Pearls and Irritations

In Part 1, Tim Buckley and Praveen Gupta discussed the influences on India’s economic growth, energy security and environmental sustainability. In Part 2 they explore the Indian government’s energy strategies and possible ways forward.

Praveen Gupta: Any thoughts on incentives and disincentives for India’s energy transition?

Tim Buckley: Let’s look at the facts. India is the world’s second largest producer and consumer of coal, behind only China (having overtaken the U.S. in the last year or so). Government owned Coal India Ltd contributes around 80% of the country’s total coal production.

While many environmentalists tend to consider only the adverse impacts of Coal India Ltd, I’d balance that by saying the company is playing a key role in India’s current economic development.

Coal India Ltd is a massive employer with almost 280,000 direct employees, most of who are in the least developed parts of the country. Indian Railways gets more than half of its revenue from transporting coal and this is used as a cross-subsidy to reduce the cost of passenger rail transport. Finally, Coal India Ltd is most probably the highest taxed coal company in the world. Some 40% of Coal India Ltd’s total revenues are returned to government in the form of GST, duties, royalties, corporate tax and the Rs400/t coal cess. (Most of the coal companies I examine in Australia are either tax-haven based and/or structured to ensure they pay next to no corporate tax. On top of this, Australia’s coal industry is adept at extracting subsidies.)

India requires a financially strong government, and despite the destructive downsides in using fossil fuels, at least Coal India Ltd is contributing to state and centre coffers.

With coal paying its way to a large degree, the key opportunity now for India’s energy system transformation is renewables, which are the least cost source of new power generation and the lowest cost in terms of externalities.

With this in mind, the government is correctly focusing on accelerating renewable energy deployments to deliver on its target of 450 gigawatts (GW) by 2030. Achieving this ambition would rightly put India on the centre stage globally.

The Paris Agreement identified the “common but differentiated” emission reduction requirements of developed and developing nations. India is on track to deliver more than its share of this globally important goal, even as richer countries like the U.S. renege on their treaty obligations.

PG: In a most optimistic scenario, how long do you think it would take India to accomplish the Paris Agreement target?

TB: In the area of energy, India made three key commitments under its nationally determined contributions – the (intended) reductions in greenhouse gas emissions under the United Nations Framework Convention on Climate Change (UNFCCC). Firstly, to drive energy efficiency by decoupling energy needs from economic growth; secondly, to aggressively invest in renewable energy; and thirdly, through reforestation.

Under Prime Minister Narendra Modi’s leadership, India could well be five years ahead of its 2030 Paris commitments. As a result, this is driving energy system deflation and improving India’s energy security.

The technology driven disruption of the world’s energy system has huge economic, political, and environmental prospects for India, and the country is responding well to these opportunities.

PG: What in your vision would be an ideal energy mix for India?

TB: Prime Minister Modi has outlined a clear and ambitious vision: 450GW of renewables by 2030. The whole-of-industry and regulatory buy-in to this goal is really impressive.

However, achieving this vision requires a fourfold increase in annual investment, with a clearly overdue immediate step-up in the deployment of distributed renewable energy (particularly rooftop solar). Further, all coal-fired power plants should either be put on a formal closure path over the next 5-10 years or immediately retrofitted to reduce their environmental impact (the centre government has mandated this but enforcement is entirely lacking to date).

India has huge hydro-electricity resources, yet water is growing scarcer. This is a key constraint to sustainable economic growth. It would be in India’s interest to incorporate a plan looking at the viability of a limited expansion of hydro-electricity capacity as part of a wider flood management and whole-of-system clean water plan (bounded by the constraints of the loss of too much fertile rural land). The country should also immediately embark on a retrofit and modernisation of India’s existing 46GW of hydro capacity, given its key value for peaking electricity generation (pumped hydro storage (PHS)).

This would require an accelerated modernisation and expansion of India’s national grid infrastructure, including firming capacity (batteries, PHS, coal- and gas-peakers and demand response management).

India should also leverage its surplus electricity capacity via a tenfold increase in two-way renewable energy electricity exports to adjacent countries like Bangladesh, Sri Lanka, Nepal and Bhutan.

Along with this, India should leverage the technology convergence of the transport and energy sectors to accelerate deployment of electric vehicles (starting with buses, taxis and 2- & 3-wheelers) and continue with the electrification of Indian Railways.

This progress should be combined with a stepped-up focus on the many “Make in India” manufacturing opportunities that come with transforming and modernising the combined energy and transport needs of 1.35 billion people. The scale of domestic market opportunities means global capital will flood in, thereby supporting the government’s sensible long-term investment plan.

In turn, the progressive replacement of fossil fuel imports by lower cost, clean, domestic energy alternatives would reduce currency devaluation risks and lower inflation, and hence interest rates, in India. This in turn would create a virtuous cycle, as lower interest rates are the key to lower renewable energy tariffs.

India should also enforce a more positive centre-state dialogue to invite buy-in and regulatory compliance nationally, including mandated and enforceable recycling or reuse systems of all end-of-life components, be it fly ash from coal-fired power plants, solar modules or lithium ion batteries.

Achieving a sustainable energy system means finding a path to ongoing economic viability of state electricity distribution companies. Cross-subsidies from industry must be progressively removed, and a national Direct Benefit Transfer (DBT) scheme put in place to support those most in need in the rural sector. This would replace the problematic system of trading ‘free’ electricity for votes, which is in turn preventing sustainable economic growth for India as a whole.

PG: Could the Covid-19 be a game changer for good?

TB: Yes. COVID-19 has reinforced a key lesson for many countries: real leadership means relying on the advice of experts, in this case medical experts. There is another crisis in which the experts have long been ignored – the scientific experts calling for emission reductions to reduce catastrophic global warming. Ignoring climate science and the need for sustainability in the mindless pursuit of short-term economic growth ignores the power of nature to give us system shocks of enormous economic and personal cost. The COVID-19 lesson is that we must work together for the common good and put the benefits of a safe and healthy environment ahead of the questionable merits of unsustainable economic growth.

PG: Imposition of duty on imported panels, does it make the economics of renewables unviable? Any thoughts on the local capabilities?

TB: This is an important question. The COVID-19 pandemic has highlighted the shortcomings of global supply chains and the risks associated with the loss of domestic manufacturing expertise.

The “Make in India” strategy provides India with an opportunity to expand its domestic manufacturing expertise, leveraging huge ongoing demand growth across a range of new low emissions industries of the future.

This opportunity was not realised with India’s temporary solar module import duty of 2018-2020. Due to poor implementation of this policy, and state-centre and centre-centre policy contradictions, no new manufacturing capacity has been established. After extremely positive renewables momentum evident in 2018, India installed just 8GW (US$7bn) of solar in 2019/20, including rooftop. This was just a third of what should have been possible absent massive regulatory uncertainty and confusion, much of which stemmed from the unexpected cost impost of the solar module import duty. Some $15-20 billion annually of new additional investment in zero pollution, zero emissions, low cost domestic power generation was lost. The 15-25% import duty undermined investor confidence and reduced the well-established value gap between solar and thermal power.

By comparison, the 2GW/6GW manufacturing-linked solar tender won by Adani Green and Azure Power in January 2020 should achieve the policy objectives in a win-win manner (the Rs2.92/kWh pricing is still 20% below the wholesale price of electricity in India, while the 25-year contract provides investor certainty), without negative installation issues and disruptions.

Policy conflicts need to be resolved before they are announced. The long-term opportunities for strong, sustainably-driven economic growth across India are too important to be undermined by short term contradictions and missteps.

India has the potential to be a clear world leader in embracing and benefiting from the current technology-driven, deflationary, energy system disruption. Post COVID-19, a central focus on sustainability and accepting the advice of scientific experts is more important than ever.

Tim Buckley is Director of Energy Finance Studies Asia Pacific at the Institute for Energy Economics and Financial Analysis (IEEFA). Praveen Gupta is a former CEO of the insurer QBE India.

This is a slightly edited version of an article originally published in The Diversity Blog.

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