State of play

High energy prices likely to impact growth & inflation

Soaring global energy and commodity prices and disruptions in supplies pose twin challenges to the Indian economy: growth may slow down while inflation could remain elevated. If the recent commodity price moderation endures and global supply chain pressures ease, the Indian economy is likely to escape from the global inflation trap. India’s power plants met maximum demand of over 210 GW (gigawatts) for the first time in June, partly because the economy began to gather momentum after the pandemic and partly due to rising electricity demand for air-conditioning to beat the summer heat wave.

Longer term, if the global economy moves into a period of sustained inflation and volatile energy prices, India, as a high interest rate country heavily dependent on imported fossil fuels, will have stronger motivation to complete the clean energy transition, but may also face higher financial barriers in accelerating it.

Climate impacts, policy and diplomacy

Bilateral and multilateral cooperation boost climate action

India’s G20 Presidency is expected to add momentum to the energy transition. India will hold the presidency from December 1, 2022, to November 30, 2023, and will host the G20 leaders’ summit in 2023. So far none of the G20 nations have submitted revised Nationally Determined Contributions (NDCs), neither have the hosts of COP27, Egypt, and the presidency of COP28 in 2023, the UAE. In 2023, India will also host the Clean Energy Ministerial (CEM), a forum of 29 countries that review various work streams in clean energy policies.

The post-Glasgow spate of new international partnerships is heavily focused on India. Germany committed an additional €10 billion in assistance to India to help achieve climate action targets set for 2030 which include sourcing 50% energy requirement from renewables and installing 500 GW of non-fossil fuel electricity capacity. India and Denmark agreed to further strengthen the Green Strategic Partnership with a focus on green hydrogen, renewable energy, and wastewater management. A Memorandum of Cooperation was signed between the Government of Japan, and the International Solar Alliance with other partners. India and France have vowed that they are committed to tackling climate change stronger than ever and discussed a partnership to ensure that environment-friendly technologies could be developed together to address the pressing global challenge.

India, the largest exporter of carbon credits, proposes to have its own uniform carbon market in one year as a large finance avenue for energy transition projects and emission reduction. An analysis by Deloitte Economics Institute showed the country could gain $11 trillion over 50 years by limiting rising global temperatures and realising its potential to 'export decarbonisation' to the world.

According to some analysis, India is not likely to meet the target of 175 gigawatts (GW) of renewable energy (RE) by 2022 and 500 GW by 2030 as many states, including Uttar Pradesh, Punjab and Haryana are lagging on this front. Renewable capacity is about 114 GW in 2022. Consistent policy across states, grid modernization, and improvement in financial health of utilities could help India achieve this voluntary target.

India recorded its warmest summer in 122 years, with a severe heat wave scorching large swathes of the country. The weather department attributed the unusual heat to the lack of rainfall due to the absence of active western disturbances over north India and any major system over south India. According to an analysis, Haji Ali, Bandra-Worli Sea-Link that lie near the sea may get submerged in the next 28 years due to the rise in water level and critical properties and road networks in Mumbai, Kochi, Mangalore, Chennai, Visakhapatnam, and Thiruvananthapuram will be submerged by 2050.

A new study has found that forest fires, especially those that break during the summer season, play a major role in reducing solar power generation in India and consequently have an adverse financial impact.

Power sector

Utility finances

Monthly instalment scheme could lead to large savings for utilities but cuts margins for developers

The underlying economics of India’s power sector continued in flux. Political promises made in the last round of state elections in the North suggested that heavily subsidized – or free – power are likely a durable feature of the political economy of electricity pricing in India.

The Aam Aadmi Party (AAP) will launch a state-wide campaign demanding free electricity for people in Gujarat. The party has promised free electricity in Gujarat, as in Delhi, if voted to power in upcoming Assembly elections. The same party, which is also in power in Delhi, has said that power consumers in Delhi will be given a choice whether they want a subsidy on electricity or not, as subsidy payments are raising financial concerns.

This casts a shadow over many of India’s previous efforts to restore financial viability to distribution utilities, since these efforts were premised on cost based power rates.

Another approach to this problem now being tried, is to make the payment shortfalls less burdensome for the utilities – at the expense of generation developers. The dues of state-owned electricity utilities to power generators have touched $15 billion but the new monthly instalment scheme introduced by power ministry can help utilities make substantial savings in the payments. Under the scheme, dues, including past late payment surcharge (LPS) will be converted into monthly instalments (EMIs) that utilities have to pay over 12 to 48 months. If utilities clear the fresh dues and EMIs on time they won’t be billed for late payments which will result in substantial savings for utilities, but losses for generators.

The Electricity (Amendment) Bill is likely to be introduced in the Parliament in August. The bill provides for de-licensing of the distribution business to promote competition, the appointment of a member from a law background in every commission, strengthening of Appellate Tribunal for Electricity (APTEL), and prescribes rights and duties of consumers among other provisions. Since 2020, clauses in the Bill that allow a larger role for markets and reduction of subsidies have been dropped because of opposition from farmers, unions, and state governments. State governments are not in favour of some of the provisions as they are seen to usurp their constitutionally endowed power over electricity policy.

Renewables & storage

Green energy open access rules will promote renewable energy

Global inflation and Russia’s attack on Ukraine have disrupted the international order and are creating a new economic landscape for renewable power, including in India. The country’s emphasis on domestic manufacturing is becoming more and more the global norm. But lost is the low interest rate world in which costs fell reliably in the absence of supply chain inflation. It is being replaced by a much more volatile price environment. In a remarkable tribute, US solar manufacturer First Solar appealed to the European Union to adopt India’s approach to encouraging domestic solar panel manufacturing, saying that “There are few better examples of how comprehensive policy, including trade safeguards, manufacturing incentives, and tangible clean energy goals, can spur domestic manufacturing than India.”. The CEO of First Solar further writes, “Today, India is looking at 50 gigawatts of new module capacity expected to come online by 2025. That’s twice as much as the capacity of solar modules installed across all 27 EU member states in 2021. This is a direct result of the effective combination of tariff and non-tariff barriers, the Indian government’s ‘Production Linked Incentive Scheme’ for domestic manufacturing, and government clean energy targets that would see 25 gigawatts of new capacity deployed every year until the end of this decade.”

The Ministry of Power, notified the Electricity (Promoting Renewable Energy Through Green Energy Open Access) Rules, 2022. This could be a watershed moment in India’s journey towards a clean energy future. Among its many features, industrial and corporate customers with a demand of over 100 kilowatts can now set up their own solar plants and wheel power to their establishment. Under the new rules, connectivity approval for renewable plants, when sought, shall not take more than 15 days to be granted. The central government also proposes to notify a “central nodal agency” that can monitor the timelines of submission and issuance. The intent, perhaps, is to expedite cases and ensure the benefit of green open access reaches all the intended.

After peaking in 2016-17, the renewable energy subsidies have fallen in India by 59 per cent. As deployment has slowed, it appears more subsidies will be needed to scale up renewable to achieve the 2030 targets of clean energy. The Ministry of Power’s scheme to liquidate dues that utilities owe to generation companies can release the past receivables of the renewable energy (RE) sector of $1 billion over the next two years. The scheme could improve the receivables lag of leading RE generators by 40-50 days from the current 180 days, and improve the equity returns of some projects by up to 1 percentage point. However, a sharp increase in the prices of solar modules and commodities such as steel, together with rising freight costs, will pull down the return on equity of nearly a fifth of the 25 GW private solar capacity.

India recorded the lowest solar tariff so far of ~$0.03/kWh in December 2020. Since then, the lowest winning tariffs in utility-scale solar tenders increased by an average of 22% relative to the record-low tariff. Increase in project cost and risk, unprecedented surge in commodity prices, imposition of basic customs duty (BCD) on solar panel imports, limiting subsidies to approved list of models and manufacturers (ALMM) and increased insurance premiums are among factors that are driving costs and prices. By 2023 solar tariff is expected to increase by 21%.

Coal mining

Summer power outages boost coal imports

Growth in electricity demand and acute coal shortages triggered blackouts across parts of India, initiating a new power crisis. Most state-run utilities and independent power producers (IPPs) have agreed to import coal falling in line with the Centre’s direction to import coal or face reduction in domestic supply of coal. State-run Coal India, the world's largest coal miner, will import the fuel for use by utilities as shortages raise concerns about renewed power outages. Coal India will also open this year what is expected to become one of the country's biggest coal mines. Since seaborne coal prices have risen sharply, use of imported coal will raise the cost of generating for those plants that must use it.

The ministry of environment, forest and climate change has eased environmental norms to increase coal mining. India is planning to reopen more than 100 coal mines previously considered financially unsustainable. NTPC Ltd. plans to expand its coal-fired power fleet with a first new project in six years, a policy shift that reflects alarm over the nation’s worsening power crisis. India entered the global market in late 2021 when global coal prices were high because of demand from Europe and again in early 2022 when coal prices are higher because of the crisis in Ukraine. In a bid to help the state maintain power supply, the railway board has cancelled eight express trains to provide hassle free passage to coal laden freight trains for thermal power stations.

For the first time ever, the Union ministry of coal will have a ‘just transition’ division, with funding from the World Bank. The project will use global standards for human resource management and land redevelopment in some abandoned mines and in more mines that will reach the end of their productive life in the future.

Hydrogen

India plans to become the cheapest hydrogen producer

India moved into a significant leadership position by taking immediate steps to green its current hydrogen sector.

The government is planning to begin green hydrogen consumption obligation to kickstart the green hydrogen demand for which it has earmarked the refining and fertiliser segments. India’s first 99.999% pure Green Hydrogen pilot plant has been commissioned by the Oil India Limited (OIL) at its Jorhat Pump Station in Assam. India wants to become the cheapest producer of Green Hydrogen in the world due to its enabling climatic conditions. It is hydrogen partnership time: India and Germany Adani and Total Energies, Brookfield Asset Management-based Pipeline Infrastructure Ltd and state-owned GAIL for jointly developing a hydrogen-based ecosystem in India. Aker Horizons and Statkraft, German firm SFC Energy and FC TecNrgy, State-run NTPC and Gujarat Gas Ltd (GGL have all forged varying types of joint ventures. Delhi-based GreenZo Energy plans to set up a 250 MW electrolyser factory.

Transportation

Two-wheelers continue to dominate EV sales growth

India seems to be moving rapidly through the early adaptor phase of vehicle electrification, with accelerating local policy making and private sector initiatives picking up the signals sent by national signals and incentives. Emphasis remains on the two and three wheelers, where domestic manufacturing is taking off, as well as public bus segments (spear headed by the mega bids by the Convergence Energy Services Ltd, CESL). Additionally, The Bureau of Indian Standards (BIS) has issued performance standards for electric vehicle batteries in order to ensure the safety of consumers amid reports of EV fire incidents.

As many as 20 states out of the 28 states in India have announced or are about to announce policies for adoption of electric vehicles (EVs). These policies are complementary to national- and city-level policies that aim to promote India’s transition from internal combustion engine vehicles to electric vehicles. The objectives of these policies vary by state but commonly include local manufacturing, jobs, improved air quality, climate change mitigation, reduced dependence on oil imports, and the development of India’s electric vehicle industry.

EV retail sales in the country witnessed over three-fold jump last fiscal with two-wheeler offtake leading the segment. Electric cars account for just over 3 percent of sales while e-buses account for 0.4 percent of sales. The rest is dominated by 2 and 3 wheelers. Karnataka has the highest number of electric two-wheelers in the country, thereby driving the EV market in this segment.

Many states and cities have introduced EVs in public transportation: Bangalore, Chandigarh, Delhi Airport as well as the Delhi Union Territory Government, Nashik, West Bengal and Uttar Pradesh have all announced electric bus purchases and new routes amounting to several thousand new E-Buses. Following CESL's successful mega 5,450 electric bus tender last month that received enthusiastic received enthusiastic response from the industry and realised a cost reduction of 40% over diesel and 34% over CNG buses, the government is planning to bring in multiple tenders for 50,000 buses in the next 1 year.

Global and domestic car makers have announced plans to manufacture or sell EVs in India. The German luxury carmaker BMW is expecting EV sales to account for over 10 percent of its total car sales in India by next year. Volkswagen AG, South Korean automotive company Kia, the Japanese company Yamaha Motors, have all announced new EV models and sales. Tata Motors expects to aggressively ramp up annual production of EVs to more than 80,000. Omega Seiki Mobility plans to set up the world’s largest electric three-wheeler manufacturing plant in Karnataka. Electric vehicle start-up Mecwin India is planning to make for EV motors and controllers. Volkswagen and Mahindra & Mahindra are exploring a partnership for Mahindra’s new “Born Electric Platform.” and Chetak Technology Ltd inaugurated its newly built EV manufacturing plant at Akurdi, Pune.

US carmaker Ford has dropped its proposed plan to manufacture EVs in India. A key executive who was leading Tesla's lobbying effort in India has resigned, weeks after the U.S. carmaker put on hold plans to sell electric cars in India. Union Transport Minister Nitin Gadkari said that Elon Musk would have to manufacture Tesla cars in India, and not China, if he wanted to sell the vehicles in the country.

Electric mobility player Bounce Infinity has partnered with Bharat Petroleum Corporation Ltd (BPCL) for setting up battery swapping infrastructure. The electric vehicle (EV) ecosystem in India welcomed the draft Battery Swapping Coverage introduced by the Niti Aayog, particularly strategies like having distinctive identification numbers (UIN) for the belongings, but in addition cautioned that the coverage must straddle the thin line between aiding standardisation and stifling innovation. The draft lays the groundwork for a battery swapping ecosystem that in concept will make recharging EVs so simple as refuelling typical autos.

Jio-BP and TVS Motor Company, Automobile manufacturer BYD India, Hero Electric, and MG Motor India along with Bharat Petroleum Corporation Limited (BPCL) all announced investments to bolster the electric vehicle charging infrastructure across the country.

Battery maker Exide Industries and joint venture partner Switzerland's Leclanche SA have begun mass production at the nation's largest lithium-ion battery plant in Gujarat. Exide Energy, Ward Innovations and Mobility Limited announced for new investments in Lithium Ion.

The government has asked electric two-wheeler manufacturers to halt new launches until EV fire incidents were investigated. Insurance premiums on EVs may rise as insurers reassess risk based on recent fires and malfunctions. Rising fuel costs and prohibitively expensive electric vehicles are making compressed natural gas (CNG) "a welcome relief and alternate fuel" for mobility for Indian consumers. (ICE engines also generate fires but as established presence, haven’t drawn as much attention.)

Electrification of Medium and Heavy Trucks (which comprise 2% of the vehicle population but contribute to over 30% of the overall road transport emissions) is emerging as a critical strategy for transport decarbonisation. Philanthropic community is stepping up its support to India in this space by providing support to partners such as CalStart, ClimateGroup, World Economic Forum, LBNL and ICCT, among others.

Climate finance

India will need over $20 trillion to achieve net zero

The major international shifts in clean energy investment in India and other emerging markets failed to materialize as higher interest rates in OECD countries drew capital away from the global south. Multilateral development banks also held back from major spending initiatives; India remained a relative bright spot but still capital constrained on its clean energy initiatives.

A number of research agencies have come out with estimates on the scale of investments required to achieve net zero. Bloomberg NEF (BNEF) calculates India will need $223 billion of investment to meet its 2030 wind and solar goals. According to E&Y, India will need over $10 trillion to achieve its net-zero emission target by 2070. The report observes that while sustainability investments account for one-third of assets under management (AuM) in the United States and globally, they comprise only 10-15% of private equity (PE) and venture capital (VC) firms currently. According to Benori Knowledge, sustainable investments by Indian PE and VC firms are projected to grow to $125 billion by 2026, at a 5-year CAGR of 46%. Sustainable investments would then make up 40% of AuM.

As per a report by Standard Chartered, India will require $12.4 trillion spending on transition to net zero long term goals by 2060. It estimates if India must be self-funded, Indian household spending could fall by $5.8 trillion. However, if the funding is provided by developed markets, the Indian household spending could increase by $7.9 trillion in its journey to net zero. According to CEEW, investments worth $ 7.2 billion will be required in the next three to four years to promote integrated manufacturing of solar modules in India alone.

The power ministry pitched for a credit guarantee fund and a renewable energy bank to help countries transition from fossil fuels to clean energy. Investment in the renewable energy sector in India surged more than 125 per cent year-on-year to touch a record $14.5 billion in the financial year 2021-22 (FY22). State-owned Indian Renewable Energy Development Agency has recorded its highest-ever loan sanction of $2 billion and disbursement of around $2 billion in 2021-22. State-owned India Infrastructure Finance Company Ltd (IIFCL) is planning to explore green bond route to raise funds to finance renewal energy sector projects. Currently, 15 per cent of total finance of the company is going towards renewal projects in the country. Renewable energy firm Greenko raised $750 million through an offshore bond offering. The three-year US dollar-denominated bonds were priced at 5.50%. Electric two-wheeler maker Ather Energy announced that it has raised $128 million funding, led by India's sovereign wealth fund National Investment and Infrastructure Fund Limited's (NIIFL) Strategic Opportunities Fund (SOF), and Hero MotoCorp among others. Abu Dhabi’s International Holding Company PJSC will invest $2 billion as primary capital in three green-focused companies of Adani Group – Adani Green Energy, Adani Transmission and Adani Enterprises.

The Indian capital market regulator’s ask of the top 1,000 listed entities (by market cap) is for ESG indicators to implement business responsibility and sustainability reporting (BRSR).

Industrial decarbonization & efficiency

Net zero goal within India’s reach

India has joined the First Movers Coalition, a global initiative aimed at decarbonising the heavy industry and long-distance transport sectors responsible for 30 per cent of global emissions.

India’s focus on decarbonising its steel sector and developing offshore wind power will help it become carbon neutral ahead of its promised goal of 2070, the director-general of the International Renewable Energy Agency (IRENA) said. Vedanta has announced that it has signed a Power Delivery Agreement (PDA) with special purpose vehicles (SPVs) to supply hybrid-based power with solar, wind and storage solutions. Aligned with Vedanta’s ESG vision of “Transforming for Good”, the move marks the beginning in the series of actions by the company to deliver on its goal of becoming “Net Zero Carbon by 2050 or sooner” and “using 2.5 GW of Round the Clock (RTC) Renewable Energy for its operations by 2030”. As part of its plan to shift towards "green steel", a Vedanta group firm has said it is working on a solution to use hydrogen instead of coke in its manufacturing process so as to reduce carbon emissions. E-commerce major Flipkart Group has committed to achieving net-zero carbon emissions target in its own operations by 2030 and the larger value chain by 2040. According to Moody's, many large Indian corporations have launched a wide range of emission targets through 2050.

Clean air

Coal continues to thrive in power generation despite pollution

National efforts to clean up air pollution from power plants stalled again. After missing previous deadlines twice for installing flue-gas desulphurization (FGD), which is a pollution-controlling technology, the coal-fired power plants cited more reasons to further delay to install the technology.

The Commission for Air Quality Management (CAQM) has issued directions to ban the use of coal in industrial, domestic and other miscellaneous applications in the entire Delhi-NCR region from January 1, 2023. However, the use of low-sulphur coal in thermal power plants has been exempted from the ban. In order to reduce air pollution in the national Capital, the Commission for Air Quality Management (CAQM) on Friday directed States in the National Capital Region (NCR) to adopt a standard list of approved fuels that can be used for various purposes. The fuels approved by the CAQM include petrol, diesel, hydrogen/methane, natural gas, Liquefied Petroleum Gas (LPG) and electricity.

As India is generating 3.5 million tons of plastic waste annually, the environment ministry has launched several green initiatives for plastic waste management. The National Dashboard on Elimination of Single Use Plastic (SUP) and Plastic Waste Management will bring all stakeholders, including central ministries, departments, states and Union Territories, at one place and track the progress made for elimination of SUP and effective management of such waste.