In today’s Finshots, we talk about STELLAR, the Central Electricity Authority (CEA)’s new tool to help electricity distributors manage power supply and possibly move towards zero power cuts in India.

But before we begin, if you’re someone who loves to keep tabs on what’s happening in the world of business and finance, then hit subscribe if you haven’t already. If you’re already a subscriber or you’re reading this on the app, you can just go ahead and read the story.

The Story

Over the last decade, India has been rushing to add a lot of solar and wind power to its electricity system. In theory, that sounds great. Clean, renewable energy is good for the planet.

But here’s the problem. Most of these renewables don’t have proper storage systems like big batteries to save the extra energy generated during the day for use later. So, when the sun sets in the evening, especially during those hot summer months of May and June when people still need fans, ACs and lights, there’s a power shortage. Solar panels stop working, but the demand stays high.

To make things worse (but better for the climate of course), India also slowed down building new thermal power plants — the coal plants that act as reliable, always-on sources to keep the grid stable when renewable supply drops.

This means that without enough of these steady sources, the electricity grid becomes unstable, and power outages start becoming more frequent. For context, as of March 2024, India had an estimated total electricity generation capacity of about 520 GW — around 280 GW from coal or thermal energy, 198 GW from renewables and the rest from gas and nuclear. But in May 2024, India’s peak power demand hit 250 GW. That left very little breathing room or spare capacity for thermal plants to increase their plant load factor (PLF). That’s basically, how much of their maximum capacity is actually being used. These plants are already working hard, and there isn’t much extra capacity left to ramp up further when demand spikes.

And this problem isn’t going away. India’s power consumption grew by 7% in 2023, compared to the global average of just 2%.

So yeah, while the country plans to increase renewable energy capacity to 500 GW by 2030, if demand and supply don’t grow at the same pace, power cuts could become a regular thing. At least that’s what a research report from the India Energy and Climate Centre, University of California, says.

But it seems as though India’s electricity authorities want to prove this theory wrong. Just a few days ago, the Central Electricity Authority (CEA) launched a new indigenously built software tool called STELLAR. It’s basically a smart simulator for India’s electricity grid or a master planner for electricity generation, transmission, storage and demand management. It helps discoms (power distribution companies) figure out how much power they’ll need in the future, where it should come from, where to store it, and how to balance supply and demand without wasting money or causing blackouts.

The best part? It’s being shared free of cost with all states and discoms, so everyone works off the same standard tool, improving planning and cutting unnecessary costs.

Also, it ensures that discoms have sufficient power supply to meet demand without overcapacity, which the Ministry of Power’s guidelines from June 2023, warned against. Because when states overestimate their needs, it leads to idle capacity, unnecessary capital expenses and higher operational costs for discoms. Sure, this extra cost can be passed on to consumers through higher tariffs. But then, that’s not really something consumers will like, nor is it good for a state’s political environment, since power pricing in India is primarily regulated by the state.

The smarter way is to find a balance. And that’s what STELLAR aims to do. It improves pricing efficiency by using real time data and forecasting, allowing for more accurate, cost reflective tariffs. Plus, by supporting dynamic pricing models like Time of Day (TOD) tariffs, it encourages people to shift their power use to cheaper, off-peak hours. If you’re new to TOD, here’s how it works. The day is divided into three parts — solar hours, peak hours and normal hours. Use more power during solar hours, pay less. Use it when demand spikes after sunset, pay more. That’s the idea.

This can reduce pressure on the grid, lower system costs and cut down on the need for expensive backup options like diesel generators. And hopefully, prevent massive blackouts like the one in July 2012, when 620 million people or 9% of the world’s population at the time, were left in the dark.

But does that mean that STELLAR can just magically fix India’s power supply problems?

Well, maybe not. Because here’s the thing. While the tool itself is free for discoms, its benefits might still be limited. And that’s mainly due to the fact that Indian discoms aren’t exactly in the best of health.

To put things into perspective, according to rating agency ICRA, the all India aggregate technical and commercial (AT&C) losses, which basically means losses that happen due to inefficient transmission, distribution issues, theft or unpaid bills, dropped from 23% in FY21 to 16% in FY23, thanks to infrastructure upgrades and subsidies from state governments. These subsidies help discoms keep electricity affordable for certain consumers.

Sounds like progress, right? But here’s the issue. Discoms in states like Bihar, Jharkhand, Madhya Pradesh, Odisha and Uttar Pradesh are still struggling, sitting on losses, some even above 20%.

And when discoms are already struggling financially, they might not be in a position to implement necessary changes or invest in complementary infrastructure to truly benefit from a tool like STELLAR even if it’s being handed to them for free. And if state governments delay those subsidies we mentioned earlier, discoms face cash flow problems, making matters worse. They might barely be able to cover operational expenses, let alone spend on optimising their systems with new tools.

Increasing tariffs to recover costs isn’t easy either. In India, electricity prices aren’t entirely market driven. State Electricity Regulatory Commissions (SERCs) set these tariffs, trying to strike a tricky balance, keeping discoms financially alive while ensuring people don’t burn holes in their pockets over power bills. To do this, they rely on cross subsidies. That means industries pay more so that the agricultural sector and households can pay less.

Now, the National Tariff Policy under the Electricity Act, 2003, says that these subsidies can’t stretch beyond ±20% of the average cost of supply (ACoS). But here’s the catch. According to a paper by the Centre for Social and Economic Progress, more than half the power sold in India breaks this rule. The biggest underpayers being domestic and agricultural consumers, who end up paying much less than they ideally should.

And here’s why fixing this is so difficult. A quote from the paper explains it well:

The general principle of raising tariffs quickly becomes political, more so if this is done disproportionately for one consumer group. Unfortunately, the lowest-priced segments are the ones with the greatest political clout—Residential and Agricultural.

How much tariff rise is too much? Much more than inflation is likely to be considered burdensome, but legacy issues including cost structure and demographic differences are also factors in tariff rises. A DisCom with limited (or even nil) tariff hikes in recent years, for whatever reason, needs a large jump.

Any substantial rise needs to be spread out over several years.

So yeah, that might derail India’s plan for a rightly priced, balanced electricity supply with zero power cuts. And until we fix that, STELLAR might not be such a stellar idea after all.

Don’t forget to share this story on WhatsApp, LinkedIn and X.

75% of Indians are NOT covered by Life Insurance!

Don’t be a part of the herd — take the first step and lead the way.

A term life insurance plan offers a crucial safety net for your loved ones, ensuring they’ll be financially supported even in your absence.

Book a FREE call with Ditto to learn more about term life insurance and find the best plan for you and your family.