Energy demand in India is increasing by nearly 5 percent each year, due to rising incomes and new grid connections. In order to keep up with the projected power demand growth, by 2040, India will need to nearly quadruple generation.

At the same time, the Indian power sector is currently largely operated through a series of bilateral contracts, rather than a wholesale market, dampening incentives for resources to be used as efficiently as possible.

According to a new World Bank report, “In the Dark: How Much Do Power Sector Distortions Cost South Asia”, overall societal costs due to efficiency gaps in the power sector are about 4 percent of GDP a year, equivalent to $86 billion in fiscal year 2016. As a result, there may be opportunities for India to better utilize its existing power plants, reducing the need for new capacity.

Why this study

In this project, we aim to quantify the extent of short-run dispatch inefficiencies in India’s power sector. The research aims at identifying why, and which, plants are being inefficiently dispatched, in order to create information that can be directly acted upon by policymakers. This will help increase generation utilization, reduce load shedding, and keep costs down for power consumers.

The research work will also assist power distribution companies (discoms) in saving money, which is important when many of them are facing financial hardship. Furthermore, understanding the incentive structure which causes inefficient dispatch will help policymakers gauge what reforms may be effective.

Approach

To estimate the extent of inefficiencies in short-run power dispatch, the study compares total marginal costs paid out under current dispatch to the total counterfactual marginal costs that would be paid out in a world with full merit-order dispatch. It is done by constructing plant-specific marginal cost information, and combining this with data on what each plant is generating on a daily basis.

The study then compares both total costs and plant-specific costs under the current vs. the counterfactual regime to understand which plants are being under- and over-utilized in the existing regime. It takes into account inter-regional transmission constraints and peak vs. off-peak demand to ensure that our estimates of inefficiencies reflect the realities of physical power system.

In order to quantify the effect of incentives, the study compares plants that are entirely supplying power under long-term PPAs with plants who participate in the IEX and Power Exchange. This helps in understanding the extent to which long-term PPAs constrain plants away from optimal generation scheduling.

Read the working paper