India Energy Outlook 2021

India has seen extraordinary successes in its recent energy development, but many challenges remain, and the Covid-19 pandemic has been a major disruption. In recent years, India has brought electricity connections to hundreds of millions of its citizens; promoted the adoption of highly-efficient LED lighting by most households; and prompted a massive expansion in renewable sources of energy, led by solar power. The gains for Indian citizens and their quality of life have been tangible. However, the Covid-19 crisis has complicated efforts to resolve other pressing problems. These include a lack of reliable electricity supply for many consumers; a continued reliance on solid biomass, mainly firewood, as a cooking fuel for some 660 million people; financially ailing electricity distribution companies, and air quality that has made Indian cities among the most polluted in the world.

India is the world’s third-largest energy consuming country, thanks to rising incomes and improving standards of living. Energy use has doubled since 2000, with 80% of demand still being met by coal, oil and solid biomass. On a per capita basis, India’s energy use and emissions are less than half the world average, as are other key indicators such as vehicle ownership, steel and cement output. As India recovers from a Covid-induced slump in 2020, it is re-entering a very dynamic period in its energy development. Over the coming years, millions of Indian households are set to buy new appliances, air conditioning units and vehicles. India will soon become the world’s most populous country, adding the equivalent of a city the size of Los Angeles to its urban population each year. To meet growth in electricity demand over the next twenty years, India will need to add a power system the size of the European Union to what it has now.

This special report maps out possible energy futures for India, the levers and decisions that bring them about, and the interactions that arise across a complex energy system. The increasing urgency driving the global response to climate change is a pivotal theme. India has so far contributed relatively little to the world’s cumulative greenhouse gas emissions, but the country is already feeling their effects. This report’s analysis is based on a detailed review of existing or announced energy reforms and targets. These include the aims of quadrupling renewable electricity capacity by 2030, more than doubling the share of natural gas in the energy mix, enhancing energy efficiency and transport infrastructure, increasing domestic coal output, and reducing reliance on imports. Progress towards these policy goals varies across our report’s different scenarios, none of which is a forecast. Our aim is rather to provide a coherent framework in which to consider India’s choices and their implications.

• The Stated Policies Scenario (STEPS) provides a balanced assessment of the direction in which India’s energy system is heading, based on today’s policy settings and constraints and an assumption that the spread of Covid-19 is largely brought under control in 2021.
• The India Vision Case is based on a rapid resolution of today’s public health crisis and a more complete realisation of India’s stated energy policy objectives, accompanied by a faster pace of economic growth than in the STEPS.
• The Delayed Recovery Scenario analyses potential downside risks to India’s energy and economic development in the event that the pandemic is more prolonged.
• The Sustainable Development Scenario explores how India could mobilise an additional surge in clean energy investment to produce an early peak and rapid subsequent decline in emissions, consistent with a longer-term drive to net zero, while accelerating progress towards a range of other sustainable development goals.

Prior to the global pandemic, India’s energy demand was projected to increase by almost 50% between 2019 and 2030, but growth over this period is now closer to 35% in the STEPS, and 25% in the Delayed Recovery Scenario. The latter would put some of India’s hard-won gains in the fight against energy poverty at risk, as lower-income households are forced to fall back on more polluting and inefficient sources of energy. It would also extend the slump in energy investment, which we estimate to have fallen by some 15% in India in 2020. Even though the pandemic and its aftermath could temporarily suppress emissions, as coal and oil bear the brunt of the reduction in demand, it does not move India any closer to its long-term sustainable development goals.

An expanding economy, population, urbanisation and industrialisation mean that India sees the largest increase in energy demand of any country, across all of our scenarios to 2040. India’s economic growth has historically been driven mainly by the services sector rather than the more energy-intensive industrial sector, and the rate at which India has urbanised has also been slower than in other comparable countries. But even at a relatively modest assumed urbanisation rate, India’s sheer size means that 270 million people are still set to be added to India’s urban population over the next two decades. This leads to rapid growth in the building stock and other infrastructure. The resulting surge in demand for a range of construction materials, notably steel and cement, highlights the pivot in global manufacturing towards India. In the STEPS, as India develops and modernises, its rate of energy demand growth is three times the global average.

Solar power is set for explosive growth in India, matching coal’s share in the Indian power generation mix within two decades in the STEPS – or even sooner in the Sustainable Development Scenario. As things stand, solar accounts for less than 4% of India’s electricity generation, and coal close to 70%. By 2040, they converge in the low 30%s in the STEPS, and this switch is even more rapid in other scenarios. This dramatic turnaround is driven by India’s policy ambitions, notably the target to reach 450 GW of renewable capacity by 2030, and the extraordinary cost-competitiveness of solar, which out-competes existing coal-fired power by 2030 even when paired with battery storage. The rise of utility-scale renewable projects is underpinned by some innovative regulatory approaches that encourage pairing solar with other generation technologies, and with storage, to offer “round the clock” supply. Keeping up momentum behind investments in renewables also means tackling risks relating to delayed payments to generators, land acquisition, and regulatory and contract uncertainty. However, the projections in the STEPS do not come close to exhausting the scope for solar to meet India’s energy needs, especially for other applications such as rooftop solar, solar thermal heating, and water pumps.

India’s electricity demand is set to increase much more rapidly than its overall energy demand. But a defining feature of the outlook is a sharp rise in variability – both in electricity output, from solar PV and wind, and in daily consumption. On the supply side, output from renewables in some Indian states is set to exceed demand on a regular basis (typically around the middle of the day) before 2030. On the demand side, the key contributor to variability comes from rapid growth in ownership of air-conditioning units. Energy efficiency measures targeting both cooling appliances and buildings avoid around a quarter of the potential growth in consumption in the STEPS, but electricity demand for cooling still increases six-fold by 2040, creating a major early evening peak in electricity use.

The pace of change in the electricity sector puts a huge premium on robust grids and other sources of flexibility, with India becoming a global leader in battery storage. India has a higher requirement for flexibility in its power system operation than almost any other country in the world. In the near term, India’s large grid and its coal-fired power fleet meet the bulk of India’s flexibility needs, supported by hydropower and gas-fired capacity. Going forward, new power lines and demand-side options – such as improving the efficiency of air conditioners or shifting the operation of agricultural pumps to different parts of the day – will need to play a much greater role. But battery storage is particularly well suited to the short-run flexibility that India needs to align its solar-led generation peak in the middle of the day with the country’s early evening peak in demand. By 2040, India has 140 GW of battery capacity in the STEPS, the largest of any country, and close to 200 GW in the Sustainable Development Scenario.

Coal’s hold over India’s power sector is loosening, with industry accounting for most of the increase in coal demand to 2040 in the STEPS. Once the coal-fired power plants currently under construction are completed over the next few years, there is no net growth at all in India’s coal fleet. Coal-fired generation was most exposed to the dip in electricity consumption in 2020. It picks up slightly in the STEPS as demand recovers, since renewables do not cover all of the projected increase in electricity demand. However, coal suppliers looking for growth increasingly have to turn to India’s industrial consumers rather than the power sector. The share of coal in the overall energy mix steadily declines in the STEPS, from 44% in 2019 to 34% in 2040, and more rapidly in other scenarios.

Energy demand for road transport in the STEPS is projected to more than double over the next two decades, although this growth is cut dramatically in the Sustainable Development Scenario. Over half of the growth in the STEPS is fuelled by diesel-based freight transport. An extra 25 million trucks are travelling on India’s roads by 2040 as road freight activity triples, and a total of 300 million vehicles of all types are added to India’s fleet between now and then. Transport has been the fastest-growing end-use sector in recent years, and India is set for a huge expansion of transportation infrastructure – from highways, railways and metro lines to airports and ports. Today’s policy settings are sufficient to prevent runaway growth in transport energy demand. And some parts of the system shift rapidly to less energy-intensive options, with one example being a strong increase in the use of two-or-three-wheeled vehicles for road transport. Nonetheless, in the STEPS, India’s oil demand rises by almost 4 million barrels per day (mb/d) to reach 8.7 mb/d in 2040, the largest increase of any country. In the Sustainable Development Scenario, by contrast, a much stronger push for electrification, efficiency and fuel switching limits growth in oil demand to less than 1 mb/d.

India is set to more than double its building space over the next two decades, with 70% of new construction happening in urban areas. The model of urbanisation that India follows and the extent to which new construction follows energy-efficient building codes will shape patterns of energy use far into the future. The shift towards urban living accelerates transitions in residential energy use away from solid biomass and towards electricity and modern fuels. Buoyed by rising appliance ownership and demand for cooling, the share of electricity in residential energy use nearly triples. Nonetheless, in the STEPS, firewood and other traditional fuels are still widely used for cooking by 2030. It would take an additional push – as in the India Vision Case and the Sustainable Development Scenario – to move all households to LPG, improved cook stoves, gas or electricity.

In the STEPS, India exceeds the goals set out in its Nationally Determined Contribution (NDC) under the Paris Agreement. The emissions intensity of India’s economy improves by 40% from 2005 to 2030, above the 33-35% set out in its existing NDC. And the share of non-fossil fuels in electricity generation capacity reaches almost 60%, well above the 40% that India pledged. India’s leadership in the deployment of clean energy technologies expands its market for solar PV, wind turbine and lithium-ion battery equipment to over $40 billion per year in the STEPS by 2040. As a result, 1 in every 7 dollars spent worldwide on these three types of equipment in 2040 is in India, compared with 1 in 20 today. India’s clean energy workforce grows by 1 million over the next ten years. If the approach embodied in today’s policies can be realised in full, as in the India Vision Case, higher economic growth than in the STEPS need not mean higher energy demand and emissions. In this Case, and especially in the Sustainable Development Scenario where the equipment market for solar, wind, batteries and water electrolysers rises to $80 billion per year, the industrial and commercial opportunities from clean energy are even larger.

The market for natural gas is growing fast in India, but its role varies by sector, by scenario and over time. The 6% share of natural gas in India’s current energy mix is among the lowest in the world. It almost doubles in the STEPS as gas use rises in the industrial sector and in city gas distribution. In the India Vision Case, natural gas also helps to displace coal in power generation, bringing India’s aspiration of a “gas-based economy” closer still. However, affordability is a sensitive issue for consumers, especially given the complex patchwork of additional charges and tariffs that, on average, doubled the cost of wholesale gas by the time it reached end-users in 2019. As India builds out its gas infrastructure, natural gas can find multiple uses in India’s energy system, including to help meet air quality and near-term emissions goals if supply chains are managed responsibly. But the Sustainable Development Scenario also underlines that a long-term vision for gas needs to incorporate a growing role for biogases and low-carbon hydrogen, for which India has large potential.

India’s combined import bill for fossil fuels triples over the next two decades in the STEPS, with oil by far the largest component, pointing to continued risks to India’s energy security. Domestic production of oil and gas continues to fall behind consumption trends and net dependence on imported oil rises above 90% by 2040, up from 75% today. This continued reliance on imported fuels creates vulnerabilities to price cycles and volatility as well as possible disruptions to supply. Energy security hazards could arise in India’s domestic market as well, notably in the electricity sector if the necessary flexibility in power system operation does not materialise. An additional systemic threat to the reliability of electricity supply comes from the poor financial health of many electricity distribution companies. Improving the cost-reflectiveness of tariffs, the efficiency of billing and collection and reducing technical and commercial losses are key to reforming this sector.

A 50% rise in India’s CO₂ emissions to 2040 is the largest of any country in the STEPS, even though India’s per capita CO₂ emissions remain well below the global average. The increase in India’s emissions is enough to offset entirely the projected fall in emissions in Europe over the same period. The remarkable rise of renewables arrests the growth in India’s power sector emissions in the STEPS, although this still leaves the coal-fired fleet – the fifth-largest single category of emissions worldwide today – as a major emitter of CO₂. Alongside the option of early retirement in some cases, this puts a strong premium on policy approaches that can retool this fleet for more limited and flexible operation and/or on technologies such as carbon capture, utilisation and storage (CCUS). But the main reasons for the increase in India’s CO₂ emissions in the STEPS lie outside the power sector, in industry and transport (especially from trucks). These two sectors are also responsible for a much larger share of air pollutant emissions than the power sector in the STEPS, and a rising urban population means that more people are exposed to air pollution and suffer its ill effects. Water stress is likewise an increasingly important factor for India’s energy sector and its technology choices.

As the world seeks ways to accelerate the pace of transformation in the energy sector, India is in a unique position to pioneer a new model for low-carbon, inclusive growth. Many aspects of such a model are already evident in India’s policy vision, and many more are highlighted in the Sustainable Development Scenario that points the way for India towards net-zero emissions. If this can be done, it will show the way for a whole group of energy-hungry developing economies, by demonstrating that robust economic expansion is fully compatible with an increasing pace of emissions reductions and the achievement of other development goals. India is already a global leader in solar power – and solar combined with batteries will play a massive part in India’s energy future. But India will need a whole host of technologies and policies to chart this new path. As new industrial sectors emerge and clean energy jobs grow, India will also need to ensure that no one is left behind, including in those regions that are heavily dependent on coal today.

More than that of any other major economy, India’s energy future depends on buildings and factories yet to be built, and vehicles and appliances yet to be bought. Within 20 years, the majority of India’s emissions in the STEPS come from power plants, industrial facilities, buildings and vehicles that do not exist today. This represents a huge opening for policies to steer India onto a more secure and sustainable course. India’s ambitious renewables targets are already acting as a catalyst for the transformation of its power sector. A crucial – and even more challenging – task ahead is to put the industrial sector on a similarly new path through more widespread electrification, material and energy efficiency, technologies such as CCUS, and a switch to progressively lower-carbon fuels. Electrification, efficiency and fuel switching are also the main tools for the transport sector, alongside a determined move to build more sustainable transport infrastructure and shift more freight onto India’s soon-to-be-electrified railways. These transformations require innovation, partnerships and capital. The additional capital required for clean energy technologies to 2040 in the Sustainable Development Scenario is $1.4 trillion above the level in the STEPS. But the benefits are huge, including savings of the same magnitude on oil import bills. Government policies to accelerate India’s clean energy transition can lay the foundation for lasting prosperity and greater energy security. The stakes could not be higher, for India and for the world.