State of play

India is well on its way to economic recovery

With caseloads of Covid-19 peaking in September 2020, India entered 2021 on a hopeful note of recovery, both economic and otherwise – although a new flare-up in Mumbai was a reminder of fragility. The IMF (International Monetary Fund) revised India’s real GDP (gross domestic product) growth in 2021 to 11 percent from a contraction of 8.8 percent in 2020. Estimates from India’s Economic Survey for the financial year ending in March 2021 (FY21) are close -- growth of 11 percent in FY22 aided by India’s massive vaccination drive and robust recovery in the services sector. Electricity demand returned to pre-lockdown levels by August 2020. Petrol (gasoline) demand returned to pre-lockdown level by September 2020 while diesel demand matched pre-pandemic levels by October 2020.

India and net-zero emissions

In the past few weeks there has been a flurry of reports, articles and opinion on whether or not India India should announce a net zero emissions commitment by 2050. Some of the most influential CSOs such as CEEW, TERI, CPR, WRI have shared their analyses and perspectives, which largely advocate the merit of setting long term targets but have also flagged the challenges and magnitude of transition needed to achieve that goal. The discussion encompasses both, a long-term commitment with a pathway such as peaking year, as well as sectoral targets. The debate is only getting intense with each passing day. There is no official position yet from India but CSOs and experts anticipate India to make some announcements in one of the forthcoming venues such as President Biden’s Climate Summit, G-7, BRICS or COP-26. However, one might interpret, the fact is that net zero emissions is no longer an alien concept for Indian policy makers and CSOs. This an important development. Philanthropy has an important and essential role play here in supporting partners and the government in further analyses and convenings to get clarity.

In this context, it is important to note that at the February World Sustainable Development forum, an array of CEOs of major Indian industrial firms affirmed their ongoing commitment to achieve "near zero" carbon emissions. Among those pledging their ambition were Tata Steel and Chemicals, Shell Group India, Dalmia Cement, Avaada Group, CLP India, and Jain Irrigation Systems. The ongoing leadership by premier business groups on climate appears to be a significant part of the government's overall strategy to position India as a global climate leader, while ensuring that on the policy front it keeps domestic economic progress at the top of its priority list.

Budget allocations support the clean energy transition

The renewable energy sector cheered budget speech proposals to increase investment in India’s clean energy transition by India’s finance minister on 1 February 2021. As the budget sets the economic course of the country, the focus on energy sector reforms and investments in clean energy in the budget for FY22 met most expectations of both the energy industry and climate policy advocates.

The 34 percent increase in budget for large-scale infrastructure is positive for private investment in clean energy. The proposal for a $40 billion utility reform package over five years could potentially restructure and upgrade India’s distribution utilities (discoms). The budget, among others, proposed a framework to give consumers choice of supply from more than one utility allowing for greater competition in electricity distribution.

An additional capital infusion of about $137 million to the Solar Energy Corporation of India (SECI), established to implement the National Solar Mission, could increase solar capacity auctions by 15000 MW each year This could potentially attract private investment of more than $ 8 billion.

An equity infusion of about $207 million in the Indian Renewable Energy Development Agency (IREDA) will increase its lending capacity by $1.6 billion, a 50% increase over current funding, enough to finance around 4,500 MW of RE projects.

The budget committed $603 million for manufacturing high efficiency solar PV modules and storage batteries in India. With the funds, the government aims to set up integrated solar PV manufacturing plants with a capacity of 10,000 MW requiring an estimated investment of about $1.9 billion by 2024.

Local manufacturing of solar modules will be encouraged through tariff protection. The budget removed the ceiling on import duty solar equipment. These moves will increase costs for solar project developers . These issues highlight the delicate balance the government is trying to strike: use import restrictions and duties to encourage domestic supply of solar while avoiding choking off the growth rate of new solar projects (wind is already substantially domestically produced.). Solar developers, understandably, fear the government is placing too high a priority on domestic content. And the government’s strategy only works if the incentives yield the rapid scale up of domestic supply, accompanied by steadily lowering prices. Keeping the pace of solar project auctions at the needed level is also essential.

Renewables

Growth continues despite pandemic

Wind and solar performed well in 2020 despite the pandemic related economic downturn, growing by 15 percent. In 2020, (calendar year) renewable power generation (excluding hydro power) accounted for about 9.3 percent of total generation. 2021 is likely to be the landmark year in terms of new solar capacity addition. About 9.7 GW and 2.5 GW of new solar and wind capacities respectively are expected. The record low rate of ₵2.58/kWh reached at a solar auction in Gujarat in December 2020 has had an immediate fallout, with the state cancelling the results of two previous auctions where the winning bids were much higher.

One World One Sun One Grid: India’s answer to One Belt, One Road?

The idea of “One Sun One World One Grid” (OSOWOG) was introduced by the Prime Minister (PM) in 2018. It gathered momentum when the PM reiterated the concept in his independence day speech in 2020. The program focusses on interconnecting solar electricity, including decentralized systems such as rooftop, on a global platform. Following up, the International Solar Alliance (ISA), has invited proposals for developing a long-term vision, implementation plan, road map and institutional framework. The funding is from the World Bank’s technical assistance programme. Geo-political analysts see OSOWOG as part of India’s answer to China’s “One Belt One Road” project.

Tariff protection for domestic solar manufactures

India will start to levy basic customs duty (BCD) of 40 percent on solar modules and 25 percent on solar cells from April 2022 to cut imports and boost local manufacturing. India imports most of its solar cells and modules from China. Trade relations have soured because of the border tensions with China.

While the increase in duties was projected to increase capital costs by about 25 percent and solar price bids by up to ₵0.65/kWh, the first solar auction post BCD fetched a tariff of ₵2.86/kWh an increase of only about 10 % over the previous low bid which is a welcome development if the trend sustains in the coming months.

The tariffs have been hailed as a boost for the RE industry as a whole and are welcomed by domestic equipment manufacturers.

Coal

Just transition

On a per person basis, India’s energy consumption and emissions are less than half of world average but on a national basis, India continues to remain the third largest energy consumer and the third largest carbon emitter. Nearly 95 percent of India’s primary energy needs are met by coal (44 percent), oil (26 percent), gas (6 percent) and biomass (essentially firewood, 19 percent) while nuclear power, hydropower and renewable energy meet the rest.

This reality is often cited in Indian discussions of the role of coal. But the rapid growth and falling cost of renewables, the low utilization of existing coal plants, and the challenge of displacing coal imports all tend to accelerate the transition to cheaper renewables. It is coal’s broader economic role -- as an employer, source of state tax revenues, and financial investments in coal - that are the strongest counter.

This is evident in the recent announcement made by Coal India Ltd, the world’s largest coal miner, that given that solar will likely take over coal as a major energy provider over the next two or three decades, the company is considering venturing into manufacturing solar wafers. The company also announced that by March 2024, it will invest approximately $82.6 million of the total planned investment of $1.73 billion in solar power projects with a capacity of 3,000 megawatts (MW).

The Executive Director of IEA Fatih Birol is emphasizing that developing nations will need international financial assistance to enable a rapid transition away from coal. This has refocussed attention in India and the global south on the failure of developed countries to meet – or come close to meeting – their pledge of $100 billion in added climate finance by 2020. Developed countries reported climate finance assistance of $59.5 billion per year on average in 2017 and 2018, the latest years for which data is available. According to estimates, the true value of financial support for climate action from developed countries is only about a third of the reported amount. India’s commitments to the Paris Agreement (reducing its carbon intensity by 33-35 percent from 2005 levels and increasing the non-fossil fuel power generating capacity to 40 percent by 2030) were conditional on such external support materializing, but India is projected to meet the energy-related commitments ahead of time and without external funding.

*Source: India Energy Outlook 2020, IEA*

Commercial coal mining takes off

Increase in domestic coal production is part of India’s ‘AatmaNirbhar Bharat’ (self-sufficient India) programme aimed at reducing imports and create domestic employment. The ministry of coal (MOC) has reiterated the goal of 1 billion tonne (BT) coal production by Coal India Limited (CIL) by 2023-24. To attract investment, the MOC has allowed private investment in coal to expand production and processing of steel, aluminum, fertilizers and cement. 11 new coal blocks were offered for private leasing. 75 mines with reserves of about 38 BT will tentatively be offered for commercial leasing. Coal India approved 32 mining projects worth $6.4 billion to achieve the production target of 1 BT by 2023-34.

Power sector policies

Steps towards utility reform

The budget for FY22 proposed to give consumers the power to decide their choice of supply from among more than one utility. If the electricity amendment bill is passed by the Parliament it will be the first (and major) step in introducing competitiveness in the electricity retail sector. The bill is seen as controversial by a section of the farmers and hence it is among the issues in the ongoing farm protests. Fearing privatisation, employees of government owned power plants are also opposing the bill. Though utility inefficiency is often blamed for financial and technical losses, political decisions to offer free or under-prices electricity are among the primary reason for utility losses. Deregulation of utilities will require policy and regulatory clarity on the separation of electricity transmission and electricity supply businesses and also on price determination process for incumbent and new licensees. Effective wholesale electricity markets with well well-functioning fuel markets that are pre-requisites for competition at the retail end are not yet in place.

Draft ‘relinquishment of long-term power purchase agreements’ may reduce the cost of power procurement

The draft proposal provides for utilities to give up power purchase agreements (PPAs) from federal government owned power generating companies that they find too expensive. Once utilities get out of expensive PPAs, they will be free to sign cheaper PPAs with renewable power generators which will improve efficiency leading to better financial status. Supply of electricity from a wide range of sources will reduce congestion in the system.

Transportation

Multi-pronged efforts to reduce emissions

This year’s budget did not resolve in any decisive way some big questions about India’s transportation trajectory. On the one hand, the government has articulated a wide variety of goals and policies designed to nudge the sector towards electrification to replace imported gasoline and diesel. It has made substantial progress towards meeting the stated supportive measures that auto makers have said they need to begin to shift towards electric vehicles. On the other, it has steered decisively away from mandates that would require the manufacture of certain market shares of EV’s, and the present level of purchase incentives for customers has proven largely inadequate particularly in the 4 wheeled vehicle segments where an increasing share of India’s oil consumption and emissions are occurring. It has however, been reported that the government plans to offer incentives to EV manufacturers, as part of a broader automotive sector scheme that aims to attract over $14 billion in investments over five years. Envisaging $8 billion in incentives over five years, the scheme includes 4-7 percent cashbacks on sale and exports of vehicles and components as well as an additional 2% growth incentive for EVs.

There is a competing narrative to electrification – a shift, often presented as a transition, from oil to gas and only later to electricity. Gas is a fairly mature industry in many cities, CNG powered vehicles have been a major, and successful air pollution abatement strategy. LNG exporters (led by the USA!) are very active and influential to expand market in India but at the same time gas-based electricity generation is not likely to be competitive in India. While policies and infrastructure for electrification are expected gain momentum, CNG and LNG, displacing liquid fuels offers the largest opportunity for expansion.

The fact that both the national government and the states are free to levy taxes at whatever level they choose on gasoline and diesel makes them an attractive source of revenue. Indeed, the governments at both levels have been relying heavily on excise taxes on oil and gas to balance their budgets; while the opposition has made this a major part of their political criticism of the government, there has been less public outcry about the higher prices than in many other countries where governments allowed fuel prices to rise.

Gas stakeholders made a pitch for lower “Goods and Services Tax” regime but the budget did not provide for such protection. There is no clarity yet on the role gas in transportation and for how long – critical questions for the opportunities for electrification.

The budget announced a scheme at a cost of 2.4 billion to support augmentation of public bus transport services. It will facilitate deployment of a public private partnership (PPP) model to enable private sector players to finance, acquire, operate and maintain over 20,000 buses.

The government is unlikely to reject appeals by vehicle manufacturers to extend timeline for the implementation of the second phase of Corporate Average Fuel Efficiency (CAFE) norms for vehicle manufacturers, which aims at further reducing the CO2 emission from vehicles from April 2022. These CAFE norms call for cars to turn 30 percent more fuel efficient from 2022 and 10 percent or more by March 2021.

In February, the Chief Minister (CM) of Delhi launched the 'Switch Delhi' campaign to promote electric vehicles (EV). Under Delhi’s EV policy the Delhi government has planned extensive subsidies on purchase of electric two-wheelers and four-wheelers, besides waiving road tax and registration charges. The government has also issued tenders for setting up 100 charging stations across the city. Delhi has an ambitious target of 25 per cent electric vehicles among total vehicle registrations in Delhi by 2024.

While there is no public outcry, the opposition parties and consumer groups are calling for a reduction of taxes on gasoline and diesel whose retail prices exceed $5/gallon in some states. Federal and state level taxes account for over 60 percent of the retail price of petrol and diesel. On average petroleum taxes contributed over 2 percent of GDP during in the last decade. Excise duty from petroleum products alone now contributes 85-90 percent of all excise collected by the Union Government and account for roughly 24 percent of indirect tax revenue in 2018-19.

Excise on petrol increased by over 200 percent and that on diesel by over 600 percent since 2014. In 2017-18, a litre of petrol cost about 25 percent of average daily per person GDP in India compared to 4 percent in China, 8 percent in Vietnam and 17 percent in Pakistan. In 2018, average implicit fuel excise tax on energy-related CO2 emissions from road transport in India was estimated at about $93.8/ton of CO2. This is higher than $51.34/ton CO2 in the USA or $79.5/tonne CO2 in China.

An emerging and important area is electrification of heavy duty vehicles (HDVs) which consumes the largest share of diesel and contributes most to the particulate matter. Philanthropic community and its partners (within and outside the Electric Mobility Initiative, EMI) are working with NITI Aayog, truck manufacturers, and industry associations to discuss and support a viable pathway for this critical transition. More details in the next update.

Other petroleum-based hydrocarbons

A gas-based economy could transform Indian kitchens

The government has a target to increase the share of natural gas in India’s primary energy basket from about 6 percent to 15 percent by 2030 but the pathway to target is not clear. Piped natural gas distributed through city networks will presumably displace bottled liquid petroleum gas (LPG) currently used for cooking. The budget proposed to extend such gas infrastructure to 100 more districts. This will help in freeing up subsidised bottled LPG to 10 million ‘below poverty line’ households. 80 million poor households have already gained access to bottled LPG under the Ujjwala scheme where they get an interest free loan for the stove and connection to supply of LPG bottles, but often cannot afford as much LPG as they need to cook.

To increase availability of natural gas, the government announced that an Independent Gas Transport System Operator (TSO) will be set up to coordinate common carrier capacity in all-natural gas pipelines on a non-discriminatory basis. The government is also trying to push natural gas as fuel for long distance transport to reduce emissions from road transportation. The government is planning to have 1000 LNG stations on all major roads, industrial hubs and mining areas. Natural gas is seen as a bridge fuel to reduce near term emissions from the transportation segment but may go against India’s EV goal and lock in large capital investments in infrastructure such pipelines, LNG terminals, retro-fitted trucks which cannot be written off easily.

A public interest litigation (PIL) filed in the Delhi High Court seeks directions to the federal government to expand the benefits and incentives under phase II of “faster adoption and manufacturing of electric vehicles” (FAME) scheme for hydrogen-powered fuel-cell electric automobiles. (A lawsuit in 1995 enabled Delhi’s public transport vehicles (buses, taxis and three wheelers) to shift from diesel to compressed natural gas (CNG) substantially reducing pollution levels in the city.)

Climate change and society

Glacier disaster: caution against overexploitation of the Himalayan Rivers

The collapse of part of a glacier lake in Uttarakhand’s Nanda Devi mountain in February 2021 resulted in floods in the Rishiganga and Dhauliganga rivers, trapping workers at two hydro power project sites. 70 people lost their lives and scores more were injured. According to Centre for Science & Environment (CSE) the entire State of Uttarakhand is categorised as falling in Zone IV and V of the earthquake risk map of India. According to experts, reduced snowfall this winter may have played a major part in the glacier bursts. India is planning to increase the share of hydro-power largely in the Himalaya region to cut carbon emissions. If the national plan to construct dams in 28 river valleys in the hills is realised in a few decades, the Indian Himalayas will have one dam for every 32 km, among the world’s highest densities. Hydro-power is a low carbon energy that can reduce carbon emissions but substantially increases the risk of local environmental destruction. Himalayan mountains are relatively young and carry one of the heaviest silt loads in the world which substantially reduces the life of the dam. Navigating the challenge of balancing global environmental goals and local environmental protection is something India has to grapple with in the coming years.