Ambitious plans vs. complex challenges. Will India realize its energy potential?

By

Somesh Kumar

EY India Power & Utilities Leader

Experienced energy leader with deep regulatory knowledge.

9 minute read 20 Jun 2019

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India has some of the world’s most ambitious renewable energy targets, and the country’s policymakers and utilities are striving to deliver on those goals. 

When established industries are disrupted, it’s often emerging markets — unhindered by legacy systems — that adapt to change the quickest. This transformation is clear in India, where the government has announced ambitious plans to achieve 227 GW of renewable energy capacity addition by 2022.1 Digital technologies, a more empowered consumer and the proliferation of renewable, distributed generation are driving fundamental changes.

Powering the world’s fastest growing economy

This push for a cleaner energy supply comes against a backdrop of massive economic and demographic change. India’s population is growing fast and by 2025 is expected to overtake China as the world’s biggest, with more people than ever living in urban areas. This, along with the world’s fastest economic growth, is forecast to quadruple India’s demand for electricity by 2050.

As demand for reliable power soars, India’s Modi government has set a target of 100% electrification by 2022 and is modernizing and extending the electricity grid to all of the country’s villages — a goal that the prime minister announced had been reached ahead of schedule in April 2018.

Tipping points to a new energy system

It’s these drivers that have combined to accelerate the transformation of India’s energy sector. In fact, EY teams and a leading global analyst house have calculated exactly when three critical milestones will change the country’s energy market forever:

India’s tipping points on the journey to energy transformation are expected to come later than those calculated for other regions (Oceania 2021; Europe 2022; US 2031; China 2031, if fuel subsidies are phased out).

Understanding this timing requires examining India’s current energy picture. While the government is committed to prioritizing renewables, India’s soaring demand for power means that coal and natural gas will continue to sit alongside clean sources in India’s energy mix for some time. India’s total demand for coal is expected to double from current levels by 2050, though the rise of renewables will see a sharp shift in the country’s energy mix.

While the Modi government acknowledges that coal will have an ongoing role in India’s energy mix for some time, it is also committed to limiting its expansion, announcing that coal capacity will remain at current levels, with little additions. And, in further support of renewables, in June, India’s Ministry of New and Renewable Energy (MNRE) announced a new renewable purchase obligation (RPO) that sets mandated targets for renewable power use in each of India’s 29 states. The RPO may soon be updated to include storage obligations, and plans are already underway to add significant battery storage capacity at specific power plants to support the use of solar energy. As batteries play a bigger part in India’s energy mix, moves are underway to build the country’s first lithium-ion battery manufacturing facility, using technology developed by local scientists.

Overcoming major challenges to transformation

If current momentum in solar and battery technologies continues or accelerates, tipping point 1 — grid parity — could be within reach for India even before 2033. But, major challenges remain if the country is to transform its energy sector, including the following.

  • Infrastructure upgrades of India’s power sector are urgently needed. The outdated electricity grid experiences high losses and frequent outages, both of which are exacerbated by the inability of current technology to communicate problems in real time. Modernizing the grid must be the sector’s top priority to improve efficiency, bring power to the millions of Indians still living without electricity and reduce the energy losses that are draining utilities’ finances. Only then can work begin to prepare for the future integration of both conventional and renewable power into the grid.
  • Creation of a national energy market, supported by policies and regulatory frameworks, will be critical to bring India’s 29 states in line with federal intentions. There are currently no common standards for open market trading between states, and even energy retail prices differ. There are also key questions to ask regarding how to incentivize utilities to better manage existing contracts.
  • Government stability:  Much of India’s progress in the transformation of its energy sector has been driven by Prime Minister Modi’s commitment to clean power. With the government getting re-elected for another five-year term, the sector is expected to maintain momentum. 
  • Policy certainty and frameworks can maximize the potential of India’s enthusiasm for renewable technologies. For example, much has been speculated about India’s goals for batteries to maximize renewables, but no incentives or regulations have been finalized to support storage.
  • The financial stress of utilities, particularly distribution companies, limits their ability to invest in critical infrastructure updates and digital grid capabilities or explore alternative business streams. This funding challenge will need to be addressed, including through tariff reforms that bring the cost of electricity in line with actual costs. Serious consideration should also be given to opening the market to retail competition.
  • Tipping point methodology

    The energy industry is at the start of a period of unprecedented change, one that will fundamentally change the market place (presenting new challenges as well as new opportunities). Three tipping points will mark the emergence of a new energy system.

    • Tipping point 1: when self-generation reaches cost parity with grid-delivered electricity. To determine this date, we calculated the projected demand for electricity, future generation mix and cost of delivering electricity via a central grid between 2015 and 2050, and then compared it to the predicted cost of self-generating electricity using solar PV and battery storage.

      To help determine when these costs would reach parity, we worked with a leading global analyst house to model the expected adoption and interactive impacts on electricity demands and costs of 10 core distributed energy and information technologies: solar PV; battery storage; electric vehicles; microgrids; home and building energy management systems; P2P electricity exchange; smart meters; artificial intelligence; grid-edge technology; and cloud.
    • Tipping point 2: when the price of battery electric vehicles reaches cost and performance parity with traditional cars with internal combustion engines
    • Tipping point 3: when the mere cost of delivering electricity (i.e., the unit-cost of electricity transmission and distribution) exceeds the cost of self-generated electricity

    Because drivers vary across markets, the tipping points will hit different regions at different times.

5 things Indian utilities can do now

Whether it’s in 2033 or sooner, grid parity is coming and is only the first milestone on the Indian utilities’ journey to a completely new energy market.

Are energy companies ready? We see many in denial or moving too slowly to seize the potential of changes. As India’s energy market attracts more foreign players, domestic utilities will need to make critical changes to their operating model and culture if they are to survive and thrive:

  • Become digitally enabled to equip them with the capabilities they need to operate in the energy future. As most Indian utilities are financially constrained, budgets will need to be carefully directed to those digital capabilities with the potential to deliver the greatest value, such as asset health analytics and blockchain for peer-to-peer trading.
  • Review business models to enable growth in a changing sector. Instead of trying to artificially block the changes that are coming to the sector, utilities should consider how playing a bigger role in transformation could generate alternative revenue. For example, following Prime Minister Modi’s September 2018 announcement of a target of having EVs make up 15% of the country’s vehicles within five years, several utilities have already announced plans to invest in EV charging infrastructure. Others may explore unlocking value in battery storage deployment, as more Indian states actively pursue this technology. For example, the Solar Energy Corporation of India has recently issued tenders for solar power projects supported by batteries in Himachal Pradesh and Jammu and Kashmir. There also may be opportunities for utilities to shift their business models to adapt to the rise of the Indian electricity prosumer — introducing new behind-the-meter offerings, such as connected homes and EV charging.
  • Consider different capital strategies to fund change. More innovative financing mechanisms will be needed if cash-strapped utilities are to generate the capital to fund future investments. Some companies may consider rethinking their capital agenda to free up more funds, while others may want to pursue external funding from government programs or global multilateral organizations, such as the Asian Development Bank and the International Finance Corporation. Companies will also need to prioritize where to allocate resources — to modernize the grid, integrate distributed generation or invest in new business streams.
  • Assess capability gaps. As well as the need to be digitally enabled, utilities will need to consider whether they have the additional capabilities needed, particularly in creating compelling customer experiences. The rise of the Indian electricity prosumer, driven by rising awareness and competitive prices, will call on utilities to rethink engagement with customers around billing, metering and new energy management solutions. Companies may consider how to best retrain current employees or recruit new talent to fill gaps.
  • Change the mindset. Most importantly, utilities need to recognize that change is coming. The sooner they begin to adapt to change, the more capable they will be of seizing its potential.

Seizing the potential of India’s energy future

It’s hard to find a more dynamic energy market than India’s. The pace of change there is dizzying, as governments and utilities scramble to meet the electricity demands of a growing, increasingly urbanized and economically empowered population.

While EY teams have forecast the first tipping point of the energy transformation to hit a little later in India than in other regions, there is the potential for the milestone to come earlier, if the government can back its ambition with supporting policies, regulations and investments.

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Summary

For Indian utilities, the future will be very different — they’ll need to adapt to huge changes when just keeping the lights on is not always easy. How will they improve efficiencies to protect revenue now? How will they invest and change to prepare for soaring demand growth and more distributed generation? Their success, and that of the country’s energy future, depends on a united effort from utilities, governments and regulators to put the policies, market conditions and financing in place to meet India’s goals for universally accessible, sustainable electricity.

About this article

By

Somesh Kumar

EY India Power & Utilities Leader

Experienced energy leader with deep regulatory knowledge.