In early August, the Union Cabinet approved India’s updated Nationally Determined Contributions (NDC) that have hence been formally communicated to the United Nations Framework Convention on Climate Change (UNFCCC). These include goals like reducing the emission intensity of India’s GDP by 45% by 2030, from 2005 levels and achieving about 50 percent cumulative installed electricity capacity from non-fossil fuel-based energy resources by 2030. In comparison to the statements made in Glasgow, the new NDC dilutes India’s climate pledge. During COP26, India promised that 50% of its energy would be from renewable energy sources by 2030. The new NDC, however, states that India will have 50% cumulative electric power installed capacity from renewable energy resources by the same date. Using 50% of electricity capacity (and not energy generation) weakens the target, as wind and solar have lower availability than conventional plants – meaning more capacity from wind and solar (somewhere between 2 and 3 times, depending on the renewable resource), needs to be built to meet a 50% generation share then a 50% capacity share. Meanwhile, using cumulative capacity as a measure adds older capacity to the calculation (when some of the new capacity is simply repowering older, retiring power plants), and thus increases the perceived amount of renewable energy availability in India. Along with mid-term goals, India’s long-term target to achieve net zero by 2070 attracted much debate since Prime Minister Modi’s announcement in Glasgow last year. Even though India moved up to rank 8th on the Climate Change Performance Index scale, its renewable energy pathway is not on track for the 2030 target. . India’s recent commitment to low carbon pathways at COP27 at Sharm-El-Sheikh would have been a promising signal had it been willing to wean off coal. This could also potentially cause delays in its recently announced Long Term Strategy at the meeting.
Despite the contractions in the economy, renewable energy projects have outpaced coal projects with a growth rate of 128%. India has set an ambitious renewable energy capacity target. By the end of the decade, India aims to rely on non-fossil fuel sources for close to 60% of its power needs. However, as 50% of the installed capacity would be non-fossil fuel based as per its target, obtaining 60% of its power needs from this capacity is unrealistic. Wind and solar plants would take up the majority of the new non-fossil fuel capacity to reach the target. Despite their lower cost per unit of electricity produced, the amount of electricity wind and solar generate for every unit of capacity (the “capacity factor”), is lower than that of fossil plants – typically between 2 and 3 times, because wind and sun are variable resources.Therefore, renewable projects need to be scaled up considerably to reach this goal.
Fortunately, India’s lending towards RE continues to grow, while coal lending experiences a steady decline. This is also reflected in the continued downward trend in terms of bank lending. While PFC and REC continue to finance the loan referred to in the previous report, there are no new project finance loans being given to new coal capacity in 2021.
2021 was marked by Covid-19-related disruptions and lockdowns, and led to the first contraction of India’s GDP in 40 years. Nevertheless, the total grid power supply increased by 10% as India’s economic recovery and warmer weather conditions in the summer drove its demand. India added 13.5 GW of renewable energy capacity in the financial year 2021-22, which is 128% higher than in FY 2020-21, most of it being solar energy. This had a significant impact on prices: according to BNEF, the power from new solar capacity in India is now cheaper than the power from existing fossil energy plants.
Nonetheless, coal still provides 74% of India’s electricity, whereas wind and solar correspond to only 8%. According to BNEF, as India’s coal fleet is relatively young, there is little financial incentive to finance their premature retirement. In addition, Indian coal PPAs support the economic viability of coal plants through a fixed price component independent of actual output, a policy that inhibits drastic emission cuts.
Even though India has made impressive progress, 43% capacity additions are still lacking to reach its interim target of 175 GW of renewables by December 2022. This means that for its 2030 target, India would need to install renewables 2.5 times faster than today. According to Ember, this is partly due to the unequal commitment of Indian states to align with national targets. Moreover, Russia’s invasion of Ukraine and the accompanying effects on the global energy markets will be critical to determining the speed of India’s energy transition in the coming years.
Interestingly, however, in mid-September 2022, the Union power ministry moved a proposal to grant PFC and REC the status of a development financial institution (DFI) for energy transition. If this comes to pass, both the government-owned financial institutions could become the nodal agencies for financing the energy transition in the country. By some estimates, India would need 10 trillion dollars to transition to net zero by 2070 and a nodal agency would play a big part in facilitating the necessary finance.
The Reserve Bank of India also recently shared a discussion paper on Climate Risk and Sustainable Finance that has suggested strongly that banks follow the Task Force on Climate-Related Financial Disclosures (TCFD) and shared suggestions on how private banks can deal with climate change risk and scale up green finance. Despite the geopolitics and depression in the markets over the last few years, some of these measures could potentially amp up the finance necessary for RE projects to scale up at the necessary pace.
Read and download the report here: COAL VS RENEWABLES INVESTMENT REPORT
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