Today, India is the world’s most important country for energy and climate policy. The country’s population is huge and growing rapidly, but the vast majority of Indians still live in poverty. In global climate policy and energy markets, India’s economic growth and pattern of industrialization are critical variables with global implications.

On June 27, India’s NITI-Aayog (National Institution for Transforming India) published a Draft National Energy Policy for public comments. It is a remarkable document that sheds lots of light on India’s energy challenges for the coming decades.

The first important component of the draft is the projection of energy demand supply up to 2040. Although coal has recently suffered setbacks and solar power is thriving in India, NITI-Aayog predicts that under business as usual, coal-fired power generation capacity could reach 441 gigawatts by 2040 – more than doubling from today’s less than 200 gigawatts. Even under an ambitious scenario with energy efficiency measures, coal-fired power generation capacity would reach 330 gigawatts. Renewables would grow fast, but coal would remain a hugely important component of India’s power sector.

NITI-Aayog’s  predictions are based on scenario modeling, and it’s unclear to which extent their models capture recent decreases in the cost of renewable power. Their models also assume that India’s annual GDP growth will remain above 8% until 2040 — an optimistic scenario of robust, uninterrupted growth for a long time. It’s a heroic escape from the poverty trap, not unlike China’s.

The other remarkable feature of the NITI-Aayog policy is a frank recognition of the political sources of India’s struggling power sector:

“The fundamental cause of repeated episodes of discoms [electricity distribution companies] going bankrupt is the absence of commercial pressure on them. Political pressures to provide electricity either free or highly subsidized prices to certain segments of the society have meant that revenues of discoms often fall well short of payments due to generation companies … The ultimate solution to this problem lies in ensuring that electricity distribution is subject to commercial pressure.”

This statement is spot on, but it remains unclear whether state governments of India – who have constitutional authority over electricity distribution – are ready for reforms that would subject electricity distribution to “commercial pressure.” Such reforms would require a firm commitment against bailing out struggling distribution companies, allowing costs to reflect the real cost of power generation, and creating truly autonomous and independent regulatory commissions.

Coal and power sector reform are but two aspects of India’s complex energy challenge, but they illustrate a bigger point: India is under tremendous pressures from all directions.

The country still faces major challenges in expanding its power generation capacity to meet the needs of a growing economy and  wealthier households, but the draft national energy policy relies on coal so heavily that a global backlash is all but guaranteed.

At the same time, India’s dysfunctional power sector undermines economic growth and puts heavy fiscal pressures on state governments with recurring bailouts. To this day, India’s overall progress in rationalizing electricity pricing is very disappointing.

NITI-Aayog’s draft energy policy is a commendable document: transparent, comprehensive, and in some respects even bold. Ultimately, though, India needs a pragmatic strategy for building a coalition in favor of a rational energy policy that brings together economic, environmental, and equity considerations.

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