Asia’s Energy Transformation: India
This is the fourth in a series on the ongoing, large-scale transformation of energy use in Asia. Previous columns have focused on Pakistan, Bangladesh and Indonesia. As we noted in earlier installments of the series, Asia is the most important global market for energy consumption, investment, and greenhouse-gas emissions. And it is a region undergoing a large-scale energy transition, whose unclear evolution has more importance to the future of both climate change and energy investments than that of any other region.
With over 1.3 billion people, India is the world’s second most populated country, and accounts for about 18% of all the people who live on earth. Somewhere around 2024 India will become the most populated of all. Yet it consumes only about 5% of the electricity produced globally. About 200 million people in India live without electricity, and about twice as many have access for less than six hours a day. Prime Minister Narendra Modi, elected in 2014, has made it a priority to change this, and provide universal electrification in India. Plans provide for roughly a tripling of the country’s electricity generation over the next two decades, a central plank to India’s development and poverty-reduction efforts. Good.
When Prime Minister Modi took office, 2/3 of all power produced in India was generated from coal. Were the plan to triple power generation to succeed the same profile of where power comes from, it would imply adding more greenhouse gas emissions annually than the amount produced annually by the United States. Bad. So Modi has also proposed an unprecedented ramp-up in renewable energy generation. India’s ability to raise electricity availability is critical to development and poverty reduction, yet how it does so will also have a crucial impact on the global environment. So India’s energy challenge is one in which both India and the rest of the world have a huge stake.
The good news is that so far, India’s bet on renewable energy has succeeded far better than most observers expected. Five years ago, when Modi was elected, India’s total renewable energy production capacity was 34 GW, about 10% of its power capacity, mostly consisting of hydropower, with solar capacity at a tiny 1.5 GW. Today renewable energy capacity stands at 80 GW, with essentially all the growth having come from solar and wind farms. This has vaulted India up to 5th globally in renewable energy production, behind China, the USA, Brazil, and Germany, and 4th (ahead of Brazil) if hydropower is excluded. The country’s well-publicized 2022 renewable energy target (just three years from now) is 175 GW, more than double current capacity – and about equal to current combined wind and solar capacity of the USA, or to the world’s total generation capacity from wind and solar power a short decade ago. Doubling wind and solar capacity in three years would seem nearly impossible – except for the fact that this is exactly what India has done over the previous three years.
A big part of this success story, as has been the case in other countries bringing on stream large amount of solar and wind power, has been rapid price decreases. As renewable auctions got underway in Brazil, South Africa, and other places, driving costs down by 75% in 3-4 years in several countries, India seemed like it would be on the outside looking in at the renewables boom. With high foreign exchange risks, government bureaucracy, and loss-making state-owned electricity distribution companies, analysts initially thought India would find it hard to bring solar costs down below $0.10/KwH – double what some countries were seeing, and well above the cost of alternative ways to raise electricity production, mainly through coal. Yet India managed to become a part of the global solar boom, with prices dropping almost monthly for three years. The cheapest prices offered for generating solar have come down to $0.036/KwH (still double world lows – see And Prices Keep Falling), or about half of what power from a greenfield coal-fired plant could be expected to cost.
In a country as large as India, with states as politically diverse as it has, it is unsurprising that adoption of renewables has varied widely across the country. Rajasthan and Gujarat have two of the largest solar programs and the lowest prices. Tamil Nadu’s late 2017 solar auctions brought signed offtake agreements at $0.054/KwH, compared to previous capacity additions there at $0.12. Renewables there are set to account for 35% of total generation capacity in the state. Karnataka and Telangana each added 2 GW in 2018. Several states, however, have no solar generation at all. The government of one state, Andhra Pradesh (AP), has managed to be good news and bad news all in one. On the one hand AP announced a very large short-term target of installing 18 Gigawatts of renewable energy by 2022, almost 20% of the total national target for the period, and tripling AP renewable capacity. Good news. On the other hand, in May newly elected AP Chief Minister Jaganmohan Reddy called for retrospective renegotiations and cancellation of existing contracts for wind, solar and storage contracts in the state. Bad news. At issue is that prices for renewable capacity contracted in the previous 5-6 years are now much higher than prices based on rapidly advancing technology. Not that previously contracted prices are particularly high in AP – tariffs being contested are in the range of 5-8 cents/KwH. These are still attractive prices relative to power generation costs in many countries. The AP problem, however, which is not unique to AP, is that a combination of gross inefficiencies in the state-owned power distribution companies (India has the highest grid losses of any country in Asia, at an average of 25%) and subsidized prices for some consumers means that state-owned distribution companies are virtually bankrupt, and the new Chief Minister seeks to squeeze improvements any way he can. Andhra Pradesh Southern Power Distribution Company (APSPDL) and Andhra Pradesh Eastern Power Distribution Company (APEPDCL), have lost $220m together in the last year. You can see the political logic driving him, but the cost in lawsuits, and the driving away of operators from AP – reducing competition for future capacity bids – is likely to be a very steep price for breaking contracts. As India looks to achieve its 175 GW target for renewable capacity by 2022, and equally ambitious capacity growth targets beyond this, the roadblocks that have stymied even faster growth will have to be overcome.
Roadblock #1 to faster renewable growth in India is the coal lobby. This consists of many actors, the most powerful of which is Coal India Limited, who among other things provides significant tax revenue and employment in India’s poorest states. Indian Railways transports most coal and over-charge for coal transport to subsidize passenger prices. And even as Modi’s government sets highly aggressive targets for the growth of renewable energy, it has continued to declare in parallel that it will build more coal plants on a large scale. Roadblock #2 remains the credit risk of state-run off-takers. India’s distribution companies collectively lose hundreds of billions of dollars a year – despite the fact that new power sources are getting rapidly cheaper. Most would be bankrupt if not haphazardly propped up by governments. It’s a very large-scale problem: A new World Bank report titled, “In the Dark: How Much Do Power Sector Distortions Cost South Asia,” says India’s power sector inefficiencies cost the economy about 4% of GDP a year. And it’s a big problem for new renewables producers whose financial future depends on their off-takers being able to pay their bills. Roadblock #3 is predictability, along with India’s tradition of economic statism. One example is attempts to renegotiate contracts for political purposes, as seen above in the case of Andhra Pradesh. Another is the attempt to force government-owned firms into the picture. That until recently solar and wind auctions in India had functioned as they have everywhere else, with private sector firms being the bidders to provide new capacity, has run against some of India’s economic traditions. Especially in infrastructure, India’s history is one of state control. This June, India tried to turn the clock back in this direction with an auction for 1.8 GW of new solar capacity… which was only open to state-run firms. Though it seemed a shock to the organizers, it was not a shock to anyone else when the auction was undersubscribed by 2/3, drawing bids for just over half a Gigawatt. Very few state-owned companies (leaving aside partially state-owned exceptions such as Italy’s ENEL or France’s EDF) are nimble enough to keep moving down the production cost curve as aggressively as private producers have done this last decade.
These are pretty big roadblocks. In spite of the historic growth of solar capacity, many observers still believe coal will continue to dominate power in India (see Coal is King in India – and Will Remain So, from Brookings). India is the third-largest coal-fired generation producer globally, behind only China and the USA. Even at the impressive level of 80GW, renewables account for only 40% of the electricity generating capacity that coal-fired power does. And when generation factors are accounted for (meaning how often wind and solar plants are producing actual electricity), coal produces still 7 times the power that renewables do in the county. In 2015, India had plans for adding another 100 GW of coal-fired power generation over 5 years, which briefly became (as China’s announced programs shifted) the largest single-country pipeline in the world for new-build coal capacity. Nonetheless, the coal lobby has a big problem of its own. While formerly expensive solar is getting cheap, formerly cheap coal is getting expensive. Since 2007, bid prices to provide new coal-fired have essentially doubled, from as low as $0.036/KwH to $0.07 by 2013. The average price for coal-fired power on Indian exchanges in 2018 hovered around 7 cents/KwH. And while new renewable PPAs are price-fixed without inflation (meaning real prices on the contracts will actually decline over time), coal power is subject to inflation in the price of coal and other operating costs. Transport inefficiencies, disruptions in imported coal supply (as many coal mines cease to operate due to declining or unpredictable demand), and problems in the domestic mining sector have contributed to the rise, and decline in prices is unlikely. Some new coal plants are being commissioned (about 3 GW in 2018), though decommissioned older capacity means net coal generation is no longer growing. At least for now. This compares with net additions of thermal generation capacity of 20 GW annually from 2012-2016. And four years into the announced plan to add 100 GW of new coal-fired power from 2015 to 2020, only about 10% of this has been built. Plans still call for another 90 GW of new plants by 2026. Let’s see. Either way, the consequences of the next set of procurement decisions will be very large.
As the political power of coal and the economic gains of renewables square off, the future direction of energy in India may depend in large part on developments in energy storage (see Fortune India — Why Storage is the Next Big Thing). The issue with solar and wind is of course their intermittent nature. This is a manageable issue when intermittent power accounts for a small share of total electricity on a grid. Though that share is growing in India, the technical weaknesses of India’s transmission grids means problems occur at lower penetration levels of intermittent power, and Indians are naturally loath to see more country-wide blackouts as the monster experienced in 2012. Therefore the potential value of energy storage, enabling renewable energy to be released to the grid at times when wind is not blowing or sun is not shining, is even higher in India than in other places. As a forthcoming Infrastructure Ideas column will review, battery storage costs continue to plunge worldwide, and storage + renewables projects are beginning to replace even relatively cheap gas-fired capacity in the US and elsewhere. The Government issued its first large-scale tenders for storage in March 2019, and states are beginning to follow suit. The cabinet has approved a National Mission on Transformative Mobility and Battery Storage, which aims also to manufacture batteries on a large scale domestically. With India’s world-class engineering skills, one should expect energy storage built in India to be cost-competitive with storage projects in the US and Europe.
Compared to the ongoing energy transition in other countries, the above snapshot may seem to be missing a third player: natural gas-fired electricity generation. In the US, gas has played the largest role in recent energy shifts, and it is playing a big role in new capacity plans in China, the Middle East, and Latin America. It is also a key question mark for Bangladesh, Pakistan, and Indonesia. For India, there is less to talk about. Sure, India is building both gas import terminals and new gas-fired plans. There are offshore gas reserves, as there are for Bangladesh. But the scale, relative to the massive existing coal fleet and the massive renewable plans, is hardly worth talking about. It could become a bigger factor in the equation for India, but only if (a) the government allows prices for domestically produced gas to come closer to international prices, and (b) it also supports investment in transporting gas throughout the country.
Hydropower will also play some role, though the better hydro sites in India have already been developed, and recent dam-building history is filled with cost overruns, social displacement and construction problems, so it’s hard to see this as more than a minor actor. In Eastern India, imports of hydro-produced power from Bhutan, and maybe gas-fired power from Bangladesh, may play a regionally more important role. But on the large scale of large India, this is not where the main battle will play out.
Keep an eye on India. The development and living standards of hundreds of millions depend on continued economic progress there. As does the extent to which the planet will get hotter. High stakes. And a Top 3 coal power going against a Top 3 renewables plan – the stuff of Bollywood epics for years to come…