Three grand challenges of the Indian energy transition

by Akshay Jaitly and Ajay Shah, Business Standard, 18 March 2024

The path to decarbonisation runs through the electricity sector. Today, this sector makes a third of India's CO2 emissions. Growth demands more electricity, and other parts of the economy are steadily switching from fossil fuels to electricity. What will a carbon-free electricity sector in India look like?

Decarbonisation is a difficult problem! The fossil fuel energy industry and its users have trillions of rupees in assets and many millions of workers. All this capital and labour has normalised a way of life that induces climate change. Unimaginable sums of money and unimaginable inputs of human intensity are required, to break away from these ways and build a new world. If viewed from a central planning lens, obtaining the required change appears simply impossible, and policy makers find it hard to imagine an India without coal, oil and gas. But once we harness the efforts of millions of firms and individuals, and fix up their incentives, it is feasible.

A variety of aspirations have been articulated or agreed by the government. We are to get to net zero in 2070. We are to reduce the emissions intensity of GDP by 45 per cent from 2005 to 2030. Half of the electricity installed capacity is supposed to become non-fossil-fuel. To get to these aspirations, or to pull back the net zero date to an earlier date, requires a strategy.

This is not a cue for engineers to jump in and choose the technologies and design the business models, on how to do energy production or consumption. Such central planning is not useful, for two reasons. India is vast and complex, and millions of decentralised optimisations at the level of one person or one firm have to take place, to figure out technologies and business models. The threat of climate change triggered off a vast scale of research worldwide, the benefits of which accrue to India for free. Researchers worldwide have given us the bounty where solar panels are now cheaper than many plastic panels. The flow of research is far from over. Nobody knows what the technologies and business models of the future will be. A process of discovery, not design, is required.

Strategic thinking does not involve determining how solar panels, EVs or battery technology will be used. It lies in thinking about institutions and incentives through which the vast forces at play are channelled into sensible decentralised problem solving by self-interested actors. Three big challenges stand out. We do not pretend to have the answers, but we think these questions are important. We believe that this quest will lead to the right inquiry and the right reshaping of institutions and incentives.

Challenge 1: The union and the state

The electricity sector is a complex interlocking arrangement with prime responsibilities at the state and a subsidiary but important role for the union. What are the good methods for both, how can each play their role, how can each not intrude upon the domain of the other?

Lok Sabha elections are not won and lost on electricity issues, but many state elections are. Many states are bedeviled with stolen, free and subsidised electricity, and have often succumbed into overcharging commercial users. While there are now over a dozen distribution companies featuring private participation, the bulk of distribution remains owned and operated by state governments. The electricity sector imposes inefficiency upon the state economy with a combination of taxation (high prices for some) and subsidies (losses at state PSUs and on-budget transfers by the state government). In some states, the fiscal problems associated with electricity have become material for the medium term fiscal strategy (e.g. Tamil Nadu).

Challenge 2: India and the world

Climate change issues will increasingly interact with international relations. Indian success in financing its transition to net-zero is essential in the global battle against climate change. People the world over are roused and hawkish on stopping climate change, which is a problem for India as we overtaken the EU as the third biggest emitter in the world. India can achieve a leadership position, by proposing concrete, implementable solutions in the field of climate financing, including by taking advantage of the frameworks available under the Paris Agreement and through bilateral arrangement.

Challenge 3: The state and the market

Climate change will not be solved by the state designing solutions and giving orders to the people. It will solved by the people doing things on their own, while the state addresses the core market failures of the field e.g. the negative externality of emitting CO2. The puzzle lies in finding the correct balance. The market failures of this field generate the rationale for the minimal use of the coercive power of the state. And once this is done, there is the incentive compatibility of millions of self-interested people discovering what is best for them.

At present, the bulk of the resource allocation decisions in the electricity sector are made by officials, who periodically give out sterile contracts (e.g. long term PPAs) to private persons to do well defined tasks. Such an approach does not harness the creativity, risk-taking, innovation and energy of private persons. The zone of private persons imagining and taking risks is limited to the short-term transactions which make up only 12% of the electricity market.

Climate change is too important to be left to climate experts. It is a grand problem that cuts across all fields and impinges on the lives of everyone. Many minds are needed in a process of debate, criticism, and invention, to develop a sophisticated consensus on the three challenges. Each of them requires a distinct expertise. And then, inter-disciplinary work is required where two tests are applied. Are the ideas employed on each of the three challenges consistent with the other two? When the overall strategy is considered in full, how quickly will it be able to mobilise vast resources and vast energies in getting to net zero?

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