Where are we in this journey? Over the past decade, modern renewables generation in India, measured in terajoules, grew by 8 per cent per year. This figure suggests motion. A growth rate of 8 per cent over a decade doubles absolute output. But with all this growth, we are really not in a good place. Modern renewables account for just 3.2 per cent of the energy supply. The achievement of decades of energy policy reduces to one number: Modern renewables at 3.2 per cent of the energy supply.
Modern economic growth is energy-intensive. Expanding gross domestic product (GDP) requires a commensurate expansion in energy supply. Demographics, urbanisation, and industrialisation guarantee that energy demand will scale up. The composition of this supply must undergo a structural transformation. At present, traditional biomass constitutes 20 per cent of the total energy supply. Economic modernisation implies the displacement of biomass. It involves deep electrification of industrial processes, transport logistics, and household consumption. To alter the macroeconomic profile and achieve energy security, the role of renewables cannot grow incrementally. The system requires an order of magnitude expansion. What is the path to renewables at 32 per cent of the total energy supply?
We took 20 years to get to a 3.2 per cent share. This won’t go to 32 per cent quickly within the present paradigm. It requires foundational changes in energy policy. Incremental adjustments to subsidies or public-sector mandates will not bridge this gap. Three structural shifts are necessary to mobilise capital and align incentives.
The first element is the transformation of the electricity sector. The prevailing architecture operates on central planning. State entities design procurement, determine quantities, and administer prices. This institutional arrangement misallocates capital, deters risk-taking, and deters innovation. Central planning cannot process the complexity of a modern, decentralised grid dominated by intermittent sources of renewables. The system must transition to the price mechanism. The design of electricity markets must allow prices to clear based on supply and demand in real time.
Market prices and profit rates are the mechanisms that correctly organise economic activity. When the price system functions, it attracts private investment in renewables generation, transmission infrastructure, and energy storage. Capital flows toward solutions that resolve grid constraints. Akshay Jaitly and I have termed this deeper energy-sector transformation as “the lowest hanging fruit of the coconut tree” (
http://bit.ly/4v5wLib). Central planners attempt to have a political-bureaucratic selection of the right technologies. Markets take risks and discover the lowest-cost solutions. The state must build the market framework within which millions of private agents optimise their energy production and consumption decisions based on unhindered price signals.
The second element involves the taxation of externalities. Energy choices involve hidden costs. The combustion of fossil fuels damages public health through particulate matter, contributes to climate change, and creates a strategic vulnerability for the country through imports of oil and gas from an unstable region. Economic theory addresses this market failure through Pigouvian taxation. A carbon tax is the optimal intervention for India. It establishes a price for carbon emission, altering relative prices across the economy away from dirty fuels.
When carbon-intensive activities become expensive, private firms adjust their supply chains. Capital is reallocated toward energy efficiency and renewable alternatives. A carbon tax uses the profit motive to drive the energy transition. The Indian economy is taxed very heavily and nobody wants more taxation. The path forward lies in a revenue-neutral reform of indirect taxes. The current goods and services tax (GST) involves multiple and very high rates, and complex classifications. This structure imposes compliance costs and distorts resource allocation. Revenues from carbon tax can finance the long-pending reform of going to a low, single-rate GST.
The third element is finance. Renewable energy is capital-intensive. The viability of projects depends on access to low-cost equity and long-term debt. A 10-fold increase in the renewable-energy share requires massive capital formation. The infrastructure build-out includes generation and storage capacity, grid expansion, and storage technologies. Big investment is required by the demand side, eg the shift to electric mobility. The balance sheet of the Indian state does not possess the capacity to finance this expansion. The domestic financial system is similarly constrained. The resource requirement exceeds domestic savings.
The solution lies in linking Indian infrastructure needs with global capital markets. Friction on the cross-border movement of capital increases the cost of financing. Regulatory barriers and hedging costs deter foreign direct investment and foreign portfolio investment. Financial liberalisation is required for the energy transition. Removing barriers to capital flows allows global savings to enter Indian clean energy projects, altering the mathematics of project finance.
Geopolitical friction helps clarify our economic reality. The dependence on imported fossil fuels is a constraint on Indian stability. Escaping this constraint requires abandoning the methods that produced it. The current outcome of a 3.2 per cent share of renewables is the output of central planning, unpriced externalities, and capital controls. To get to the desirable 32 per cent renewables share, we need to change course. This calls for an electricity system based on the price system, a carbon tax, and capital account convertibility.
The author is a researcher at the XKDR Forum
 "renewable energy sector, electricity sector, energy demand")