From the G-20 leaders’ summit in New Delhi to the COP-28 meetings in Dubai, climate and energy ranked top among India’s priorities. Even the heated elections in five Indian states in November 2023 saw Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) making climate commitments in its manifesto.
However, upon further exploration, there appear to be conflicts between BJP’s subnational and India’s international commitments. While satisfying voters and fulfilling manifesto promises is important for the BJP at the subnational level, the BJP government at the center must prioritize green policies to achieve its international targets and ensure the long-term sustainability of the green energy sector.
Internationally, the BJP-led government has promised that India will develop 500 GW of non-fossil energy capacity and will meet 50 percent of its energy requirements from renewable energy by 2030. Additionally, in Rajasthan, Madhya Pradesh, and Chhattisgarh, the BJP pledged electricity-related benefits in two ways: promises of subsidies and stability — and won an astounding majority. In Madhya Pradesh, the BJP committed to subsidizing 100 units of electricity at 100 Indian rupees for each household; in Chhattisgarh, 24/7 power supply and relief from irregular electricity bills; and in Rajasthan, 24/7 electricity in domestic areas and continuous power supply for agriculture.
Delivering on these promises requires substantial fiscal infrastructure. The current state of energy finances in India is dismal, facing losses of about 15 percent in 2023. If fulfilled, election promises of free electricity will only worsen state finances, inhibiting India’s ability to meet its international goals.
When providing subsidies, state-owned distribution companies bear the cost of electricity supply. The electricity supply chain involves power generation by generation companies, transmission companies, and distribution companies that are responsible for supplying electricity to households. Typically, households pay the distribution companies, who then pay the generation companies based on their own procurement arrangements. However, when politicians promise electricity subsidies, they must pay the distribution companies the difference with the subsidized amount on behalf of the households. Unfortunately, this often does not occur or involves significant delays, leading to distribution companies accumulating debt.
For instance, in August 2022, 13 state-owned distribution companies, including those in Madhya Pradesh, Rajasthan, and Chhattisgarh, owed generation companies $612 million. Although some states have cleared their dues since then, this serves as a reminder of the precarious financial position of distribution companies.
Despite several decades of bailouts and reform programs, state-owned power distribution companies remain a substantial burden on the electricity supply chain and the country’s banking system. Increasing losses at the distribution level mean that dues to generation companies continue to rise, delaying payments to coal mining businesses and negatively impacting the stability of the overall power sector. Distribution companies incur vast losses and struggle to recover the cost of energy supply.
Additionally, government subsidies create incentives for over-usage and wastage. For instance, in agricultural states like Punjab, Haryana, Rajasthan, and Gujarat, generous electricity subsidies incentivize the over-extraction of groundwater. By subsidizing electricity, the BJP might inadvertently increase electricity demand. Since 75 percent of India’s current power supply is from coal, an increased demand for electricity will increase fossil fuel dependence.
Stability and Energy Financing
As per the power ministry’s recently implemented late payment surcharge (LPS) regulations, if a distribution company fails to settle their unpaid balance within 45 days of the bill’s issuance, the generator will only provide 75 percent of the contracted electricity to the company. This means that when state governments promise electricity subsidies but do not pay distribution companies in time, power supplies to voters could face disruptions. The promise of subsidized electricity could come in the way of stable and continuous electricity. This is in addition to the erratic power supply owing to infrastructure which cannot be upgraded due to poor cash flows.
Additionally, manifesto promises like 24/7 electricity and continuous power supply for agriculture either require fossil fuel reliance or long-term investments. Renewable energy power sources are less reliable due to changing weather conditions. For instance, solar energy, available during the day, requires supplementation with fossil fuels at night. To keep stable power supply pledges in states, the BJP presently will have to rely on coal since renewable energy storage is still nascent.
Investments in battery-based energy storage systems (BESS) can provide stability to renewable energy, and India has committed to BESS development despite its high cost. However, financing these promises remains a challenge. Spending money on subsidized electricity will impede investments and infrastructure in renewable energy generation capacity and storage, placing the BJP’s subnational politicking at odds with international commitments.
Poor discom financial and operational health adversely affects the stability of the entire power sector. Furthermore, the precarious financing of the power sector jeopardizes India’s long-term renewable energy goals, underscoring the need for a balanced approach to meet short-term political objectives and green energy targets.
This article was originally published on New Perspectives on Asia from the Center for Strategic and International Studies and is reprinted with permission.