Explained: What’s India’s Union Budget got to do with COP26?

What should the union budget 2022-23 tell about India’s climate ambitions announced at COP26? That the announcements are not rhetoric but real. And that the country intends to turn its energy transition ambition into action by aligning the climate and fiscal policies. A climate-responsive budget will set in motion the structural transition of the markets, technologies, and institutions to deliver India’s net-zero commitment at pace and scale. However, accounting for the social and economic impact of decarbonizing existing assets, supporting large-scale capital reallocation, and managing the near-term increase in input costs will matter more than ever in this year’s budget.

The country will have to confront a considerable ramp-up in investments for its low-emission future. Per IEEFA, the country will require $500 billion to reach the 450-gigawatt (GW) renewable energy (RE) capacity target by 2030. According to IEA, India will need $1.4 trillion to finance green energy technologies alone over the next two decades. Raising and deploying finance for the capital-intensive energy transition will remain a persisting challenge for India. And so, the forthcoming budgets will be pivotal in coalescing the policy incentives and fiscal tools to address key investment barriers and accelerate capital inflows in low-emission projects.

India’s power distribution sector is the biggest impediment to clean energy investments. The sector loses $0.005 on every unit of electricity sold. A mix of the high cost of supply, long-term power purchase agreements, and subsidized electricity tariffs has rendered the sector financially unviable. This has resulted in a history of overdue payments to power generators, thus inflating the cost of finance, especially for renewable generation projects. Further, the clean energy plants compete for the same pool of capital as the conventional power assets but stressed thermal plants are putting constraints on market lending. Lowering power procurement costs would need repurposing or retiring India’s increasing stock of stranded, underutilized, or old thermal plants. The transition will likely be complex. The budget could play a catalytic role in structuring incentives and social support for such a phase down.