India’s energy transition: beyond the budget

Two and a half months after Prime Minister Narendra Modi announced India’s goal of achieving net zero emissions by 2070, Finance Minister Nirmala Sitharaman has highlighted climate action and energy transition as pillars economic development in his budget speech. The message is clear: climate sustainability is an integral part of India’s economic policy. The energy transition will also have far-reaching implications for energy security, and the ripple effects of events unfolding in Ukraine remind us of its relevance. So what do we need to do to make the transition happen?

Three parallel transitions or shifts are emerging on our journey to a low-carbon future. First, a shift from fossil fuel-based electricity generation to renewable energy (RE)-based generation. Second, a transition from gasoline and diesel vehicles to electric vehicles (EVs). Finally, a shift from industrial manufacturing powered by fossil fuels to that powered by green hydrogen. Each shift is at a different phase, and a holistic transition forces them to intersect. This involves five considerations.

First, the investment challenge is real. The 21st report of the Standing Committee on Energy (2021-22) on financial constraints in the renewable energy sector highlights that India’s long-term renewable energy commitments require 1.5 to 2 billion per year. Actual investments in recent years have been approximately 75,000 crores. A study by the CEEW Center for Energy Finance estimated that our power, mobility and industrial sectors would require investments of $10.1 trillion for India to reach net zero by 2070. She pointed out that conventional sources could only muster $6.6 trillion. Developments such as Indian RE developers raising a record $5.1 billion in international bond markets in 2021 are promising. The same applies to the injection of capital into the Indian Renewable Energy Development Agency (IREDA), which would apparently enable it to lend 12,000 crores. Still, these could be considered the opening laps of a marathon.

Second, we need differentiated interventions. So far, the growth of the renewable energy sector has been driven by political impulses, including power purchase agreements (PPAs), solar farms and reverse auctions for price discovery. Incentives for domestic manufacturing, new energy sources such as offshore wind, new tariff and tendering models, and grid integration would further drive growth. Electric mobility is different. His 14.4 trillion income opportunities are primarily generated by individuals. Building consumer confidence in electric vehicles is essential and recent budget proposals on battery swapping and interoperability do just that. For green hydrogen, blending and exporting offers the possibility of PPA-type contracts with highly rated buyers, opening financing options. However, unfamiliarity with the technology means interventions may also be needed at the lender level, which electric vehicles could also benefit from.

Third, treat the investment challenge as an opportunity. There was a budget announcement related to sovereign green bonds. We can expect these bonds to be fed by rupee revenue, with rupee-denominated end use. This argues for domestic bond issuance as well as overseas masala bond issuance. The budget speech also highlighted the development of Gift City, home to the India International Exchange (India INX). Several Indian companies have used India INX to raise capital from international investors. India’s huge need for green finance could be turned into an advantage to develop a local but globally oriented capital market. This could make India a gateway for emerging economies in Asia and Africa looking to mobilize international capital for their own transitions.

Fourth, design a more transparent and equal playing field. As investors pour capital into green, climate and sustainability themes, they would demand accountability. Companies also expect to be fairly rewarded for their achievements.

In 2021, the Securities and Exchange Board of India (Sebi) ordered India’s top 1,000 companies to publish mandatory corporate responsibility and sustainability reports from 2022-23. More recently, Sebi released a consultation paper on a regulatory framework for environmental, social and governance (ESG) rating providers. What’s left? A classification system, or taxonomy, that allows all stakeholders to uniformly determine the ecological, climate or sustainability attributes of companies.

Fifth, a broader market for carbon credits is essential. As India transitions, there will be overshoots and those who miss emissions targets. A system of rewards and nudges is an important political lever. To some extent, Renewable Energy Certificates (RECs), which allow buyers to purchase the zero-carbon attributes of renewables, fulfill this role. But they face challenges. Revolving Purchase Obligations (RPOs) mainly extend to discoms; businesses and industries are generally exempt. Their volumes were remarkable, with 9,266 crore of REC sold on the exchange until trading was suspended in July 2020 (resumed in November 2021). However, RECs would also face a shortage of supply if discom RPOs were strictly enforced. Therefore, a broader market for carbon credits is essential for India to link the different transitions.

There does not appear to be any turning back on the path to decarbonized economic growth for India. The recent EU budget has made this sufficiently clear. The magnitude of the challenge is also balanced by an opportunity. Execution will now determine the pace at which we move forward on this path.

Gagan Sidhu is director of the Center for Energy Finance at the Council on Energy, Environment and Water

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