Foreword
India's power sector has undergone a notable transformation, marked by the increasing involvement of private, or independent, entrepreneurs since the economic liberalization of the 1990s. This includes decisive policy drivers and regulatory frameworks that shape a dynamic private sector, which has demonstrated amazing growth, surpassing related challenges.
Let us make an effort to investigate India's independent power-producing sector, focusing on the prevailing policy and regulatory framework, tariff trends, generation capacity, and the challenges encountered by independent power producers. Such a comprehensive study focusing solely on the private sector may be useful for Bangladesh stakeholders seeking to gain knowledge for investment purposes.
1. Policy and Regulatory Framework:
1.1 Key Legislation, Policy, and Role:
The basis of India's power sector regulation is the Electricity Act, 2003. It serves as the primary legislation governing the electricity generation, transmission, distribution, trading, and use. This act is a contributor to promoting competition and inspiring private sector participation, except for nuclear and large hydroelectric projects. Besides, the law creates a framework for open access to transmission and distribution systems, enabling any consumer with a substantial load to source power from any generator. The Act, 2003 also dictates the establishment of independent regulatory commissions at both the central (CERC: Central Energy Regulatory Commission) and state (SERC: State Energy Regulatory Commission) levels. These commissions commonly recommend regulating tariffs, ensuring compliance, and protecting consumer interests, creating a pathway for private entrepreneurs to invest and operate. Both CERC and SERCs arbitrate disputes between licensees and distribution companies at the national and state levels.
The independent regulatory commission acts as watchdogs and rule-setters for the sector. The primary objective behind the establishment of both CERC and SERCs was to depoliticize the sector. They create an environment favorable to private investment by ensuring transparency, competitiveness, and fairness in the regulatory processes. Their ability to make impartial
decisions on tariffs and the enforcement of regulations directly impact the profitability and risk assessment of private power projects.
Complementing the Electricity Act, the National Electricity Policy (NEP) outlines the vision and objectives for the development of the power sector. It emphasizes financial viability, signaling the government's intent to create a suitable environment, and focuses on cost recovery and commercial viability for attracting and sustaining private entrepreneurs. The National Tariff Policy further guides the regulatory commissions in determining tariffs, ensuring a balance between attracting investments and protecting consumer interests.
1.2 Policy Revisions:
The power sector in India evolves with recent policy revisions aiming to address emerging needs and challenges. The Electricity (Amendment) Bill, 2022, proposes significant changes to the existing Electricity Act, 2003. Key provisions of the Bill include facilitating the entry of multiple distribution licensees (discoms: distribution companies) in the same area of supply to foster competition, mandating the establishment of a payment security mechanism to ensure timely payments to generation companies. These amendments increase competition in the distribution sector and improve the financial health of the ecosystem, creating new opportunities and challenges for private producers selling power to discoms.
Further rationalization of the regulatory landscape, the Electricity (Amendment) Rules, 2024, introduce exemptions to licensing requirements for dedicated transmission lines established by generating companies, captive generating plants, energy storage systems, and large consumers. These rules endorse ease of doing business, lessening project timelines, costs, and accelerating the development of renewable energy projects by simplifying the regulatory obligations for transmission infrastructure. The ‘National Green Hydrogen Mission’ allows incentives to entrepreneurs for the development of energy storage solutions and offshore wind energy projects.
2. Tariff Structures and Trends:
The tariff structure in India comprises two parts – the first entails ‘fixed or capacity charges’, which allow the IPPs to recover annual fixed costs, including interest on loan capital, depreciation, operation and maintenance expenses (excluding fuel), and taxes on income. The second part is the ‘energy or variable charge’, which primarily covers the cost of the fuel consumed to generate electricity. This two-part structure aims to provide a more stable revenue stream for independent power producers by ensuring the recovery of both fixed investments and variable operating costs.
The tariffs for independent power producers are determined by CERC for inter-state generation and by SERCs for intra-state generation, guided by the principles of the Electricity Act, 2003, and the National Tariff Policy. The approach to power procurement is based on tariff-based competitive bidding. It is fixed following a cost-plus tariff mechanism, where tariffs were determined based on the cost incurred by the generator plus a reasonable return.
To improve grid efficiency and manage energy demand, time-of-day (TOD) tariffs are also being applied in some regions. These tariffs are dissimilar rates for electricity consumption at different times of the day, which offer lower rates during off-peak hours and higher rates during peak demand periods.
3. Source-wise Generation Capacity of Independent Power Producers:
In February 2025, the total installed capacity rose to 470.448 GW, with the private sector retaining a significant share of 253.178 GW (approximately 53.8%).
4. Challenges Faced by the Independent Power Producers:
4.1 Fuel Supply:
The availability, quality, and cost of domestic and imported coal as primary fuel are inconsistent, leading to operational interruptions. Gas-based private power plants face even more severe fuel supply challenges due to natural gas production has not kept pace with demand. The alternative, imported LNG, is often expensive, making gas-based power generation economically unviable for extended periods.
4.2 Financing:
Renewable energy projects typically need longer payback periods compared to conventional power plants, which may make these less attractive to commercial banks. Independent power producers also face financing challenges due to uncertainties and inconsistencies in state-level regulations.
4.3 Grid Connectivity and Infrastructure Limitations:
There is a challenge in obtaining timely and consistent grid connectivity for independent power producers invested in renewable energy projects. The insufficient grid infrastructure results in transmission bottlenecks and shortening of renewable energy generation.
4.4 Environmental Regulations Concerns:
The increasing global and national attention on sustainability and reducing carbon emissions is driving a transition towards cleaner energy sources. It brings opportunities with challenges for private entrepreneurs to adapt their generation portfolios. Again, independent power producers operating fossil fuel-based plants face increasing pressure to comply with strict environmental regulations. This leads to additional costs for operational changes and technology advancements. Renewable energy projects also have environmental issues related to land use and waste disposal.
4.5 Policy Inconsistencies and Regulatory Hurdles:
The private power-producing sector in India operates within a multifaceted regulatory setting characterized by recurrent policy changes, inconsistencies in regulations across different states, and bureaucratic delays in obtaining necessary approvals. These regulatory hurdles can create uncertainty for investors in making long-term plans and project execution. Private entrepreneurs sometimes drop their ambition to invest due to frequent changes in policies related to tariffs, connectivity, and renewable energy obligations. Variations between central and state regulations further complicate the situation.
5. Conclusion:
The private power-producing sector is a vital component of India's energy infrastructure, possessing the potential to meet its rising power demands. It contributes to India’s ambitious clean energy objectives. The sector is guided by a wide-ranging policy and regulatory framework, with a shift towards market-based tariff mechanisms. However, the sector wrestles with considerable challenges spanning fuel supply security, financing convenience, grid connectivity infrastructure, adherence to environmental regulations, and the complexities of the regulatory landscape.
