Teri's Ajay Shankar & Mahendra Singhi: India's 2030 Green Transition Goal is Difficult but Doable

India’s commitment to achieve net-zero emissions by 2070 will entail a long-term fundamental transformation of the entire economy. This transition can strengthen growth rather than constrain it. The nearer milestones of 2030 are ambitious and challenging. The headline number is the creation of 500GW of fossil-fuel-free capacity. On this we are on track.

Fortunately, the breakthroughs in technology and costs of solar power and storage have created a sweet spot. Rapid decline in the cost of solar power and storage have made renewable-based generation increasingly competitive with new thermal capacity. Achieving the 500GW fossil-fuel-free capacity goal would result in cost savings rather than impose additional costs.

In major energy-intensive industrial sectors, the country has achieved extraordinary success in improving energy efficiency. The process was driven in partnership with industry by the Bureau of Energy Efficiency through its perform and trade scheme with achievable targets being evolved with industry.

This approach has now been adopted to direct reduction in carbon intensity through the Carbon Credit Trading Scheme. This is more challenging. Yet industry remains optimistic as targets are gradually increased to feasible levels.

Structural Challenges

The next stage is harder. Deep decarbonisation in several sectors presents a structural challenge not just for India, but globally. Steel, cement, refining, fertilisers, chemicals and freight transport are often described as “hard-to-abate” sectors. These are intrinsic difficulties. These sectors are constrained by process chemistry and high-temperature heat requirements. Decarbonisation over the medium to long term is envisaged through three pathways.

First, electrification wherever technically feasible, with electricity sourced increasingly from renewables. Second, substitution of fossil fuels with green hydrogen where processes permit. Third, where neither electrification nor hydrogen substitution is viable, carbon capture with utilisation and/or storage becomes necessary. These solutions are technically complex and impose significantly higher costs.

For industry, higher costs are a real constraint. Firms operate in competitive markets. The use of carbon-free green electricity is now a viable option. Forward-looking industries are going in for renewables. The pace is gathering momentum which is positioning many Indian industrial firms towards the global frontier in terms of decarbonisation.

Government has been forward looking by launching the Hydrogen Mission which is well funded. In the recent Budget, the government has also provided support for carbon-capture initiatives. But firms competing in domestic and global markets cannot be expected to take on the higher costs of green hydrogen or carbon capture on their own.

Further, the use of these technologies usually requires substantial capital investment in new plants. The hard-to-abate sectors are capital intensive. Firms need confidence about returns on these investments over the life of the new plant. The role of government policies becomes critical. Uncertainty is inhibiting.

Industrial investments lock in production pathways for decades. Decisions taken today must assess expectations about the supply and price of green hydrogen, availability, infrastructure access, regulatory treatment and market demand.

Policy coordination is critical for the full value chain of production of green hydrogen, storage, supply and downstream use for production with confidence.

Decarbonising of hard-to-abate sectors is not a problem that firms can solve individually. The experience of the power sector offers a useful parallel.

Cost reductions in renewable energy did not emerge spontaneously. They were driven by scale, long-term visibility and deliberate market creation. Similar dynamics will be required for hard-to-abate sectors, though over longer timelines and with greater complexity. The key to the success of the Solar Mission was the risk mitigation of private investment in solar power projects. Long-term procurement at competitive bid prices addressed both offtake and price risk.

Derisking Investments

For the hard-to-abate sectors there are two distinct investment streams. One is for the production of green hydrogen. The other is for the use of this green hydrogen for downstream production where the output would be more expensive. Government can derisk both investment streams through long-term offtake arrangements that provide visibility on price and demand. This would be the way for cost-competitive technology deployment and cost discovery. This implies that government needs to absorb the higher cost through a combination of tax rebates and subsidy.

There is also the need to match the projected production of green hydrogen with downstream use.

In the initial stage, the priority should be to undertake one or two demonstrative projects in the hard-to-abate sectors of steel, aluminium, fertiliser and cement by 2030. Government can derisk these investments through assured offtake arrangements, making good the cost difference between the new green plants and conventional fossil-fuel-based production. The specifics of the process should be evolved in consultation with industry representatives.

A pilot cement plant would require carbon capture. The captured carbon could then be used in a pilot green fertiliser plant producing green ammonia from green hydrogen. Even one carbon-emission-free production facility in each hard-to-abate sector by 2030 would place India at the global technology frontier and position Indian industry for leadership.

The EU’s Carbon Border Adjustment Mechanism creates a historic opportunity for Indian industry to emerge as a global hub for competitive green manufacturing.

(The authors are distinguished fellows at Teri. The views expressed are personal)