Energy to drive India’s transformation

India, the world’s third-largest oil consumer, is also one of the most active markets for renewable energy innovation and investment

November 30, 2017

India added more renewable energy (RE) capacity than conventional generation capacity in 2016-17

RE tariff in the country has dropped to a level of cost competitiveness with coal-fired power generation

India has pipped the US to become the second most attractive market for RE investments

RE represented 13% of the total installed energy capacity at the end of financial year 2017

India is on its way to become a global economic powerhouse, and energy will lie at the heart of this transformation. The stakes could not be higher for it concerns the economic growth of more than 1.3 billion people who uses just 6% of the world’s energy. Resultantly, the rhetoric is high around India’s energy transformation, backed by strong government support and symbolic developments.  India, which was until recently considered a “coal Goliath”, is now expected to play David in global energy transformation. This will be achieved by maintaining the Government pledges, holding to account the developed world and thus, building global confidence.

This makes the energy sector transition a powerful driver for the government’s reform plans to increase the robustness and sustainability of power supplies while expanding affordable energy access. These goals are behind the 24×7 Power for All initiative to provide electricity to 245 million people without power by 2019. Meanwhile, peak electricity demand has grown by 13% over the past two years as a growing middle class seeks new services, which continue to place higher demands on the system. At this rate, over the coming 25 years, the demand for energy is expected to double.

RE offers a way for India to meet this growing demand and improve its energy security by diversifying fuel sources while reducing its environmental impact. Making this a reality would demand a massive shift in investment. Over the past five years, coal power made up over two-thirds of capacity additions in India’s generation, and currently accounts for more than 60% of India’s power-generating capacity.

India’s renewable efforts
India has set in motion an ambitious energy strategy to more than triple RE capacity – mainly from solar and wind. Along with additional boost from bioenergy and small hydropower, the Government has revised the domestic RE target to 175 GW of installed capacity by 2022. In the Intended Nationally Determined Contributions (INDC) of 2015, India had made a global pledge to achieve 40% cumulative installed capacity from fossil-fuel-free resources by 2030. While the domestic policy target is ambitious, the global pledge is aptly cautious and realistic. 

The energy strategy and associated enabling policies are already yielding results. India was the fourth-largest country in terms of new installed solar PV capacity in 2016 and remains the fourth-largest wind energy market globally in cumulative capacity. A recent solar PV tender in Madhya Pradesh for a 750 MW solar park was awarded at a price of US$55/MWh, the cheapest in India and among the most competitive worldwide. Solar PV prices contracted in auctions have decreased by half over the last three years in India, making renewable competitive with coal-fire electricity.

With nearly US$10 billion invested in 2015, renewables represented over a third of power-generation investment, up from just over a quarter the prior year. Nonetheless, a key challenge will be to deliver electricity where and when it is most needed, for instance during the early evening peak demand period. This will require integrating solar PV and wind with a more flexible power generation and storage systems. An investment of around US$20 billion in 2015 behind upgrading and expanding India’s electricity network has already alleviated some of the infrastructure concerns.

While climate action is at the centre of RE’s global narrative, energy security and economic development dominate domestic dialogues

Expanding renewable landscape
Modernizing the power distribution sector is a critical component of the transition to RE. India is set up as a single-buyer model for electricity, with state-owned distribution companies serving as the main investors and purchasers of power. But various states can differ sharply in their resource endowments as well as energy supply and demand patterns. In the majority of cases, low regulated power prices have contributed to a mismatch between revenues and costs. As a result, distribution companies are reluctant to procure power to be sold at a loss as well as undertake fixed investments to expand and upgrade the grid.

India has been using multiple narratives to support its RE aspirations. While climate action is at the centre of its global narrative, energy security and economic development dominate domestic dialogues. Many states have begun to align with the Central Government’s narrative, though with varying objective and approach. While states like Madhya Pradesh and Andhra Pradesh have added RE to their industrial thrust, building on the economic development narrative, states like Odisha have taken up RE to bridge energy access gap. RE has become an emerging political mandate as well, with many elected public representatives across party lines taking up RE installation as a key part of their local area development.

While the initial phase of RE development was infested with short-term winners, seeking to gain from state incentives, the current phase has seen emergence of serious players. A high-level policy framework is in place, a political mandate is shaping up and implementing actors are coming up to further drive the movement. Now, the intermediaries need to be strengthened for an effective orchestration and creation of social legitimacy for energy transformation. Steps have also been taken to improve the economics in the power generation, distribution and transmission industry with support from the Government’s Ujwal Discom Assurance Yojana (UDAY) programme, as well as through improving the metering infrastructure.

Renewable efforts reaping results
India’s power industry is already adapting to the flexibility challenge. Still, significant new investment in the grid, greater regional integration and market design that rewards flexibility from more efficient thermal generation and hydropower will be important for a more robust system with a high level of solar PV and wind capacity. There is now an opportunity to upgrade the thermal power plant stock and retire some of the least efficient plants without compromising reliability of supplies.

In such circumstances, natural gas can play a key role in flexibly expanding power supply, with adequate investment in the right infrastructure. Integration would be further enhanced by adding electricity storage and demand response from consumers themselves, supported by smart metering technology. Finally, distributed solutions, such as rooftop solar PV and microgrids, can serve as relatively attractive options for quickly scaling power supplies in underserved areas.

India’s energy transition would indeed need to occur amid a uniquely complex institutional and policy-making environment. However, such efforts are garnering strong support across civil society as an opportunity to enhance both economic and human welfare. A successful “Make in India” movement would serve as an attractive roadmap for a number of countries following on the same path.