As India braces for record electricity demand this summer, the spot electricity prices in the country’s power exchanges are witnessing sharp volatility. On several days this summer, the spot price of electricity in the real-time market segment on the Indian Energy Exchange (IEX) — the country’s biggest power trading bourse — crashed to near-zero levels during daytime in multiple time slots, only to surge to the regulatory ceiling of Rs 10 per unit (kWh) during night-time. In May alone, spot electricity prices dropped to near-zero levels in multiple daytime slots on at least 10 days: May 1, 3, 10, 14, 18, 22, 23, 24, 27, and 29. The near-zero price episodes refer to instances when spot electricity prices fell below 10 paise per unit in a time slot (typically 15 minutes) on a particular day.This is a sharp increase in such episodes compared with last year. In May 2025, such near-zero price episodes were recorded on only two days: May 22 and 25.A similar trend was visible in April as well. This year, spot prices plunged to near-zero levels during different daytime slots on at least seven days in April, compared with just one such instance in April last year.Why are power prices swinging so sharply, and what does it mean for the grid? We explain.First, we need to understand how the electricity market functions. Electricity generators usually enter into long-term pacts with distribution utilities known as power purchase agreements (PPAs) that typically span 25 years to sell electricity. Power markets, which are hosted on power exchanges, facilitate short-term electricity trades to meet demand fluctuations, where generation companies (which own and operate power plants to generate electricity) can sell their surplus power independently of PPAs at market price. Prices discovered on power exchanges are wholesale electricity prices and do not reflect the retail tariffs paid by end consumers.Power markets are divided into different segments based on the timing of delivery and the duration of contracts. One such segment is the Real-Time Market (RTM), introduced in 2020, which enables power utilities and generators to buy or sell electricity close to the time of actual consumption, helping them balance unexpected fluctuations in demand and supply. It allows participants to procure additional power during shortages or offload surplus electricity when generation exceeds forecasts. Story continues below this adAlso in Explained | Why India curtailed solar energy during peak summer power demandOther key market segments include the Day-Ahead Market (DAM), where power is traded a day before delivery, and the Term-Ahead Market (TAM), which caters to contracts with longer delivery horizons.In India, the short-term power market is expanding gradually, with the total volume of short-term transactions of electricity increasing from 65.90 billion units (BU) in 2009-10 to 238.35 BU in 2024-25. A windmill power grid in Kutch district, Gujarat. The sharp price volatility witnessed this summer essentially reflects a widening mismatch between electricity supply and demand across different times of the day. Photo: Nirmal HarindranThe volume of short-term transactions of electricity as a percentage of total electricity generation stood at 13.03% in 2024-25, compared to 9.6% in 2009-10.The imbalance in the systemThe sharp price volatility witnessed this summer essentially reflects a widening mismatch between electricity supply and demand across different times of the day. During daytime, abundant solar generation, coupled with relatively moderate demand, has led to a surge in supply, pushing spot electricity prices to near-zero levels. India’s installed solar capacity has expanded rapidly in recent years and now stands at 154.23 gigawatts (GW). However, battery and energy storage capacity has not expanded at the same pace, limiting the ability to store excess daytime power for later use.Story continues below this adThe situation reverses after sunset. As solar generation drops sharply, demand remains elevated due to cooling requirements and other evening loads, creating a supply crunch. This has repeatedly pushed spot electricity prices in the real-time market to the regulatory ceiling of Rs 10 per unit (kWh) during nighttime hours.More in Explained | India is rapidly scaling up renewable energy. Now it needs to store itThe imbalance is also reflected in data from the Grid Controller of India, which has reported power shortages during nighttime peak demand periods on most of the days this summer. On May 21, when India’s peak power demand touched 270 GW, the system recorded a nighttime shortfall of around 2.5 GW. In April, too, the nighttime power shortages had climbed to as high as 5.4 GW, underscoring the growing challenge of meeting evening demand in an increasingly renewable-heavy power system.Selling excess electricityBut why are generators willing to sell electricity at such low prices?According to industry executives and power market experts, one of the key reasons is the near-zero variable cost of solar power. Unlike conventional thermal power plants, solar power plants do not consume fuel to generate electricity. Consequently, when solar generation surges and supply outstrips demand, generators are often willing to sell power at extremely low prices rather than switch off, contributing to the near-zero price episodes seen in the market.Story continues below this ad“Zero is the technical floor and prices can even turn negative. Since solar power has virtually zero marginal cost — as it does not require any fuel — generators bid electricity at zero in the market to ensure their power gets cleared. When supply exceeds demand during solar hours, the market clearing price can fall to zero,” said Alok Kumar, former Power Secretary who currently serves as director general of the All India DISCOM Association.“If solar capacity continues to expand at the current pace without a corresponding rise in daytime demand, such situations will become more frequent. Storage could help absorb excess renewable generation, but battery storage remains expensive,” he told The Indian Express.NewsletterFollow our daily newsletter so you never miss anything important. On Wednesday, we answer readers' questions.SubscribeNear-zero prices do not necessarily mean generators are deliberately selling electricity for free, an industry executive of a leading renewable energy company said. One reason is the use of block bids on power exchanges. A generator plans power sales over a longer duration — for instance, from 6 am to 6 pm — at an average price rather than targeting a specific price for each individual time block.“For example, a generator may be willing to sell a certain amount of power during the day at an average price of Rs 4 per unit. Since market prices are discovered separately for each time block, prices may be Rs 5 per unit during some periods, Rs 4 in others, and even fall to near-zero in a few slots. As long as the average realised price over the entire bidding period meets the generator’s target, the seller remains commercially viable despite occasional near-zero prices,” the executive said. Story continues below this adAnother factor is the challenge of managing excess generation. A solar developer may have scheduled a certain amount of electricity for delivery to its offtaker based on its expected generation profile. However, during periods of intense sunshine, the plant may generate more electricity than scheduled.If the excess power is not sold, it is injected into the grid as unscheduled generation, which may fetch no revenue and could potentially expose the generator to deviation-related charges. In such situations, generators often prefer to sell the surplus electricity on the power exchange in the real time market at extremely low prices. For them, earning a few paise per unit is preferable to receiving nothing or risking deviation-related penalties for the excess generation.