India is having its moment in the cloud as the country gears up to add 3.3 gigawatts of data centre capacity. Looks like these new-age, AI-powered large electricity consumers are choosing to move away from state discoms, as Andhra Pradesh recently allowed data centre players to obtain private power discom licences.

However, until now, private power discom licences were given to private entities like Tata Power, Adani Electricity Mumbai and Torrent Power, which supply electricity to an area and its consumers. The latest move allows large hyperscale data centers who are also commercial & industrial consumers to become power distributors as well.

India’s race to build the digital infrastructure in the era of AI is creating the unexpected challenge of finding enough reliable electricity to keep vast new data centres running around the clock.

Increasingly, some of the country’s largest cloud and AI operators might be concluding that state utilities cannot meet those demands quickly or flexibly enough, and are seeking to generate, procure and power on their own terms. Armed with a power discom licence, they could also look to sub-distribute excess power to other consumers.

Powering Upscale Data Centres

Electricity doesn’t just power a data centre, it’s the central resource around which they are built. So much so, data centres are measured in megawatts.

As per a JM Financial report, the power requirement per rack can be anywhere between five and 50 kilowatt (kW). Their power needs are also much more complicated than those of other large commercial consumers.

“Hyperscale data centres typically require over 100 MW of continuous power along with very high uptime standards, making private discoms and specialised power arrangements attractive for faster infrastructure augmentation, dedicated feeder infrastructure, tariff visibility, and flexible renewable sourcing,” Ram Soni, practice leader of mobility energy and transportation at Praxis Global Alliance, told The Core.

Downtimes can be catastrophic to a data centre, and hence require reliable high-tension power connections that cannot be off even for a minute. For example, if an e-commerce website is down for a few minutes, it stands to lose crores worth of business.

In the case of colocation data centres, if a data centre is down for a certain amount of time, there could even be penalties for ‘data not being available’.

To manage these complexities, data centres might choose to go on their own for power needs.

“An exclusive power distribution licence can allow the company to directly procure power from someone. Also, managing the power needs of a data centre is not easy, as peak social media content consumption happens between 8-10 pm,” said a power sector analyst on the condition of anonymity.

The Off-Grid Way Of Life

In addition to reliability, data centres, especially hyperscale AI data centres, require rapidly scalable power infrastructure. With a discom licence, a data centre can write its own rulebook, beyond the regulatory structure of a state-owned discom.

Under the Electricity Act 2003, state regulators may grant licences to private entities under Section 14.

Alternative procurement structures, such as open access, become increasingly attractive to such players as they bring assurance of power supply. As they purchase power directly from the producers, data centres can write their own rulebook.

“Beyond conventional supply, data centres may increasingly seek specialised services such as guaranteed power quality agreements, battery energy storage integration, demand-response systems, real-time energy monitoring, and dedicated renewable sourcing, although such offerings remain relatively nascent in India today,” Soni said.

Alternate power procurement allows them to deal with regular issues around power supply, like voltage fluctuations, slow building of infrastructure, lack of flexibility with creating dedicated high-availability power arrangements, and renewable energy procurement.

Data centres might also require their power producers to invest in backup diesel generation, UPS systems, battery storage, and power conditioning equipment.

How Does An Off-Grid Deal Work?

In case of a direct deal with a power producer, a data centre can either set up its own transmission line or ask the former to do so and share the maintenance burden between them.

This, however, can be even achieved as a consumer, like in the case of many large steel and other companies which have their own dedicated captive power capacities.

But a distribution licence could allow them to deal with the extensive vagaries in power requirements within data centres.

“A data centre has to have a standby power system – one for base load and another for peaks. They have a long-term purchase agreement for the base load and manage their peak with other set-ups like renewable power, batteries etc,” Pradeep Lenka, a power sector expert and consultant, told The Core.

Large AI and cloud campuses need dedicated systems like N+1 redundancy configurations and ring-main feeder networks to ensure or improve reliability. An N+1 redundancy configuration ensures at least one independent backup component for every component, in order to run a system at full capacity.

Data centres also have farming arrangements where they take in the overflow from other data centres, for which they need to keep capacities ready. They also have complicated pancaking arrangements that make sure that they need to have power utilities on standby.

“So most data centres might end up paying for power they might not completely use. In such cases, they could sub-distribute excess power that has been contracted to and not used to other consumers,” surmises Lenka.

On the other hand, one more complication might arise for hyperscalers who might become legit power distributors. They would be bound by the renewable purchase obligations (RPOs) that all distributors have to abide by as per the mandate. As per the Ministry of Power, the current mandates, around 33% of the total power procured by the entity must be as much as 33% of as FY26.

As of now, most data centres have their own renewable energy goals. Sharad Sanghi, founder of NetMagic, who founded one of India’s earliest data centres, admits data centres are heavy consumers but calls them ‘a necessary evil’.

“In NTT, we have announced a sustainability goal of being carbon neutral by 2030. Today, about 45 to 50% of energy is green. So we've set up captive solar, hybrid wind solar plants, that where we feed energy to the grid and get wheeled back,” Sanghi told The Core in an interview earlier.

Most power experts believe that it’s not difficult for a data centre distribution licensor to meet renewable targets, unlike state discoms, which are bogged down by legacy losses.

“If you see, most state discoms push their green energy targets to next year, as there are no penalties for not meeting these losses,” Lenka said.

Costs Beyond Subsidies

The direct benefit of not buying power from state discoms is the ability to escape the complicated web of subsidies.

In India, commercial and industrial consumers cross-subsidise domestic consumers. Simply put, domestic consumers’ tariff is lowered artificially, and a premium is charged to commercial consumers, allowing the discom to balance its purchasing costs.

As per Soni, data centres are typically high-paying and reliable industrial consumers, often paying Rs 10-12 per unit with relatively stable demand profiles. This also includes a subsidy charge that most commercial consumers like themselves have to pay.

“Industrial consumers also often pay a cross-subsidy premium of Rs 2-4 per unit above average supply cost to subsidise agricultural and residential tariffs, increasing operating costs for large facilities and making alternative procurement structures such as open access increasingly attractive,” said Soni.

Apart from subsidy burdens, discoms also face challenges like AT&C losses, delayed cost recovery, and elevated sector debt levels. As more high-paying consumers, such as data centres, move away from discoms, it could undo the delicate system of balance.

“Commercial and industrial make up for as much as 40-43% of the total demand. Already, we are seeing a migration from the grid via open access or energy route. There could be regulatory compensation structures and tariff rationalisation measures that could mitigate the loss for discoms,” said Girishkumar Kadam, senior VP and group head of corporate sector ratings at ICRA, in a webinar on the power sector.

Experts believe that many states that have a high concentration of data centres, such as Maharashtra, could follow suit with private power distribution licences. While Google and Meta have committed to building AI data centres in Andhra Pradesh, a bulk of the existing data centres are in Mumbai, with 54% of total capacity, followed by Chennai at 18%, as per J M Financial.

“States competing for AI infrastructure, advanced manufacturing, semiconductor facilities, and hyperscale data centre investments are more likely to explore similar models, particularly where large consumers require reliable, high-volume, and plug-and-play power infrastructure,” said Soni.

Private distribution licences can also provide long-term tariff visibility for commercial consumers.

Not only does it offer them an idea of the cost structure of operating a data centre, but it also allows them a certain sense of control over the astronomical electricity bills that a data centre could run up.