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India's Role in Diversifying Global Clean Energy Supply Chains

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Special Report No. 3

Editor: Shayak Sengupta
Contributors: Raj Sawhney, Shayak Sengupta, and Gregory Wischer

Contents

  • Preface                                                                         By Shayak Sengupta

Preface
By Shayak Sengupta

To avert the worst effects of climate change, the energy transition must continue in a world that is becoming more geopolitically and geoeconomically fragmented. Ongoing armed conflicts in Europe and the Middle East and a fractured trade relationship between the world’s two largest economies, the United States and China, mean the energy transition cannot take economic integration and its accompanying benefits for granted.

National governments are increasingly becoming comfortable with tying climate and energy policies to economic competition. They look to capture the economic opportunities associated with the transition by securing their shares of raw materials, technologies, and manufacturing capacities needed for clean energy.

Carrot and stick efforts span both developed and developing regions. The United States passed the Inflation Reduction Act (IRA) to subsidize clean energy manufacturing and deployment while Europe has established a Carbon Border Adjustment Mechanism (CBAM) to penalize imported goods from countries with emissions intensive production. In India, Production-Linked Incentives (PLI) offer a suite of financial and non-financial incentives for companies to set up clean energy manufacturing in the country and impending tariffs on imported Chinese solar panels look to give a leg up to domestic manufacturers. Indonesia has banned the export of raw nickel (a key component of electric vehicle batteries), forcing producers set up mineral processing within the country.

While this fragmentation offers economies the opportunity for a share of the economic pie from the energy transition, no single country will be able to manufacture all clean energy technologies and associated inputs. Financial and investment flows must accompany ambitions for clean energy manufacturing to make these opportunities a reality. Consequently, cooperation between countries to manage differences arising from fragmentation will be necessary for the energy transition.

Given this context, India’s G20 presidency in 2023 elevated several topics to prioritize clean energy technology, manufacturing, and finance between the 20 largest economies in the world. India plays a crucial role in this grouping. It ranks among the largest economies, greenhouse gas emitters, and consumers of energy. As the largest source of global energy demand in the coming years, India’s own clean energy transition and economic development will influence whether the world succeeds in meeting its climate goals.

This volume serves two objectives. First, it aspires to contextualize India in the emerging global landscape of manufacturing and supply chains of three clean energy sectors: hydrogen, electric batteries, and solar. Second, it seeks to enhance understanding of how these contexts paired with relevant priorities from India’s 2023 G20 presidency can inform global clean technology and finance partnerships centering India. The volume aims to give a global policy audience a better understanding of where and how India could play a role in the supply of these emerging, transformative clean energy sectors.

In the first piece, Raj Sawhney analyzes the costs of production of renewable-based hydrogen (green hydrogen) in India. Green hydrogen could play a role to decarbonize industrial sectors, but India faces competition from many G20 countries setting strategies to capture parts of a growing, nascent green hydrogen market. Higher capital investments mean lower-cost finance will be crucial to making India’s green hydrogen production cost-competitive.

In the second and third pieces, Gregory Wischer looks at India’s role in global supply chains of electric vehicle batteries and solar panels, respectively. China currently dominates supply chains of both sectors. While India, like the United States and Europe, lacks reserves of critical, raw materials that go into electric vehicles like lithium, nickel, and cobalt, it does produce sizable amounts of ancillary inputs like graphite and manganese. Consequently, international partnerships could fuel growth of India’s share in parts of battery manufacturing, to meet both domestic and export demand. Likewise in solar, India, along with the United States and Europe, are looking to grow domestic shares of solar manufacturing. While India already manufactures (and exports) solar panels and cells, it still depends on China for upstream inputs. Costs of energy and financing must decrease in India to grow the country’s nascent shares of raw materials for solar manufacturing.

Lastly, in the fourth piece, I look at priorities in clean energy technology and finance from India’s G20 Presidency in 2023 and how they square with the country’s role in global hydrogen, solar, and battery supply chains. Among geopolitical and geo-economic fragmentation, finance for the energy transition must address emerging markets’ desire to capture additional value from clean energy manufacturing and production. India is no exception to this trend, but the country offers a unique position as a clean energy technology supplier for both emerging and developed markets.

International Partnerships to Advance Clean Energy Manufacturing in India By Shayak Sengupta

1. Introduction

India has positioned itself as a growing producer of global clean energy technologies and their inputs, especially as countries like the United States look to turn away from China as a leading source of such technologies. India’s interest in taking advantage of geopolitical and geoeconomic fragmentation to capture economic opportunities from the clean energy transition is not unique among emerging markets and developing regions. For example, Indonesia, Zambia, Namibia, and Chile have all announced efforts to capitalize on their mineral wealth (key to producing electric vehicle batteries) by either banning exports of raw materials to capture benefits from mineral processing or exerting greater public ownership of mineral assets.

India’s recent presidency of the Group of 20 (G20) advanced and emerging economies in 2023 highlighted the country’s uniqueness among emerging economies. Not only did the presidency highlight the India’s policy priorities in expanding global clean energy supply chains and associated finance, but the country was able to bridge geopolitical differences in these priorities across G20 nations. Moreover, the Indian G20 presidency’s focus and outcomes on these topics elevated them for attention by G20 national governments.

The Indian G20 presidency bolsters the case for international partnerships to further integrate India into global supply chains and manufacturing of clean energy technologies. In addition, India’s leadership in bodies like the International Solar Alliance (ISA) to deploy solar energy in other developing regions like Africa, show the country’s rising clout in international climate policy. This, coupled with the staggering scale of the country’s energy transition needs (in volumes of both clean energy and finance), and the country’s attractiveness for renewable energy investment make India a crucial partner for any national or multilateral actor looking to advance the global energy transition and consequently, climate goals.

However, beyond addressing global climate goals, these international partnerships have the potential to address numerous other needs: climate finance, economic development, and geopolitical objectives. Consequently, efforts to channel climate finance and technology to India and the international partnerships that underpin them must seize upon the opportunity to grow clean energy manufacturing in India.

2. Outcomes in Clean Energy Manufacturing and Finance from India’s G20 Presidency

India’s G20 presidency in 2023 elevated several priorities in climate change, energy transitions, and finance. Among them, G20 countries during India’s presidency agreed to work to increase uptake of emerging climate and clean energy technologies, to diversify and grow clean energy manufacturing and supply chains, and to finance and grow investment to address climate change, especially from private sector sources. Two working groups of the G20 in 2023 focused on climate and clean energy technology, manufacturing, and finance during the Indian presidency: the Sustainable Finance Working Group (SFWG), led by finance ministers and central bank governors, and the Energy Transitions Working Group (ETWG), led by energy ministers.

Outcomes and recommendations from SFWG during India’s G20 presidency adopted a paradigm of de-risking private investment for climate change, i.e. using strategic investments of public sector funding to reduce risk for private investors, thereby crowding-in private capital. This is especially relevant for developing regions which face bottlenecks from higher costs of capital due to real or perceived investment risks for private actors. Instruments to reduce these private sector investment risks include co-investments, insurance, or guarantees with public funding in the event of an investment project defaulting or failing. Coupled with these instruments include other recommendations for consistent regulatory environments and calls upon the multilateral development banks, such as the World Bank and Asian Development Bank, and Development Finance Institutions, like the U.S. Development Finance Corporation and the Japan Bank for International Cooperation, to increase the share of private sector investment in their investment projects.

For emerging climate and clean energy technologies, SFWG continued its theme of de-risking private finance. It recommended national governments and multilateral institutions incentivize private sector research, development, and innovation investments in this area. They can do so by offering consistent regulatory environments, engage in public-private partnerships, and offering tools as loans, guarantees and tax incentives. While these recommendations focused on early-stage climate technologies, not commercial projects, innovation is key because many of the technologies needed to decarbonize have yet to reach commercial scale. Moreover, to meet the desire of developing regions to capture the economic benefits of clean energy manufacturing, they must participate in higher-value technology development and innovation.

The G20 Energy Ministers in 2023 through the ETWG agreed on several provisions related to supply chains of clean energy and low-cost financing for the energy transition. The ministers agreed to secure, diversified supply chains for critical minerals supporting the energy transition. G20 countries agreed to promote local value creation and finance to support technical and human resources in source regions, many of which are low and middle-income. Moreover, the ministers addressed technology gaps in the energy transition especially for developing countries. They agreed for the need for developing countries to access emerging clean energy technology through private and public channels as well as innovation, research, and development to deploy clean energy technologies in these regions. Lastly, like the finance ministers and central bank governors, G20 energy ministers agreed to support greater private sector financing for the energy transition through de-risking by public financing.

3. The Need for Stronger Climate Finance and Technology Partnerships with India

The Indian G20 presidency produced two overall themes related to the pursuit of expanding clean energy manufacturing:

  • Greater integration of developing regions like India into global clean energy supply chains so they reap economic benefits.

  • Increasing private sector investment in developing regions for this integration by strategic de-risking with public funds.

These themes complement India’s own domestic efforts to grow local clean energy manufacturing. These include the country’s Production-Linked Incentives (PLI), suites of financial and non-financial incentives aim to attract private sector investment for clean energy manufacturing. Relevant PLI schemes cover solar, battery and hydrogen equipment manufacturing.

However, the fiscal latitude from the India’s government is limited. The opportunity cost of a dollar in India is higher than wealthier economies. Likewise current financial flows for India’s energy transition fall short of meeting the country’s needs, with international flows a much lower fraction than domestic flows. Consequently, stronger international partnerships in clean energy manufacturing have the potential to not only deliver more climate finance for India’s energy transition needs, but do so in a way that increase local value creation and seizes upon current geopolitical trends to diversify manufacturing away from China. These international partnerships could involve a variety of tools and action by the public and private sectors:

  • Concessional finance by development finance institutions and governments to de-risk investment for private sector and complement PLI efforts.

  • Governments encouraging private sector joint ventures and offtake agreements between Indian companies and companies abroad.

  • Economic diplomacy and trade missions by governments to and from India to highlight possible business opportunities.

  • Carve outs to qualify Indian component exports for financial incentives to encourage domestic manufacturing in export destinations like those of the Inflation Reduction Act.

  • Governments continue highlighting the issue in bilateral and multilateral fora like G20.

In the production of green hydrogen, higher costs of capital for countries like India could cancel any advantage the country has from cheaper, more abundant solar resources. Concessional finance through debt, equity or guarantee instruments from multilateral and bilateral development finance institutions could lower this cost of capital. Likewise, participation of these public institutions gives confidence to private investors, thereby increasing chances of private sector finance. For example, several of these institutions have announced intentions to devote resources to hydrogen in emerging markets and developing countries, but India is among one of many geographies competing for this scarce public capital.

An added advantage of India versus other emerging markets that makes it an attractive destination for international concessional finance is domestic demand for energy and associated products. Investment for projects to produce green hydrogen will only flow when there is a guaranteed offtake, or buyer, for the produced product, and the country is a large demand center. India is one of the largest producers of fertilizer and refined petroleum, two key sectors that use hydrogen. Consequently, offtake agreements for green hydrogen and its derivatives could create the demand signal needed for a growing hydrogen market. For example, several Indian companies have already entered agreements to produce green hydrogen or ammonia for use by Japanese power and heavy industry. While these offtake agreements occur in the highly uncertain export market (as opposed to fulfilling domestic demand), they showcase international partnerships by governments to facilitate such agreements. To meet domestic demand through offtake agreements, foreign direct investment catalyzed by concessional finance likewise could spur the green hydrogen market in India. These investments could also see the participation of state-owned enterprises controlled by the India’s central government, which have sizable roles in fertilizer production and petroleum refining.

In solar and battery manufacturing which offer more mature market than hydrogen, partnerships with India should target upstream, portions of their supply chains, many of which are capital-intensive. In the solar supply chain, raw polysilicon production along with ingot and wafer production have the highest barriers to entry to reorient away from China. Here, while India has lower initial investment costs, higher electricity costs make investments in these energy intensive segments of the solar supply chain difficult. Consequently, partnerships should finance renewable electricity and energy storage projects to provide firm, clean power for solar manufacturing. Likewise in the electric vehicle battery supply chain, India lacks significant reserve of key minerals required to manufacture batteries. While the country looks to secure supplies of these minerals through international partnerships like the U.S.-led Minerals Security Partnership and state-owned enterprises like Khanij Bidesh India Limited, international partnerships can again de-risk investment to create local value. Specifically, partnerships could focus on ancillary and precursor materials needed for battery production like graphite and manganese that India already produces as well as projects to recycle batteries. Moreover, international partnerships could focus on public-private finance for capital-intensive battery cell manufacturing in India to complement attention by the PLI.

4. Conclusion

With greater geopolitical fragmentation, India has emerged as a growing manufacturer of global energy technologies and inputs. While unlikely to meet the scale of the current dominant player, China, India can be an alternative producer, especially for countries concerned by Chinese dominance. This is especially relevant as the country’s presidency of the G20 in 2023 highlighted the issue and bridged geopolitical divides in it. India built consensus among the G20 to strategically de-risk private sector finance for climate action and create local value through reorienting clean energy supply chains. This supports the case for international partnerships that seek to further integrate India into global supply chains of clean energy technologies. These partnerships can extend the consensus at the G20 to address several priorities simultaneously: the need to channel more climate finance to India, India’s economic aspirations and energy security needs, and geopolitical concerns about concentrated clean energy supply chains in China. International partnerships between the public and private sectors to increase clean energy manufacturing capacity in India can use financial and non-financial tools that increase finance and reduce risk for private sector investors.

Note: Citations and references can be found in the PDF version of this paper available here.

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