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If the proposed energy transition pathway provides a stable long-term vision for India's energy future, it could provide important direction to developers and investors interested in the green energy space
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This essay is part of the series "Budget 2024-25"
Energy, particularly energy transitions, have been a consistent focal point in most budget announcements by the current Finance Minister (FM) Nirmala Sitharaman. This year too, ‘energy security’ was one of the nine priority areas identified in the Budget. This is a slightly different from last year where green energy featured under the broader pillar of ‘green growth’. The shift in focus from green to security is in line with the broader focus on self-sufficiency in this Budget. The announcements related to energy in this Budget point to some interesting trends.
The announcement that India will develop an official energy transition pathway is an important development. If this pathway provides a stable long-term vision for India's energy future, it could provide important direction to developers and investors interested in the green energy space.
The announcement that India will develop an official energy transition pathway is an important development. If this pathway provides a stable long-term vision for India's energy future, it could provide important direction to developers and investors interested in the green energy space. Alongside the announcement of an official taxonomy for climate finance, this could help mitigate some of the perceived risks that hinder large-scale external green capital flows to India. However, as with previous energy transition commitments, the challenge will be to balance sustainability with access and accessibility.
The announcements in this Budget also highlight the technologies set to receive increased policy support, with energy storage emerging as a clear priority. The Budget speech promised a new policy to accelerate pumped energy storage, a nascent technology in India, where the principle of gravity is used to generate electricity by releasing water from a reservoir, initially pumped up using renewable energy sources. With a potential of around 103 GW, pumped storage could offer a cost-effective alternative to battery storage, enabling greater integration of renewable energy into the electricity grid. Battery storage is also given a push with a first-time allocation of INR 96 crores for viability gap funding for development of battery energy storage systems.
The second noteworthy announcement is related to nuclear energy. In a move of significance, the FM’s speech mentions that nuclear energy is expected to play a ‘very significant part’ in India’s future energy mix. Further, there is also a fresh willingness to engage the private sector in nuclear energy with the announcement of public-private partnerships for setting up small modular reactors as well as R&D in newer small modular nuclear technologies. Last year, India’s long-term low-emission development strategies (LT-LEDS) submission to the UNFCCC also contained a commitment to triple nuclear energy capacity in the next 10 years. It seems, therefore, that nuclear is now firmly on the energy transition agenda.
The second noteworthy announcement is related to nuclear energy. In a move of significance, the FM’s speech mentions that nuclear energy is expected to play a ‘very significant part’ in India’s future energy mix.
Both nuclear and energy storage technologies aim to address a major challenge in India's energy transition: The intermittent nature of renewable energy. Despite renewable energy comprising 45 percent of installed capacity in India, it currently contributes only about 25 percent of total electricity generation. Storage solutions will enhance the utilisation of renewable energy by providing grid operators more flexibility in integrating solar and wind energy into the grid. Meanwhile, nuclear energy can substitute coal-based thermal power as a source of baseload power, especially when solar or wind energy is unavailable. It seems, therefore, that the focus of the energy transition has shifted to some extent from merely increasing the installed capacity of renewables to ensuring that these energy sources can actually meet more of the country’s energy demand in the future.
However, the growth of both nuclear energy and storage solutions (pumped and battery) will hinge on two key factors. First, access to technology for local production is crucial, as the government is unlikely to accept significant foreign dependence. Second, creating the right conditions for greater private sector involvement will be crucial in bringing in the investments needed to scale these solutions. It now remains to be seen if the momentum from this Budget can actually translate into effective policies through the year.
The budgetary allocations for different ministries also reveal some interesting trends. Electric vehicles (EVs), earlier a key priority area for this government, is conspicuous by its absence in the Budget speech. Many anticipated an announcement regarding the next phase of the FAME scheme, as the current scheme ends this year. However, the Budget speech did not address the FAME at all. There is still however an allocation of INR 2,671 crore in the budget for FAME, much below last year’s allocation of INR 4,807 crores. On the other hand, the allocation for the PLI scheme on automobiles and components, and battery storage saw a massive increase in allocation to INR 3,500 crores and INR 250 crores, respectively. This combined with the easing of customs duties on lithium and other minerals critical for EVs suggest a strong focus on the supply side of EVs in contrast to the FAME scheme, which focussed on demand subsidies.
The big question for the EV sector now is the impact of reduced subsidies on EV purchases. The government likely believes that in some segments, particularly two- and three-wheelers, EVs are already as affordable as their fossil fuel counterparts. However, this assumption may be premature since there is no evidence that consumers currently perceive cost parity. In fact, for the brief period when the FAME subsidies were reduced last year, there was a large drop in EV sales. The government must be flexible in its approach to demand incentives since a large drop in EV sales will also eventually impact the success of the PLI schemes. Moreover, for certain vehicle segments like medium and heavy freight vehicles, the cost of electric variants is still much higher than their diesel counterparts. The governments need to think about demand incentives for these segments as well and it is most likely that current budgetary allocations may not be adequate.
The big question for the EV sector now is the impact of reduced subsidies on EV purchases. The government likely believes that in some segments, particularly two- and three-wheelers, EVs are already as affordable as their fossil fuel counterparts.
Some interesting insight can also be gleaned from the allocations for the Ministry of Petroleum and Natural Gas. Compressed biogas is receiving a significant push this year, with the government allocating INR 498 crore for the first time to develop pipeline infrastructure for injecting compressed biogas into city gas distribution networks. Compressed biogas can serve as an effective alternative to compressed natural gas, while also creating value and reducing pollution from agricultural and municipal waste.
Additionally, INR 150 crore has been allocated for a scheme to improve biomass collection. This long-awaited move could greatly enhance the availability of feedstocks for biofuels derived from agricultural waste, supporting a biofuel pathway that avoids reliance on food grains and mitigates food security concerns.
There is also a first-time allocation of INR 332 crore and INR 388 crore for mission Anveshan and appraisal of areas in India’s extended continental shelf, respectively. This signals an increased urgency to expand India’s existing reserves of oil and natural gas in anticipation of an increase in consumption in the coming decade.
Overall, this Budget suggests that this year will bring new priorities and a reshaping of existing ones for India’s energy transition. The focus on energy storage and nuclear energy are commendable and aim to plug the biggest gap in the growth of renewables in India. The push for waste-based biofuels is also welcome and perhaps should have received greater prominence in the Budget speech. However, this year will be a decisive year for India’s EV sector and the government must be flexible to ensure momentum is not lost in this sector.
For those interested in energy in India, this year promises to be very interesting.
Promit Mookherjee is an Associate Fellow at the Observer Research Foundation.
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Promit Mookherjee was an Associate Fellow at the Centre for Economy and Growth in Delhi. His primary research interests include sustainable mobility, techno-economics of low ...
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