The Competitive Effects of Transmission Infrastructure in the Indian Electricity Market
EGC Research Summary, September 2021
India’s power sector began a transformation in the 2000s, as tens of millions of new customers connected to the grid. The government opened up new market institutions to supply these citizens with power. Have these markets worked?
There have certainly been some growing pains. The pre-2000s power system was largely segregated by state and region. A legacy of this system has been huge regional imbalances across states, creating a need to send power from one part of the subcontinent to another. The new power market reflected this need through high prices in low-power regions.
In a recently published paper, EGC affiliate Nicholas Ryan shows that congestion on the power grid exacerbates market power – meaning sellers are able to raise prices with little risk of being undersold – in the Indian electricity market. The paper uses an economic model to explore how infrastructure investments would bring a return by increasing competition on the grid. The findings have relevance for market design as India adopts further reforms to supply a growing population of consumers on the grid.
Results at a Glance
- India has undertaken major reforms to introduce energy markets in an electricity sector that was formerly all controlled by the state.
- Despite common shortages, the marginal costs of power supply in the Indian electricity market are relatively low, suggesting that occasional high prices are due to the exercise of market power.
- Increases in transmission capacity would reduce the exercise of market power by broadening competition across the Indian electricity grid and raise the value of trade in India’s power markets.
- Investments in transmission may become all the more valuable as India adopts more renewable sources of energy.