distribution companies or DISCOMs. They’re the middlemen buying power from generators and delivering it to consumers. However, most DISCOMs are struggling with debt. In fact, an RBI report estimated that these DISCOMs have accumulated losses of $75 billion until March 2023. To put this into perspective, this was about 2.4% of India’s GDP at the time.

And that’s because DISCOMs are forced to sell electricity at a loss, especially to residential and agricultural users. They even suffer massive transmission losses, and struggle to collect payments (partly due to subsidies). Naturally, this puts them in a tight spot.

This is why, even if power is available in the market, they can’t always afford to buy it, at least not in a timely manner. So, instead of going further into debt, they take the easier way out and ration the supply. That’s why you might get short spells of load shedding, especially during peak demand periods.

But that's only part of the problem. There’s also the issue of how we contract electricity. 

Power producers often sign long-term contracts, known as Power Purchase Agreements (PPAs), where they commit to selling a certain amount of power to a buyer, sometimes even to a foreign country. These contracts are rigid and often favour international buyers, who are usually more reliable with payments. So if, say, a country has a 25-year deal to buy 1,500 MW (megawatt) from a power plant in India, that electricity is locked in. It can’t just be rerouted to an Indian city during a local shortage. A perfect example is Adani Power’s plant in Godda, Jharkhand. It was built specifically to supply electricity to Bangladesh. For a long time, it wasn’t even connected to the Indian grid.

Now, you might ask… Can’t we just just renegotiate PPAs during emergencies or if there’s a stall in payments?

Well, not really. These are multi-billion-dollar deals that involve diplomatic ties and international credibility. Backing out could damage long-term trust and future trade prospects.

And if that weren’t enough, there's a third layer to this issue, which is the power grid itself.

You see, India has 5 regional grids. The North, East, West, South, and Northeast grids. Now, these grids are connected, but inter-regional power transfer is frequently constrained, especially from the East to the North and South regions. Think of it like a network of highways. Power surplus regions (like the Northeast or eastern coal belts) generate plenty of electricity. But the areas that actually need it, like cities in the South and West, can’t always access it because the roads connecting them are too narrow or congested. 

Export grids, on the other hand, are often specially built and maintained to ensure smooth delivery to foreign partners. So, while we have enough electricity on paper, it just doesn’t always flow where it’s needed most.

And the next logical question is, what can we do about it?

To begin with, we need to clean up the financial mess within our DISCOMs. 

Over the years, the government has launched multiple bailout schemes to reduce its debt burden. This included the UDAY scheme in 2015, which shifted 75% of the liability to state governments, and more recently, the Revamped Distribution Sector Scheme (RDSS) to reduce losses during transmission.

But bailouts alone won’t fix the core issue. What DISCOMs need is a sustainable model that reduces losses, improves collections, and ensures they don’t sell electricity at a loss. 

But this involves a few hard steps: 

First, rationalising tariffs so that they reflect actual costs, and improving billing systems through smart meters. Unless DISCOMs are financially healthy, they won’t be able to procure enough power during peak demand. And no amount of surplus generation or infrastructure upgrades will matter if the utility at the last mile can’t afford to deliver electricity to your home.

The second fix lies in reforming how we plan for power needs. Until now, demand estimation and procurement have been more art than science. But that’s changing.

Earlier this year, the Central Electricity Authority launched a new tool called STELLAR, a software platform that helps states forecast electricity demand more accurately and plan procurement more effectively (We even wrote about this here). 

And this dovetails nicely with the launch of electricity futures from today.

Both MCX and NSE are now launching monthly electricity futures contracts, allowing power utilities to lock in prices in advance. So, in theory, a DISCOM could use STELLAR to estimate how much electricity it’ll need a few months from now, and then go on MCX to secure that supply at a fixed price, reducing the risk of spot market volatility. This adds a layer of predictability, not just in demand estimation, but also in procurement costs.

But this, of course, would only be practical after DISCOMs clean up their books. Because no amount of forecasting or price hedging can help if they don’t have the funds actually to procure the power they’ve planned for. These tools assume utilities are solvent and creditworthy. Without that foundation, even the most sophisticated planning systems and financial instruments are reduced to wishful thinking.

The third, and perhaps most overlooked step, is building more flexible power contracts. 

Right now, many PPAs are rigid. If a state overestimates demand and locks into a PPA, it ends up with surplus electricity it can’t use. Ideally, we should be moving toward more dynamic contracts that allow for the sale of excess power on exchanges or to third parties. 

Some international PPAs, like those used in the India-Bangladesh deal, follow a “take-or-pay” model, where payments are guaranteed even if the power isn’t consumed. But in India, this kind of predictability doesn’t exist between generators and DISCOMs, and the take-or-pay model is usually used in government-to-government contracts. But this doesn’t mean that we can’t introduce smarter contracts that provide flexibility, while still protecting producers’ revenues, which could help ensure power isn’t wasted or misallocated.

And finally, we need to upgrade our grid infrastructure, especially the inter-regional transmission corridors that connect surplus regions to deficit ones. With the rise of renewable energy, this becomes even more important. After all, you can only generate solar power where the sun shines and wind power where the wind blows. Without a robust grid that can move power around the country efficiently, or enough storage capacity on site, we’ll keep running into artificial shortages.

So, what’s the takeaway here?

India’s electricity paradox isn’t about choosing between powering homes and exporting energy. It’s primarily about fixing the grid. If we strengthen our DISCOMs, modernise our contracts, and invest in infrastructure, we can do both. We can keep the lights on for every Indian home and still play the role of regional energy provider.

Until then…

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