Financing clean energy transitions to meet India's climate goals

In 2021, at global climate negotiations, the government established a new commitment to reach net-zero greenhouse gas emissions by the year 2070. It also reaffirmed its aim to install 500 GW of non-fossil power capacity by 2030. This is up from 159 GW of non-fossil capacity as of February 2022 (Central Electricity Authority [CEA], 2022).

Renewable energy subsidies in India have fallen by 59% to INR 6,767 crore after peaking at INR 16,312 crore in FY 2017 as deployment slowed during COVID-19 pandemic-induced lockdowns and grid-scale solar PV and wind achieved cost parity, according to a joint independent study released today by the Council on Energy, Environment and Water (CEEW) and the International Institute for Sustainable Development (IISD).

However, subsidies in FY 2021 are still nine times higher than renewable energy subsidies. The country, therefore, needs to further shift support away from fossil fuels and towards clean energy technologies to reach 500 GW of non-fossil power capacity by 2030 and net zero emissions by 2070.

Overall, India provided over INR 540,000 crore to support the energy sector in FY 2021, including nearly INR 218,000 crore in the form of subsidies. Most notably, in May 2022, India reintroduced LPG subsidy of INR 200 per gas cylinder (for up to 12 cylinders) for the beneficiaries of the Pradhan Mantri Ujjwala Yojana (PMUY) scheme.

“The reintroduction of the LPG subsidy is a welcome move. As the fiscal situation improves, rapidly scaling up targeted LPG subsidies is the only solution to ensure that the benefits of the PMUY scheme are sustained in the long run. Further, the Centre and the states must ensure adequate support and financing models for clean energy in the medium- and long-term, in line with India’s stated decarbonisation goals,” said co-author of the study Karthik Ganesan, Fellow and Director of Research Coordination at CEEW.

The study further notes that electric vehicle (EV) subsidies have more than tripled since FY 2017 to INR 849 crore in FY 2021. During the year, India announced a production-linked incentive program to attract investments in domestic manufacturing of EVs and components.

In fact, annual disbursements by the largest PFIs were 3 times higher for fossil generation than renewable energy in FY 2021, according to the report. While several public sector undertakings (PSUs) have announced new clean energy partnerships and targets, they need to set out clear strategies for adjusting business models to the energy transition and net-zero goals.

“To accelerate the pace of India’s energy transition, public finance institutions need to increase the clean energy sector lending targets, in line with stated policy targets, and develop a medium to long-term roadmap for phasing out public finance for fossil fuels and managing possible stranded assets,” said co-author of the report Swasti Raizada, Policy Advisor at IISD. “They should seek to swiftly end new public finance for coal-based power plants which are at a high risk of becoming stranded assets.”

To ensure that revenue benefits are considered in the context of full costs, it also estimates externalities associated with the various sources of energy that India relies on. This results in two key themes: “support” and “revenue and externalities”.

Recommendations

Align support with 2030 targets and net-zero

• Continue to phase out support for fossil fuels in a socially responsible way.
• Introduce new support as needed to meet clean energy targets and ensure a just transition.
• Establish a body to coordinate actions across support, taxation, and pricing for energy, with relevant ministries, departments, and expert agencies.

Shift subsidies

• Establish a National Electricity Council as a platform on power sector issues and mandate it to lead dialogue between the centre and states on electricity subsidy reform, including targeting subsidies to low-income consumers and swapping subsidies for sustainable agricultural practices.
• Ensure that any subsidies for LPG are targeted and combined with support to incubate non-fossil cooking technologies.
• Develop a strategy and timeline to reform coal subsidies responsibly—for example, shifting subsidies away from the input (coal) and toward the service (affordable electricity).
• Identify how much support is required to achieve clean energy targets, particularly for new and emerging technologies—and provide it.

Diversify PSUs

• Ministries should mandate energy PSUs to diversify into clean energy and adjust corporate social responsibility rules to explicitly encourage support for sustainability and just transition.
• PSUs should ramp up investment in clean energy while establishing net-zero roadmaps for phasing down fossil fuels.

Shift public finance

• Ministries should increase clean energy sector lending targets in line with stated policy targets.
• PFIs in India should seek to swiftly end new primary public finance for coal thermal power or mining, other than decommissioning and just transition, to minimize the already high levels of exposure to fossil assets. PFIs should further set out a vision and roadmap on how to phase out public finance for fossil fuels and manage possible stranded assets.

Use taxation strategically

• High fossil fuel revenue during a period of increasing prices should be set aside for:
  • improved social protection and public services to reduce living costs; and
  • public support for clean energy, including just transition, to reduce volatility and improve security in the medium term.
• As the government elaborates more detailed policy frameworks on net-zero, it should explicitly articulate what role taxation plays in creating accurate and consistent carbon pricing and the social protection that is needed to redirect revenues to the poor and vulnerable.

Improve transparency

• Ministries, departments, PSUs, and PFIs should improve reporting on support for energy to enable better joined-up decision making.

The full report can be accessed here