Power markets would drive India’s green energy transition with new market model

For over the last 16 years, power markets have enabled efficient and competitive price discovery in India’s power sector. As India advances on its path to becoming a Net Zero emitter by 2070, power markets are poised to play an instrumental role in enabling a sustainable and energy-efficient future. A significant part of this role rests on the evolving energy mix, which aims for over 50% renewable capacity by 2030—an estimated 500 GW of renewable energy (RE) capacity. The large-scale addition of RE will also require efficient integration with the power system to ensure reliable grid operations.

Evidence from Europe suggests that large-scale renewable capacity can be effectively integrated through power markets. In terms of energy transition, India bears considerable similarity to the European energy market of a decade ago. Between 2000 and 2010, spot market penetration in the UK was approximately 10%, while the share of RE in total consumption was around 20%. India is currently at a similar stage. Since 2010, RE and spot market penetration have accelerated, and today, European countries trade 40% of their generation through power exchanges, with renewables accounting for 40% of the generation.

Regulatory Support

Given their benefits, power exchanges have received consistent encouragement from the government and regulatory bodies. While the draft National Electricity Policy envisions a larger role for power exchanges in India’s power generation, an expert group constituted by the Ministry of Power for the Development of the Electricity Market in India has outlined a roadmap for the sector. This group has drawn insights from market models in countries such as the UK, the US, and Germany, which successfully increased their respective RE penetration to over 30% through market-based reforms.

Additionally, the implementation of the General Network Access (GNA) in October 2023 has simplified the levy and collection of Inter-State Transmission System (ISTS) charges and losses for generators and discoms, further encouraging market participation. As per the trajectory defined by the Ministry of Power and adopted by State Electricity Regulatory Commissions (SERCs), obligated entities are mandated to procure a predefined portion of their total electricity consumption from renewable sources—around 30% for FY25.

Green Energy Open Access is also available, with the threshold limit for green open access reduced from one megawatt to 100 kilowatts. This development enables small and medium enterprises in the Commercial and Industrial (C&I) sector to participate in exchanges and benefit from competitive pricing. Similarly, draft procedures for the Trading of Carbon Credit Certificates, published by the Central Electricity Regulatory Commission (CERC), allow for carbon credit trading through power exchanges.

Emerging Market Models

Since early 2024, significant developments have occurred in the Battery Energy Storage System (BESS) space to facilitate grid integration. Globally, BESS additions are happening in two ways. First, as ancillary services, where the system operator procures BESS to meet balancing requirements. Second, through Independent Power Producers (IPPs) investing purely based on market arbitrage.

In 2024, the Ministry of Power finalised the Viability Gap Funding (VGF) mechanism to develop 4,000 MWh of BESS in the country. Prices in a recent NVVN tender fell to approximately ₹2.37 lakh per megawatt per month under the VGF scheme. Battery capital expenditure costs have also been declining rapidly. In 2023, SECI awarded a 500 MW tender at ₹10.83 lakh/MW/month. However, a recent SECI tender for 2,000 MW solar plus 1,000 MW (4,000 MWh) BESS was awarded at ₹3.52 lakh/MW/month. This trend validates that storage prices have become as competitive as those from thermal power plants.

BESS will be able to store surplus solar power during the day to deliver electricity during peak demand hours. One of the proposed methods for charging and discharging BESS is through power exchanges, which is expected to enhance liquidity. A recent concept note issued by the Ministry of New and Renewable Energy (MNRE) proposes setting up a market-based BESS of ~10 GWh for sale through power exchanges.

In power markets, there is a distinct price premium between daytime and nighttime, allowing for arbitrage opportunities. This means that if BESS power is available, arbitrage on one cycle will be possible throughout the year. Additionally, during winter months, particularly in Northern states, there is a morning peak demand, creating another arbitrage opportunity for IPPs.

Firm and Dispatchable Renewable Energy (FDRE)

Firm and dispatchable renewable energy (FDRE) has emerged as a key focus area, with substantial developments over the past year. FDRE and Round-The-Clock (RTC) tenders are gaining traction to meet discoms’ varying power demand profiles. FDRE tenders (100% green energy supply) offer options such as load following, RTC, and assured peak power supply.

Another option is RTC power, where generators combine various RE sources, BESS, and some non-RE power to provide uninterrupted electricity supply. Recent FDRE tenders have seen prices drop below ₹5.0 per unit. For exchanges, these tenders present an opportunity, as they require oversizing, leading to 20–25% surplus generation. The most efficient way to dispatch this surplus energy is through exchange-led green markets.

Today, power exchanges offer a diverse range of market-based products such as the Green Day Ahead Market, Green Term Ahead Market, and the Renewable Energy Certificate Market. The pan-India green market enables independent power producers (IPPs) and surplus states to efficiently dispatch excess power while helping obligated entities—such as discoms, open-access consumers, and captive power plants—meet their Renewable Purchase Obligations at competitive prices.

Additionally, there is an increasing need for a Green Real-Time Market (G-RTM) to assist RE generators in reducing costs associated with deviations from schedule and to help obligated entities source green power in real time.

Virtual PPAs and Merchant RE

Among emerging market models, Virtual Power Purchase Agreements (VPPAs) and Merchant RE are gaining attention. VPPAs are particularly popular in the C&I sector in the US. In this model, a generator (e.g., a solar power producer) sells electricity in the brown market (Day Ahead Market/Real-Time Market) and receives Renewable Energy Certificates (RECs) for the generated power. The buyer—typically a large corporation such as Google, Amazon, or Microsoft—continues sourcing power from the discom while acquiring the green attribute (REC certificates) from the generator. If the market realisation for the generator falls below the contract price, the buyer compensates the difference.

Merchant RE is already present in India’s market. Of the 30 million units traded daily, a significant portion comes from generators, particularly IPPs operating without long-term tie-ups and selling power directly through exchanges. In FY25, an estimated 3,000 MW capacity addition is expected solely through the merchant route.

Conclusion

Power exchanges have played a crucial role in lowering the cost of renewable energy integration and providing efficient price signals for capacity addition worldwide. As India progresses toward its Net Zero goals, exchange platforms are expected to play an increasingly vital role in the country’s energy landscape.

The development of new market models—whether through battery storage arbitrage, FDRE, or VPPAs—will likely be key drivers of India’s power market, ensuring a smooth energy transition. Furthermore, with the rise of decentralised energy resources such as rooftop solar, battery storage, and microgrids, power exchanges could facilitate more localised trading and peer-to-peer energy transactions.

As a result, power markets will evolve to meet the growing need for flexibility, the integration of new technologies, and alignment with sustainability goals. These advancements will enhance market efficiency and contribute to the creation of smarter, more resilient energy systems.

Views are personal. The author is Joint Managing Director, Indian Energy Exchange