As the world gathers once again for global climate talks at COP28 in Dubai, many outstanding priorities will hang over negotiators. Chief among these will be the issue of climate finance. In 2022, rich countries will barely meet the $100 billion promised each year to poor countries to reduce greenhouse gas emissions and protect them from the worst effects of a warming world.
One bright spot in this financing gap has been the emergence of the Just Energy Transition Partnerships (JETP), a series of climate finance deals between the G-7 and several developing countries: South Africa, Indonesia, Vietnam and Senegal. Agreements are at various stages, with political declarations and investment plans being released as negotiations progress. The exact terms of the deals vary, but they include loans to finance clean energy projects, retraining fossil fuel sector workers for employment in other sectors and, most obviously, private finance for retired coal power plants. And involves combination of promises.
Conspicuously absent in these efforts to finance greenhouse gas emissions reductions in developing countries is an agreement with India, which is potentially the crown jewel. The country ranks third in global emissions, and about 70 percent of its electricity generation (the world’s third largest) is powered by coal. The coal power capacity in India is more than that of South Africa, Indonesia, Vietnam and Senegal combined, i.e. more than all the countries except China.
India is also enjoying growing relations with the G-7 countries. Despite it being a logical option for the JETP deal, negotiations with the country have been slow. India has blocked any efforts to link climate finance with coal power retirement.
Several factors contribute to the failure to get India on board. The first is that the country’s post-COVID-19 surge in power demand means the premature retirement of coal-fired power plants is at risk of blackouts. The country has added about as much electricity generation capacity as Brazil in the past decade, but faces regular challenges to keep the lights on.
While India’s ambitious renewable energy targets make it a top market for clean energy globally, one-to-one alternatives to coal – such as renewables and energy storage – have still not reached comparable costs. Reducing the capacity available to meet electricity demand will make efforts to keep the lights on even more difficult. The West is facing similar problems: Amid the power crisis in Europe, the United Kingdom, France and Germany are turning their attention to coal to stabilize their energy grids.
Second, the financial condition of the Indian power sector is not suitable for the solutions – mostly debt – offered in the JETP. India’s ailing power distribution companies still face trouble generating enough revenue to pay generators. These distribution companies are under the purview of state governments, where increasing electricity tariffs remains a controversial topic for voters. Furthermore, many of the stressed financial assets in the Indian banking sector have been private coal power plants. After careful consolidation and reduction, the quantum of these bad loans from the power sector has reduced. Loading more debt (especially international debt) on the sector when cash flows already fail to cover electricity costs increases the risk and, ultimately, the likelihood of blackouts.
Third, the Indian political economy and legal framework pose obstacles to JETP. The power sector in India is jointly operated by the central government and state governments. This federal structure is unique among JETP candidates. Most coal mines and the cheapest coal power plants are located in a handful of poor states, where the sector is important to government budgets and employment, with about 13 million people directly or indirectly employed in the coal industry.
Existing JETPs pay limited attention to this intergenerational inequality, let alone interstate inequality. Given that the JETP addresses two key areas of policy that oversee delicate federal relations within India – power and fiscal policy – any deal for India must strike a sensitive balance between India’s states and New Delhi’s The middle separates the powers.
Finally, energy independence, though vaguely defined and attainable, is a political objective for Prime Minister Narendra Modi’s government. Despite being one of the world’s largest fossil fuel consumers, India’s dependence on coal is less import-dependent than oil and natural gas. As a result, domestic coal is an important source of energy security and furthers the government’s objectives for self-reliance. Any international deal that reduces India’s sovereignty in the energy sector will face political hurdles in its adoption.
Many of these factors are not unique to India among the JETP candidates, but given the sheer scale of the impending transition in the country, they require careful consideration in the design of such an agreement. While the JETP is tailored to suit individual countries, the failure to reach agreement with India requires reconsideration of an approach substantially different from that announced for other countries.
Any effort to revive the India JETP must first consider its states, which rival blocs like the EU in their diversity. A plan for India would require different transition plans for different states. Such plans would have to consider the varying demands on energy infrastructure in those states. For example, in South Africa, there is a single national public utility, Eskom, which owns and operates the coal fleet. In India, power generation, transmission and distribution is spread across 28 state governments, the central government and the private sector.
A state-centric India JETP should also consider disparities in the energy mix among Indian states and their implications for any phase-out for coal power. Under its 2070 net-zero emissions target, India will likely retain coal for at least the next two decades. Like coal in its eastern states, renewable energy production remains disproportionate in the southern and western states due to geography and state investment privileges. Therefore, target years for coal retirement will vary by state, with states that are more optimistic on renewable energy possibly retiring coal earlier.
Until this happens, the existing coal fleet needs to be managed more efficiently with a view to phasing out it as soon as practicable. India can ensure this by facilitating JETP funding so that developers can recover the efficiency investments made in such plants.
A state-centric India JETP should also work to translate energy transition investments into investment potential. Unlike other countries where transition finance instruments have focused on boosting substantial investment through one-time expenditure, India needs to scale up investment to have a significantly attractive, functioning clean energy investment market, which is unique among JETP countries.
For example, India has been largely dependent on domestic financial resources to finance renewable energy. In 2020, the country attracted $44 billion in finance for the energy transition, and more than 80% of this amount came from domestic sources. This is just a quarter of the country’s needs, so JETP may consider increasing the scale of such investments from international sources by encouraging Indian states to adopt more market-based instruments.
Finally, beyond renewable energy investments in the power sector and mature technologies like solar and wind, India-JETP could focus on finance for emerging technologies. India has announced policy initiatives in energy storage systems, green hydrogen, carbon capture and utilization, and small modular nuclear reactors. However, these technologies are still maturing, and their widespread deployment faces funding and technical challenges. A JETP can be an effective way to reduce costs for early commercialization of these systems through technology sharing. Technology waivers such as intellectual property rights waivers would be an important enabler for India in reducing emissions and could be included in any financial deal.
JETPs are special investment deals aimed at mobilizing global focus and resources for the energy transition in developing countries. Although they have been successful in drawing attention to a handful of smaller countries, the G-7 and other donor countries need to revive the approach to reach a compromise with India. India already attracts a large (albeit insufficient) share of global climate finance and attention, so adopting a JETP approach similar to existing deals would provide little added value for the country.
The political, economic and technological obstacles hindering the India JETP are mostly not unique, but their size and scale are much larger than those of other JETP countries. A deal that focuses on Indian states and the delicate balance they share with New Delhi in determining the pace of India’s energy transition is crucial.
Similarly, moving coal retirement to an agreement that targets finance for new energy technologies would yield palatable results for New Delhi. Reaching an agreement with India will lead to success not only for climate finance, but also for global climate progress.