India’s difficult transition from fossil fuels to net-zero emissions

Electricity generation is the main source of carbon emissions. Estimates based on data from the International Renewable Energy Agency (IRENA) show that non-renewable fossil fuels account for 70% of the current (2020) generation capacity of 452,3038 MW, followed by hydro/marine power, solar and wind at 11%. Energy at 6% each, nuclear power at 5% and bio-energy at 2% (bit.ly/3G2mWbh).

The big question is, how can we move from such a heavy reliance on fossil fuels to a state of net-zero carbon emissions, where fossil fuels are almost exhausted, and how long will it take us to get there?

A recent Council for Energy, Environment and Water (CEEW) report has highlighted several formidable challenges for India’s transition from a fossil-fuel-dependent economy to one based on renewable energy. First, there is the technical, managerial and regulatory capacity to manage this revolutionary change. Then there is the major constraint of finance. The change would largely involve higher cost, higher risk, longer term investments. There is little fiscal space for large public investment in renewable energy, while large-scale private investment in renewable energy is just getting started.

The willingness of developed countries, particularly the US, to provide adequate low-cost finance and essential technologies remains uncertain. India has negotiated hard to access such financing and technologies. Results are still awaited.

Another major obstacle is access to land. CEEW estimates that between 4% and 6% of India’s land mass may be required to create renewable energy generation capacity for a near-zero economy. Another challenge is to manage the political economy of change. Reducing fossil-fuel-based power generation and the closure of coal mines, oil wells and thermal or oil-based power plants will be opposed by the owners of these properties as well as the thousands of workers employed in these installations. If the cost of electricity based on renewable energy exceeds that of fossil-fuel-based electricity, consumers will also resist the change. Breakthrough technologies in carbon capture and storage (CCS) and hydrogen-based electricity could radically reduce the cost of electricity based on renewable energy. Some Indian groups are also investing in renewable energy and these technologies. However, the commercialization of these technologies on a large scale is still a work in progress.

The CEEW report also explored the effects of several alternative net-zero scenarios. Whatever the scenario unfolds, it is quite clear that emissions will increase for the next 30 to 50 years. A two-pronged strategy of accelerating renewable energy production and radically changing the composition of the fossil-fuel basket in favor of gas could significantly shorten that period of transition.

Carbon dioxide and other emissions from gas constitute only a small fraction of emissions from oil, and especially coal. Global gas supply has increased dramatically following the shale revolution, driven by hydraulic fracturing and horizontal drilling technologies. Estimates from the International Energy Agency indicate that gas will overtake coal as the second largest energy source after oil within this decade. Despite these developments, the share of gas in primary energy supply and electricity generation in India remains stuck at only 5-6%. The country ranks 29th in global production of a little over 1 trillion MMcf per year and 14th in global consumption of about 2 trillion MMcf per year. Why has the shale gas revolution passed through India?

A recent collection of papers, edited by Vikram Mehta, The Next Stop (HarperCollins, India, 2021), addresses this question and other aspects of the gas market in India and abroad. Although India may have gas reserves of over 100 mmcf, only 40% of this is in accessible terrain and will be exhausted within a few decades. Given the high risk and cost of gas exploration and extraction, the expected return is low. These are further compromised by a completely distorted administrative pricing and taxation system, combined with a regulatory nightmare of multiple overlapping systems. Hence, neither public investment nor private investment is coming by GAIL.

However, apart from the development of our neglected domestic gas distribution system, energy investments should be directed entirely towards the development of renewable energy. India’s future gas requirements must be met largely through imports. This will be largely foreign exchange cost neutral, as gas imports will mostly replace oil and coal imports. Thanks to Pakistan, our gas imports still mostly come from West Asia, particularly Qatar, due to the failure of planned pipelines from Central Asia. But the global gas market is undergoing a radical change.

Australia could soon displace Qatar as the largest liquefied natural gas (LNG) exporter and itself could be replaced by the US in the future due to the shale revolution. US suppliers are also undermining rigid, traditional long-term gas contracts with flexible market-based contracts. This diversification of supply sources and the rise of active spot and futures markets is transforming the global gas market. Two recent technological developments, enabling the liquefaction and re-gasification of LNG onboard, will further disrupt the market and reduce costs. Therefore, India has a huge opportunity to take advantage of these developments and make excellent gas import deals.

The author would like to thank Rohit Sanyal Nag for his help. These are the personal views of the author.

Sudipto Mundele is a Distinguished Fellow in the National Council of Applied Economic Research.