Renewables vs. fossil fuels: The continuing battle for India's energy future

Posted on 19 Mar 2024

A country such as India, which cannot afford to compromise on access to affordable power to address its growth concerns, must carefully navigate between environmental and economic stability during its energy transition phase. Balancing the shift from fossil fuels to zero-carbon sources while ensuring sustainable economic arrangements presents a significant challenge.

Image Courtsey: Cental Electricity Authority (CEA), IISD

The renewable energy sector in India has experienced impressive advances in the last few years whereby renewables have become the key pillar of its eco-friendly programme. The country is situated at the frontline of the world due to its astounding targets and huge investments that serve as a model for the transition to cleaner and greener sources across the globe.

However, amidst these efforts, there looms a critical question: How would the future of the country be if it began to shun its plans on the support to renewable energy and going back to the coal and other fossil fuels as its major energy sources?

The recent developments in the fossil fuel sector indicate that the country may have to rely on coal for a longer period before it can successfully engineer its much-aspired transition to renewables.

A recent Reuters report stated that Adani Power, JSW Group, and Essar Power are among the firms that have expressed their desire to expand old plants or revive stalled coal-fired projects with a capacity of about 10GW. The report also indicates that India has been trying to attract investments to boost its coal-fired capacity by 80GW by 2032. Slower renewable installations and heavy power demand are cited as reasons behind the newfound interest of private investors who had once deferred or abandoned several of their projects, which were then considered unviable.

Additionally, according to government sources quoted in a media report, the country has plans to commission an additional 19GW of coal-based generation within the next year and a half. This includes the planned commissioning of 14GW in the current year. The 2024 capacity increase will surpass the annual average of the last five years fourfold. In 2023, India added 4 GW of coal-fired power capacity, the highest since 2019, with coal-fired output surging 14.7% — surpassing the 12.2% growth in the renewable domain — for the first time since at least 2019.

The government has affirmed its stance once again. Addressing a press conference last November, Union Power Minister RK Singh stated that renewable sources alone would not suffice to meet the increasing power demand in recent times. He signalled his government’s decision to add approximately another 80GW of coal-based generation capacity.

“Since nuclear capacity cannot be added at a rapid pace, we have to add coal-based thermal capacity for meeting our energy needs. We have 27 GW under construction, and we had thought that we will add another 25 GW. But we have decided that we will start work on at least 55 GW – 60 GW of thermal capacity. As demand keeps accelerating, we will keep adding this capacity,” the minister said. Given the power needs, the industry would keep getting orders for thermal capacity addition for the next 5-7 years, the minister believed.

The government’s position on further investments in coal-based generation was further affirmed when the minister in his recent interview with Financial Express reiterated that the country would get along the coal path until it finds sufficient renewable storage capacity. Further plans are afoot to increase the coal production to about 1.5 billion tonnes by 2030.

The government cites energy security concerns, alongside surging power demand and low per-capita emissions, to justify its reliance on coal. The interest in the sector is occurring after investments resulted in about 56GW of additional coal-based capacity up to 2018, which then steadily fell to 1.5GW over the next five years.

What would surprise a power sector analyst more than anything is that the resurgence of coal is not driven by cost economics. Despite solar and wind generation costs estimated at US$30 and US$40 per MWh, respectively, in 2024, coal-based generation is estimated to cost well over US$50 per MWh. NTPC, the largest coal generator, reckoned it to be closeto US$60 in the last year.

A significant decrease in the cost of solar-based generation was observed in 2023, attributed to a decline in solar module prices. It is estimated that the average cost of large-scale solar projects in India decreased by about 27% during the year, leading to increased capital investments and subsequent installations. The average selling price of Chinese modules fell by 51% year-on-year, while that of Indian-made modules decreased by 37% year-on-year. It is estimated that India imported 9.5GW of modules in the fourth quarter of 2023 to meet the commissioning targets for the fiscal year 2023.

However, despite consequential developments, distribution companies have not yet opted for low-cost renewable power in a wholesale manner, even as their accumulated debt rose by 24% to US$75 billion in FY 2022 compared to the previous year. They appear to be stymied by a host of reasons.

A Bloomberg analysis holds logistical and regulatory roadblocks as the reason for the failure of the renewable promise the country envisioned some years ago. Instead of creating a conducive local manufacturing atmosphere, the tariffs on imported solar panels eventually ended up in raising the cost for developers. Power auctions in India consistently require battery or hydro backup for renewable projects, which is deemed unnecessary given the relatively low levels of grid penetration witnessed at present, thereby increasing expenses further.

Again, the fixed-volume purchases mandated by long-term power purchase agreements of state distribution companies, or discoms, thwart the possibility of them entering into new agreements with renewable producers for cheaper supplies. Although this further stretches the already stressed discoms, legal complications deter them from pursuing much more profitable ways.

The Institute for Energy Economics and Financial Analysis (IEEFA) believes that any new investment in thermal power can potentially lead to stranded asset risk, given the cleaner economic case of renewable energy over thermal power. However, strategic acquisitions of stranded thermal assets by power majors such as NTPC, aimed at saving billions of dollars for lenders, will inevitably reduce the capital earmarked for promoting renewables.

The impact of coal’s enduring prominence is evident in the energy subsidies paid by India. An International Institute for Sustainable Development (IISD) report suggests that the country required over US$ 39 billion as fuel subsidies in the financial year 2023.

While subsidies for coal, gas, and oil account for 40% of this, subsidies for coal alone amounted to US$6.2 billion, representing a 17% increase year-on-year. A preference, likely stemming from compelling circumstances, becomes glaringly evident when compared to the subsidy of US$1.8 billion allocated to the renewable energy sector, which represents a mere 8% increase year-on-year.

Thus, a country like India which cannot afford to compromise on the availability of cheaper power to meet its growth concerns should strike a delicate balance between environmental stability and economic stability during its energy transition phase. The country has the difficult task of shifting from fossil to zero-carbon sources while maintaining explicit and sustainable economic arrangements. The transition will take a great deal of planning and smart implementation so as to avert serious disruptions that might affect the nation's GDP negatively.

Moreover, achieving ambitious electric mobility targets by 2030 necessitates a significant increase in renewable energy generation. Experts emphasize that relying on coal-based generation to power electric vehicles would be counterproductive. They argue that renewable generation should account for at least 40% of the country’s power consumption by then for a smooth transition to electric mobility. Therefore, prioritizing the expansion of renewable energy sources such as solar, wind, and hydroelectric power is imperative. Not only does this approach align with environmental sustainability goals, but it also ensures that electric mobility initiatives contribute to overall emissions reduction and energy efficiency.

With the shifting trend, one of the biggest issues is how the industries and jobs dependent on fossil fuels would be affected. The Indian economy heavily depends on coal, oil and gas as the main sources of energy, and the move away from them can impact sectors like mining, manufacturing and transport in a short time. This means that government should give such industries gradual and phased support through carefully thought policies that promote smooth transition to renewable energy.

On top of that, India needs to assess its security of energy demand during the transition period. While renewable energy sources brings long-term sustainability benefits, they may not provide the same level of reliability or consistency in comparison with the fossil fuels, particularly when it comes to energy storage and stability of a grid. Accordingly, the country is expected to make hefty investments into technological and infrastructural systems to tackle this initiation, and supply energy in a manner that is reliable.

In addition to this, social policies that promote inclusiveness and equity are vital for India's energy transition. The renewable energy's advantages should reach the urban regions which include marginal and isolated areas. These efforts must be articulated through decentralized energy solutions, affordable finance options, and skill development programmes which intend to equip the communities with knowledge and skills in participation in the renewable energy economy.

As a power sector expert from IIT Roorkee whom I recently met pointed out, the energy transition in India is a multifaceted and complex issue that requires consideration of various economic, social, and environmental components. By adopting a holistic approach that favours a step-by-step transition, prioritizes energy security, and promotes social inclusion, India can pave a smooth path from fossil fuels to renewables, ensuring both its economic prosperity and sustainability for future generations.

Kindly follow us on:

LinkedIn