On World Environment Day, A Look At Why Falling Oil Prices Are the Perfect Opportunity for India to Adopt Renewable Energy

Solar panels at the Gujarat solar park at Charanka village of Patan district, some 250 kms from Ahmedabad on 14 April 2012. India made its foray into renewable energy three decades ago with a wind plant in Tamil Nadu, the capacity of which was 0.5 Megawatts. SAM PANTHAKY/AFP/Getty Images
05 June, 2015

On the 5th of June every year, people around the world celebrate World Environment Day, an initiative to encourage awareness and action for a better environment. ‘Seven billion dreams. One planet. Consume with care,’ is the theme for 2015. On the same day, members of the Organisation of Petroleum Exporting Countries (OPEC), a total of 12 countries including Saudi Arabia, Kuwait, Iran, Iraq, Venezuela and others, are meeting at the headquarters in Vienna to talk about the impact of falling oil prices on their business. The concurrence of these two events is ironic, since oil is one of the factors that has led to the sorry state of the environment.

The price of a barrel of crude oil has tumbled down from a high of $114 nearly a year ago to $65 now. The United States on account of the shale boom—a significant increase in oil and natural gas production that has been caused by advances in exploration and production technologies—has been pumping large quantities of oil, almost equalling the daily production levels of the OPEC. However, the expansion in supply has not been met with an increase in the demand for oil thereby spiralling prices downwards. There is consensus in global analysis that, at least for a protracted period, oil prices are going to hover in the $50–70 a barrel range. Kaushik Basu, a noted Indian economist, refers to this range as “the shale shelf.”

As the fourth largest consumer of crude oil in the world, this fall in prices is a welcome change for India. According to the export–import database of the ministry of commerce and industry, at present, 34 percent of India’s import bill constitutes of purchases of oil, and according to theministry of petroleum and gas, these imports make up around 80 percent of the oil that it consumes. The windfall gains for India’s economy from this cheap oil bonanza can be succinctly conveyed through the following metric that was quoted by the minister of state for commerce and industry, Nirmala Sitharaman, in the Rajya Sabha: every decrease of a dollar in oil prices leads to a saving of Rs 8,578 crores.

Since India had no role to play in the international oil market dynamics, the falling oil price has been fortunate. Intuitively, one might assume that this would deter the growth of renewable energy, as cheap oil would encourage its consumption over other sources of energy. But a closer analysis reveals that such an inference is inaccurate. Low oil prices actually present an opportunity to infuse much needed capital into, and provide a level playing field for, the renewable energy sector in India, which is still in very nascent stage in the country.

As per an analysis of India’s energy sector done by The Energy and Resources Institute (TERI), a think-tank in New Delhi, only 2 percent of our total energy comes from renewable sources. After making an allowance for traditional biomass, which is still the primary source of energy in rural parts of the country, the balance requirement is mostly drawn from conventional fossil fuels such as coal and oil. The forecasts of India’s energy consumption by TERI show that, low prices or not, fossil fuels are not going away from its energy basket anytime soon. Even in the research’s most ambitious scenario, in which the objective is to drastically reduce energy imports, they project that India’s fossil fuel dependence is going to increase from its current 69 percent to 74 percent by 2030. This minimal increment in the use of fossil fuels can be ensured only if India takes steps in the right direction by incentivising the consumption of renewable energy.

The benefits of using renewable energy are manifold. Unlike conventional fossil fuels such as coal, oil and natural gas, using solar or wind energy is free from carbon-dioxide emissions, one of the leading causes of climate change. The installation of renewable energy power plants is uncomplicated and incremental while setting up conventional power plants requires meticulous and long-term planning. For instance, the largest solar park of India, in the Patan district of Gujarat, started with a capacity of 5 Megawatts (MW) in December 2010. As new investors started setting up projects in the park, an additional capacity was installed over the years, bringing the current total to 900 MW. In contrast, the biggest thermal power plant in India with a capacity of 4,000 MW, located in Mundra in Gujarat, had to be built in one go and took five years to be constructed. Finally, the energy generating capacity of a renewable setup depends on factors such as the sun and wind, which are far less volatile than the international coal, oil and natural gas markets.

Renewable energy has not yet achieved parity with conventional energy in India. At this point, generating one unit of electricity in a thermal power plant costs Rs 3.5 while solar and wind installations cost at least Rs 5 to 8 even with subsidies. Five years ago, this cost was as high as Rs 20. Rapid progress in bettering the technology has brought this cost down tremendously. Without subsidies, despite the decrease in prices, the large-scale deployment of such power generating facilities as a replacement of conventional power plants is still not profitable in India.

This transition to clean energy, which has been in the making for half a century now, has finally reached a tipping point in the rest of the world. If recent studies are to be believed, the prospects for renewable energy are looking good. By 2017, parity in the prices of renewable and conventional energy will be achieved in most parts of the world. By 2050, the cost of power generation from renewables will shrink to just one-third of the cost of coal-fired power generation.

Taking stock of the sharp decline in costs, the new government in India appears to have warmed up to the idea of increasing renewable energy in India’s energy basket. India made its foray into renewable energy three decades ago with a wind plant of 0.5 MW capacity in Tamil Nadu. From then till now, renewable energy capacity, including solar, wind, small-scale hydropower and biomass, has grown to 37,000 MW. On 28 February 2015, Finance Minister Arun Jaitley announced that Prime Minister Narendra Modi plans to boost the renewable energy capacity in India to 175,000 MW (175 Gigawatt) by 2022. This will include 100 GW of solar energy, 60 GW of wind energy, 10 GW of small-scale hydropower, and 5 GW of biomass-based energy capacities. If successful, this would mean that the share of renewables in India’s total energy production will go up to 15 percent by 2022 and bring India in the league of clean energy giants like the United States and Germany. Additionally, renewed emphasis on initiatives such as the National Solar Mission—which aims at decreasing the cost of solar power through research and development and domestic manufacturing—hold the promise of creating jobs in the economy.

The central government also organised the first ever Renewable Energy Global Investors Meet—RE-Invest—in February this year, where the prime minister called for an increase in innovation and research to make renewable energy affordable. As many as 293 companies have signed agreements to set up 266 GW of renewable energy capacity over the next five years. This is a welcome change from the namesake policies of the previous government to fight climate change. However, it is important to note that an increase in the country’s renewable energy capacity by 138,000 MW in seven years is an ambitious objective, and one that appears to have been set without any visible roadmap. Furthermore, all of these are only “commitments” to green energy projects in the future, which may not necessarily translate into tangible action. A notable case in point is Vibrant Gujarat—a biennial investors' summit held by the government of Gujarat in Gujarat—during which memorandums of understanding for foreign direct investment worth $876 billion from 2003 to 2011 were signed. But Gujarat’s share in FDI inflows for the year 2012–13 remained a paltry 2.38 percent, indicating that a majority of these promised investments had not been realised.

A degraded environment hurts the poor more than the rich. With their limited incomes, the poor can barely afford basic necessities, let alone fight the increasingly harsh climate. The recent heat wave in southern parts of the country, where the death toll has crossed the 2000-mark, stands testimony to the deteriorating changes in climate. According to the Centre for Research on the Epidemiology of Disasters (CRED), it has been thefifth deadliest ever, and climate experts believe that such heat waves are only going to increase. As problems of climate change become graver, the resilience of the economy will be tested, and it would be prudent to be prepared. Policy changes in favour of renewable sources for the production of energy will help battle climate change, as well as make India’s economy self-sustained and less dependent on the international energy market.

Fossil fuels have historically enjoyed subsidies in India, and all over the world, on the basis that cheap energy promotes development and growth. Given that technology the world over has made cheap renewable energy a reality, the same argument can now be extended to renewable energy. In India, subsidies to this sector are given by the government directly as part of the total capital required to set-up the infrastructure and as loans at discounted rates over and above the direct component against collateral.

The problem with this newfound political will is that it is half-hearted. The intentions of the government are to create a favourable climate in the economy to allow the renewable energy sector to grow and compete with the coal, oil and natural gas industries. But that process has been sluggish due to the government’s hesitation to loosen the reins on the sector, which is essential to let private players grow and thrive in it. For example, being eligible for subsidies requires a company to follow strict guidelines that include restrictions on buying the equipment from a specific set of vendors approved by the government and at fixed prices. It is not easy to do business in this sector. Doing away with some of the bureaucracy will definitely do the nascent renewable sector good.

Even if the government does not wish to free the sector from bureaucracy, it should, at least, provide it a level playing field. It subsidises kerosene, making it the primary fuel for lighting in rural India. However, solar lamps or electricity from solar energy provided to rural areas, where grid connectivity has not yet reached, enjoy no such support from the government. Entrepreneurs looking to set-up micro-grids that would generate electricity from solar energy, enough to power a village, are faced with direct competition from kerosene. No one is willing to buy their power because, without enough subsidies, it is more expensive than subsidised kerosene. What makes things worse is that the subsidised kerosene, which the government wants to provide to the poor, hardly ever reaches them because of rampant theft in the public distribution system. If instead, this money was channelled to provide renewable energy to the poor by working collaboratively with the entrepreneurs, the returns on government spending would be much higher.

While coal-fired power is the biggest competitor to renewable energy in large-scale power generation, it is kerosene that is the roadblock to small-scale setups trying to increase energy access to the rural poor in the innermost areas of the country. These inherent disparities in the first and last miles along the pyramid cannot be tackled by simply sounding a clarion call for investors to pump money into the sector. It should be noted that the contention here is not with the National Democratic Alliance’s ( NDA) central planning methodologies. If Modi likes keeping his cards close to his chest, so be it. He should then go all out, perhaps, and look at an integrated energy ministry. Given that Modi’s modus operandi is that of galvanising the public sector, and not necessarily pro-market reformation, why hasn’t the NDA come out with a roadmap to bring in an integrated energy policy?

The low oil prices simply mean that India, being an oil importer, got lucky. As the Reserve Bank of India governor, Raghuram Rajan, said, we just received a “$50 billion gift.” This gift, however, comes at the most opportune moment, when solar and wind energy is nearing grid parity—a point when they will cost the same as power produced from traditional sources. A semblance of a will seems to be present in the government to bring renewable energy to the forefront. The savings from the cheap oil bonanza can be utilised effectively to cement a way. If utilised well, this cheap oil can go a long way in getting rid of India’s energy import dependence and cleaning its economy of dirty fuels.


Saahil Parekh is an economist tracking developments in the energy sector, sustainability and climate change. He works at a think tank in New Delhi.