Energy Transition: No rush for India on net zero

It should end subsidies for all sources of power, and if this means more renewable energy, especially solar, comes onstream, then so be it

Energy Transition: No rush for India on net zero
This strategy would also imply that there is no forced adoption of net-zero commitments by 2050 by India.

By Kumar V Pratap

One is bombarded with information these days on why India should join the net-zero or carbon-neutral coalition of countries, implying that, by 2050, the net carbon emissions of these countries would be balanced by carbon sequestration and removal to the same extent, thus contributing net-zero carbon to the environment. This would help the world keep the rise in temperatures to within 1.5oC of the pre-Industrial Revolution temperature, thereby preventing catastrophic climate change. Europe, Japan and South Korea have announced net zero by 2050, and China before 2060.

While the goal is laudable, we need to examine whether it is in the national interest. The power generation capacity in the country is about 380 GW, of which about 62% is thermal (mainly coal, 53% of total). India is abundant in coal, and the celebrated Hechsher-Ohlin theorem tells us that a country’s competitive advantage should be based on its abundant resource. Adopting a net-zero carbon goal by 2050 would mean abandoning action based on this theorem and, therefore, may be a sub-optimal strategy.

There are many traditional reasons why we should not subscribe to net-zero by 2050. Though India is the third-largest carbon emitter in the world, after China and the US, Indian per-capita carbon emissions are an eighth of those of USA and less than a third of China. The developed countries have used the emissions route to development, while India is still developing. Any pre-mature adoption of the net-zero emissions target will mean that a vast proportion of India’s population would continue wallowing in poverty for generations to come.

Finally, any substantive compensation mechanism from the developed world to the developing world in terms of finances and technology has not materialised. So, it may be unethical for the developed world to insist on premature adoption of net-zero targets by India.

India is already among the very few countries which are well on their path to achieving their voluntary Nationally Determined Contributions (NDCs) as part of the Paris Accord (Conference of Parties 21, or COP 21, Paris, 2015). This includes decreasing the carbon intensity of its GDP by 33-35% compared to 2005 levels by 2030. Also, the non-fossil fuel capacity of the total electricity capacity of the country would have to go up to 40% by 2030 and the country has accordingly planned for renewable capacity of 450 MW by that year.

As solar power achieves grid parity and more [the latest solar auctions are priced at Rs 1.99 per unit (NTPC, Torrent Power, Al Jomaiah Energy and Water Company, and Aditya Renewables) and round-the-clock (RTC) renewable power at Rs 2.90 per unit (ReNew Power) compared to average cost of supply of power in India of Rs 6 per unit], the renewable energy (RE) transition in the country is already helping achieve India’s voluntary obligations aimed at preventing disastrous climate change. It would also help in improving the cost-competitiveness of the Indian economy as the price of RTC renewable power is about half of the average cost of supply of power in the country.

However, this relentless rise of renewables has thrown up a number of challenges, which would become more acute as the proportion of RE in the total electricity mix increases. One of the most important of these challenges is the increasing financial unsustainability of the power distribution sector, dominated by the public sector distribution companies (discoms).

As competition in power distribution increases because of the coming of age of RE, the largest and the best consumers of the discoms would start to source power from the RE sources, using open access in power distribution, because that would be more cost effective (DMRC is sourcing about a third of its power requirements from Rewa solar project using open access). This would lead to decreasing demand of power from the discoms (RE also has ‘must run’ status owing to its zero marginal cost) and commensurate lower capacity utilisation (plant load factor is already below 54% currently) in the power generation sector.

However, since the discoms have already entered into long-term power purchase agreements with mainly thermal and coal-based power generating companies, they would have to pay the fixed cost of power, further adversely affecting their financials. This would lead to more stranded thermal power assets, adding to the non-performing asset (NPA) problem of the banks, the cost of which would ultimately devolve on the government.

In this scenario, what should be the optimal strategy for the country as far as adoption of net zero emissions by 2050 is concerned? Continuing with coal-first strategy (because of our resource endowments) would mean loss of cost competitiveness and increasing financial unsustainability of the sector. Also, there would be increasing challenges to financing new coal-based power plants by financial institutions owing to environmental, social and governance (ESG) considerations. On the other hand, pushing more RE (say, tidal power and offshore wind) based on subsidies would make the discoms more financially unsustainable.

Therefore, the optimal strategy may be to stop all subsidies for all sources of power (including large hydro, where the capital costs are estimated at over Rs 10 crore per MW) and let market forces take charge. If this means that more RE comes onstream, because of its increasing cost competitiveness, with consequential adverse impact on conventional coal-based power—in Britain, the share of electricity generated by coal fell from 40% in 2013 to 2% in H1 2020 (The Economist)—so be it. This strategy would also imply that there is no forced adoption of net-zero commitments by 2050 by India.

Currently joint secretary, ministry of home affairs, and former joint secretary (infrastructure policy and finance), department of economic affairs, ministry of finance

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