Green CAPEX: A tightrope walk for India

At last November’s COP26 in Glasgow, India set a target date of 2070 to achieve net zero (compared to 2050 for advanced economies and 2060 for China). Also, India changed the wording of its pledge with respect to coal—from “phasing out” to “phasing down.” These were far-reaching decisions, seen as a dilution of the government’s commitment towards climate change. In this blog I delve deep to understand some background and, importantly, discuss how the country plans to deliver its global greenhouse gas (GHG) reduction commitments.

From 1751 to 2017, the cumulative contribution of the country to total atmospheric greenhouse gas emissions (GHGs) has stood at 3%. Today, India’s per capita emission stands at 1.92 tons, compared to the 4.48 tons average for the Asian continent, and less than half of the pre-COVID global average. This can be largely attributed to the fact that the country’s GNI per capital of $1,902 that gives it a lower middle-income nation designation.

At the same time, India has the distinction of being the world’s fastest-growing large economy. Sustained growth would enable it to leap frog to upper middle-income status in the decade ahead. However, an unfortunate by-product of this success is the country has now become the world’s third-highest GHG emitter. India is also expected to make up the biggest share of incremental energy demand, as it overtakes the European Union to become the world's third-biggest energy consumer by 2030. 

We know that, even though GHG reduction is a voluntary exercise for countries, there are increasing costs—explicit and implicit—to delaying GHG reduction. Countries and corporates are faced with ever-tighter “green” conditionalities, Task Force on Climate-related Financial Disclosure (TCFD), requirements and linking of the flow and cost of international finance to green business credentials. There is also a pressing need for an import-dependent nation like India to reduce reliance on fossil fuels to improve energy security and the nation’s current account. Furthermore, the economics of investing in cleaner energy are becoming more lucrative for investors. And last but not least, rising pollution levels in India are causing an immense health hazard, which in turn is curtailing labor productivity and denting economic output.

Thus, for a developing yet large economy like India, achieving a clean energy transition is not just about reducing GHGs, it is a means for the nation to balance long-term trade-offs among affordability, security, and sustainability. 

At COP26, India announced a target of up to a 45% reduction of its CO2 emission intensity of GDP by 2030, aiming to achieve 50% of its total energy requirements from renewable sources. The government has indicated its intention to increase overall non-fossil energy capacity to 500 GW by 2030, although it is unclear whether this refers exclusively to electricity generation.

For India’s climate change action to succeed, material progress needs to happen across multiple sectors. Electrification and efficiency gains will play a major role, while “hard-to-abate” sectors (including cement, steel, and agriculture) may need to also consider suitable carbon offsetting mechanisms. More generally, the demand for renewable energy as a primary energy source can be materially enhanced. We should also expect more expeditious progress with greater penetration of battery storage, both for electrification of transportation and greening the grid. According to a recent report by the Rocky Mountain Institute, the cumulative demand for advanced battery storage is expected to more than double by 2030, with India well-positioned to capture a large share of the global market—an estimated 13% of global battery demand by 2030.

Given its domestic availability in abundance, coal continues to produce more than 70% of India’s electricity. However, greenfield coal-powered plants are increasingly becoming unviable when compared to renewable sources. Recently, the government even announced policy support for bundled power that allows existing coal power generators to supply renewable energy under ex­is­ting power purchase agreements. Further, given the country’s robust national transmission network and the increasing commercial viability of large-scale battery application, achieving 50% of total electricity generation from renewable sources and curtailing total coal power generation capacity at current levels of 200 GW seem achievable by 2030.

But let’s get to brass tacks. There needs to be huge capital expenditure (CAPEX) to effect real change. The Indian government estimates investment needs of up to $250 billion from 2023 to 2030 in ‘Green CAPEX’ —technology enabling clean energy transition. This requires cohesive public policies that emphasize private sector participation. We have some successes to be sure: India recently implemented production-linked incentives for 50 GWh of advanced battery storage and 10 GW of solar panels, comprising cash incentives for domestic manufacturers to encourage value capture and economies of scale. These schemes experienced phenomenal response from the private sector. The government also implemented a policy to spur faster adoption and manufacturing of hybrid and electric vehicles. The recent announcement of a roadmap for electrifying the country’s entire railway network is emblematic.

The potential of green hydrogen is highly relevant for India. It can replace fuel required for all forms of transportation, generate and store grid-scale electricity, replace coal in industries, and even be piped to households. Last August, the government announced its National Hydrogen Mission aimed at making India a global hub for green hydrogen production and export. India ambitiously aims to create an ecosystem to bring down the cost of green hydrogen to $1/Kg and catalyze production of 5 million tons by 2030.

India has demonstrated that, with deft policy support, it could create a solar power market that has become increasingly affordable. Now, similar possibilities are emerging in green hydrogen fuel and fuel-cell enabled transportation, advanced battery storage, and electric vehicles for attracting private investments across the value chain and support infrastructure.

By no means is the country sitting on its haunches with respect to meeting its climate commitments. It is taking visionary steps, many of which include the participation of the private sector to retain scarce public spending for areas better served by government.

But whether these are enough is a question that remains a challenge to dispassionately answer.  

Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.
 

Related event

The blog author, Aman Hans, will be moderating the 17th India Business Conference at Columbia University on April 1-2, 2022, click on the link for more information. 

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