The Indian power sector has evolved rapidly over the past two decades. In 2005, the National Electricity Policy (NEP) noted that about 44% of households in the country did not have access to electricity. In less than two decades, India accomplished the remarkable feat of electrifying every village and went from being a power-deficit to a power-surplus nation. 

But the stellar growth has brought a new set of challenges that signals the transition of the country’s power sector to a new paradigm focusing on decarbonization, renewable energy integration, and increasing quality of access. The recently announced draft NEP 2021 has been an acknowledgment of this shifting paradigm.

From capacity expansion to capacity optimization

The country’s success in capacity expansion and renewable energy deployment is increasingly challenging the role of coal, which still accounts for approximately 70% of generation. As renewable energy capacity grows, the growing underutilization of coal pushes it towards becoming a stranded asset.

In this context, the draft NEP emphasizes demand forecasting and integrated planning for ensuring optimal asset utilization. It also stresses the role of short- and medium-term power markets for optimized power procurement. The NEP hints at introducing capacity markets and auctions to replace the traditional long-term power purchase agreements (PPAs). 

From generating to balancing electrons

Growing renewable energy generation also merits the need for power balancing and grid stability. The draft NEP lays out pathways for expanding balancing areas, coupling renewable energy with the conventional generation or storage systems, mandating renewable energy forecasting, enabling demand response, and introducing an ancillary services market. 

On this front, the NEP prescribes that the Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commission (SERC) introduce regulations for enabling ancillary services and demand response. This has been put into effect by the recent introduction of the draft ancillary market regulations by CERC. 

The NEP also highlights the need for a new balancing capacity in the form of pumped hydro storage, gas plants, and energy storage. Pilots and demonstration projects are also encouraged in many of these areas. 

Given the geographical variability, the NEP recommends leveraging the transmission system to facilitate grid balancing for transferring power from regions with high generation to areas with high demand. 

The NEP also proposes a cost-sharing mechanism either nationwide or between states reaping the benefits of renewable energy generation to tackle the variability challenges faced by renewable energy-rich states. This mechanism can drive the proliferation of low-cost renewable energy adoption across states even where renewable energy potential is limited.

From quantity to quality of power

Highlighting the success of 100% village electrification the past decade, the NEP has focused on the need for distribution companies (DISCOMs) to improve the quality of electricity access. Central to this will be better load management, new distribution models, and automation and mainstreaming of climate resilience. 

To this end, the NEP emphasizes feeder segregation and solarization of agricultural pumps (via PM KUSUM) in rural areas. For larger urban areas, it prescribes implementing a ring main system that enables an alternate route for electricity supply to consumers in case one of the feeders faces any failure or interruption. 

The NEP also proposes a new distribution system operator to assist DISCOMs with load management, management of solar photovoltaic systems, improving power quality, and improving customer billing and collection using Distribution SCADA. 

While the emphasis on resilience leaves room for improvement, the NEP, nonetheless, recommends that DISCOMs explore the possibility of integrating renewable energy-based microgrids with the capability of automatic islanding.

Strengthening the NEP

With the draft NEP 2021, India provides the right policy direction for this decade of the energy transition. Yet, there is room for further improvement. 

First, it is critical to have correct economic signaling that can support the transition. Beyond introducing appropriate market mechanisms, this includes aspects like wide adoption of time-of-use tariffs and introduction of carbon pricing, reduction and streamlining of subsidy and cross-subsidy, and enabling and valuing services that various assets such as storage and smart meters can provide. Further, as many think tanks have commented, there needs to be a movement from normative cost-of-service regulation to performance-based regulation.

Second, targets and obligations need to meet compliance. This holds particularly true for aspects like renewable purchase obligations (RPOs). States should be allowed to propose a bundled RPO that is in line with integrated planning studies they undertake. 

Similarly, the solarization of agricultural pumps needs a targeted approach reinforced by ways to measure and encourage compliance. New avenues of flexibility such as storage and demand response could also use a target-setting approach going forward.

Lastly, the NEP leaves the door open for the deployment of efficient coal-based power stations. But a growing number of states like the large states of Karnataka, Gujarat, Chhattisgarh, and Maharashtra are discontinuing the buildout of new coal plants. 

The CEA in 2018 also showed that India does not need additional coal capacity until 2027 if existing capacity targets are met. With renewable energy and energy storage costs continuing to challenge coal, any proposed new coal capacity should be assessed against the price of alternatives. The real emphasis must be on ensuring a just transition away from coal. 

The draft NEP is an important step in the right direction. But ultimately, the success will primarily depend on building consensus among the various states and their ability to enforce these initiatives in a time-bound manner.