Asia Gaze

India’s fast pace towards low-carbon energy sector

The two challenges of the Indian power sector

Access to affordable, reliable, sustainable, and modern energy is critical to basic human needs. Energy availability and quality are also vital for economic activities and national competitiveness. Over the past two decades, India has bridged the gap in electricity access, providing electricity to 730 million people, mainly rural households, covering almost the entire Indian population (99.6%). India has recognised the energy sector’s potential in combating climate change. India’s Nationally Determined Contribution (NDC) includes a 45% reduction in the emissions intensity of its GDP by 2030. The power sector is the largest emitter in the country and plays a crucial role in meeting emissions targets. India has committed to achieving approximately 50% cumulative installed capacity in non-fossil fuel-based energy sources by 2030. India is moving towards a low-carbon energy sector by doubling its renewable energy production capacity in the past ten years and setting ambitious targets for the future. 

Basics of electricity and Indian power policies

Household connection is the very end of the electric network: electricity is produced, and transmitted, sometimes for thousands of kilometres to a consumer that shall be individually connected to the network (so-called « distribution »). For optimal network functioning, i.e. minimising electric losses and avoiding shutdowns, the network shall be optimised and production shall meet the demand, at any time of the day. In addition, intermittent renewable energy like wind or solar cannot be produced 24 hours a day and must be complemented by consistent sources. Therefore, India’s increase in renewable production and electricity access results from careful planning at the central level and declination in the vast territory. In 2003, as part of a strategic strategy for energy security, India took a decisive step in its energy policy through the National Energy Act. The policy allowed renewable energy into the mix, taking advantage of India’s massive solar and wind potential and rationalising electric production and network expansion through 5-year planning. The National Electricity Plans assess needs, potential and set targets. In the last ten years, although discrepancies between the plan and the reality occurred, the sector was scrutinised, and a large set of policy measures were implemented to correct and allow the country to reach its goals.

Snapshot of the electricity sector as of today

The installed capacity was around 100 GW in 2001, 72 GW thermal capacity, and 25 GW renewables. By 2022, the installed capacity is almost 400 GW, of which 157 GW is renewables (see graphs for more details of the current energy mix). Coal-based energy is one of the cheapest sources and is the backbone of India’s energy production. It is now supplanted by renewables addition: over the past five years, thermal capacity increased by 31 GW, mainly coal, whereas renewables increased by 55 GW with a significant contribution from solar (41 GW). Nevertheless, keeping up with India’s population and economic development demands appears challenging. Despite a slight energy deficit, the installed capacity still fails to meet the electric requirement and peak demand. In addition, transmission and distribution losses resulting from non-optimal functioning are high and stand at around 19%.

Public or private?

Historically, providing enough energy to households and economic activities is considered a state matter and is handled by the public sector. Private sector involvement started 30 years ago, and 51% of the energy installed belongs to the private sector. In terms of distribution, among a total of 70 power distribution companies – or  DISCOMs – 54 are public, and 16 are either privately owned or privately operated (and publicly owned, which is called a « franchise »). Regarding production, some mega projects (coal or solar) are proposed for bidding and operation to the private sector under PPPs-modalities. Some prominent private companies like Adani Power, Tata Power, Reliance Energy, L&T, TERI, GE, and Siemens are well implanted in the market.

Reforming the power sector

Faced with the failure of the public sector to provide a much-needed electricity distribution service in a financially viable manner and its impacts on the country’s economy, the government of India started reforming the DISCOMS in 1995 to improve their technical and financial performances and to enhance the quality and reliability of electricity distribution. The 2003 National Energy Act created the franchising model in which the private sector runs the company while the ownership is kept public. Many programs were implemented to reduce technical and commercial losses with mixed results. Currently, the Ujwal Discom Assurance Yojana scheme offers state-owned DISCOMs the option to have their debt taken over by the state in exchange for committing to a severe financial restructuring plan. The Revamped Distribution Sector Scheme Bharat is a reform-based and results-linked scheme that provides financial assistance to DISCOMs in exchange for upgrading distribution infrastructure and implementing smart metering. Other significant reforms to facilitate the renewable energy transition include Renewable Purchase Obligations (RPOs), which obligate DISCOMS to purchase a certain percentage of electricity from renewable energy (RE) sources. The flagship Perform Achieve and Trade (PAT) program is a financial incentive for improving the energy efficiency of the Industrial sector.

Achieving rural electrification

Evidence in India shows a link between access to electricity and literacy rates, which in turn increases household GDP and supports the country’s economy. However, the rural electrification challenge persists: rural electricity supply and service costs are prohibitively high. In contrast, rural demand density is low and fragmented, creating a vast disincentive for India’s DISCOMS to provide such service. Two massive rural electrification programs were implemented. The Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) started in 2005, followed by the Saubhagya scheme (2017), provided significant subsidies allowed to connect more than 28 million households through a focus on last-mile connectivity and connecting the unelectrified households. On the DISCOMs side, the National Electricity Fund (NEF) for Distribution Scheme promotes capital investment in the distribution sector by providing interest subsidies, linked with reform measures, on the loans taken by public and private power utilities for various capital works under distribution projects. Today, 10 million households are still not connected to the network. In addition, around 3/4 of the population faces unanticipated power supply interruptions.

Further challenges to the Indian power sector

Demographic growth in India remains important, and the trend is to increase electricity consumption per capita, which stands at a shallow level today. As a result, energy demand in India is expected to double or triple by 2035. Generation, transmission and distribution will have to keep up with the pace. As the mix integrates more and more renewables, the network’s reliability is becoming more challenging to maintain, and storage solutions are currently heavily investigated. Question of resilience and adaptability to economic shocks: current energy crisis side effect of war between Russia and Ukraine. India’s response to capping fossil fuel prices led the State to redirect a significant budget towards fossil fuel subsidies. Adaption to climate change is growing in importance and still lacking from policies as the country’s most considerable power shortfall is expected for June 2024 due to an arid year limiting hydropower generation. Adaptation is indeed more complex than mitigation, requires context-specific, and adds up to the critical challenges of the sector.