Power sector reforms central to tackling India's climate finance problem

According to the NITI AAYOG study, the first step towards climate financing is strengthening power discoms'finances and reducing the risk of default

The power sector is emerging as the single largest problem facing India’s ambitions of climate financing. Its sheer size and the multitude of interfaces with other segments of the economy ensure that almost all big-ticket economy-level challenges have at least one finger in the power pie. 

India will have to invest $22.7 trillion over the next 35 years to meet its net zero target by 2070, according to an analysis released earlier this week by government think-tank Niti Aayog, which noted that the capital mobilisation required is “urgent, massive, and long-term”. 

Not surprisingly, the power sector dominates the estimate, accounting for nearly half the total investment needed through large-scale deployment of renewables, storage, and transmission projects. The other two problem areas, transport and industry, account for 25 per cent and 20 per cent of that investment requirement, respectively. 

Global picture 

India has made strong progress, reducing emissions intensity by 36 per cent over 2005 levels and achieving 50 per cent non-fossil power-capacity five years ahead of its Nationally Determined Contribution target. However, its annual investment flow from domestic sources in tackling climate change stands at a mere $135 billion, including $80–90 billion towards clean energy projects. 

For comparison, India will need $8 trillion between 2026 and 2050 alone, and an additional $14.69 trillion between 2050 and 2070 to meet the Net Zero goal. 

There are two problems. One, fresh investments in emerging and hard-to-abate (HTA) sectors are deterred by high capital costs, limited concessional finance, and structural constraints. Two, the country’s energy transition spans technologies at different maturity levels: Mature renewables that need scaled up capital; mid-stage options such as storage and e-mobility that require concessional or structured finance; and frontier areas such as green hydrogen and carbon capture, utilisation, and storage (CCUS) that depend on grants from the government and blended capital. 

This makes it imperative to develop a financing strategy that is both stage-sensitive and technology-specific, a difficult task. 

According to the NITI Aayog’s assessment, transitioning from the ‘Current Policy Scenario’ (CPS) to the ‘Net Zero Scenario’ (NZS) requires an additional $8.1 trillion in incremental investments by 2070 — estimated as the difference between the $22.7 trillion required in NZS and $14.7 trillion in CPS. 

Again, the incremental gap is led by the power sector ($4.5 trillion), followed by industry ($2.7 trillion) and transport ($0.9 trillion). The task, then, is to ensure investment, dominated by renewables and transmission infrastructure through 2050, shifts seamlessly to battery storage, grid storage, and charging infrastructure, alongside major roles for green hydrogen and CCUS till 2070. 

Steps for transition 

“India can mobilise approximately $16.2 trillion for its net zero transition by 2070 through targeted reforms in its financial system and stronger integration with global capital markets,” NITI Aayog said in its study Scenarios Towards Viksit Bharat and Net Zero – Financing Needs. “On the domestic side, this requires deeper capital markets, greater channelling of household savings into productive assets, and a shift by institutions towards high-quality corporate and green investments.” 

The analysis reveals a significant and widening financing gap in India’s power sector. By 2050, financing needs for mitigation in the power sector, including use of technologies like solar power that cut emissions, are estimated at $4.32 trillion, while available finance is projected at just around half, or $2.34 trillion, resulting in a funding shortfall of $1.98 trillion. 

This gap more than doubles by 2070, reaching $5.4 trillion, as financing requirements rise sharply to $12.33 trillion against availability of $6.93 trillion. 

How can India increase financing for climate action? The first step, according to the Niti Aayog study, is to strengthen power distribution companies’ (discoms’) finances and reduce the risk of default or failing to meet contractual obligations. 

“The most persistent challenge lies with discoms,” the study noted. Many discoms remain financially distressed despite the government’s Revamped Distribution Sector Scheme, which provides ₹3.04 trillion in performance- linked grants. Structural inefficiencies such as high Aggregate Technical and Commercial losses and weak billing and collection systems continue to erode balance sheets. 

“Even with the Late Payment Surcharge Rules reducing legacy dues, contractual insecurity remains a deterrent for investors in power generation projects. Without deeper market reforms such as privatisation or franchise models for loss-making utilities, and stronger legal enforcement of power purchase agreements, discom fragility will continue to raise the cost of capital for the sector,” the report said. 

Experts believe that given the scale and complexity of the climate finance problem, the government can use fossil fuel taxation as an important policy tool. 

“The fossil taxes contribute approximately one-third to the indirect tax revenue collections in India. Given the significant amount of revenues generated by taxes and duties on fossil fuels, and India’s massive need for climate finance, some of these revenues may emerge as an important source of domestic climate finance,” Centre for Social and Economic Progress (CSEP) researchers Rajat Verma and Shifali Goyal said in a research paper released earlier this week. 

The study calls for funding energy-efficiency technologies in HTA sectors — cement, iron and steel, aluminium — and building transmission systems dedicated to renewable energy evacuation to meet the country’s 500 gigawatt (Gw) non-fossil fuel-based energy target by 2030.

 

According to the study, around ₹75,166 crore is required annually to finance both energy-efficiency technologies in the HTA sectors and the renewable energy transmission system. With the recent Goods and Services Tax (GST) 2.0 reforms discontinuing the compensation cess, the excess revenue collection from the increased GST rate on coal is estimated at ₹16,949 crore, based on FY24 figures. Finance from oil and gas taxes is also around ₹58,217 crore, or 8.7 per cent of collections. 

“As per existing studies, around ₹1.32 trillion of cumulative capital expenditure is required in HTA sectors. As per the Central Electricity Authority, capex of around ₹2.44 trillion is required by 2030 in renewable transmission systems. The redirected funds could finance a substantial portion of HTA efficiency upgrades or accelerate renewable grid expansion,” CSEP said in the report. 

India must strategically utilise fossil fuel taxes, including those from the power sector, by redirecting them to finance green investments in HTA sectors and renewable energy infrastructure, the researchers conclude. The strategy would also help boost overall GDP and employment apart from cutting emission intensity.