Foundations for an Indian JETP

Business Standard, 26 December 2022

by Akshay Jaitly and Ajay Shah.

Advanced economies polluted the atmosphere and it is fair that they should send resources to poor countries, where carbon-intensive growth is now infeasible. Two climate financing channels are addressing the distinct problems of investability and investment. The global ESG phenomenon came first, and it has created ample cheap financing for clean energy. But it requires investability: the foundations of a mature market economy in the energy sector. The Just Energy Transition Partnership, "JETP", is the nascent second channel of climate financing. JETP for India needs to work with one Indian state at a time and part-fund the electricity sector reform to achieve investability in that state.

Climate justice and climate financing

`Climate justice' is the idea that the advanced economies polluted the atmosphere, thus ruling out the possibility of poor countries getting to prosperity by doing similarly. There is something to be said for these claims, while recognising many limitations of the argument.

Poor countries therefore say that DMs must transfer resources to help fund their energy transition. The `Just Energy Transition Partnership', with two big programs afoot in South Africa and in Indonesia, is the nascent second channel of climate financing. We in India need to understand this landscape, while being mindful of the incentives and posturing by various actors.

Investment vs. investability

We find that the most important organising principle in the Indian energy transition is the distinction between investment and investability.

Investment is the business of private firms in generation, storage, distribution, and transmission, which add up to a market-based electricity sector. This should be a world of firms that make decisions shaped by prices and prospective profits. These firms would face true risk -- not lay it off using long-term PPAs -- and continuously change their behaviour in response to changing prices. Prices would fluctuate at all levels so as to clear supply and demand, thus inducing energy transition by both the demand side and the supply side.

Channel 1, ESG for investment

Climate financing for investment is a largely solved problem: the highway to near-infinite resourcing from foreign capital has been established in the form of ESG investment. This involves pensioners and insurance customers in DMs who get a sub-market rate of return for their investments in return for funding the Indian energy transition.

Global ESG investment has reshaped the facts on the ground in investment finance in Bombay. The ESG world is quite able to support the Indian energy transition, subject to the limitations of present and future Indian financial regulation, capital controls, tax policy and rule of law. It is now hard to find financial closure for fossil fuel energy businesses in Bombay. It is easy to find financial closure, at concessional rates, for economically sound clean energy businesses.

The climate financing glass is thus half full for the Indian energy transition. On the one hand, infinite capital is available from the global financial system for sound projects. But on the other hand, there are limitations in the Indian electricity sector that limit what is possible. Our foundational problem is that we have an electricity sector that operates through state control instead of one which operates through the price system.

Channel 2, JETP for investability

We have written extensively about the strategy from here to there. A lot of work is required, in policy research, policy design, capacity building, etc., to plan and execute the required electricity reform projects. A one-time expenditure of substantial sums of money is required, to overcome the hump, to solve the policy problems, to get up to investability so as to access boundless investment.

There are three sources for this one-time expenditure:

  1. General budget resources;
  2. Proceeds from privatisation of state assets in electricity; and
  3. Aid from rich countries. JETP is the mechanism for this aid.

The JETP documents for South Africa and Indonesia mix up donor/official flows and private flows; they mix up the issues of investment and investability. We in India should keep the investment problem out of JETP. Indian financial firms are well plugged into global ESG circles and are quite able to intermediate global private capital into Indian private electricity investment, barring the traditional Indian problems that afflict cross-border activity such as mistakes in financial regulation, capital controls, taxation, and the inadequacies of the rule of law. The focus of an Indian JETP should be upon investability. The South African experience suggests a JETP of \$8.5 billion, that was focused on investability, that catalysed a total investment of \$98 billion. We should emphasise four principles:

  1. India is a diverse sub-continent, it is comparable with the EU in its heterogeneity. The optimal strategy for electricity sector reforms is quite different across the different states. It makes sense to divide-and-conquer, to build the energy transition in one state at a time. The JETP engagement should be with one state at a time, prioritising exporting states such as Gujarat, Karnataka, Maharashtra or Tamil Nadu that will face the brunt of carbon taxation in their export destinations.
  2. JETP should be seen as a financing component of the reforms program that achieves an electricity sector grounded in the price system. External resourcing is a necessary but not sufficient condition for this reforms program. Three pots of money should be in play for financing this reform program: budgetary resources, the proceeds from government exit, and aid from rich countries.
  3. Officials have an incentive to overstate their accomplishments. Discussions around donor and government money should focus only on money that supports this reforms program, not private ESG money. Similarly discussions around money should focus on grant-equivalent dollar values, a convention that is well understood in the field of aid.
  4. The climate community yearns for the date by which the (say) Tamil Nadu electricity sector will be free of fossil fuels. But the `climate policy transmission mechanism' runs through the price system. The precondition for net zero is thus the date by which the Tamil Nadu electricity sector is investable in the eyes of private persons.

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