Economics of energy transition

Economics of energy transition

September 2024
00
Economics of energy transition

Decoding the economics behind the

transition towards cleaner energy
sources
Until the early last decade, the global shift towards greener alternatives was relatively modest. However, this trend changed.
Demand-side factors (such as environmentally conscious consumer preferences) and supply-side dynamics (such as falling
renewable energy costs, especially in solar and wind) resulted in a rapid transition towards clean energy usage due to technological
advancement and economies of scale. Geopolitical uncertainties, energy security concerns and global pressure compelled
governments to move towards renewable sources. Consequently, the world is now following a more cautious approach towards
new investments in fossil fuels, with a clear focus on lower carbon investments. In addition, one can expect a shift in energy trade
equations due to differences in renewable endowments, changing energy security dynamics and nations’ capacity to scale up
faster.

What are the possible implications of these shifting global dynamics in India?

Deloitte’s energy experts estimate India needs an annual average investment of approximately US$300 billion between 2022 and
2070 to achieve clean energy transitions.i For a country with a population of 1.4 billion that aspires to be the third-largest
economy in the next few years and a developed nation within the next 2.5 decades, committing to such a significant investment
will come with pros and cons. While experts provided answers to “where” and “how”, we have tried to answer the “why” from an
economic lens, using a benefits and costs analysis.

We believe India may see immense benefits from investments in greener technology reflected in GDP, employment, financing and
supply chains over the medium term. We estimate that this new investment in green energy is expected to boost the GDP by 2030.
India may see its GDP increase by an annual average of US$613 billion annually and increment GDP by 1.1 percent in 2030.
Similarly, a significant additional net direct job growth of over 56.8 million by 2030 is expected since the renewable energy sector
has a higher employment elasticity today than the fossil fuel sector per unit of money invested. In addition, higher credit growth
and reduced supply chain disruptions are expected as India becomes more self-sufficient in energy.

However, such a transition will come with costs. Higher investment in cleaner energy options may result in higher fiscal expenses
(at least in the initial years) or require reallocating resources from other social sectors. There could be associated job losses (in
non-renewable sectors), viability funding and risk exposure. On the other hand, inaction could lead to significant costs, including
loss of wealth and assets due to frequent and unpredictable natural disasters, poor health conditions due to low air quality and
possible investment downgrades. These will have implications on borrowing costs and the current account balance. The
consequences of climate change are expected to be felt as early as 2030, and India could see a downgrade in credit ratings by one
notch, according to a study by Cambridge.ii

The good news is India is already ahead in the game. Over the past 8.5 years, the country’s installed non-fossil fuel capacity has
increased by 396 percent.iii But is that enough? Not really! Certain challenges, such as the under-utilisation of resources (in terms
of a lower generation mix of renewables), remain a concern. India will need to significantly increase renewable energy generation,
requiring substantial upfront investments, to meet the energy needs of the world's largest population and ensure that cost
concerns do not outweigh the benefits of the transition. It makes sense from an economic standpoint, and our experts have
outlined a roadmap to achieve this. The speed at which India can get on the path to transition will be something to watch for.

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Economics of energy transition

India’s current energy consumption

profile
India is behind major industrial nations on the economic development path, and its per capita energy consumption is much lower.
Yet, it is the third largest nation in Greenhouse Gas (GHG) emissions in the world. This is due to its coal-dominated energy mix,
leading to increased carbon dioxide emissions (Figure 1).iv In India, energy used for the power sector accounts for 40 percent of
GHG emissions. Meanwhile, industry (specifically iron and steel, cement and chemicals sectors) accounts for 30 percent and
transport accounts for about 15 percent.v

Figure 1. India’s emission by sector and overall growth

India's emission landscape by sector, 2020 metric India's CO2 emissions

tonnes per
capita

Others, 4% 2.0
1.8
Buildings, 7% Electricity, 1.6
46% 1.4
1.2
1.0
Transport, 0.8
13%
0.6
0.4
Industry, 30% 0.2
0.0
1990 1995 2000 2005 2010 2015 2020

Source: IEA, Deloitte Report Source: World Bank

Since dependence on coal plants is high for electricity and industrial sectors (in contrast to the world’s consumption of various
energy sources), India’s share of coal in primary energy consumption is far higher (60 percent of total energy consumption as of
2022) (Figure 2). On the other hand, the share of renewables (10 percent) is lower than in the world (13 percent).

Figure 2: India’s primary energy consumption

Source: Energy Institute - Statistical Review of World Energy (2023) – in collaboration with Our World in Data
Note: Energy consumption refers to the total consumption of different energy/fuel types across different sectors, such as power, manufacturing, transport and
buildings.

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Economics of energy transition

If India is expected to be the fastest-growing major economy over the next decade, its energy consumption intensity is expected to
rise only. Studies suggest that as economies become rich, their carbon footprint increases. vi With rising disposable income and the
middle-income class population, India’s consumption basket would tilt towards more energy-intensive goods (such as industrial
goods with higher carbon content) and services (such as tourism and data).

The irony is that with increased environmental concerns and an emphasis on sustainability, India will have to meet its energy
demand from alternative green energy sources. It is not a choice anymore!

In line with global trends (reference COP 27), India has committed to meeting the net-zero target by 2070. As an intermediate
target, India aims to reach about 50 percent of its cumulative electric power installed capacity from non-fossil-fuel-based energy
resources by 2030.vii In addition, it has committed to reducing the emissions intensity of its GDP to 35 percent by 2030.viii

The choices India has

Hard choices may lie ahead, but the economics of transitioning to renewable energy is rather favourable. Higher investments in
renewable energy will lead to higher GDP, greater net employment, higher credit flows and improved balance of payments. At the
same time, these investments will also come with associated costs. We have highlighted a benefit-cost analysis from the four
perspectives:

GDP and employmentix,x

Benefit Cost

Deloitte estimates India will require initially US$176 billion The energy transition is highly capital-intensive with high
to US$204 billion investments every year until 2030 to requirements of frontloaded investments, high gestational
transform the existing infrastructure, build new ones, lags and delayed return on investments. Until the unit
transition technologies and facilitate and support the economics kicks in, private participation is expected to be
deployment of green energy across the country. Assuming limited. The government will have to bear the initial
that investment accounts for 32 percent of GDP, such an expense of building the infrastructure (transmission and
investment will directly contribute to an average of US$613 storage) and provide subsidies to the producers and
billion annually and boost India’s GDP by 1.1 percent by consumers for wider adoption. For a resource-constrained
2030. Besides, the positive externality associated with nation, such as India, it may reflect in the form of higher
building the infrastructure will trigger ripple effects fiscal expense, or reallocation of resources away from
throughout sectors, such as the social, private (via other social sectors.
investments) and financial (for funding) and create
In the next couple of decades, the coal industry is expected
employment opportunities.
to shed jobs. According to a study by Global Energy
In India, the renewable energy sector generated 9,88,000 Monitor, closing coal mines is expected to cost a large
direct and indirect jobs in 2022, up from 8,63,000 in 2021. potential layoff in India by 2040s, even without climate
Most of the jobs were created in the hydropower sector, commitments and coal phase-out policies. India’s climate
followed by the solar PV sector. Research suggests that a commitments to phase out of coal power generation may
green energy programme (including renewable energy accelerate these trends in the future, although the quest to
sources, public transport and improved efficiencies in shift away from fossil fuels is marginal at present. The shift
industries efficiencies) has an employment-generating towards renewables is expected to help absorb these
capacity of 151.7 direct and indirect jobs per million US$ employees. However, the government will have to step up
invested. This is 107.7 jobs more than those created from to adequately to compensate and upskill these workers for
fossil fuel programmes. We foresee a net direct job growth reemployment and resettlement.
of 56.8 million jobs by 2030.
Increased employment and lower energy prices will
increase the real income of households and improve their
purchasing power leading to a higher GDP.

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Economics of energy transition

Financing xi

Benefit Cost

Rising investments are expected to increase the need for As the upfront investment in building infrastructure is huge,
credit and boost credit growth. The appetite to borrow it will entail finding viable funding solutions, including
from banks will increase and boost innovative finance collaborating with multilateral development banks. Some of
methods. For example, the outstanding bank loans to the these investments are financed through bank lending,
renewable sector more than doubled to INR4.2 billion by potentially competing with lending to other productive
the end of 21 October 2022, compared with INR2.1 billion sectors. While the financing structure for solar and wind
(a year ago). In this sector, banks can expect an increase in projects is becoming well established, credit risk exposure
demand for credit without worrying about the economic remains a concern to certain kinds of projects (such as
state or consumption levels. It could also lead to new green hydrogen and Carbon Capture, Utilisation and
collaborations to offer solutions, boosting the BFSI space. Storage [CCUS]). Implementation delays will involve
government guarantees and costs of insurance.

Supply chainxii

Benefit Cost

India is heavily dependent on imported oil, hence the rising Any change in energy sources is expected to disrupt various
share of renewable energy is expected to reduce existing supply chains across industries and geographies.
dependence on certain economies for fossil fuel imports as These disruptions, until recently, have led to inertia among
well as its exposure to supply chain disruptions (due to consumers, businesses, investors and policymakers to
geopolitical uncertainties). According to a study by IRENA, change the status quo. India relies heavily on imports of
the trade balance can improve by over 1 percent due to cells, modules, glass, encapsulant film, backsheets and
higher electrification of energy. Furthermore, pursuing aluminium framing. These are sourced from different
energy self-sufficiency increases energy security. nations adding supply chain vulnerabilities and price
fluctuations. Besides, shifting towards renewables will
require massive policy intervention and coordination across
nations.

The costs of inaction

Significant costs associated with inaction also exist. According to a Deloitte study, no significant reduction in emissions could lead
to a global average temperature increase of more than three degrees Celsius by 2070. This could lead to an economic loss of US$6
trillion in Present Value Terms (PVT)—equivalent to 6 percent of the GDP—by 2050. By 2070, this loss will escalate to US$35 trillion
in PVT, which will be 12 percent of GDP in 2070 alone.xiii

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Economics of energy transition

The losses will incur due to the rising pollution caused by using fossil Figure 3: India’s import dependence
fuel energy sources. This will lead to the following:
% of energy
demand
• High energy import dependence affects energy security, 80%
inflation and the current account balance (Figure 3). 70%
• Perpetuated inequities in energy access and climate injustice 60%
50%
occur when those who contribute the least are the ones who
40%
suffer the most from the adverse effects of climate change.ivx 30%
• Impact on food supply and prices is driven by the salinisation of 20%
farmlands and degradation of freshwater supplies. 10%
0%
• Frequent and unpredictable natural disasters cause loss of Oil Natural Gas Coal
assets and wealth of households and businesses.
• Loss of productivity due to poor health conditions and a rising Source: IEA
number of diseases are emanating from environmental pollution.
• Possible investment downgrades could raise borrowing costs and lead to higher interest payments.vx
This could cost treasuries billions of dollars and make corporate debts expensive. According to S&P, the consequences of
climate change are going to be felt as early as 2030, and India could face a downgrade of two notches.

The demand-supply side dynamics

The economics of transition indicate that India may benefit from shifting towards cleaner energy alternatives, and a few demand-
supply dynamics are at play as well (in addition to the assurance that energy is sourced domestically). Once considered too costly
beyond niche markets, large renewable projects now beat the conventional energy sources on price and performance in India,
accelerating the transition towards cleaner alternative energy sources.

On the demand side, Indian consumers, particularly in large cities, are becoming more environmentally conscious leading to
changing preferences. A perceivable shift in energy demand that is reliable, affordable and environmentally friendly is noticed
across sectors (including electricity, transport, urban and industrial). Besides, there is a demand to democratise the benefits
through universal access. This is because renewable energy sources are more widely present and can be deployed in local, small-
scale installations in a dispersed and distributed way.xvi

Globally, the intersection of trade policies and climate impact is gaining traction as lawmakers look to address emissions embedded
in globally traded goods that are subject to different jurisdictions’ climate regulations. For example, the European Union (EU)
implemented the world’s first Carbon Border Adjustment Mechanism (CBAM) to levy carbon tax on imported goods that are
carbon intensive. In the U.S., the recently introduced Clean Competition Act and Foreign Pollution Fee Act aim to address climate
and trade challenges.

In the medium term, a majority of the domestic energy demand in India is expected to continue to be met by non-renewable
sources. However, the factors mentioned above are intensifying the demand for alternative cleaner energy counterparts such as
electric vehicles, solar and wind, among others in India.

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Economics of energy transition

On the supply side, falling costs play an important

Sidebar 1
role in ramping up investments and production of
renewables. For instance, solar and wind can now beat
“In 2010, the global weighted average LCOE of onshore wind
conventional sources on price (especially when the latter
was 95 percent higher than the lowest fossil fuel-fired cost.
remains highly volatile due to geopolitical factors).
In 2022, the global weighted average LCOE of new onshore
According to the Irena global research, in 2022, the global
wind projects was 52 percent lower than the cheapest fossil
weighted average Levelised Cost of Electricity (LCOE) from
fuel-fired solutions. The most competitive weighted average
newly commissioned utility-scale solar Photovoltaics (PV),
LCOEs in onshore wind projects worldwide remained below
onshore wind, Concentrating Solar Power (CSP), bioenergy
US$ 0.050/kWh in 2022. India remained one of the key
and geothermal energy fell despite the rising material and
markets with low LCOE of US$ 0.037/kWh in 2022, which is a
equipment costs.
61 percent decline from 2010 levels.
India was one of the major countries that witnessed a
However, this improvement was surpassed by that of solar
dramatic decline in weight average LCOEs in utility-scale
PV. This renewable power source was 710 percent more
solar and onshore wind projects between 2010 and 2022.
expensive than the cheapest fossil fuel-fired solution in 2010
(Refer to the sidebar 1).xvii
but cost 29 percent less than the cheapest fossil fuel-fired
I
solution in 2022. The lowest weighted average LCOE in
utility-scale solar PV projects was observed in China and India n
in 2022. Between 2010 and 2022, costs in India declined by d
90 percent, followed by China at 89 percent to reach i
US$0.037/kWh in both markets, which is 24 percent lower a
than the global weighted average.” w
a
− IRENA’s global renewable power generation costs s
study, 2023 o
n
e
o
Figure 4: Lithium-ion battery pack price
f
t
According to Bloomberg NEF, lithium-ion
USD/KW-hour h
battery pack prices fell from US$732 per
kilowatt-hour in 2010 to US$151 per e
800
700 kilowatt-hour in 2022 (Figure 4).xviii The m
600 falling prices of batteries are enabling a
500
the electrification of transportation and j
400
300 electricity generation. o
200 r
100 c
0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 (F)
o
u
n
Source: Bloomberg t
r
Two factors are driving down costs of renewables and alternative cleaner energy sources—technology and economies of scale. i
e
s
t
h
a
t
w
i
t
n
06 e
s
s
Economics of energy transition

a. Technology: Innovation and digitisation are aiding in price

Sidebar 2 and performance parity, cost-effectiveness and reliability in
• Automated drones and robots are used to reduce the renewable production and usage (Examples of different
inspection time of the internal structure and materials in technologies affecting costs are mentioned in sidebar 2).
solar panels and wind turbines, reducing maintenance Renewable energy technologies become more efficient with
costs. incremental investment. Doubling the cumulative installed
• Artificial intelligence and machine learning systems can capacity causes prices to decline by the same fraction.xix This
process satellite images, weather station measurements is not true for energy from fossil fuel sources, suggesting that
and historical data patterns from wind turbine and solar the cost differential is narrowing exponentially with
panel sensors. These systems can accurately predict the technology advancements. Prices of renewable energy
availability of wind and solar to map them with demand. sources such as solar and wind have decreased drastically
• Perovskite and additive manufacturing are increasing and are comparable to non-renewable sources.
efficiency gains in solar panels and significantly reducing
prototyping costs and time in building wind panels. In India, rapid technological advancements in the solar sector
have led to the establishment of the world’s largest floating
solar power plant in Kerala, where solar panels are installed on floating structures in water bodies. Floating solar plants have
the potential for higher energy efficiency and yield than ground-mounted solar systems, resulting in lower LCOE. For instance,
according to several recent studies, floating solar systems can produce 0.6–4.4 percent more energy and offer efficiency
improvements ranging from 0.1 percent to 4.45 percent, reducing LCOE by more than 20 percent compared with land-based
systems.xx

b. Economies of scale: In the case of renewables, especially in wind and solar, the economies of scale are greater at the
equipment manufacturing stage than at the electricity-generating site.xxi For instance, solar energy has different economies of
scale because it generates the bulk of overall output through many smaller and cheaper units instead of fewer but bigger and
more expensive fossil fuel-based plants. Therefore, solar projects are driven more by the economics of panel production.

In India, the abundance of sunlight throughout the year and the government initiatives to promote solar adoption have led to
a rising demand for solar energy in recent years. This increased production to meet the rising demand and cheaper financing
options are resulting in scale economies, bringing down manufacturing costs of solar panels and components and boosting
investment in supporting infrastructure. Reduced costs of setting up solar projects, manufacturing equipment and deploying
products are further boosting demand, resulting in a virtuous cycle in action (Figure 5).

Figure 5. Virtuous circle of economies of scale

High demand Scale of economies in equipment Investment in

manufacturing and deployment infrastructure

Falling prices of Greater competition Falling production

final products and cheaper financing costs and financing
options risks
Source: Deloitte Research

The implications of demand-supply dynamics and the race towards energy security are visible globally. In 2023, global investment
in clean energy technologies touched US$1.7 trillion, with an increase of 7.6 percent year-over-year, while investment in
conventional fuels has moderated (Figure 6).

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Economics of energy transition

Figure 6: Global energy investment

US$ billion
Clean energy Fossil fuels
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
-
2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: IEA

India is also making significant strides in clean energy investment. In 2023, the country spent about US$9 billion to add 13.5 GW of
renewable energy capacity. It is further expected to add 25 GW of capacity in 2024 at an investment of US$16.5 billion, according
to estimates from the power ministry. Moreover, the government has set an ambiguous target of achieving 500 GW of renewable
installed capacity by 2030, with a plan to add 25 GW annually.xxii

In addition to solar and wind energy, the government is pushing the domestic production of green hydrogen, given the country’s
abundance of renewable energy sources (solar, wind and tidal). Measures include launching the National Hydrogen Mission in
2021, establishing separate manufacturing zones, incentivising production and raising the budget allocated for the mission by 102
percent to INR600 crore from the initial allocation. This is expected to provide a strong push for the development of a supporting
green hydrogen ecosystem.xxiii, xxiv

Time to double down on our efforts

India’s commitment to energy transition is everyone’s responsibility, and it is therefore important to understand the underlying
economics of the transition. The benefits are immense and cannot be overlooked in the long run. India can accomplish the
adoption of clean energy by:

Better utilisation of capacity through more generation: India’s efforts towards the growth of renewables have been impressive.
Over the past 8.5 years, the installed non-fossil fuel capacity has increased by 396 percent (at fourth position globally). As of March
2023, it accounts for more than 40 percent of the country’s total capacity at more than 170 GW (including large hydro, solar and
wind). In 2022, India recorded the highest year-on-year growth in renewable energy additions of 9.83 percent. The installed solar
energy capacity has increased by 30 times in the past nine years and stands at 70.10 GW as of July 2023 (in third position
globally).xxv

However, a disconnect remains between the installed capacity mix and the generation mix (Figure 7). Using renewable energy can
potentially conflict with the legacy infrastructure and require changes in regulations and contract agreements among stakeholders.
In addition, there are external or opportunity costs associated with renewables, such as the potential alternative land uses and
altering ecosystems (for example, biofuel production from sugarcane is depleting water levels and windmills are harming birds).xxvi

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Economics of energy transition

Figure 7. India’s installed energy capacity mix and generation mix

Installed capacity, as of March 2023 Gross generation, FY23

Other RE, Total = 415.5 GW Total = 1,624 BU
Wind, 10.0%
3.0% Wind, 4%
Solar, 6% Other RE, 1%
Solar, 16.0% Coal, 49.0% Hydro, 10%

Hydro, 12.0% Nuclear, 3%

Gas, 2%

Nuclear, 2.0% Lignite, 3% Coal, 71%

Gas, 6.0% Lignite, 2.0%

Source: CEA

Continuous government support and regulatory consistencies: xxvii According to Deloitte, India’s final energy demand is expected to
double by 2070, driven by rapid urbanisation and industrialisation. A targeted set of initiatives, including policy and regulatory,
investment and R&D, will help contain the increase in final energy demand.xxviii The focus should be on reducing GHG emissions
across key energy demand sectors—grid decarbonisation, industrial decarbonisation and transport transition. These areas are
expected to have the most consequential effects, attracting policymaker attention. Moreover, the government's ability to design
policies and implement regulations will be essential to steer the energy transition through the difficulties. The government must
emphasise on R&D to hasten the adoption of renewable energy technologies, introduce new business models to facilitate supply
and energy storage or enhance discoms' state of health to persuade them to invest in alternative energy sources and update their
outdated infrastructure. In addition, a continuous need to align policy needs and regulatory consistency to encourage investors,
markets and other stakeholders to engage in the transition with greater confidence is required.

Encouraging businesses to invest in new business models, sourcing strategies and operations: Industries and businesses will need
to adopt changes throughout the entire value chain, from sourcing raw materials to distributing finished products. This transition
may involve changes in supply chains, production processes and distribution networks to ensure a seamless transition. For
instance, investing in renewable energy infrastructure within manufacturing facilities, such as installing solar panels or wind
turbines, can help power operations sustainably and achieve cleaner manufacturing processes. In addition, it is necessary to closely
monitor and adapt to evolving regulatory requirements and industry standards related to environmental sustainability and clean
energy usage. Compliance with regulations on carbon emissions targets, energy efficiency standards and waste management
regulations is critical to avoid penalties and maintain a good reputation.

Contributors
Dr. Rumki Majumdar
Sayantan Sengupta

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Economics of energy transition

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interim-
budget/articleshow/107333252.cms#:~:text=The%20Union%20Budget%20for%202024,manufacturing%20hub%20for%2
0green%20hydrogen.
xxv. https://www.investindia.gov.in/sector/renewable-
energy#:~:text=This%20is%20the%20world's%20largest,(as%20of%20July%202023).

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 Economics of energy transition

xxvi. https://www.nationalgrid.com/stories/energy-explained/onshore-vs-offshore-wind-energy;
https://ieefa.org/resources/integrating-higher-shares-variable-renewable-energy-india; and
https://edition.cnn.com/2023/05/28/world/wind-turbine-recycling-climate-intl/index.html
xxvii. https://www2.deloitte.com/content/dam/Deloitte/in/Documents/energy-resources/in-eri-
India%E2%80%99s%20energy-transition%20pathways-noexp.pdf
xxviii. Deloitte, India’s energy-transition pathways; A net-zero perspective, September 2023

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Economics of energy transition

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