Russia-Ukraine war, volatile coal markets driving up electricity costs in India: B-school study

Panaji, Sep 21 (PTI) Global crisis such as the Russian–Ukraine war and volatile coal markets are directly impacting the electricity costs in India where higher premiums are being paid only to secure uninterrupted power supply, a study by the Goa Institute of Management and UK's Kingston University has found.

The study specifically investigated why electricity prices in India’s day ahead market is consistently higher than the real-time spot and identified coal price fluctuations, geopolitical risks, domestic demand patterns, and policy uncertainty as the key factors behind it.

The research published in the prestigious journal "Energy Economics" claims to provide first systematic evidence that these shocks translate into significant risk premiums, meaning Indian households and businesses are paying higher risk premium to secure uninterrupted power supply.

According to Prakash Singh, Associate Professor, Goa Institute of Management, the Russia-Ukraine war significantly increased risk premiums and market volatility.

"The increases in coal prices drove risk premiums higher by exacerbating supply-side uncertainty, while subsequent price corrections significantly reduced them. In India, day-ahead electricity prices are on average significantly higher than real-time prices resulting in a positive 'risk premium' thus indicating consumers are willing to pay extra to avoid supply uncertainty," Singh told PTI.

He explained that the risk premiums are significantly higher during peak hours (6–11 PM) and rise by up to 13 per cent on weekends, reflecting severe supply shortages.

"Both geopolitical risks and economic policy uncertainty were found to elevate risk premiums. India's electricity markets stand at the crossroads of global turbulence and domestic supply constraints. Our research underscores that without rapid diversification and smarter market design; Indian consumers and businesses will bear the brunt of volatility triggered by distant geopolitical and commodity shocks.

"Addressing these vulnerabilities now is key to ensuring energy security and affordability for the future," he added.

Jalal Siddiki, senior lecturer, Kingston University, who co-authored the paper said the findings of this study have several important applications, including the need to diversify India’s energy mix away from coal and invest in renewable energy with storage solutions.

"The study provides regulators with evidence to redesign electricity markets to minimise inefficiencies and better manage volatility. It equips utilities, producers, and traders with valuable data to develop more effective hedging strategies against global uncertainty. The research has also exposed the vulnerability of India’s power sector to external shocks and emphasises the need for strategic reserves and flexible generation capacity," he said.

By drawing on high-frequency data, including hourly and 15-minute intervals from June 2020 to April 2024, sourced from the Indian Energy Exchange, the first-of-its-kind study provides detailed evidence linking the Russia-Ukraine war with risk premiums in India’s electricity spot market.

The research provides actionable insights for regulators, policy-makers, and market participants to enhance India’s energy resilience in the face of global shocks. PTI GJS GJS DV DV DV