The policy debate on low-carbon energy often tends to focus solely on setting targets. This column argues that the State’s capacity to meet targets and the strategies followed to build the required capacity are equally important. Meeting the targets requires creative manoeuvres such as involving and incentivising market players to participate.
Like in many other developing countries, energy policy in India is confronted with the challenge of balancing four competing objectives: (i) powering industrialisation (ii) improving energy access for the poor (iii) enhancing domestic energy security, and (iv) protecting the environment. In response to this challenge, India claims to be undertaking a transition to the low-carbon electricity sector. The alleged transition has followed a two-way approach that focuses on increasing renewable energy production (the country aims to meet a substantial portion of its energy demand from non-fossil sources) while taming the rising demand through enhanced energy efficiency. The underlying postulation is that the two-way approach will lead to energy security and also produce developmental and environmental benefits.
India has set a target to achieve the installation of 74 gigawatts (GW) of renewable energy capacities by 2022 and produce 15% of consumable electricity from renewable sources by 2020. At the same time, it aims to achieve an energy saving of 10 GW by 2014-2015 and thus avoid an addition of 19 GW to its generating capacity (Charnoz and Swain 2012).
Manoeuvres for a low-carbon electricity sector
While India’s energy policy in the past was solely driven by domestic energy security goals, currently it is being interwoven with global climate concerns. By developing clean energy industries, India seeks to achieve regional development, employment generation, globally competitive domestic industries, improved energy access for the poor, domestic energy security, and climate mitigation (World Bank 2010).
Although the State has retained control over energy for long, is it capable of implementing a new energy policy? Being a large and fissiparous country, where control and command of central policy making agencies over field level implementing agencies is increasingly eroding1, it is less likely that central policies will be effectively implemented at the local level. The low confidence of national agencies in the capacity and intention of local agencies has resulted in opening the floor to market players. In the emerging institutional architecture, actual implementation is left to market players, while the State is closely engaged with the question of how implementation takes place (Harrison and Kostka 2012). For the promotion of renewable energy, India has made provisions for capital subsidies, feed-in tariffs, renewable energy certificates, and renewable purchase obligations. In the energy efficiency domain, it has mandated a specified level of efficiency from designated consumers (such as high consuming industries) and introduced energy saving certificates to reward or penalise them. Efficiency in other sectors is promoted through market transformation.
The State not only offers incentives to market players to participate, it also seeks to encourage market players to enter where they are absent or lack capacity. The provision of a high capital subsidy for renewable energy developers and the accreditation of energy service companies are two such initiatives. Simultaneously, the State has been enforcing local content requirements (LCRs), as a policy tool to protect and support domestic renewable energy manufacturing industries2. It has also made a significant effort towards capacity building of public institutions so that they can engage with the market institutions on market terms.
Consequently, India seems to be emerging as a global leader in clean energy development, particularly among developing countries. By launching the Perform, Achieve and Trade scheme last year, India became the first developing country to adopt market-based mechanisms to trade energy efficiency. With 27.7 GW renewable energy installed capacity (13% of total capacity), India is already a global leader in renewable energy.
Paradoxes of low-carbon electrical development
While energy efficiency will reduce the potential energy demand, renewable energy can meet much of the remaining demand from non-fossil sources. In a context where the existing demand is substantially higher than availability, renewable energy development without adequate energy efficiency may not lead to real gains. Considering their equal potential and complementarity, both approaches merit equal and simultaneous attention.
Although efficiency measures offer high collective returns (at least as high as renewable energy at a much lower investment), they have received less attention and priority. What drives this paradox? India’s renewable energy strategy, following a top-down approach of grid-connected generation is much easier to implement than an efficiency strategy that requires a bottom-up action on the part of consumers. The presence of concentrated interests, facilitated by big business conglomerates, has expedited renewable energy development as opposed to efficiency promotion where interests are diffused across the utilities and a large number of consumers. Being an early taker of renewable energy, India has a well-established institutional architecture for its development, with an exclusive ministry at the centre and dedicated public agencies at subnational level. The institutional architecture for energy efficiency is weak. Finally, as the State begins to perceive larger developmental co-benefits from renewable energy, there seems to be a stronger political will backing its development (Charnoz and Swain 2012).
Considering the political and economic context, India’s initiatives for energy efficiency are commendable, if not adequate. Yet, energy efficiency initiatives taken by the State seem to be paradoxical: State actions prioritise industrial sector for promotion of energy efficiency, while it is the domestic and agricultural sectors that have maximum energy saving potential.
What drives this trend? A credible explanation may be related to the relatively low incentives faced by individual consumers, despite the fact that overall collective return and incentive is high in these sectors. Implementation is easier when individual incentives are higher. Moreover, in the absence of an effective incentive structure and financial tools, upfront investment for energy efficiency is often unaffordable for most agricultural and domestic consumers. A low level of public awareness about the benefits of energy efficiency has also contributed to a lower willingness to accept. Finally, limited numbers of industrial consumers are easy to target, while it is difficult to reach out to a geographically dispersed, large number of agricultural and domestic consumers (Charnoz and Swain 2012). More recently, however, the State is seeking to promote enhanced energy efficiency through market transformation- by incentivising leading manufacturers to produce and sell super-efficient equipment and appliances.
In its pursuit of low-carbon electricity, India seems to be serious about its goals. The State has initiated major shifts in energy trajectories, loosening its control over the sector and offering incentives to private capital. Though much of India’s electrical development has been State-led, the current energy governance paradigm seeks greater participation and contribution from the private sector. India’s transition to low-carbon electricity is promising but much depends on the extent to which the private sector shares the State goals and its capacity for collective action. At the same time, the State needs to build the confidence that private activities will be supported- not frustrated- and that rent-seeking will be avoided. Regulators have a key role to play in implementing these policies and will affect the pace and pattern of transition. The process and its outcome will not only shape India’s energy future, but also set an example for other developing countries.
- Pritchett (2009) encapsulates the problem by referring India as a ‘flailing state’- “a nation-state in which the head, that is the elite institutions at the national (and in some states) level remain sound and functional but that this head is no longer reliably connected via nerves and sinews to its own limbs” (p. 4).
- For a detail discussion of LCRs in solar energy, see Johnson 2013.
- Charnoz, O. & Swain, A. (2012), ‘High Returns, Low Attention, Slow Implementation: The Policy Paradoxes of India’s Clean Energy Development’, AFD Working Paper 125, Paris: Agence Française de Développement.
- Harrison, T. & Kostka, G. (2012), ‘Manoeuvres for a Low Carbon State: The Local Politics of Climate Change in China and India’, DLP Research Paper 22, Developmental Leadership Programme.
- Johnson, O. (2013), ‘Exploring the Effectiveness of Local Content Requirements in Promoting Solar PV Manufacturing in India’, Discussion Paper 11/2013, Bonn: German Development Institute.
- Pritchett, L. (2009), ‘Is India a Flailing State?, Detours on the Four Lane Highway to Modernization´, HKS Faculty Research Working Paper Series, RWP09-013, John F. Kennedy School of Government, Harvard University.