The cost of uncertainty: analysing the influence of coal price changes, the Russia-Ukraine war and geopolitical risk on risk premiums in Indian electricity spot market

Using hourly data from June 1, 2020 to April 25, 2024, this paper first examines the characteristics of wholesale spot - Day Ahead Market (DAM) and Real Time Market (RTM) - prices in India. Second, we examine the impact on risk premiums (RPs) of changes in coal prices, the Russian-Ukraine war, demand conditions, economic policy uncertainty (EPU) and geopolitical risks (GPRs). We find that spot prices are highly volatile. Average hourly DAM prices are significantly higher than RTM prices for most hours during both weekdays and weekends, resulting in positive RPs and reflecting supply shortages and the presence of inefficiency in Indian wholesale electricity markets. The Russia-Ukraine war, EPU, GPRs, coal prices and high peak-hour demand increase RPs and are critical factors in explaining RPs. Results are robust across data frequencies and across sample periods. The results suggest increasing product diversification to reduce dependence on coal-based electricity production. These results have important policy implications for attempts to circumvent uncertainty, given that the Russia-Ukraine war has accelerated the rise in energy prices and brought significant uncertainty to Indian and global energy markets.