Energy transition under fiscal and institutional stress..ORF


Energy transition under fiscal and institutional stress

20 May 2023

India has to see through its energy transition commitments while dealing with fiscal constraints and institutional challenges

There is a 93 percent probability that at least one year between 2022-2026 will dislodge 2016 as the warmest year. More worryingly, the probability of a temporary increase in temperature more than 1.5°C above pre-industrial levels (1850-1900), which was zero in 2015, has now increased to 48 percent. The warning bell is ringing, and it is now up to the Paris Agreement signatories to deliver on their commitments.

India’s energy transition commitments extend into the long term. By 2070, India’s GDP, in real terms, could be four to 10 times the GDP in 2020, depending on GDP growth within a band of 6 to 8 percent per year. India’s emissions reduction is consequently a bellwether for the success or failure of the global strategy to keep global ambient temperature below 2°C by 2100.

Common themes in global decarbonisation

The International Energy Agency Report, Net Zero by 2050: A Roadmap for the Global Energy Sector, published in October 2021, estimates global Non-Fossil Fuel (NFF) electricity to increase from 10 percent of electricity supply to 90 percent by 2050 and become the dominant mode for supply of energy services. The end of coal as a fuel stock in electricity generation is visible in advanced economies. In “hard-to-abate” industry—metals, cement, and fertiliser—it is likely to be replaced by green hydrogen—produced by electrolysing water—between 2030 and 2040, by when the price of Green Hydrogen will reduce to US$1 per kilogram, aided by the declining cost of solar and wind power. The death knell for petroleum fuels is being struck by the electrification of transportation, with heavier vehicles expected to be fuelled by hydrogen; the electrification of kitchens; and the potential for heat pumps to replace gas heating in cold environments.

Natural gas/liquified natural gas, once hailed as a relatively clean bridge fuel for India, is now a graveyard of stranded assets in electricity generation.

India’s energy transition strategy is contextually bounded by one long-term target and three near-term ones. All four push India towards a gradual and transactional decarbonisation strategy aligned with the vagaries of energy markets and geopolitics. Natural gas/liquified natural gas, once hailed as a relatively clean bridge fuel for India, is now a graveyard of stranded assets in electricity generation. The move towards self-reliance and resilience in energy supply does not align with the high import share of this resource. Also, fluctuating prices in oil and gas since the Ukraine conflict generate deep uncertainties. The share of LNG in generation capacity is expected to stagnate at the existing 25 GW till 2030.

Net zero: The end goal

The long-term umbrella target is to achieve net-zero GHG (Green House Gas) emissions, after accounting for emissions absorbed by the ocean and forests or captured and stored using technology. This state of a benign equilibrium, nurturing climate stability, could allow developing economies to converge towards the higher energy consumption levels of advanced economies. Of the 136 nations that pledged Net Zero at COP26 in Glasgow (2021), the nearest target is 2035 for Finland, 2040 for Iceland and Austria, and 2045 for Germany and Sweden. The pledges targeting 2050 account for one-half of global emissions, which is encouraging. China, Russia, Saudi Arabia, and Brazil have a 2060 target whilst India targets 2070.

Near-term metrics

India has three near-term targets by 2030. First, a 45-percent reduction in GHG emissions intensity of the economy (change in emissions per unit increase in GDP) over 2005 levels by 2030. This builds on a voluntary pledge made, as early as 2010, of a 20 to 25 percent reduction in the emissions intensity of GDP over 2005 levels by 2020. India achieved a 24 percent reduction. Consequently, the residual target is a 28 percent further reduction by 2030 over 2020 emission levels.

Banking on solar and wind power

Second, India needs to tread a median path, balancing fiscal constraints and the urgency to decarbonise. The net impact of decarbonisation on growth is uncertain, though factoring in co-benefits like cleaner air in cities could boost growth by reducing morbidity and mortality. Also, the speed of the transition determines the fiscal impact.

The pledges targeting 2050 account for one-half of global emissions, which is encouraging. China, Russia, Saudi Arabia, and Brazil have a 2060 target whilst India targets 2070.

The preferred solution is to maximise electricity capacity in non-fossil fuels (NFF)-based electricity generation. A generation capacity of 500 GW (including hydro and nuclear) is targeted by 2030 with large increases in solar power and wind power including prospects of offshore wind projects—a business area that could be of interest to Indian oil and gas exploration companies, seeking to diversify their energy portfolio.

Half green by 2030

Third, by 2030 “about” 50 percent of electricity generation capacity is targeted to be NFF. In 2020, new renewables (solar, wind, recycling waste, biomass) accounted for 145 GW or 38 percent of the total installed electricity generation capacity of 377 GW. The Central Electricity Authority’s 2023 assessment revises the optimal mix of generation capacity to align with the Glasgow commitments. Of the 777 GW generating capacity by 2030, NFF makes up 64 percent. The projected share of NFF in the generation of 44 percent is up from just 25 percent in 2023. Around 61 GW in storage capacity (19 GW pumped storage and 42 GW battery enabled storage (BESS) two to six hours supply), is also envisaged. Natural gas-based capacity—useful for peaking power—stagnates at its existing 25 GW on the headwinds of high landed cost, which has significantly stranded even this marginal capacity.

King coal:  A reliable base load supplier

Coal-based generation capacity of 211 GW in 2023 will increase to 238 GW by 2030 on the back of 27 GW capacity under construction or bid out with marginal retirements of existing capacity. This will embed carbon in India’s generation profile till at least the mid-2050s. Coal-based electricity generation remains significant, nearly56-percent share in 2030, despite being overtaken in installed capacity by NFF. The diurnal and seasonal profile of solar and wind power reduces the generation available from them versus base load fossil fuel (FF) plants.

Working with constrained fiscal resources

India is pushing the hard decisions around decoupling with coal to post 2050 for two reasons. First, viable storage options to level out the variability in new renewables are still being developed. Second, India cannot expand fiscal commitments for an energy transition from public sources. The fiscal shock from COVID-19 is yet to be internalised. The targeted fiscal deficit this year is 5.9 percent of GDP—far above the outer limit norm of 4 percent. Only a gradual reduction in fiscal deficit to 4.5 percent of GDP by 2025-26 is envisaged. Slowing global growth constrains the options for an export-led growth, whilst high policy interest rates constrain investment and growth. The decarbonisation strategy has to be focused tightly on least cost emissions reduction till prospects for high growth revive, bringing with it additional tax resources.

The tussle for institutional relevance

The energy transition is an all-of-government effort, including energy demand-generating ministries like the Ministry of Housing and Urban Affairs (MOHUA), ministries dealing with transport and industrial production and the state and local governments, who will interface with customers and citizens. Five Union government ministries are central to this effort. The Ministry of Environment, Forests, and Climate Change (MOEFCC) has a vital but traditional technical role to play, in deepening natural sinks for GHG emissions and is the designated authority for monitoring, reporting emissions and liaising with the Secretariat for the UN Framework Convention on Climate Change.

Slowing global growth constrains the options for an export-led growth, whilst high policy interest rates constrain investment and growth.

The continued relevance of two ministries –the Ministry of Power (MOP (electricity transmission and supply) and the Ministry of Non-Renewable Energy (MNRE (non-conventional and renewable electricity supply) is undisputable with green electricity becoming the dominant mode for delivering energy services. They are already under a common minister and could be merged.

Two other ministries – the Ministry of Coal and Mine (MOCM) and the Ministry of Petroleum and Natural Gas (MOPNG) will fight for their survival as the share of coal, oil, and gas in primary energy supply decreases. Between the two, coal is more vulnerable as the substitute for coal is hydrogen—a gas which is transported and distributed in much the same way as LNG or natural gas. More importantly, oil and gas public sector enterprises are publicly traded corporate giants. Four are listed in the Fortune 500 list. Their combined profit is around INr 1 trillion (2019), giving them the deep pockets necessary to finance the transition.

Possibly, this is why Prime Minister Modi recently appointed an advisor on energy transition in his office, who till recently was Secretary MOPNG and the Chair of a committee mandated to recommend a transition strategy for the oil and gas sector. The Green Shift is a comprehensive review of the potential and preparedness of the oil and gas sector for the transition—a preview of what other ministries, in the fray for continued institutional relevance, should be doing.

Sanjeev S. Ahluwalia is Advisor at the Observer Research Foundation

The views expressed above belong to the author(s).

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