Energy transition in India: Where we are and what we need to do now

In the upcoming union budget scheduled for Feb 1st, the renewables sector is expected to receive a massive capital infusion, giving India’s energy transition story a much needed boost. However, in the absence of significant structural reforms, the sector continues to lag at acquiring the required pace to reach transition levels and achieve the planned decarbonisation goals. With an existing population of 1.39M and anticipated to reach 1.47M by 2030, India has a long way to go to ensure energy security for its entire population. Although India’s per capita energy consumption of 1208 KWh has been witnessing robust growth of 35% continuously over the last ten years, it is still just one-third of the world average and one-tenth among the developed nations. We also remain well below the other developing BRIC (Brazil, Russia, India & China) nations’ in per capita energy consumption. Although the country is witnessing rapid growth led by the growing aspirations of its rising middle class, India needs major policy and structural changes to ensure energy security without adversely affecting the climate.

The developed nations, especially the UK and the countries in the European Union, are moving rapidly towards achieving ‘Energy Transition’ and were quick to push policy changes and drive structural reforms to enable renewable energy to be viewed as the primary source of energy. Germany, for example, has decided to phase out Coal by 2038 and aims to achieve nuclear-free carbon neutrality by 2030 in line with the EU’s ‘Green Deal’. Tremendous funding support in Solar & Wind power helped renewables generate more energy than fossil fuels. After passing the legislation to amend the Climate Change law in 2008, the UK has moved swiftly towards decarbonisation and targets to phase out Coal by 2025 and decarbonise the grid by 2030. There are lessons that India can learn from the developed world in particular how the developed nations successfully managed to decouple energy consumption from GDP growth. As a result, although their energy consumption and intensity decreased in the past years, it did not have an impact on their growth. China and the US being large economies also managed to tread the same path, which is a remarkable achievement. India unfortunately, has a direct correlation between energy consumption and growth and it’s going to be several years before it can break that linkage.

India has done a remarkable job of providing last-mile connectivity to meet the energy security needs of its citizens. Thanks to the growth of the coal-fired power plants, the supply of electricity has increased over three times over the last fifteen years, while the country witnessed a population growth of 18% during the same period. Albeit the per capita energy consumption has also doubled due to a sharp increase in the availability of power, renewables have grown more than three times over the last fifteen years. However, the real growth has come in recent years, driven less by climate change concerns and more by the cost-effectiveness, development and ease of availability in remote areas. The contribution of renewables to the electricity mix stands now at 37%. Thanks to policy changes and financial incentives provided by the government, renewable energy capacity has outpaced fossil fuels in recent years.

Turning attention to the COP 26 summit and commitments made like - increasing non-fossil fuel capacity to 500 GW, meeting 50% energy requirement through renewables, reducing one billion tons in carbon emission and reducing the economy’s carbon intensity to less than 45% by 2030 are going to require substantial efforts. Without making significant policy changes and structural reforms, the 2030 sustainability targets as well as the goal of providing 24/7 emission-free affordable power to industries and households may well be a moonshot. The policymakers need to act swiftly to bring the following changes to the ailing energy sector.

1. Provide a conducive environment for the local renewables manufacturers to encourage investments in R&D and to scale up their production. Removing policy red tape on land acquisition, licensing, incentivising attractive loan provisioning can be a good start. Foreign and local players should be encouraged to set up domestic R&D and manufacturing capacity to cater to local as well as global customers.
2. DISCOMs enjoy a fixed and stable customer base in India as most consumers can’t choose their electricity supplier. Due to licensing requirements, there is a significant entry barrier for new distribution suppliers to come in. While the distribution losses in the state-owned DISCOMS have mounted to over 35%, subsidies continue to be offered for certain customer segments for electoral gains. As a result, DISCOMS continue to remain under massive debt and operate rather inefficiently. There is an urgent need to reform the DISCOM sector as the growth of renewables will be constrained in the absence of an efficient supply system.
3. Integration of variable renewable energy with the existing grid requires greater changes to make the system capable of utilising surplus power from one region to compensate for the power deficit in another. This requires coordination between multiple state governments, who are likely to be more keen on offering short term subsidies to gain popularity while disregarding the long term benefits accruing from such a system. Interstate coordination on energy exchange is going to be critical for achieving the planned goal of ‘One Nation One Grid’.
4. Distributed energy resources (DERs) have been adopted to incentivise consumers for installing distributed energy resources, particularly rooftop solar PV panels. However, the proliferation of the DERs has remained primarily concentrated in just a few regions with available installation capabilities, cheap labour and unreliable grid power. The installation of rooftop solar has been severely lagging. If this is not addressed, the proposed target of 40 GW RTS Solar Power out of 100GW Solar Power planned for 2022 would be very difficult to meet. This will also have a reverse cascading effect on meeting the 500 GW of 2030 renewable goal. The current nonstandard regulatory environment doesn’t support the DER business model and needs immediate overhaul. Different states have their own laws and regulations for BTM (Behind the meter) resources, including banking incentives, smart metering setup etc.
5. The government alone can’t ensure meeting the aggressive decarbonisation targets without each entity sharing the same goal and acting collaboratively. Whether private or public, companies and industries should disclose their carbon footprint quarterly and ensure renewable power consists of more than 15% of their overall energy consumption, which can increase YoY.
6. Energy Transition is essential for achieving the decarbonisation goals and it is expected to help with economic development as well. To boost the climate control initiatives and kickstart the climate economy, the government needs to amend the tax structure restricting the GST of 5% on renewable solutions and levying a higher GST on other nonrenewable sources of energy including thermal power, which currently attracts lower tax than non-fossil energy sources. Tax provisions should reduce the gap between coal-based and solar PV power.

The policy changes need to focus on both the long term as well as the short term requirements. The short team benefits are required to attract the startup ecosystem to drive innovations in this industry and the upcoming union budget is likely to catalyse the growth of the energy sector. However, long term structural changes are also needed to help producers attract investment for their multiyear projects. Bringing the cost of energy from Solar, Wind and Green Hydrogen sources to the end customer on par with coal power is a tall order, but favourable policy changes shall demonstrate commitment and ensure progress towards achieving these targets.