How Covid-19 can affect India’s energy transition goals – analysis
As we watch the Covid-19 pandemic, the crisis has jeopardized the trend toward an energy transition. While some fear that the transition will remain unchanged, others are optimistic that this cataclysm will be supercharged.
India advanced at the forefront of the global energy transition with a renewable energy (ER) target of 175 gigawatts (GW) by 2022. This is likely to undergo 450 GW by 2030. Simultaneously, policy interventions are planned to boost electric vehicles, energy storage, smart grids and other modern energy technologies and practices. Will the pandemic-induced economic downturn topple India’s energy transition priorities?
First, disruptions in the global supply chain for clean energy technologies is a key impediment. A long journey to restoration will not only cause delays but also increase component costs by eliminating global manufacturing surplus. India, with a modest manufacturing capacity of 3 GW, depends on Chinese manufacturers for approximately 80% of our solar cells and modules.
Chinese manufacturers and India’s Ministry of New and Renewable Energy (MNRE) expect a rapid revival. The ministry has offered a general extension of the lockdown period plus 30 days for ongoing projects and is making efforts to facilitate the movement of materials. In addition, MNRE has sought suitable land for RE manufacturing and export service centers.
Second, the downward trend in fossil fuel prices and demand reduces the cost advantage that RE has gained in recent years. Crude prices have declined, even turned negative on a memorable day, while coal prices are also under pressure. For example, India’s kerosene subsidy bill dropped to zero in March, and the cost of the LPG subsidy (which includes the three free refills provided to Ujjwala consumers during the shutdown) dropped to almost zero in May. The Coal Ministry has removed surcharges, quantity restrictions and up-front payment requirements to keep up with demand, and may even lower prices.
The government continues its protective drive against coal, seeking to maintain production, substituting for coal imports and promoting sales, probably because workers, some poorer states, and key sectors such as railroads are highly dependent on the coal economy. On the contrary, the Center took advantage of the moment with the fall in the price of oil to increase the special tax on gasoline and diesel to increase tax revenues. Will the net effect that government use of tax and subsidy instruments benefit fossils or work to keep ER costs competitive?
Third, global capital has been increasingly excited about an energy transition, but the pandemic may open up alternative investment opportunities. India’s development of RE has been largely financed by private and foreign capital which can be reduced if the pandemic worsens. Domestic public capital, restricted by blockages to non-functioning energy assets, has limited capacity to finance the energy transition. Will the RE transition suffer from lack of funding?
Fourth, declining demand for electricity will likely reduce space for new ERs. Distribution companies struggle to keep up with surplus power purchase contracts. Following the closure, some states attempted to invoke a force majeure clause and stop the withdrawal of the ER plants. However, the Center ordered the “must run” status and regular payments for RE to keep it running. In addition, India signaled its continued support for RE by completing tenders for 2 GW of solar energy even in the midst of closure. The government could go even further by removing old and polluting coal plants to create space for ER.
The Center’s efforts to protect RE are important signals in favor of maintaining the energy transition. Additionally, a bill to amend the Electricity Act, notified in the midst of closure, may add additional safeguards, such as provisions for a national ER policy, a stricter compliance mechanism for the renewable purchase obligation, and a Compliance Authority. of Electricity Contracts that can protect RE and other generators from renegotiation threats. Beyond these rapid signals, India needs a strategic approach to sustain the transition to a 21st century energy future. Here are three key steps in that direction:
First, although firm national objectives are essential, the centralized approach to implementing the proposed amendment is out of place. It is crucial to commit to the economic political opportunities and constraints in the states and to let the states chart their transition paths. While the Center should focus on creating incentives, states must step up to take advantage of them and get rid of chronic blockages. For example, the transition offers opportunities to manage the increasing burden of recurring tariff subsidies in states through unique support for clean energy infrastructure for the poor.
Second, in planning for the post-Covid-19 recovery, the energy transition could be a catalytic force to restart the economy while redirecting energy toward greater resilience. For example, we need more health infrastructure, to manage the health emergency, which can be energy resistant through decentralized clean energy.
Finally, the pandemic is exacerbating weaknesses in India’s electricity system, causing strains in the transition. Both fossil and ER systems will need stimulation to sustain the impacts. It is not a question of what technology to support, but a choice between different configurations of technology, politics and institutions. Our focus should not be on restoring the pre-Covid configuration and the underlying low-level balance on electricity. Rather, we must use this critical juncture to drive positive reforms and backward structural changes to build a resilient electricity future.
Ashwini K Swain is a member of the Policy Research Center.
The opinions expressed are personal.