Analysis | Merit Order Dispatch Is Undermining India's Climate Goals
India is investing billions in renewable energy, storage projects, green hydrogen initiatives. Yet dispatch practices rooted purely in variable cost calculations risk diluting these gains.
Published : February 26, 2026 at 4:46 PM IST
By GSR Bhavani Prasad
India has set an ambitious target: achieving net-zero carbon emissions by 2070. The country has invested heavily in renewable energy, expanded solar capacity at record speed, and mandated cleaner thermal technologies. Yet, hidden within the daily operations of the power sector lies a policy contradiction that quietly works against these climate goals.
The issue is not technological. It is procedural. The current Merit Order Dispatch (MOD) system --- designed to minimise short-term power generation costs--- is inadvertently favouring older, less efficient coal power plants over cleaner, modern supercritical units. This paradox deserves urgent attention.
India's Progress in Clean Energy
India has made remarkable strides in energy transition. The country crossed the 100 GW solar capacity milestone ahead of schedule. The Centre has also mandated that new coal-based plants must use supercritical or ultra-supercritical technology, effectively ending approvals for new subcritical units. The reason is clear. Supercritical plants operate at efficiencies of 41--45%, compared to 36--38% in older subcritical plants. Higher efficiency means lower coal consumption per unit of electricity and significantly lower CO₂ emissions.
On average:
• Subcritical plants emit around 766--789 grams of CO₂ per kWh.
• Supercritical plants emit about 722 grams per kWh.
The difference may appear small on paper. But when multiplied across thousands of megawatt-hours daily, the emission savings are substantial. Through initiatives like the Perform, Achieve and Trade (PAT) scheme, thermal stations have already improved energy efficiency by 3--7% over multiple cycles. India has clearly demonstrated both intent and capability. So where is the contradiction?
The Grid Flexibility Challenge
The rapid growth of solar energy has created operational complexities. Solar power is available only during daytime. It falls sharply during early morning and evening peak demand periods.
To manage fluctuations, grid operators often back down thermal units to as low as 40% capacity and occasionally place them under reserve shutdown. These decisions are governed by the Merit Order Dispatch system. Under this system, power plants are scheduled based on their variable cost of generation---primarily fuel and transportation costs. The lowest-cost units are dispatched first. From an accounting perspective, this seems logical. But environmental consequences are not factored into this calculation.
The Dispatch Paradox
Variable cost does not equal environmental performance. A supercritical plant located far from coal mines may incur higher railway freight charges. Meanwhile, an older subcritical plant located close to coal fields may have lower transportation costs. Under MOD principles, the cheaper plant---regardless of efficiency --- gets priority.
As a result:
• Efficient, cleaner supercritical units are sometimes backed down.
• Less efficient, higher-emission subcritical units continue operating.
Each time this occurs, the country effectively chooses slightly higher emissions to save marginal fuel transport costs.
When a supercritical unit is replaced by a subcritical unit, emissions increase by roughly 44--67 kilograms of CO₂ per megawatt-hour.
India generates over 1,000 TWh of thermal electricity annually. Even a 10% shift in dispatch preference can translate into millions of additional tonnes of CO₂ per year. This contradicts the very rationale behind promoting supercritical technology.
Economic Logic vs Climate Logic
Distribution companies (DISCOMs) and power traders are not acting irresponsibly. They are responding to the rules that govern them. Their mandate is to procure power at the least variable cost. The problem lies in the design of the dispatch framework, not in the intent of operators.
At present, environmental efficiency has no monetary value within daily dispatch decisions. A plant that invests in improving heat rate under PAT receives recognition---but if its freight cost is higher, it can still be backed down.
This creates perverse incentives:
• Cleaner plants are not consistently rewarded.
• Older plants may continue operating purely due to logistical advantage.
In effect, short-term accounting savings override long-term climate objectives.
Learning from Global Practices
Other countries have recognised this conflict and redesigned dispatch principles. China, which once followed a "fair dispatch" model where plants received similar generation hours irrespective of efficiency, gradually shifted to "energy-saving dispatch." Under this approach, cleaner and more efficient units are given priority, subject to grid stability.
Europe has gone further. Through the European Union Emissions Trading System (EU ETS), carbon emissions carry a price. When a high-emission plant bids into the electricity market, it must account for the cost of carbon allowances. That cost difference automatically makes cleaner plants more competitive.
Environmental efficiency becomes economically visible. India does not yet integrate carbon cost into dispatch order in this manner.
A Practical Way Forward
The solution does not require dismantling the merit order system. It requires refining it.
Three practical measures could align dispatch with climate goals:
1. Efficiency-Adjusted Merit Order
Introduce a "carbon-adjusted variable cost" formula that accounts for plant heat rate or emissions intensity along with fuel cost. A modest implicit carbon value could significantly reorder priorities without destabilising markets.
2. Targeted Freight Rationalisation
Freight disadvantages faced by efficient supercritical plants located far from mines could be corrected through policy intervention. This would level the field without compromising economic discipline.
3. Carbon-Informed Power Trading
Heat rate or emissions benchmarks could be incorporated into day-ahead market mechanisms.
Such reforms would gradually phase out subcritical dominance without abrupt disruption.
Why This Matters Now
India is investing billions in renewable energy, storage projects, green hydrogen initiatives, and advanced thermal technologies. Yet dispatch practices rooted purely in variable cost calculations risk diluting these gains. Policy consistency is essential. It is not enough to build efficient plants. They must also operate optimally. It is not enough to mandate cleaner technology. The system must reward its use. Daily operational decisions, repeated across hundreds of generating units, determine the actual emissions trajectory --- not policy announcements alone.
The Bigger Picture
India's power sector transformation is admired worldwide. The country has demonstrated that growth and clean energy expansion can proceed simultaneously. But as the transition deepens, governance frameworks must evolve. Merit Order Dispatch was designed in an era when cost minimisation was the overriding concern. Today, climate responsibility is equally important. Aligning economic dispatch with environmental objectives is not a radical reform. It is a logical progression. If India ensures that its most efficient plants are given priority, emission reductions can accelerate without building a single additional megawatt of capacity. Sometimes, the most powerful climate action is not about constructing new infrastructure --- but about intelligently utilising what already exists.
Conclusion
The contradiction is clear. India promotes supercritical technology to cut emissions. Yet the dispatch system sometimes sidelines it. Correcting this imbalance will strengthen energy security, reduce emissions, and reinforce India's credibility as a global climate leader. The question is not whether we can afford to reform dispatch policy. The question is whether we can afford not to.
(Disclaimer: The opinions expressed in this article are those of the writer. The facts and opinions expressed here do not reflect the views of ETV Bharat)
