Only a new price system can solve the complexity of modern electricity

A market-based price system is key to managing renewable energy, AI-driven demand and grid stability, replacing outdated central planning in modern electricity systems

The electricity sector was once a domain of stability. For decades, the technology of thermal generation remained static. This technological stagnation allowed for a specific institutional design: Central planning. Officials in state capitals determined capacity, location, and dispatch. The grid buffered the difference between supply and demand, shielding consumers from the physics of the network. 

The involvement of private capital in generation was termed “private-sector participation”, but it lacked the features of a market economy. These were arrangements where returns on equity were guaranteed for 25 years. In a functioning capitalism, it is unusual to have a 25-year return locked in by state fiat. The centrally planned electricity system was guaranteed to perform poorly when faced with dynamism. This system is now being hit by three simultaneous shocks. 

The first is the imperative of climate change. The scientific consensus on global warming is clear: Carbon-dioxide emission must cease. This is no longer just a moral constraint but an economic one, enforced by mechanisms like carbon pricing, the European Carbon Border Adjustment Mechanism (CBAM), which comes into force on January 1, 2026, and the clarity in the financial sector that fossil-fuel generation will stop at some point, therefore new projects are now unbankable. We see this in the paper by Borah, Jaitly, Sane 2025, which was unveiled at the recent Emerging Markets Conference (https://bit.ly/4sfKwcH). 

The second shock is technological. We have witnessed mind-blowing gains in solar photovoltaic (SPV) and lithium-ion batteries. These came out of first world basic research funding, and then Wright’s Law: Costs plummet as cumulative production doubles. These are not incremental improvements but order-of-magnitude shifts in capital efficiency. With wind generation and other storage technologies also, the gains are substantial even if less dramatic. Options like pumped hydroelectric storage, particularly relevant for geographies like the Indian Western Ghats, are now top of the mind. 

The third shock is on the demand side. First came cryptocurrency mining, and now the computational demands of artificial intelligence (AI). These technologies require vast quantities of power. They produce a rapid increase in demand, of the kind that the central planning system struggles to keep pace with. 

These three changes have led to a global breakdown in centrally planned electricity systems. The grid, designed for a static world, cannot accommodate new renewable-energy (RE) generators or the demands of modern consumers. We are in a “fractured transition”. The replacement technologies are mature and deployable. However, the institutional framework — the price system that must be the resource-allocator — is absent. The hardware is ready; the software of the market economy is missing. 

The story of the electricity system in Pakistan is a precursor to what could happen in India. There is an uncomfortable resemblance between the fiscal and operational realities of several Indian states with conditions in Pakistan. 

The breakdown emerged from a set of feedback loops [see diagram, from Jaitly, Sane & Shah 2025 (https://bit.ly/4pppoOB)]. As grid electricity becomes unreliable and expensive due to cross-subsidisation and inefficiencies, consumers with capital exit the system. They install decentralised solar generation. This reduces the revenue pool for discoms, worsening their financial health. To recover costs, discoms raise tariffs on the remaining customers, primarily commercial and industrial users. This increases the incentive for those users to also leave the grid. This cycle destroys the public utility. The forces dismantling the grid in Pakistan are at work in India. What Pakistan faces today, Indian states may face tomorrow. 

The rigidities of the 25-year power purchase agreements (PPAs) exacerbate this. These contracts were written for a world of constant marginal costs. In a world of renewable energy, which has zero marginal cost, they become liabilities. The central planner cannot optimise a system where supply is stochastic (solar and wind) and demand is increasingly volatile (AI and electric-vehicle charging). 

The story of the AI demand shock in advanced economies is another precursor to what could happen in India. The stability of the grid is threatened not just by supply fluctuation but by the sheer scale of new consumption. Attempting to manage this through administrative controls will result in shortages, rationing, and the acceleration of the death spiral described above. What advanced economies face today, Indian states could face tomorrow if latency considerations demand that inference chips be close to customers. 

The way out lies in the price system. The “lowest hanging fruit” in the climate transition is the reform of the electricity market based on the price system, as detailed in Jaitly & Shah 2021 (https://bit.ly/4p4kZQA). 

In a functional market, price is the signal that coordinates private decisions. When the sun shines and the wind blows, electricity prices should drop to near zero. This signals consumers to run energy-intensive processes — pumping water, charging vehicles, batch computing. Cheap daytime prices for a vast array of Indian consumers is the political bargain which would go with expensive evening electricity and the removal of subsidies. When generation is low, prices should rise, signalling storage providers (eg electric vehicles) to discharge and consumers to curtail usage. 

A recent talk by Smeet Poladia (https://bit.ly/4ao3bwk) showed how the price system has been harnessed by the Ercot system in Texas. This fares well in handling extreme variability and high renewable penetration. It shows that reliability does not require central planning; it requires price discovery and risk-taking private firms who build capacity based on the possibility of future profit. 

The “Pakistan outcome” should concern us: Financially ruined state utilities, a grid abandoned by the affluent and productive, and a breakdown of energy security. This path is paved with good intentions, subsidies, and an adherence to the central planning model of the 20th century. 

The price system is the only mechanism capable of coordinating the complexity of the new energy landscape. It involves moving to a market system where supply and demand clear in real-time for all components of the electricity system. It means the grid as a community marketplace rather than government infrastructure. 

The author is a researcher at the XKDR Forum