At the Clean Energy Ministerial hosted in New Delhi recently, Prime Minister Manmohan Singh pledged to double India’s renewable energy capacity by 2017. This target adds to India’s already significant clean energy plans: In 2012 India was the world’s fourth-largest market for new wind power projects, it has ambitious solar energy and state-level targets, and it has significant government programmes on energy efficiency.
There are good reasons behind these goals. Renewable energy resources are Indian resources: They can provide India a degree of energy security, provide a cheaper alternative to fossil fuels for rural electrification and help reduce the outflow of rupees to purchase imported fuel. And, while it may be more expensive today, experience in building renewables has been one of the main drivers reducing their costs. By building these industries now, India can continue to reduce the cost of improving energy security, providing energy to those without grid access and reduce air pollution in future.
Thus, developing renewable energy is the right strategy for India. Designing a strategy, however, is different than executing it, and research suggests that India may have more work to do on that front.
Evidence suggests that in this matter India is currently on a path similar to China’s. Despite progress in expanding renewable energy, India, like China, still relies mostly on coal to meet growing energy needs, locking in a carbon-intensive energy infrastructure. Following this path could lead to worse than just losing out on a domestic source of clean energy. In China, heavy dependence on coal has led to air pollution levels more than 25 times World Health Organization guidelines.
There are some issues that could hinder India’s progress.
One challenge is India’s financial environment. While India’s abundant renewable energy potential and relatively low labour costs should provide a significant advantage, its financial environment, and specifically the high cost of debt, wipes out those advantages. A joint Climate Policy Initiative-Indian School of Business study found that high interest rates and relatively short-term loans for renewable energy projects in India add 24–32% to the cost of financing renewable energy in India compared with similar projects in the US and Europe.
The state of India’s electricity system and the poor financial condition of state electricity boards is another challenge. Efforts to keep electricity tariffs low have undermined the finances of many state electricity boards to the extent that many renewable energy developers are unwilling to sign contracts with them. As a result, renewable energy investments have been concentrated in a handful of states perceived to have a good business environment, such as Gujarat, while others with ample wind or solar resources, such as Tamil Nadu, can no longer attract investors.
So what can Indian leaders do?
In the past, India has borrowed solutions from the US and Europe. However, the policies that worked in those countries will be less effective in India because they face different underlying issues. India may find a better example in other developing countries, such as Brazil, a country that’s dealt with similar constraints but which, by offering concessional financing, has successfully encouraged renewable energy development.
After all, just as the India of today cannot prosper without reliable electricity, the India of tomorrow will reach its full potential only if it develops sources of energy that are domestic, clean, and renewable. India’s goals are admirable, but to meet them, it must take a hard, realistic look at market conditions, the state of the electricity boards, and differences between states and make an effort to reform. The country’s future depends on it.
