Most power procurement by distribution companies is done through long-term, 25-year contracts with power generating firms. These contracts legally bind the distribution companies into paying the generating company a lump sum annually for fixed costs, and a per-unit charge to cover variable costs (mostly for fuel). 

Distribution companies have to pay the fixed charges even if they do not draw power from the generating company for a particular time period. If such surplus cannot be sold, it is backed down, which means power generators lie idle at that time, incurring fixed costs, but generating no electricity.

India is the world’s third largest producer and third largest consumer of electricity.