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Context

India’s energy sector stands at a crossroads, despite a booming renewable energy (RE) sector, 44 GW of ready capacity remains unused due to a lack of Power Purchase Agreements (PPAs).

Energy Sector in India

Renewable Energy Growth: Total installed power capacity reached 476 GW by June 2025.

• Non-fossil fuel sources contribute 49% of total capacity by June 2025.  
• India ranks 4th globally in Renewable Energy Installed Capacity, 4th in Wind Power, and 3rd in Solar Power capacity.
• Solar capacity increased to 110.9 GW.
• Installed wind increased to 51.3 GW.
• Installed nuclear capacity grew to 8,780 MW, across 25 reactors.
• Hydro capacity increased to 48 GW.

Coal Dominance: Coal and lignite account for 79% of domestic energy production. Over 85% of oil and 50% of gas are imported, highlighting energy import dependency.

Energy Demand Surge: India’s energy consumption is projected to grow at 3.2% annually till 2045, driven by urbanization and industrialization (NITI Aayog).

Key Challenges in India’s Renewable Energy Sector

Lack of Demand for RE: 44 GW of RE capacity remains idle due to unsigned PPAs; a long-term contract between a power producer (seller) and an energy consumer (buyer) for the sale and purchase of electricity.

• States prioritize coal contracts for reliability, despite higher long-term costs and emissions.
• Discoms face financial strain, avoiding RE contracts due to high integration costs.

High Costs of Renewables: While solar and wind prices have fallen, India’s tariffs remain higher than global benchmarks. For example, solar power in Saudi Arabia is nearly half the cost of that in India, due to high capital costs, GST, and import duties.

• Storage-backed RE for peak hours costs Rs 6.6 per unit with 30% Viability Gap Funding (VGF), rising to Rs 9 without subsidies, making it unaffordable for discoms.

Storage and Grid Limitations: Battery storage for RE is not yet commercially viable, limiting supply during peak demand.

• Periodic ramping of thermal plants to balance variable RE strains infrastructure and increases costs.
• India’s grid lacks flexibility, with less than 4 crore consumers using smart meters for demand response.

Low Electrification Levels: Limited electrification in mobility (EV two-wheelers penetration: 6.2%, NITI Aayog), cooking, and industrial heating restricts RE absorption.

• Coal-heavy grid undermines EV benefits, though EVs remain 30% more energy-efficient than fossil-fuel vehicles.

Reliability Issues: India’s System Average Interruption Duration Index (SAIDI) is 600 minutes annually, compared to 35 minutes in Thailand and 46 in Malaysia.

• Unreliable power discourages high-tech industries like AI and semiconductors, critical for economic growth.

India’s Strategic Concerns

Energy Security: Heavy reliance on imported fuels (85% oil, 50% gas) threatens economic stability, especially during global price volatility.

Environmental Risks: Coal’s dominance contradicts India’s Paris Agreement commitments and net-zero target by 2070, increasing exposure to climate risks.

Economic Competitiveness: High RE tariffs and unreliable power deter investments in advanced sectors, impacting India’s global economic ranking.

Policy Misalignment: Uniform Renewable Purchase Obligation (RPO) targets (43.3% by 2030) strain financially weak states, raising costs for discoms and consumers.

Way Forward to Overcome the Paradox

Boost Storage Incentives: Increase VGF for battery storage to reduce costs below Rs 6 per unit. Promote 8–12-hour storage systems for peak-hour reliability, as recommended by NITI Aayog.

•  In June 2025, the Ministry of Power approved a Rs 5,400 crore VGF scheme for 30 GWh of battery energy storage systems (BESS), to attract investment and lower costs. 

Accelerate Electrification: Expand EV adoption through subsidies and charging infrastructure. Promote electric cooking and industrial heating to raise electricity’s share in energy consumption.

Enhance Grid Flexibility: Expand smart meters to enable real-time demand response. Upgrade urban and industrial distribution networks to reduce SAIDI to 100 minutes.

Reform Must-Run Rules: Shift from mandating RE as market-based mechanisms, allowing discoms to balance costs and reliability. Introduce time-of-day tariffs to incentivize off-peak RE consumption.

Customize RPO Targets: Design RPO agreement based on state-specific grid capacity and financial health to ensure affordability. Support weaker states with central funding to meet RPO goals.

Conclusion

India must align its renewable energy push with demand-side reforms to resolve the green energy paradox. Strengthening storage, electrifying key sectors, and modernizing the grid will enhance RE absorption.  

Source: DOWNTOEARTH