India’s transition to clean energy poses significant challenges

Posted on 18 Sep 2020

Clean energy is a sustainable development goal to build sustainable cities and communities, good health and well-being, ensure climate action and sustain life in the land. However, the pace and quantum of investments done in transition to clean energy are weakly aligned with the aforesaid goals, says a recent Observer Research Foundation report.

The World Energy Investment Report 2020 said that investment levels in clean energy fell short of meeting what should be required to put the world firmly on a sustainable path. Investments in renewable power should double by the late 2020s but investments from the private sector are falling due to several impediments and public financing isn’t sufficient to meet the goals.

The United States under Trump administration has withdrawn from the Paris Agreement but India is trying to keep its commitments through the gradual increase of renewable energy sources in the energy mix. India is striving to achieve its target of 175 GW of renewable energy by 2022 and increase it up to 450 GW by 2030. In a summit organized by the International Solar Alliance, the Prime Minister Shri Narendra Modi expressed confidence of not only meeting but also surpassing this target.

Achieving this necessitates the country to install 36 GW of renewable energy annually, as per Institute for Energy Economics and Financial Analysis. It also requires sufficient investments from both Indian and foreign companies and though India has been accelerating capacity addition in renewable energy remarkably in the last decade or so, investments in the promotion of clean energy continue to face multiple headwinds.

Investors primarily look for policy stability when looking to invest in the business in a geographical region and when it comes to India there are several policy inconsistencies and centre-state conflicts. The government needs to sort this out in the country’s interests and growth in the renewable energy sector. Projects need long-term financing to meet the objectives as short-term financing wouldn’t give the results in infrastructure projects. Banks fund such projects in India which have constraints and, therefore, it is pertinent for pension fund companies and insurance companies also to step in to provide funds.

There are risks associated with technology since many technologies in the renewable energy sector are new and companies tend to postpone their investments in expectation of cost reductions over a period of time. India is also dependent on a cross-country supply chain when it comes to manufacturing low-carbon technologies and since this depends on trade, exchange rate risk is on the higher side.

As per World Bank between 2011 and 2017 institutional investors hadn’t funded any infrastructure project in South Asia as investing in emerging markets was considered high risk.

Clean energy technologies are still evolving and are not as commercially viable as conventional technologies for example. Technology development costs are high and entities consider venturing in developing clean energy technologies as highly risky. The rate of return matters the most for investors and sustainable development goals are sacrificed.

Lack of familiarity, experience, market information and knowledge is major barriers to funding projects in clean energy. Additionally, there are key challenges such as import duties on solar panels, land availability issues, development of electricity infrastructure, the uncertainty of power purchase agreements, and many more such impediments which slow down the progress.

India is already reeling under the worst impacts of climate change and to protect its ecological diversity there is an urgent need to pump funds to upgrade existing energy systems, retrofit existing carbon-intensive infrastructure and develop new low carbon infrastructure.

As the government mobilise key initiatives while recovering from the Covid-19 pandemic its actions can streamline the transition to clean energy and propel climate action forward. Indian electricity demand which is expected to grow at an aggregated demand of around 5-6% in another 10 years could then see itself meeting sufficient demands from renewable sources.