India has experienced impressive economic growth since its reforms in 1991. Since that time, the country has witnessed a considerable reduction in poverty and vast improvements in the standard of living. To revive the vibrancy of its economy,a well-functioning and financially-sound energy sector is critical to allow India to sustain further economic growth and reduce negative impacts on its public finance. This will require an accelerated transition to an energy sector based on market economy. There are two major trends appearing in India’s overall energy sector: first, a serious energy shortage across different fuel sectors, ranging from coal, gas, and oil to uranium. The deficiency of these fuels is resulting in a considerable shortage of electricity, which hampers economic and social development. Second, there is an increasing need to import more energy as a result of the country’s stagnating domestic production. Crude oil used to be the main energy import, but India now needs to import greater volumes of coal and gas as well. However, due to considerable disparity between domestic and international prices for these fuels, actual imports might not take place, or will take place to a lesser degree then the actual fuel shortage might require. Moreover, increasing fuel imports will have negative implications on India’s financial condition. To effectively address these two trends, India needs a functioning energy market, in other words, a system where national energy demand can be met by timely and adequate investment in a sustainable way and business entities operating in the energy market are commercially viable. Six major challenges are identified here, which need to be resolved to create a functioning energy market: players, pricing, investment, implementation, policy and political will. These challenges should be addressed urgently by Indian policy makers, as the deteriorating energy situation can seriously weaken the country’s prospects for a robust national economy and improved daily life of its citizens. Pricing is the key to ensure the commercial viability of business entities and to attract investment into each fuel sector. The importance of pricing was recognised by the deputy chairman of the Planning Commission: “The energy challenge in the Twelfth Plan is how to deal with a situation in which global energy prices will b