This article originally appeared on Business Standard (subscription required).

While India is expected to have a power surplus for the first ever time in FY17, with the overall energy surplus and peak surplus forecasted to be 1.1 percent and 2.6 percent respectively, the penetration of short-term markets in power remains low and calls for the attention of policymakers. Short-term markets refer to contracts less than one year long, and consist of bilateral contracts between a buyer and seller, and power trading on exchanges. Compared with countries in Europe, where volumes traded on short-term markets range from 23 percent to as much as 88 percent as of 2015, short-term power markets account for about 10 percent of total power consumption in India (only three percent traded over exchanges, with bilateral contracts and deviation settlement mechanism/UI accounting for five percent and two percent respectively). The majority of our generating capacity remains tied up in long-term contracts of 12-25 years (along with short-term intra-state transactions) which results in the entire demand-risk being transferred to the discoms, or power distribution companies.

Heavy reliance on long-term contracts has led to multiple issues faced by both discoms and generators. The state distribution companies are losing money due to the higher cost of power procurement in long-term contracts and much lower realizations due to AT&C losses (Aggregate Technical & Commercial losses) that includes transmission losses, pilferage, and free power to agriculture. The total losses of discoms in India (adjusted for subsidy) as of FY15 were about Rs. 58,275 Cr.

This, in turn, has led to delayed payments to generators, idle capacities, stranded plants with no PPAs or power purchase agreements—and hence no means of achieving financial closure—and high tariffs for industrial customers, which affects their competitiveness and decreases their investments. Hence, while generating capacity has increased, only 49 percent of this capacity is available at the time of peak demand.

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Amit Sinha is a partner and Parijat Jain is a principal in Bain & Company’s New Delhi office.