Context

• In its first updated Nationally Determined Contribution (NDC) in August 2022, India pledged to reduce the emissions intensity of its GDP by 45% by 2030 (from 2005 levels) and achieve 50% of its installed electricity capacity from non-fossil fuel sources.
• However, despite this shift, thermal power continues to hold a significant share in India's electricity production, accounting for 50% of the total electricity generation.
• A critical issue arising from this scenario is the environmental burden borne by thermal power-producing States, which generate electricity for other States but receive no compensation for the pollution caused.
• Therefore, it is important to examine the current state of thermal power production in India, the disparity in electricity generation and consumption, and the necessity of compensating power-producing States for the environmental damage they endure.

The Environmental Burden of Thermal Power

• Thermal power plants remain the dominant source of electricity in India, relying heavily on coal.
• As of April 2023, India had 378.21 billion tonnes of coal reserves, with Odisha alone accounting for 94.52 billion tonnes.
• Approximately 59.12% of India's total energy supply is derived from coal, and in 2022-23, 73.08% of electricity was generated using coal, oil, and natural gas.
• The environmental consequences of thermal power generation are severe, with India recording 20,794.36 kg of carbon emissions from electricity
• Power-producing States bear the brunt of this pollution, as they are responsible for supplying electricity to other States, often at the expense of their own environmental and public health conditions.

Disparity in Electricity Generation and Consumption

• Power-Producing vs. Power-Consuming States
  • Data from the Central Electricity Authority (CEA) for 2022-23 illustrates this divide.
  • Maharashtra, Uttar Pradesh, and Gujarat had the highest non-renewable electricity generation capacities, producing 31,510.08 MW, 26,729.374 MW, and 26,073.41 MW, respectively.
  • At the same time, Rajasthan led in renewable electricity generation with an installed capacity of 22,398.05 MW.
  • Despite these figures, some States consume significantly more electricity than they generate, while others sell their surplus electricity to power-deficient States.
  • Uttar Pradesh, Odisha, and Chhattisgarh produce substantial amounts of electricity but consume only 40%, 38.43%, and 29.92%, respectively, of their NTPC-generated power.
  • Gujarat, despite having a minimal NTPC generation capacity of only 17.7 MW, is the largest importer of NTPC-generated electricity, consuming 4,612 MW.
  • Maharashtra and Haryana are also significant electricity importers, relying on electricity produced by other States.
• The Role of Net Exporting and Importing States
  • An analysis of net electricity exports and imports reveals a concentration of electricity generation in certain regions.
  • According to NITI Aayog’s 2022-23 data:
    • Chhattisgarh was the highest net seller of electricity, exporting 535.29 MW.
    • Other significant net electricity exporters included Madhya Pradesh (379.19 MW), Himachal Pradesh (153.43 MW), Rajasthan (135.14 MW), Odisha (95.40 MW), and Meghalaya (55.22 MW).
  • On the other hand, certain States are highly dependent on electricity imports:
    • Gujarat was the largest electricity importer, purchasing 17 MW from other States.
    • Other major importers included Haryana (212.63 MW), Maharashtra (187.50 MW), Delhi (162.97 MW), Punjab (160.82 MW), and Tamil Nadu (128.37 MW).
  • This pattern demonstrates that industrially and economically developed States, such as Gujarat, Maharashtra, and Tamil Nadu, rely on power-producing States to meet their energy demands while facing minimal pollution themselves.
• Case Study: Tripura and Bihar
  • Tripura has the highest share of thermal power in its total electricity generation capacity (96.96%), followed closely by Bihar (95.57%).
  • However, not all the electricity generated in these States is consumed locally. For example, Bihar sold 16,529.62 MW of electricity in 2022-23, indicating that a large portion of its power generation benefits other States rather than its own residents.

The Issue of Lack of Compensation for Power-Producing States

• Despite their significant contribution to India's power sector, thermal power-producing States do not receive any compensation for the pollution they endure.
• India’s regulatory structure does not account for the environmental costs of electricity generation, as taxes and duties are imposed on electricity consumption and sale rather than on production.
• Since electricity falls under the Concurrent List (Entry 38 of List III) of the Constitution, both central and State governments can legislate on electricity matters.
• However, the Ministry of Power issued a directive in October 2023 prohibiting States from levying additional taxes on electricity generation, limiting their ability to earn revenue from power production.
• Additionally, electricity is exempt from the Goods and Services Tax (GST), meaning power-producing States do not benefit from tax revenues associated with electricity distribution.

The Way Ahead to Ensure Fairness in India’s Power Sector: The Need for a Compensation Mechanism

• Taxation on Thermal Power Generation
  • States hosting central sector power plants should be allowed to impose taxes on thermal power production.
  • Alternatively, the Union government could collect and redistribute these tax revenues to the affected States.
• Finance Commission-Based Compensation
  • The Finance Commission of India can introduce a structured compensation mechanism for power-producing States.
  • The last three Finance Commissions have already incorporated environmental and climate concerns into their fund allocation strategies.
  • The Sixteenth Finance Commission should further strengthen this approach by considering India’s international climate commitments and implementing a fiscal roadmap to address environmental burdens.

Conclusion

• India’s commitment to a cleaner energy future must also acknowledge the disproportionate impact of thermal power generation on certain States.
• The imbalance between electricity generation and consumption, coupled with the absence of financial compensation, places an unfair burden on power-producing States.
• A well-structured taxation or Finance Commission-based compensation system is necessary to ensure that these States receive fair economic support for their role in India’s energy security.