Photo: Reuters
Photo: Reuters

Opinion | Structural reforms for decarbonising India

A successful transition to a low-carbon economy depends on effective implementation of larger structural reforms

Earlier this year, India surpassed France to become the sixth largest economy of the world. It is also one of the world’s fastest-growing economies, poised to become the third-largest by 2028. Rapid economic growth is often driven by an increase in energy demand and consequently higher carbon dioxide emissions.

In the lead-up to the Paris Agreement on climate change, India committed to cutting its emissions intensity of GDP by 33% to 35% below 2005 levels by 2030, and to achieving 40% of its electricity-generation capacity from non-fossil sources by the same year. While it is on track to meet these commitments, India could do more to help keep the global temperature rise well below 2 degrees while simultaneously achieving its sustainable development goals. Structural reforms are now needed to facilitate India’s decarbonisation, similar to structural reforms that are critical for achieving higher and equitable economic growth. Four structural reforms hold the key.

First, India’s electricity pricing policy needs to be significantly overhauled. Current policy subsidises electricity prices for agricultural and residential consumers, while penalising commercial and industrial consumers. Most of the discussion around electricity pricing reforms is focused on the financial health of the distribution companies, an important cog in the political economy of India’s energy sector that hold the key to any future reforms.

However, we often ignore how pricing reforms could help decarbonise India’s industrial sector. Electricity is expensive for industrial users compared with the cost of fossil fuels, especially coal. Hence, more than 80% of India’s energy use is based on fossil energy. Research by the Council on Energy, Environment and Water (CEEW) finds that in the business-as-usual scenario, the industrial sector would account for one-third of India’s carbon dioxide emissions in 2050.

In the absence of electricity pricing reforms, it would be next to impossible to mitigate direct carbon emissions from India’s industrial sector. Shifting these emissions to the electricity generation sector through electrification and, in turn, mitigating the emissions via renewable and other low-carbon electricity sources would be an effective strategy.

Second, revamping the market design of India’s electricity sector is a must. For absorbing a greater percentage of variable renewable energy (VRE), i.e. solar and wind, into the grid, conventional power plants, especially those running on coal, would need to operate differently. Currently, most coal power plants operate to serve the baseload demand. In the future, with a higher share of VRE in India’s electricity mix, such plants would primarily operate to only serve mid-peak demand, peak demand and super-peak demand. The way we currently view Indian electricity markets needs to fundamentally change.

However, the political economy of our electricity sector would pose a major challenge. Liberalised electricity markets like those in the EU or the US are already finding integrating renewable energy difficult. The challenge is far more complex for India where we are likely to have different power plants operating under different market paradigms. If the electricity market design is not reformed, and the share of renewables crosses 40%, tussles between thermal power generators and VRE generators, due to loss of revenue for the former, could become very frequent.

Third, banking sector reforms are pivotal for meeting India’s ambitious renewable energy goals. For years, the banking sector has been plagued by the issue of non-performing assets. Significant progress has been made by the present government in addressing this issue. Arguably, this is still a work in progress. A risk-averse banking sector means less capital and high interest rates for unconventional energy businesses, invariably the renewable energy sector.

CEEW’s research has highlighted in the past that the cost of finance contributes to 60% of the total cost of solar electricity in India. To reach scale, and that too rapidly, availability of adequate capital at favourable interest rates will make or break the transition to clean energy sources. Only banking sector reforms can ultimately assure this. India is moving in a positive direction on this front.

Finally, India’s bond market needs to take off. Experts have highlighted that while green bonds are being issued for supporting renewable energy, India ironically does not have a well-functioning larger bond market. Proceeds from green bonds provide critical financial support for environment-friendly investments. Already, over $6 billion has been raised via green bonds in India. Unless bond market reforms are undertaken at a larger scale for deepening of capital markets in India, its immense potential will be largely untapped.

Under a changing climate, extreme weather events like the floods in Kerala are becoming more common across the country. India needs to meet its decarbonisation goals not only for meeting its climate commitments and economic targets, but also for fulfilling its human development objectives. While the government has taken several steps to decarbonise the Indian economy, incentives like those for renewable energy or electric vehicles are not enough. India’s successful transition to a low-carbon economy depends on effective implementation of larger structural reforms.

Vaibhav Chaturvedi is a research fellow at the Council on Energy, Environment and Water, an independent not-for-profit policy research institution

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