The energy transition away from fossil fuels which India has embarked on poses formidable challenges. Learning from experience to craft the right policy instruments would be the key to success.

There was remarkable success in getting private investment in wind energy in the 1990s. India became among the top five developers of wind farms. It also developed a globally competitive manufacturing industry.

The triggers were two smart decisions. One was the introduction of banking of electricity by the southern States which had wind power potential. Industrial units could put up wind farms. The State grid absorbed all the electricity generated by the wind farm and set it off against the electricity consumed by the industrial plant.

As industrial tariffs were far higher than the cost of wind energy, the industrial plant saved money for each unit of wind energy generated.

Further, the Finance Ministry incentivised wind farm investment by providing the special dispensation of 100 per cent depreciation. This made investments in wind farms very attractive. The State governments were forward looking and willing to forego some cross subsidising revenue from industrial consumers and the Finance Ministry some tax revenue to promote a sunrise sector.

Solar success

The National Solar Mission is a success. When it was launched in 2010, the cost of solar power approved by the Regulator was about ₹17 per unit whereas the price of conventional thermal power from a new plant was a little over ₹4 a unit. Under the Mission competitive bids for long-term contracts for the supply of solar power were invited repeatedly.

Initially, the expensive solar power was bundled with much cheaper power from the older depreciated plants of the NTPC and given to the Distribution Companies at rates comparable to the price at which they were entering into contracts from new plants. No subsidy from the budget was needed for this. A competitive industry structure emerged.

Private investment was de-risked by the implicit guarantee of the State. India now has one of the lowest costs of solar power in the world, between ₹2 and ₹3 per unit.

The invitation of bids for renewable energy and storage has been initiated. The bid prices indicate that we could meet all additional power demand from renewable energy and storage.

Competitive procurement by government can be used to create globally competitive manufacturing capacity. Bids may be invited for the supply of solar panels with full value addition in India for five years from the date the plant goes into production. A five-year assured off take would de-risk investment and result in lower prices. With competition in successive bids, prices would go down. We would become self-reliant.

The government could use these panels, even if they are initially more expensive than imported ones, in its institutions such as universities, schools and defence establishments.

Green hydrogen

A similar approach could be used for procuring Green Hydrogen from a prospective date. Competitive procurement is a better instrument than Production Linked Incentive (PLI) as it incentivises movement down the cost curve.

Green hydrogen can then be provided for downstream uses as a substitute of fossil fuels in the production of ammonia, fertilizer, steel, etc. The setting up of the first pilot green fertilizer and steel plants may need government backed risk capital as well as assured offtake. Once these start working smoothly, then green fertilizer and steel can be competitively procured by government to incentivise cost reduction. Green fertilizer for supply to farmers would need a higher subsidy. Steel may be used by government agencies who could absorb the higher cost.

The large GST rate differential put in place between electric vehicles (EVs) and conventional motor vehicles along with financial support from the Centre as well as the States is having an impact with EVs gaining market share.

The results of the innovative bulk procurement tenders for running electric buses in cities have yielded surprising results; the cost per km of an electric bus has turned out to be lower than that of diesel buses. Mandating change from a prospective date giving sufficient time for green supply to emerge at reasonable prices and gain acceptance is a sensible approach.

After major car companies started bringing a range of EV models into the market, the UK decided that from 2030 sale of vehicles using fossil fuels would not be permitted.

California and the EU have set the year 2035 for this. India could consider setting a date for new taxis and buses being only electric.

The transition to a fossil fuel economy is a necessity. India has taken the right strategic decision to bypass the development path taken by the advanced industrial economies and move directly into the green economy. This would also give us competitive advantage. The challenge would be to craft pragmatic and affordable policies for this historic transformation.

The writer is a Distinguished Fellow at The Energy and Resources Institute (TERI), and former Secretary, Department of Industrial Policy and Promotion, Government of India

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