Consequences of cheap electricity
Business Standard, 12 October 2026
The traditional firm view of energy cost in India
In India, we have a gloomy view of energy costs. Indian coal is of poor quality. Moving it across the country is expensive. For petroleum and gas, domestic prices largely track world prices. The electricity system often socks commercial buyers. The net result is a high-cost energy landscape.
It's hard being an Indian firm. Indian firms navigate arbitrary state power, fragile infrastructure, and expensive inputs through protectionism and energy policy. The dominant strategy for successful Indian enterprises was to harness top-decile intellectual capital, to compensate for the three handicaps. This allowed Indian firms to compete in the global economy, primarily in services and asset-light models, to great effect.
A new world of winning on energy cost
A sea change in energy prices is dismantling this old worldview. For the first time, India is emerging as a favourable location for energy costs. Recent research by Nikit Abhyankar and Amol Phadke at UC Berkeley brings remarkable facts to light. The capital expenditure required for a solar plant in India is now approximately one-third of that seen in the United States. This difference stems from three factors: interconnection delays, labour costs, and land acquisition. India suffers a penalty on the cost of capital, reflecting the failures of financial economic policy including capital controls. Overall, the advantages in physical execution outweigh the financial penalty. Also see link link.
Consider solar electricity delivered during daylight hours. In India, this stands at $30 per megawatt-hour (MWh), whereas the US price is closer to $50 per MWh. For firm power, where solar is bundled with battery storage to provide round-the-clock energy, this is $70 per MWh in India, compared to $100 per MWh in the US.
Daylight solar Firm power India 30 70 US 50 100 The US was the original fossil fuel hegemon. It built its economic supremacy upon the combustion of wood, coal, oil, and gas. US government research funding made the renewable revolution. The traditional view held that competing with the US on energy costs was impossible. But the emerging Indian electrostate is now delivering a powerful new Indian growth fundamental. There are, of course, countries that beat India on energy costs. But surpassing the US is a big deal. Now, producing in India has two distinct advantages over the US: cheap labour and cheap energy.
What to produce in India?
The emerging Indian electrostate calls for a rethink of strategy in private firms. The current structure of Indian industry is based on compensating for expensive energy. The trade liberalisation of 1991-2007 forced firms to find competitive niches. Because energy was expensive, Indian firms favoured business areas that had low energy-intensity. We see this in the Centre for Monitoring Indian Economy (CMIE) database. In 1992-93, power-fuel-water was 5.73% of expenses in the vast database of large non-financial firms. In 2024-25, this had dropped to just 2.87%. But green power now reshapes the frontier of what can be profitably done in India.
Steel and Aluminium
Consider the steel industry. Almost all existing steel capacity relies on coal as the primary raw material and energy source. The technological alternative is the production of green steel. This involves using electricity to produce hydrogen, running a direct reduced iron (DRI) shaft furnace to produce sponge iron, and melting this iron into steel using an electric arc furnace (EAF).
These calculations look good with green hydrogen today, in a way which was not the case just a few years ago. Solar and battery electricity is a locked-in nominal rupee price for 25 years, while coal prices will rise in the future. As a consequence, green steel is now at rough parity with coal-based steel in India. When exporting into the EU and the UK, green steel is superior owing to their Carbon Border Adjustment Mechanism (CBAM).
This technological dislocation presents a unique opportunity for the Indian steel industry. In China, the industrial base is dominated by a billion tonnes/annum fossil-fuel steel capacity. India has the opportunity to build green steel capacity which can beat this industry. There can be a scenario where the billion tonnes/annum Chinese industry become stranded legacy assets, and the Chinese non-market economy will struggle with their bankruptcy.
Making aluminium requires electricity and not coal as a raw material. As with steel, we get to estimates for green aluminium that are competitive against coal-based production, with an edge when exporting into CBAM countries, once we take into account contemporary prices for green power in India and the locked-in nominal prices for 25 years.
Peering into the next decade
We are at a tipping point in 2026 where these calculations have reached rough parity. From here, the domination of green technologies will go up through three certainties and two pieces of optimism about India:
- More countries will adopt the CBAM.
- Progress on solar energy and batteries will continue, and the cost of green power will keep dropping [EiE Ep87 Moore's laws].
- Coal prices will go up with inflation.
- In the optimistic view, Indian macro/finance policy reforms make progress, capital controls will be removed, which will reduce the cost of capital, and then the cost of green power will go down.
- In the optimistic view, the Indian state will take global warming and air quality more seriously, and taxes and other restrictions on coal will arise.
A time for strategy
According to the CMIE CapEx database, projects currently under implementation for primary steel total ₹6.4 trillion, representing roughly 149 million tonnes per annum of capacity. For primary aluminium, projects under implementation total ₹2.6 trillion, representing about 5.8 million tonnes per annum. A good chunk of the aluminium projects is a ₹0.8 trillion bet on new coal power plants. This is odd by global standards, where the modern consensus is that there is now no longer a case for new fossil-fuel generation plants. Boardrooms and investment committees must now rethink strategy in many respects.
There are novel investment opportunities in energy-intensive industries in the Indian electrostate. The tail risk of stranded fossil fuel assets, in areas such as electricity, steel and aluminium, has gone up. The script for the future involves two stages: with new investment switching to green technologies, and then with green technologies damaging the ROE of fossil-fuel incumbents. What is needed in this field is not practitioner knowledge about how the business worked in the last decade but a strategic sense about how the world will change in the next decade.
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