Commentary: Energy is at the heart of India’s transformation

Mike Waldron

By Michael Waldron
Energy Investment Analyst
10 April 2017

Poor air quality and unreliable power supplies are key issues for India, home to 11 of the 20 most polluted cities in the world (Photograph: Getty Images)Poor air quality and unreliable power supplies are key issues for India, home to 11 of the 20 most polluted cities in the world (Photograph: Getty Images)

India is on its way to becoming a global economic powerhouse, and energy will lie at the heart of this transformation.

The stakes could not be higher to bolster economic growth and enhance living conditions for this nation of 1.3 billion people, which uses just 6% of the world’s energy. Unreliable electrical supplies hinder India’s development. Further, India is home to eleven of the world’s twenty most-polluted cities, according to the World Health Organization.

Poor air quality and unreliable power supplies were identified as key issues in the International Energy Agency’s India Energy Outlook 2015 report. Furthermore, India’s growing dependence on fossil fuel imports, which account for around half of its energy consumption, is also raising new energy security concerns.

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 “24x7 Power for All” initiative to provide access to 245 million people without power by 2019.

Peak electricity demand has grown nearly 13% over the past two years as a growing middle class seeks new services, such as air conditioning, which continue to place higher demands on the system. Over the next 25 years, energy demand is expected to more than double as a result.

Renewable energy offers a way for India to meet this growing demand and improve its energy security by diversifying fuel sources while reducing environmental impacts. But getting there would require 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.

The country is pursuing an ambitious energy strategy to more than triple renewable power - mainly from solar and wind, but also including bioenergy and small hydropower - by 2022 to 175 GW, from just over 50 GW today. In addition, large hydropower capacity is also planned to grow by around a quarter in the same timeframe. To reach this goal, renewables in total would need to account for over 40 percent of India’s power generation capacity.

The energy strategy and associated enabling policies are already yielding some results. India was the fourth-largest country in terms of new installed solar PV capacity in 2016 and remains the fourth-largest wind 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 USD 55/MWh, the cheapest in India and among the best worldwide. Solar PV prices contracted in auctions have decreased by half over the last three years in India.

Large-scale solar PV and wind should drive the majority of investment going forward, supported by competitive auctions and technology progress to make them more affordable. In some cases, contracted prices for solar PV have already fallen below pricing for some coal power plants. Meanwhile, coal plants themselves face risks related to falling utilization rates due to slowing demand and bottlenecks in supplies.

With nearly USD 10 billion spent in 2015, renewables represented over a third of power-generation investment, up from just over a quarter the prior year, or USD 8 billion. However, investments in inefficient subcritical coal plants – which can cover consumption over a full day, but are highly polluting – were larger.

Another 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 system. This too poses investment challenges for an electricity system where coal power plays a dominant role. Spending to upgrade and build out the electricity network, at a record USD 20 billion in 2015, is already playing a crucial enabling role, in addition to better use of existing flexible generation. Financing this transition will be a key question that will be examined in depth in this year’s World Energy Investment report.

Modernizing the power distribution sector is a critical component of this transition. 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.

Recent improvements to support their financial health and to narrow this income gap have been made, supported by the central government’s Ujwal Discom Assurance Yojana (UDAY) programme, as well as in metering and electrification. But results are uneven and high operational losses persist in some areas.

Providing incentives to invest in renewables and flexibility over time will be important to meet the country’s energy strategy goals. Reforming electricity tariffs to reflect the underlying cost of the system would greatly help put utilities on a more sustainable financial path. Policies that help reduce the cost and enhance the availability of debt finance can further enhance the economic attractiveness of renewables.

India’s power system 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. 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.

Gas can play a key role in flexibly expanding power supply, but requires investment in the right infrastructure. Moreover, analysis from the IEA’s World Energy Outlook 2016 found that 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.

Mobilizing diverse sources of capital for a sustained wave of energy investment that meets these aims should be a policy priority. 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” transition would serve as an attractive roadmap for a number of countries following on the same path.