Time to pick priorities: India can maximise benefits of any stimulus intervention aimed at aiding a transition to clean energy if it is accompanied by widespread structural reforms | Photo: International Growth Centre

For India’s energy sector, a long road divides stimulation from transformation

The economic argument for increasing investments in clean energy and sustainable technologies received a massive fillip this past week. A group of renowned economists put out an extensive survey, spanning 53 countries, that highlighted the economic benefits of policies aimed at maximising investments in such technologies.

While analysing responses pertaining to the 2008 global financial crash and the stimulus packages introduced thereafter, experts found that green stimulus policies often have an advantage over traditional fiscal stimulus, both in the short and long term. While investments in renewables have lower labour requirements in the long run, investments in clean energy infrastructure, including infrastructure aimed at increasing energy efficiency, were found to generate three times as much employment as fossil fuel infrastructure projects.

The working paper prepared for the Oxford Review of Economic Policy serves as a timely cue for new fiscal stimulus packages as governments around the world scramble to push through economic recovery plans. While the calls for stimulus packages to be built around climate action have been resounding, initial evidence suggests that governments are yet to be fully convinced of moving away from conventional fiscal stimuli, which rests heavily on the fossil fuels sector. The survey also identified 300 policy measures that had been implemented in the wake of the COVID-19 pandemic, only 4% of which led to a long-term reduction in GHG levels, while 92% were found to maintain a status quo in terms of emissions.

The findings of the survey are especially significant for a country like India to plan for the expected doubling of energy demand over the next 20 years. Prime Minister Narendra Modi has announced a massive ₹20 lakh crore package to revive the economy post the COVID-19 lockdown, a part of which is expected to go towards energy companies. But specific details are yet to be made public. 

While India has been lauded for increasing its renewable energy capacity more than three-fold over the past six years, a slowdown in capacity addition over recent months, even before the disruptions brought on by the novel coronavirus pandemic, sheds light on a need to rethink critical policies and fiscal interventions. A recent analysis by IISD and CEEW on subsidy volumes shows that while subsidies for fossil fuels and renewables have both fallen in recent years, the former still commands the lion’s share of India’s subsidies. Interestingly, the current depressed oil prices provide an opening for the country to divert some of the savings on oil imports and a part of the existing fossil fuel subsidies towards renewables.

The area most ripe for transition seemingly is the impending shift from coal. Coal and thermal power have continued to look less and less lucrative for investors with every passing day. While renewable energy has reached prices that beat thermal power, investors have seen holdings in Indian coal mining and thermal power significantly below par since 2013. A recent Carbon Tracker analysis revealed that 23% of the 66GW of thermal power in the pipeline will enter the market with negative cash-flow, making them high-risk projects that will potentially add to the stress in the country’s financial and banking sectors.

While the lockdown saw plant load factors in India’s thermal power units fall to just above 50% as energy demand crashed during the lockdown, renewables proved to be a reliable source with steady generation that met a significant chunk of the demand. This experience raises the question of whether it is worth pursuing any additions to India’s coal capacity at all. Nevertheless, recent doubling down of coal production targets, opening up of the coal sector to foreign investments and the doing away of certain environmental norms in mining indicate that the Indian government is still moving forward with plans of thermal power expansion into the coming decade.

The move towards renewables, though, is also hampered by roadblocks of its own. For one, manufacturing capacity, especially with regards to solar energy, has failed to catch up to demand. The government has attempted to kickstart local manufacturing by imposing safeguard duties on imported solar cells and modules and mandating domestic content requirements. These attempts have, however, failed to spur production as investors remain spooked by frequent policy changes and rapid progress in technology. India currently imports about 80% of its solar cell and module requirements with domestic manufacturing just accounting for 3GW and 10GW for solar cells and modules respectively. According to projections, scaling up domestic projection to keep up with ambitious capacity addition targets could see the country save US$ 50-60 billion over the next 15-20 years in import bills.

Ramping up production capability is also crucial for the success of energy decentralisation schemes such as the PM KUSUM and the rooftop solar programme, which are likely to heavily influence the success of any energy transition in the country.

One daunting prospect that must be addressed is the issue of modernising the grid so that it is better prepared to absorb the intermittency of renewable power. The reliable handling of India’s recent power demand fluctuations during the lockdown has effectively demonstrated the readiness of the grid for a swift, but steady transition towards renewables. According to industry experts, the expansion of microgrids backed by renewable energy, especially in rural India, will further aid national grid performance while improving energy access.

Equally daunting is restoring the financial health of India’s power sector. While Finance Minister’s announcement of ₹90,000 crore liquidity infusion does not even cover DISCOMs’ debts towards power generating companies, troubles in generating funds for implementing agencies Power Finance Corporation Ltd and Rural Electrification Corporation Ltd is not likely to get any less messy as they eye funds from LIC and EPFO. To make matters worse, PFC and its subsidiary REC have extensively and continually lent to coal power plants that have in turn resulted in close to ₹50,000 crore in non-performing assets and impairment losses amounting ₹15,751 crore between 2014 and 2019, according to the Institute for Energy Economics and Financial Analysis (IEEFA).

Another key component of the clean transition project, which will also help bridge the uncertainties of renewable energy, is the expansion of battery storage. India must take advantage of falling battery prices and increase domestic production. This would not only help achieve the target of reaching 175 GW by 2022, but also incentivise individuals and state governments to electrify mobility as prices are driven down.

While the government is yet to divulge details of the economic stimulus package pertaining to the energy sector, the stress on domestic manufacturing and production has been unmissable. But in order for a steady transition to take form, the Indian government must pick a lane. Avoiding the fickleness that has marked India’s energy policies in recent years, and focusing on accelerating the clean energy transition remain the country’s best chance to maximise economic benefits and long-term environmental sustainability.

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