Electricity: A strategic view

Heavy lifting is now required in electricity and financial reforms

The age of carbon is coming to an end. We can debate precisely when fossil-fuel use in India will be over. But to achieve net zero by 2070, decarbonisation will have to take strong hold by 2050. A great question of the age lies in thinking about how this will pan out. Scientists worldwide have done their job by delivering near-miraculous gains with renewable energy (“RE”), energy storage, and energy efficiency. Now the puzzles lie in economic adjustment.

We sometimes lose sight of the immensity of the electricity sector. Let’s examine the projects “under implementation” in the CMIE (Centre for Monitoring Indian Economy) capex database. This reveals that the sum total of all private non-electricity projects, as of today, have a similar value to the size seen in one sub-industry — electricity generation — alone. And the Indian electricity industry needs to grow by a lot to support the shift from fossil fuel (for example, electric vehicles) and to support growth in gross domestic product.
 

The private sector has understood that fossil fuel is problematic and is in full retreat. The mightiest private Indian firms have got the memo and have shifted course. Once the end of the road is visible, we see the loss of interest from labour, capital, and enterprise. We are in a bind in India as the retreat from fossil fuel has come, but the commensurate renewable energy buildout has not.
 

There are three kinds of complacence in this field:
 

1. “The government will build everything required, in a feckless coal-intensive way.” NTPC’s huge investment plans for thermal plants notwithstanding, public finance and management bandwidth will not suffice to address the magnitude of the electricity required. The cost will increase when important nations in the world start pressuring India to reduce carbon emission. India is at the front line of harm from climate change, and it is not in our interests to emit a tenth of global annual emission.
 

2. “We’re doing fine, the private sector is building ample RE.” The private sector avoids selling electricity to government companies, so RE activities are increasingly focused on commercial and industrial buyers where transportation of electricity is feasible. RE requires significantly rethinking the grid. Big investment is required to reshape transmission and distribution for the flexibility required in the RE world. These difficulties are showing up in the numbers. The scale of annual RE commissioning in India is incommensurate with the size of the problem. The share of RE in electricity generated in India is now about 20 per cent, which is low when compared with other big countries. This needs to grow by 3 percentage points per year, while the reality is about 30 basis points per year.
 

3. “We have muddled along for many years, so surely muddling along will continue to work.” Officials have heroically juggled balls to keep things working in the past 20 years. We admire their creative problem solving, but stress is mounting from multiple pathways. It will become increasingly difficult to pull off this act. Things that can’t go on don’t. Slower economic growth has helped to keep down electricity demand, but we should all hope this will rapidly change. When the sun is shining, generation can harness new solar capacity and keep things going. But in the evening peak, the legacy systems are creaking.
 

What is to be done? Thinking strategically, there are two problems. The electricity sector needs to change so that electricity is plentiful, and the RE share of generation grows by 3 percentage points per year. A reformed electricity sector will be thirsty for vast quantities of capital. The financial sector needs to change to address these needs. In both cases — electricity and finance — the status quo is not up to the task, and the magnitude of the task has never before been seen.
 

What is the way forward with electricity policy? The legacy electricity system is a centrally planned one where officials determine the technology, the production, and the pricing. This approach has run its course. The heart of the problem in electricity policy lies in graduating from this to a price-system approach where self-interested private actors look at prices and choose where and when to invest in assets such as generation, storage, transmission, or distribution. For example, when prices fluctuate based on supply and demand, and the price of electricity is low in the afternoon and high in the evening, this creates the incentive for self-interested actors to build storage companies which will charge batteries in the afternoon and sell electricity in the evening. These should be private decisions determined by the price system and not by officials.
 

What is the way forward with climate finance? The vast resources required for rebuilding the energy system, and also investing in many other aspects of the climate transition, are available from the infinite global capital market. The puzzle lies in connecting it up into the Indian economy. This requires a great deal of work in financial-sector reform.
 

The first wave of infrastructure investment (1996-2011) petered out because it involved forcibly mobilising resources from the financial system. That approach will not work here, partly because many people have burnt their pockets before, and partly because the magnitudes involved are much larger. What is required is a true market-based financial system where large investment is made through voluntary action by self-interested actors. Financial-sector policy needs to graduate to a price-system approach where self-interested actors look at asset prices and form their portfolios.
 

A generation of reformers improved the Indian financial system, including a limited liberalisation for cross-border activity. There is now much urgency in carrying this work forward. The climate finance work programme also involves harnessing this knowledge of financial markets for the purpose of carbon-emission trading, and reshaping micro-prudential regulation in a way that adequately recognises the impending threats associated with assets such as coastal real estate or fossil fuel.

Shah is a researcher at XKDR Forum,  Jaitly is partner, Trilegal, and founder of Trustbridge, and Krishnan is an honorary senior fellow at the Isaac Centre for Public Policy and a former civil servant