COVID-19 and India’s Renewable Energy Transition
The pandemic is likely to impact India’s ongoing energy transition – though no one knows for sure whether it will shift or pause the trajectory or induce radical change. Rahul Tongia, Fellow, Brookings India
A snapshot of India’s energy transition
India ranked in the middle of the pack in the 2020 Energy Transition Index, but this score masked some important details.
First, India’s renewable energy ambitions are among the most aggressive in the world. In 2014, India announced a short-term target of 175 GW of renewable energy by 2022, which wouldn’t require major grid upgrades or storage. Coal – which accounts for half of India’s energy – is being replaced by renewable energy, at least for most new electricity. Longer term, India is moving towards electrifying mobility with electric vehicles (EVs).
Second, while the electrical grid can balance supply and demand, India’s financial balance was always precarious. Social welfare redistribution has long been a key aspect of energy policy, with commercial and industrial users paying more to cross-subsidize homes and agriculture.
Now, this entire model is at risk, with overall demand down 25%. For example, TCS, India’s largest IT Company, plans to establish 75% of their workforce at home by 2025.
What COVID-19 changes
The immediate challenge is financial liquidity. Analysts expect distribution companies’ annual losses to double to about $15 billion. As a result, cash will be scarce, and new investments will face more hurdles. India’s only recent energy-generation investments were in renewables; these may also be at risk because they concern capital rather than labour.
India already had surplus capacity and stressed assets before the lockdown. Decisions about adding non-renewable capacity were a few years away; COVID-19 delays them further. Before the pandemic, about 90% of power was coming from power purchase agreements (PPAs), but demand is down. While power exchanges now have very low prices, PPAs have limited the value of cheap third-party supply – unless distribution companies claim force majeure, the new buzzword. Electricity remains an essential service, however, which incentivizes innovative technologies, especially accelerated smart metering.
How does labour in a land of 1.3 billion people fit in to the “new normal”?
COVID-19 has made all countries worry about supply chains and strategic capabilities. Imports from China are a concern; imports dominate India’s solar modules, with 88% coming from China. At the same time, there is a renewed push for Make in India, a central government programme to boost domestic manufacturing and create jobs. This might suggest boosting coal, which is mostly domestic. But India may focus stimulus money on strategic investments, not only for renewable energy but also for batteries, which are key to both EVs and high penetration of renewables.
After the pandemic, it’s likely the big (and the public sector) will survive and even thrive, with access to funds, scale and technology. The small and niche may also thrive. But India’s informal economy – which employs the most people – hasn’t been globally competitive. In the new world, it may not need to be.
How to ensure a just transition?
The real challenge of the transition is how to handle winners and losers. India can’t pay off the losers, so deeper change is required.
Proposed amendments to the Electricity Act 2003 highlight the bold reforms needed to change the status quo. If subsidies are to be given directly to end-consumers, they should pay “full cost” for electricity – a sea-change. India should make social welfare objectives more direct and explicit, perhaps as a line item in consumer bills. This would make it easier to use separate funds (including stimulus money) for them.
Even if no new Greenfield coal power plants are built, half of India’s electricity will still come from coal by 2030. So, we have to clean up coal, not wish it away. India will need to find funding to clean up emissions. Maybe India could create new, efficient coal plants when required to shutter older, dirtier plants even before they reach their end-of-life.
What is the way forward for transition to clean energy?
It’s too early to predict if we’ll have deep structural change, but the status quo cannot remain. It’s important to plan under extreme uncertainty, across jurisdictions, domains and ministries, as well as across the public and private sectors. This is made more complex by the long lifespans of many investments, not only in generation capacity but also more broadly in transportation, natural resources and consumption.
India was already changing. Before the pandemic, some necessary reforms – on pricing, regulation, risk allocation, market design – were pending or delayed, mostly because they were politically unpopular. But now, it might be time to make some of the tough decisions.