Opinion A green transition, but not without the coal-rich states
Green industrial policy should not be the exclusive privilege of historically well-endowed states. Otherwise, the energy transition will simply be yet another drain of resources from India’s least developed to its most developed regions.
In August 2023, 92.5 per cent of all grid-connected RE generation came from eight states. This is largely driven by higher insolation and wind density but also bolstered by favourable state finances and investment environments. (Representational Image) 
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Reports of coal’s death are highly exaggerated. Between the strike notice by Coal India’s unions, to the power minister’s recent announcements of India’s intent to build new coal power plants, to addressing the peak power problems which have repeatedly surfaced during seasonal demand surges, the dilemma of energy transition has reared its face in the last few months. Between the G20, the Clean Energy Ministerial and the actions of the International Solar Alliance, much has been said about India’s global commitments and actions toward decarbonisation. But the logic and incentives of domestic energy transition need to be considered closely.
The first wave of power plant construction in India, between the mid-1970s and the mid-1990s, happened on the back of a push by central PSUs to solve the imbalances of state power supply. Some state electricity boards managed to build up power plants, others did not. The creation of the NTPC and Coal India in the mid-1970s was a central solution to a regional problem. NTPC’s first four power plants (Ramagundam, Farakka, Singrauli and Korba) were sited so that they could supply power to multiple states. The second great wave of power plant construction between 2000-2015 was driven primarily by private promoters who built plants after the Electricity Act, 2003 was passed. These plants were largely located in central, western and southern India. From the mid-1990s onwards, India invested in a national power grid, and by the mid-2000s moving power between states became easier. Private investment in the power sector post-2000 clustered around states with more industrial demand, histories of commercial activity and stronger finances.
The next wave of power plant construction in India is likely the mass construction of renewable energy assets over the next few decades. While projections from government agencies about India’s power future have varied, the Central Electricity Authority’s report on Optimal Generation Capacity Mix for 2029-2030 establishes a clear expectation of sustained RE growth. According to this report, by 2030, solar and wind will make up almost 51 per cent of total generation capacity (up from less than 20 per cent in 2019) and almost 31 per cent of all generated power (up from 8.3 per cent in 2019). If these projections materialise, they are likely to have major fiscal consequences for states.
Research by Sanjay Mitra and me zoom into the regional consequences of this RE build-out, and the accompanying expectation of greater RE procurement by state discoms. India’s massive RE build-out so far has largely benefited western and southern states. In August 2023, 92.5 per cent of all grid-connected RE generation came from eight states. This is largely driven by higher insolation and wind density but also bolstered by favourable state finances and investment environments.
Assuming such patterns persist, RE-poor, coal-rich states are likely to face a double hit to state revenues: Coal royalties as a proportion of overall state revenue will decline as coal growth starts slowing later this decade, and the cost of power procurement will increase as new RE contracts are layered on top of existing commitments for firm power. Grid-scale energy storage technologies are still expensive and experimental, and are unlikely to be adopted at a large scale by the end of the decade. Since most coal-rich states have limited grid-scale RE-deployment, they will have to import more power from other states. This means that the quantum of inter-state financial transfers for power procurement will shoot up over the next decade. We find that the combined revenue impact of declining coal royalties and increasing electricity imports could worsen budget deficits of RE-poor power-importing states by almost 8.66 per cent on average, taking them well beyond the norms established by the Fiscal Responsibility and Budgetary Management Act, 2003.
The reality of India’s fiscal federalism is that states are protective about the few major sources of revenue they have left post-GST. Coal royalties and their delayed upward revision cause frequent disagreements between coal states and the Union government. The power sector is another site of frequent tension. Between attempts to establish a centralised spot market for electricity, enforcing strict payment discipline on state discoms, privatisation of state discoms, drastic Electricity Act amendments, uncompensated transmission waivers for RE projects, and financing struggles with state lenders, there are many axes of policy friction between Union and state governments. Of particular concern is the displacement of RE integration costs onto state transmission companies. By giving inter-state transmission waivers to an entire generation of new RE projects, the integration costs of the energy transition are displaced onto state PSU balance sheets without necessarily facilitating compensatory investment in upgraded transmission capacity, which can better manage the variability of the new RE projects.
If these emerging frictions are not addressed, reluctant states and frequent policy conflicts could hold back India’s ambitions for an energy transition. RE-poor states need to be given a bigger stake in this energy transition, rather than be treated as collateral damage. The philosophy of balanced regional developmentalism that led to the creation of NTPC in the 1970s needs to be revived. This could take many forms — preferential lending for RE projects in RE-poor states by state lenders, greater voice in federal power negotiations (through revival of institutions like the Inter-State Council), explicit financial transfers to RE-poor states through the Finance Commission and collaborative industrial policy through just transition mechanisms. Green industrial policy should not be the exclusive privilege of historically well-endowed states. Otherwise, the energy transition will simply be yet another drain of resources from India’s least developed to its most developed regions.
The writer is Assistant Professor, IIT-Delhi’s School of Public Policy
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