How liberalisation pushed power sector from persistent outages to surpluses

Three decades of reforms have taken India's power sector from chronic shortages to near-universal access and surplus capacity, but discom finances remain a key challenge

Back in the late 1980s just over 50 per cent of India had access to electricity. Some of the largest states had to endure power deficits of 20–38 per cent of estimated requirements.

 

In fact, under the state electricity boards (SEBs) regime — established under the Electricity (Supply) Act, 1948 — there were a host of problems. There were energy deficiencies of 9–10 per cent, supply was unreliable with power cuts up to 12 hours a day, there were large peak load deficits, and delays of four to five years in power projects.

 

Besides, capacity utilisation at thermal power plants averaged 50 per cent, and there was a widening gap between the average cost of supply (ACS) and the average rate of realisation (ARR), also called the ACS-ARR gap, which increased from Rs 37.3 in 1974–75 to Rs 151.6 in 1985–86 for 1,000 kilowatt hour, according to a 2006 study published in the Journal of Cleaner Production by energy economist Subhes C Bhattacharyya.

 

Change swept into the sector after the P V Narasimha Rao government made power sector reforms a key component of economic liberalisation.

 

Independent power producers (IPPs) were allowed to enter the generation business and were offered attractive incentives: Bonuses for better capacity utilisation, five-year tax holidays, low equity requirement and selective counter-guarantee arrangements.

 

The initial interest was overwhelming, with 189 project proposals received by 1995 for new generation capacity of over 75 GW at an investment of over $100 billion, according to the study cited earlier. However, it was short-lived as only a few projects actually materialised.

 

Now, 35 years after those reforms, one of the three segments of the sector, power generation, has hit a record of more than 500 Gigawatt (GW) of total installed capacity, compared with merely 100 GW three decades ago. There is near universal access, outages have virtually disappeared, barring localised ones caused by infrastructure issues. And renewable energy generation is making giant strides.

 

 “It is a sea change today. When I got involved in the sector, we used to have huge power outages. That was a result of some fallacious policies made at that time,” says Anil Razdan, former Secretary, Ministry of Power and former Special Secretary, Ministry of Petroleum and Natural Gas.

 

Of course, it is another matter that the other two segments of the sector — transmission and distribution — continue to face challenges. Even though India has one of the largest transmission networks globally, the rapid addition of renewable energy capacity is testing the grid’s ability to absorb and balance variable power. 

 

Difficult start

 

The reforms got off to a bumpy start in India. There was much hope when United States-based energy giant Enron set up a power project in Dabhol, Maharashtra. Soon, however, the liquefied natural gas (LNG)-based plant became mired in controversy over costs, political opposition and payment disputes with the Maharashtra SEB. It eventually collapsed and became a symbol of the limitations of the first phase of power reforms.

 

Besides, some structural weaknesses were not addressed. The cost of power purchase agreements increased as electricity delivered by IPPs was 1.5 to 2 times costlier than NTPC or SEBs. And, IPP interest in entering power purchasing agreements (PPAs) was limited to better performing SEBs.

 

Funding declined due to poor financial health of the states, lower central allocation and lack of expected private investment in generation. Between 1992 and 1997, only 16 GW was created against a target of 30 GW, and in the next five years only a further 19 GW was created, against a target of 40 GW.

 

However, there was a concerted effort to bring in reforms at the state level. This included a push to privatise generation and distribution, and experiments with financial and organisational restructuring, supported by lending agencies and the central government. Prominent among them was the World Bank’s power sector lending policy announced in 1993, promoting unbundled state-level industry, independent regulation and cost-based tariffs with transparent subsidy mechanisms.

 

Odisha was the first to unbundle its SEB by creating two generating companies (one for hydropower and the other for thermal), one transmission company (transco) and four distribution companies (discoms). It privatised its thermal power stations and all discoms by 1999.

 

Despite this, the discoms remained bankrupt, with negligible improvements in technical, commercial or financial health. Transcos, on the other hand, ended up accumulating losses of the distribution businesses, and the entire supply chain was affected.

 

Moreover, electrification projects also took a backseat. The number of villages electrified during the period 1997–2002 dropped to 11,000, compared to the electrification of 100,000 between 1985 and 1990, according to Bhattacharyya’s study.

 

Bureaucrats of that time called it a missed opportunity. “Minor change through an amendment to the Electricity Supply Act was a half-hearted reform initiative. Despite the government’s assurance of guarantees for payment, it did not deliver,” says R V Shahi, former power secretary (2002–07) and currently chairman of a consulting company Energy Infratech.

 

The big shift

 

“India’s power sector was reshaped by four seminal moves: The introduction of the Electricity Act, 2003, open access, private licensing and unbundling of the SEBs,” says Sehul Bhatt, Director, Crisil Intelligence.

 

It resolved many of the systemic issues. It consolidated the existing laws and prepared a new framework.

 

Open access, under the Act, allowed eligible consumers to procure power outside their local distribution utility, turning transmission and distribution into “network services” rather than exclusive pathways for a single supplier.

 

It modernised the regulatory framework, provided room for competition, and clearly defined the roles of regulators. It also allowed multi-year incentive tariffs and introduced transparent subsidy management, clear financing arrangements for regulatory bodies and strong penal measures to check theft and corruption. Finally, it supported electricity trading as a licensed activity and laid the groundwork for functional separation and network access.

 

Alok Kumar, director general, All India Discoms Association and former power secretary (2021–23), calls the open access policy one of the biggest reforms. “It was a turning point because it created a competitive electricity market by mandating non-discriminatory access to transmission and distribution networks,” he says.

 

He adds that it allowed generators to access multiple customers and markets, significantly improving the viability of private investment. This was followed by power trading and exchanges. “As a result, over 50 per cent of India’s generation capacity is now privately owned, helping the country move from peak shortages of around 20 per cent in the early 1990s to near-zero now,” Kumar said.

 

Further, the unbundling of SEBs completed the structural shift by separating generation, transmission and distribution into distinct entities, thereby improving accountability and making costs, losses and performance visible. However, the impact has varied depending on the segment. “Generation and trading advanced more quickly than distribution, where social constraints, cross-subsidies and delayed subsidy and payment flows continue to limit full retail competition and financial turnaround,” Bhat notes.

 

Living with Surpluses

 

Cut to 2026, and the power sector in India has evolved from seeing persistent shortages to one that commands a surplus. However, the very foundation of the sector — electricity distribution — remains its weakest link.

 

“Between 2013-14 and 2020, the power sector had two primary objectives: adding generation capacity and achieving universal electricity access,” Kumar says.

 

While the issue has been discussed frequently, the financial sustainability of discoms did not receive the attention it deserved, Kumar adds. “The reform process in the power sector has not achieved the expected goals of almost single-digit aggregate technical and commercial (AT&C) losses and eliminating the ACS-ARR gap. Although there have been significant improvements, we need to sustain this momentum and increase its pace,” he adds.

 

With outstanding legacy dues of Rs 3,300 crore, discoms recorded AT&C losses of 15.04 per cent in FY25, and ACS-ARR gap of 6 paise per unit.

 

“With universal access largely achieved and power shortages significantly reduced, the focus has shifted to improving the financial viability and governance of distribution companies,” Kumar says.

 

Unlike earlier programmes, the Revamped Distribution Sector Scheme (RDSS) launched in 2021 links central grants to measurable reform outcomes. It also places emphasis on smart metering, aiming at improving operational efficiency, reducing losses and improving financial discipline, he adds.

 

The Centre has also incentivised reforms by allowing states additional borrowing of up to 0.5 per cent of gross state domestic product (GSDP) if they met reform targets. “With effective smart meter deployment, AT&C losses could reach single digits over the next three to four years,” Kumar says.

 

New challenges

 

As renewable energy begins to dominate the grid and new technologies like battery energy storage systems for balancing supply and demand get adopted, a new set of challenges is emerging. Razdan says, “Technologies may change, but the fundamental principles of the energy sector remain the same. Whatever technology is adopted must be environmentally responsible, ensure reliable and continuous supply, remain affordable for consumers and operate on sound commercial principles.”

 

In the next phase of reforms in the sector, the government will have to increase the integration of renewable energy to the grid to reduce its energy intensity.

 

Apart from solar and wind power, there are issues with traditional sources too. Razdan says: “New concerns are emerging. For example, the changing rainfall pattern is a warning signal. Will there be enough water for irrigation and for hydropower stations?”

 

Going ahead, the sector’s growth will depend on fixing distribution, strengthening grid flexibility and ensuring that the energy transition remains reliable, affordable and sustainable.