In a forthcoming working paper, we assess the impact of deep decarbonization on states with low endowments of solar and wind energy and find that strong, continued regional variations in the build out of solar and wind energy and lower coal offtake together exacerbate existing regional inequalities. The absence of an acceptable framework and policies that address resultant fiscal and political issues could impact India’s climate change goals.
The country is targeting 500 GW wind and solar capacity by 2030. Changes in the energy mix through 2022-2030 have been built into the National Electricity Plan and the Optimal Generation Mix (OGM). On the all-India supply side, The share of variable renewable energy that is wind plus solar, in electricity generation grows from around 17 to 30%. The resultant coal requirement of 895 MT, nearly 40% lower than needed without higher VRE, is the intended impact of climate policies.
India’s energy resources exhibit a high degree of geographical concentration. VRE is confined to 8 western and southern states (VRE Rich), with two thirds of the potential and more than 90% of the total VRE capacity installed. They will naturally continue to dominate VRE build out in the coming decade. Ten other big states, (VRE Poor), in the east and north, have a much lower (13%) share. Likewise, coal is concentrated in the east and centre, with Jharkhand, Odisha and Chhattisgarh having 71% of the proven coal reserves and 60% of the total production. Royalty on coal production and related inflows form a major source of revenues.
The unintended consequence shows up on the demand side at the sub-national level. The key insight lies in categorising the states as VRE rich and VRE poor and then moving the analysis away from the supply to the demand side. A completely different picture emerges. VRE share in the system demand of “VRE rich” states rises to just short of 60%, while it stays at around 6% in the latter.
At 60% VRE, system stability demands inter-state power transfers. During certain seasons and times of day, VRE by itself could exceed the total system demand. No exports would imply curtailed VRE generation which will work against the mitigation targets. During lockdown, Germany managed to cross the 50% mark in renewables penetration, through inter-country electricity trade of nearly 20% of own demand. As its share of solar power grew beyond 15%, California offloaded nearly 18% of its power sales in 2017 to neighbours like Arizona. Curtailments are expensive. (1% VRE cut in 2030 =7.7 billion kwhr~ Rs 23000 cr).
The unintended impact of specific policies plays out as follows. Through 2030, VRE build out happens mainly in the VRE- rich states. VRE share in their electricity production rises to levels requiring inter-state exports. According to current policies, VRE poor states have to absorb this power. Policy also requires both groups to curtail fossil generation irrespective of legacy fixed cost commitments. Exports likely remain one-way since “Rich” states will prefer to bring back their own fossil plants online to make up for shortages.
Most distribution utilities, barring few held privately held metro utilities, run deficits paid for by the state exchequer. The total annual deficit across all utilities is more than, Rs 1trillion. Deficits are normally managed within a state through mechanisms that lower actual cash outflows, including periodic grants and loans from the state government, deferred payments to states’ own generators, write offs and conversions of loans to equity. Policies and law mandate immediate cash payments to VRE generators. This will add to their deficits and impact the fiscal position of the state. On the revenue side, lower coal production plays out through reduced royalty and other inflows.
In the paper we come up with a simple model of state finances and engage in some basic scenario analysis to consider the short-medium term fiscal impacts of the effects described above. For the base case with 10% power exports, we categorize states into VRE Rich and Poor, project GSDP to 2030 and derive electricity demand, fiscal deficit and coal revenues for each state in a BAU scenario. We then incorporate the growth in VRE generation in VRE Rich and assess the volume and value of exports to VRE poor. The sum of import value and coal revenue loss is set off against the overall fiscal deficit for the final result.
VRE poor states will see a substantial deterioration in their overall fiscal deficit and there will significant resource outflows to the “VRE Rich “. Combined fiscal deficit in VRE poor states rises by 8.66% on account of payments for imported electricity (7.41%) and losses on account of coal revenues(1.25%) Some states are severely affected. Chhattisgarh’s deficit rises by more than 17%, Jharkhand(10%),Punjab (13%), Odisha( 8.45%), Haryana (8.99%), UP (8.7%), Bihar (6.78%) and WB(6.18%) also show fiscal deterioration. Outflows from Chattisgarh in 2030 would be around 0.86 % of its GSDP. Punjab (0.66%), Haryana(0.45%), Jharkhand (0.46) and UP(0.43) also show significant outflows.
VRE absorption would primarily depend on the willingness and ability of the “importing” states. Rather than a purely techno-economic matter related to a “national grid” and national climate commitments, it is most likely to become a political issue related to the rise in deficits, sustained resource outflows and perceived loss of autonomy over a critical sector of enormous significance to public order and the political fortunes of the parties in power. It does not help that most “VRE rich” are better off with larger GSDPs and HDIs. VRE and energy autonomy have been the subject of intense political give and take across the world. An analogue of the GST Council could be better positioned to deal with such basic issues than the purely techno-centric consultative arrangements within the electricity sector. It is hard to escape comparisons with circumstances and interests existing prior to the Freight Equalization Policy for coal and iron ore.
The direction of the results are robust to different scenarios. Deficits worsen if states grow differentially or at lower rates. Increased inter-state trade worsens deficits, while a long- term fall in prices of traded power works the other way. Higher coal royalties exacerbate the problem. Business as usual in the distribution business is a strong assumption and its impact difficult to assess. Mere privatization of the distribution sector is unlikely help address the core issues of autonomy and resource outflows and may vitiate perceptions as money is seen to flow from the state exchequer to “out of state” private entities.
Data sources: Ministry of New And Renewable Energy; Central Electricity Authority; Ministry of Coal, National Statistical Organization); Report on Performance of Power Utilities 2020-21, Power Finance Corporation; UIDAI.
Authors: Sanjay Mitra and Rohit Chandra. Authors can be reached for comments and clarifications at sanjay.mitra@sopp.iitd.ac.in and chandrar@sopp.iitd.ac.in.