India’s renewable energy transition is no longer constrained by the ability to build clean energy generation capacity. Solar and wind installations have crossed 180 gigawatts and renewables have become among the lowest-cost sources of new generation. Instead, the transition is constrained by the urgent need for reforms in distribution and market design. The challenge today is whether the power system can utilise the green electrons it already produces as efficiently as possible.AdvertisementThat challenge has three pieces. First, distribution reform is the decisive bottleneck. Second, dynamic retail tariffs and smart technologies are key to scaling access to clean and reliable electricity. Third, wholesale market reform is essential both to attract investment and to reduce renewable curtailment by improving how power is scheduled and traded across the country.Distribution companies (discoms) sit at the heart of India’s clean energy transition. Improving their operating performance is therefore critical. National aggregate technical and commercial losses remain around 16 per cent and several discoms continue to face persistent cost under-recovery even after initiatives such as UDAY and RDSS. These programmes have rightly focused on modernising distribution infrastructure, funding smart metering, and building capacity, but financial and operational stress remains widespread.This challenge becomes more acute as renewable penetration rises. Variability increases, peak demand becomes costlier to serve, and balancing and forecasting become core system functions. Yet discom incentives remain tied primarily to volumetric electricity sales rather than to maximising overall system efficiency. Some of the very changes needed for the energy transition can appear financially threatening to discoms because they reduce sales and shift fixed costs onto a smaller base of consumers.AdvertisementIn many states, discoms recover a substantial share of their revenues from commercial and industrial consumers who pay tariffs well above cost, subsidising households and agriculture that pay below-cost tariffs. When these high-paying consumers invest in energy efficiency, adopt rooftop solar, or shift to open access, discoms lose their highest-margin sales but continue to bear the obligation of serving subsidised consumers, which strains their finances.At the same time, discoms face large, fixed costs from network operations and maintenance to capacity payments under long-term power purchase agreements. When energy efficiency or behind-the-meter solar reduces demand, these costs do not disappear. If tariffs are predominantly volumetric, fewer kilowatt-hours sold means less revenue to cover the same fixed obligations. Demand response may lower peak demand, but the overall cost savings on power procurement can be limited when fixed costs dominate while revenue could take a hit immediately.Rooftop solar further alters the economics of discoms’ most valuable customers. Net metering, where permitted, credits exported solar power at or near the retail tariff, even though that tariff often includes network costs and cross-subsidies. Consumers reduce purchases during the day when the sun is out while continuing to rely on the grid at night. Unless tariff design evolves, discoms effectively become backup providers without being fully compensated for that service.None of this implies that energy efficiency, rooftop solar, or demand response are inherently harmful to discoms. What makes these measures financially threatening is the absence of complementary tariff reform, the deployment and usage of smart technologies and incentive redesign. If regulators allow discoms to recover fixed network costs and earn returns for reliability, loss reduction and flexibility, then these same measures can become tools discoms actively want rather than risks they seek to avoid.India has mandated time-of-day tariffs and scaling smart meters at unprecedented speed. Around 49 million smart meters have been installed, with many more planned. This is an essential foundation for a modern grid. But price signals alone are not enough to shift demand away from peak times. For time-varying tariffs to work, consumers must understand when electricity is expensive, know which appliances drive peak consumption, and be able to respond without constant effort. In practice, many households and small firms lack the time, information, or coordination to do this manually.Tariff reform must be paired with smart technologies that allow demand to respond automatically — such as smart thermostats for cooling, smart charging for electric vehicles, and smart plugs and switches for appliance-level automation. Without automation, we are effectively asking households to act as real-time energy managers, which is unrealistic. While investments in grid networks and energy storage are essential, well-designed demand response can often deliver similar flexibility at lower cost, especially for managing short-duration peaks.On the wholesale side, India’s renewable challenge is also geographic. Renewable resources are unevenly distributed across states, while demand is concentrated in urban areas. Although the physical grid allows power to move across regions, the market design remains fragmented. The majority of supply continues to be tied up in long- and medium-term contracts, with discoms largely self-scheduling generation from their contract portfolios. Organised power exchanges that optimise dispatch only account for 7 to 9 per cent of total electricity supplied. This limits India’s ability to use cheap renewable power efficiently across the country.most readTwo wholesale reforms are important. The first is transitioning to a nationwide market-based economic dispatch system. A centralised framework would ensure that the cheapest available power — including zero-marginal-cost renewables — is dispatched first ahead of generators with a higher short-run marginal cost. CERC estimates suggest that such a reform could reduce annual power procurement costs by around $1.6 billion while significantly improving renewable integration.The second is integrating captive power plants into wholesale markets. Captive power plants represent a large and underutilised source of flexible capacity. Bringing them into markets would increase competition, improve liquidity, and lower system costs. Taken together, retail and wholesale reforms could redefine the role of discoms from passive intermediaries to active system optimisers. With the right incentives and market design, discoms can use demand flexibility to manage peaks and improve reliability, and more integrated wholesale markets can support the efficient integration of renewable energy. If renewable integration delivers better service quality, public support will deepen; if it delivers uncertainty, resistance will grow.The writer is LSE Fellow in Energy Economics and Policy in the Department of Geography and Environment at the London School of Economics and Political Science