The rural energy balancing act, or India’s overlooked challenge
/ 4 min read
If left unaddressed, this divergence could undermine growth, social equity, and India’s clean energy ambitions. | Credits: Nilanjan Das
The rural energy balancing act, or India’s overlooked challenge
India's energy sector is at a crossroads, with urban areas rapidly modernizing while rural regions struggle with inadequate power access. Without targeted policies, this disparity could hinder growth and social equity. Bridging the gap requires strategic investments in rural infrastructure, distributed renewable energy, and tariff reforms to ensure a balanced and inclusive energy future.
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The rural energy balancing act is not a moral add-on to India’s growth story but rather a commercial imperative.
If left unaddressed, this divergence could undermine growth, social equity, and India’s clean energy ambitions. | Credits: Nilanjan Das
India’s energy sector stands at a pivotal moment. As of June 2025, the country’s total installed power capacity surged to 476 GW, and while the spotlight often falls on megacities and industrial corridors for bolstering transmission capabilities, a quiet but significant transformation is reshaping Tier III cities.
These rapidly urbanising town hubs are strengthening local grids and modernising distribution, with industrial sheds, digital services, warehousing parks, and new healthcare facilities multiplying the electricity load in areas that were once considered peripheral. This signals a welcome dispersal of economic growth.
However, the benefits of this growth are not evenly distributed, and rural areas continue to face significant challenges in accessing reliable and affordable power.
Therefore, without targeted policy and investment, we risk entrenching a two-speed power economy with smart infrastructure concentration in urban and semi-urban zones at the cost of supply in rural areas.
If left unaddressed, this divergence could undermine growth, social equity, and India’s clean energy ambitions.
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The rural access deficit: Beyond connectivity
A major challenge remains the high level of Aggregate Technical & Commercial (AT&C) losses faced by state-owned distribution companies (discoms) stemming from not only poor billing mechanisms but also inadequate rural infrastructure. Political tariff waivers, often cross-subsidised by higher tariffs for urban and industrial consumers, further constrain discoms’ ability to generate sufficient revenue, making rural infrastructure upgrades a less attractive investment.
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From the perspective of advising investors, utilities, and developers, three simultaneous trends are evident. First, Tier III demand is growing in ways that distribution discoms can readily monetise through metered consumers, commercial tariffs, and anchor loads suitable for rooftop solar and open access. Second, rural feeders are already stressed by agricultural pumping, and seasonal peak demand is not being upgraded at the same pace. Third, capital is flowing to bankable offtake, i.e., to urban distribution networks with smart meters, prepaid systems, and better collection efficiency. The convergence of these trends, especially in the context of India’s 2024 push for energy security and digitalization, could potentially widen the urban-rural power gap, with tangible social and political consequences.
Strategic roadmap: Bridging the divide
Bridging this gap demands more than simply expanding generation capacity. It requires a fundamental rebalancing of how we plan networks, structure tariffs, allocate risk, and regulate last-mile delivery. Some priority areas include:
Grid modernisation: Large-scale infrastructure programmes like the Revamped Distribution Sector Scheme (RDSS) have made important strides in feeder segregation, smart metering, and reduction of AT&C losses. However, RDSS implementation must explicitly ring-fence rural investments ranging from substation augmentation, high-voltage distribution systems, to cutting technical losses, and redundancy to handle monsoon outages. Linking funding to measurable rural reliability metrics such as hours of supply, voltage profile, and transformer failure rates will help safeguard rural budgets from being overshadowed by Tier III upgrades. State regulators can further reinforce this by embedding robust service-quality standards into multi-year tariff frameworks, with transparent penalties and pass-through mechanisms.
Enabling distributed and decentralised renewable energy (DRE): Distributed renewables like solar mini grids can be great equalisers if strategically integrated into the grid. The PM-KUSUM scheme, for example, has enabled feeder-level solarisation and grid-connected agricultural pumps, reduced daytime rural load, and improved voltage stability. The transformative potential of distributed renewables is further evident through Mlinda mini grids in Jharkhand and West Bengal, which have provided stable, round-the-clock electricity to thousands of rural households and businesses. However, the financial viability of DRE remains inconsistent. Lenders seek predictable offtake and payment security while developers need clarity on land aggregation, evacuation, and metering. To address these challenges, states can standardise power purchase agreements for feeder-level solarization, streamline approvals for right-of-way on panchayat land, and establish escrow-backed payment mechanisms funded through RDSS savings.
Last-mile delivery of public-private partnerships for rural distribution: Persistent challenges such as right-of-way, tree-felling permissions, and environmental and social due diligence continue to impede rural network upgrades. To address these bottlenecks, rural feeders should be equipped with automated SCADA/AMR systems and managed through performance-linked contracts. A model state-level rural distribution works code harmonising timelines, clarifying compensation for temporary access, and recognising community assets would significantly reduce execution risks. Digitisation is equally critical through prepaid smart meters, feeder-level SCADA, and geotagged asset registries to reduce losses and enhance the investment appeal of rural networks. Private sector participation through distribution franchises or input-based distribution models can help, but only if risk allocation is realistic. To enable this, contracts should include enforceable service standards, indexed tariff recovery mechanisms, and provide step-in rights for lenders.
Tariff reform and the cross-subsidy challenge: With Tier III consumers increasingly adopting distributed solar and leveraging open access under the Green Open Access Rules, the traditional base for cross-subsidisation is shrinking. Regulators should accelerate two key reforms in this regard: rationalising cross-subsidy surcharges to reflect actual costs of supply, and piloting direct benefit transfers (DBT) for agricultural consumers. While DBT is administratively demanding, it aligns incentives and allows utilities to price power closer to cost without compromising farmer welfare. Without this shift, discoms are likely to focus on Tier III commercial users and deprioritise rural feeders where recovery is uncertain. Further, transitional mechanisms such as a phased reduction in cross-subsidy trajectory combined with a universal service obligation fund at the state level can help finance rural upgrades. Funding for such mechanisms could come from a modest levy on open access transactions and carbon market proceeds. This approach aligns with India’s broader decarbonisation agenda while keeping rural equity central to energy transition.
The rural energy balancing act is not a moral add-on to India’s growth story but rather a commercial imperative. Tier III cities will continue to attract investment due to visible demand and manageable risk environments. The challenge for policymakers, regulators, and advisers is to make rural power projects equally attractive to investors. This can be done by strengthening contractual frameworks, providing regulatory clarity, and insisting on measurable service quality. This would ensure that the evolution of India’s grid is not just urban-smart but is also rural-resilient. If these efforts succeed, the surge in Tier III electrification can become the anchor for a more robust and inclusive grid, rather than the catalyst for a new divide.
(The author is Partner, Shardul Amarchand Mangaldas. Views are personal.)