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India’s Climate Commitments and Role of Public Sector Enterprises

In March 2022, India surpassed the UK to become the fifth largest economy in the world. One of the fastest-growing large economies, India is expected to be the third largest by 2030 (behind the USA and China). Driven by this economic growth along with an anticipated rise in population and an increase in demand for goods and services, energy needs will increase significantly.

Traditionally, India’s electricity sector has been dominated by coal considering India’s vast coal reserves. Coal based capacity generated 70% of the total electricity consumed during 2021-22. While use of domestic coal provides a certain level of energy security, the extensive use of coal has led to electricity generation being the single largest source of greenhouse gas emissions in India. India is the third largest emitter of CO2 in the world, after the United States and China, and  power generation accounts for about 40% of India’s total greenhouse emissions.

Considering global climate change, India’s rapidly growing economy, and the expected rise in electricity demand, at COP21 in Paris 2015, India committed to ramp up renewable energy to 40% of the total energy capacity by 2030. India exceeded expectations and achieved this feat by November 2021, nine years ahead of schedule. Given India’s growing global stature, India further revised its climate change commitments at the COP26 summit in Glasgow 2021. At the COP26 summit, the Prime Minister presented India’s “Panchamrit” (five nectar elements) commitments:

  1. India will reach non-fossil energy capacity of 500 GW by 2030.
  2. India will meet 50% of its energy requirements from renewable energy by 2030.
  3. India will reduce the total projected carbon emissions by one billion tonnes from now onwards till 2030.
  4. By 2030, India will reduce the carbon intensity of its economy by less than 45%.
  5. By the year 2070, India will achieve net zero carbon emissions.  

India cannot achieve these ambitious targets without significantly decarbonizing its electricity sector.

That decarbonization will not be possible without the leadership of India’s public sector enterprises in the energy value chain, which hold significant market share. Three key Indian Public Sector Enterprises that have a strategic presence across the thermal-dominated electricity sector value chain in India are:

  • Coal India Limited (CIL) along with its subsidiaries, is among the largest global coal producers and controls 82% of India’s coal production. It produced 622 MT tonnes of coal in 2021-22 and has set a production target of one billion tonnes by 2024.
  • Indian Railways (IR) is the prime mover of the Indian economy and plays a key role in coal transportation, which comprises a significant share of its freight revenue. As freight revenue is critical for subsidizing passenger fares, the coal transportation business is financially critical for Indian Railways.
  • NTPC Ltd. is India’s largest power company, generating ~22% of India’s annual electricity. NTPC operates a vast thermal power fleet comprising nearly a quarter of India’s installed coal-based capacity.

These public sector enterprises not only play a vital role in the electricity sector, but also contribute significantly to India’s economy and the social fabric of the country by employing over 15 lakh individuals. These public sector enterprises, with their vast interests in the coal value chain, would need to become key change-makers, to not just help achieve India’s decarbonization commitments but to also ensure a just transition for all stakeholders.

The evolving international ecosystem aimed at limiting global warming to 1.5°C above pre-industrial levels has already started impacting the business models of the carbon-intense sectors. The availability of low-cost international capital for the development of new carbon-emitting projects has become increasingly scarce. The rapid price decline of RE based generation has made it more cost competitive than most coal-based generation. Furthermore, the growing affordability of storage is likely to make RE more suitable for grid dispatch at competitive tariffs. Policy measures being considered globally such as carbon tax will also continue to impact on such businesses.

Considering this global shift, along with India’s climate commitments, public sector enterprises like CIL, IR and NTPC will need to factor in the transition linked impacts on their businesses and growth plans. It is estimated that financial risk due to the energy transition for these public sector enterprises could be over 16% of their respective cash flows by 2030. As revenues for CIL, IR, and NTPC are linked to the production, distribution, and consumption of coal, a revisit of their current and future business plans may help them better manage and mitigate the foreseeable risks.

Any strategic action and investment decisions taken by the country and in turn by these public sector enterprises to decarbonize their operations will have a significant impact on the pace of India’s transition to a low-carbon energy sector. While this transition creates a few challenges for these entities, it also presents wide-ranging opportunities. By leveraging growing policy support and strong financial base of these entities, reformulating existing and future business models could be undertaken to significant strategic advantage. This may consider diversification of their respective business portfolios towards low carbon intensity businesses in alignment with national commitments. Such diversification would not only de-risk their long-term financial position, particularly cashflows, but also provide the opportunity to become a lead change maker and thereby uphold their dominant position in the energy and economic sphere of India.

The second part of this two-part series “Futureproofing Indian Public Sector Enterprises” will look deeper into the potential diversification opportunities for these public sector enterprises, in light of the transition risks.

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