NEW REPORT: The New Economics of Innovation and Transition: Evaluating Opportunities and Risks
By Saswata Chaudhury and Vidhu Kapur
Tackling the climate emergency is a key priority for governments around the world. However even if nations fully implement their Nationally Determined Contributions (NDCs), which were at the heart of the UNFCCC’s Paris Agreement, and ‘net zero’ pledges under the Glasgow Climate Pact, global temperatures are estimated to rise to between 1.8°C and 2.4°C by 2100.
Since COP26, India has seen significant progress from government and wider stakeholders, including actors in the private sector, to achieve its 2070 net zero goal, but an ever greater effort will be required to keep within the available carbon budget.
A comprehensive review of the empirical evidence by the Economics of Energy Technology and Systems Transition (EEIST) consortium shows that strategic investment and market-shaping policies around new technologies can lead to rapid innovation, cost reductions and technological change to help accelerate progress towards that net zero target.
Decarbonising India’s energy sector
The net zero transition in the Indian energy system requires a range of action, including a rapidly increased share of renewables in the energy mix, the electrification of transport and key processes in heavy industry, and improved energy efficiency. A smooth energy system transition needs to be based on effective coordination between sectors and their specific decarbonisation policies. All of this must be delivered while considering energy security, energy sovereignty, energy access, equity, choice of technology and financing.
Real progress has already been made. In pursuing its commitment to net zero by 2070, India has achieved 25% of its target to produce 450 GW of its renewable energy capacity by 2030, becoming one of the world’s largest generators of renewable energy.
The ground is being prepared for continued growth, with India entering into a Memorandum of Understanding with countries including Chile, Australia, and Argentina to ensure an undisrupted supply of raw materials for renewable energy technologies. Initiatives like Atma Nirbhar Bharat, production linked incentives (PLI) for manufacturers, and imposing barriers on imported components, will help to promote the indigenous production of renewable technologies.
The delivery of uninterrupted, reliable and affordable power supply is also an important election agenda for governments and thus can significantly mobilise political interest for the digitalisation of the grid and distribution network.
Renewable energy can provide the lowest cost route to full electrification and energy security for India. But relying heavily on renewable energy presents a range of challenges that include; battery storage requirements, grid connectivity, land constraints and water availability, which will require nuanced policy decisions.
Currently the domestic production of renewable technology components is not competitive in terms of price or quality, requiring financial investments in research and development to cultivate the industry. However, risk averseness presents another barrier to the renewable energy transition in India.
To break down these barriers, politically viable pathways that deliver impact over the short term are required. Four key measures would help accelerate the renewable transition. Firstly, an expanded and robust digitalization of the electricity grid and transmission network. Secondly, a reform of Intellectual Property Rights. Thirdly, a patent regime to promote indigenous production of renewable technology and battery storage, and lastly, philanthropic investment in infrastructure development.
A new approach to policy making
EEIST’s recent report, The New Economics of Innovation and Transition: Evaluating Opportunities and Risks, highlights that some of the greatest successes in the clean energy transition so far, such as dramatic cost reductions in wind and solar power, have come from policies to shape markets that were generally not those recommended by conventional economic analysis.
Yet the same policy analysis tools and frameworks that often advise against the bold policies that produce this result remain commonplace in policymaking today. EEIST’s analysis on the effect of policy on innovation and low carbon transitions around the world has come to a critical conclusion: Processes for assessing policy to drive decarbonisation, and the analytical tools used to support them, must account for the dynamics of innovation and technological change – including the uncertainty that surrounds them – if they are to achieve their aims.
India is currently in the early stages of energy system transition and is presented with a variety of alternative technology choices – achieving its net zero target will require a careful balance. Informed policy-making is therefore needed to guide India along a sustainable decarbonisation pathway. In making informed decisions, the needs of a variety of stakeholders and sectors must be addressed and the scale of uncertainties understood.
Choice of Technology over Time
While making decisions, policy makers should consider socio-economic impacts, and co-benefits both in the short- and long-term. For example, hydrogen produced using renewable energy is likely to have huge potential for transport and industry, while addressing both net zero and energy security objectives in the long-term. On the other hand, hydrogen use in these sectors is in a nascent stage and is unlikely to be widely used this decade, so focusing on promoting the use of electricity in various industrial processes and decarbonising the transport sector will be more fruitful in the short- and medium-term.
India is the world’s second largest producer, and third largest consumer, of steel. The transport sector is India’s fastest-growing source of carbon emissions. EEIST analysis finds that innovation ‘trump cards’ like hydrogen and EVs can together rapidly transform energy use and carbon emissions in these co-dependent sectors, including in vehicle manufacture, vehicle use and surrouding infrastructure, so should be prioritised.
Regional Choice of Technology
Achieving the optimal policies for the energy transition is also challenging due to India’s regional diversity and the localisation of various sectors and stakeholders. Adapting policies and technologies to the geographical, socio-economic, and cultural context is of utmost importance.
To meet the requirements of different regions, the Indian Government has delivered policies that support different forms of solar technology applications, including solar parks, rooftop solar, combining the production of food and energy via agri-PV, plus using solar to power water pumps.
In making these decisions, Indian policy makers have employed simple cost-benefit analysis and normative rational microeconomic decision-making. However an alternative approach to policy making, based on systems thinking could help to accelerate the deployment of innovative technology to deliver deeper, systemic change across the economy and society.
EEIST is providing governments, including India, new tools and analysis, by supplementing traditional cost-benefit analysis (CBA) with Risk Opportunity Analysis (ROA) in situations where transformational change may result – like transitioning to a low carbon economy. ROA is a more holistic way to appraise policy decisions to develop and scale new technology, by identifying key leverage points, where small interventions can produce rapid and substantial changes, to drive system-level transformation.
These new methods seek to include an extensive understanding of interactions between stakeholders and their dynamic transition, innovation processes, and financial sector responses.
The rise of LEDs
The explosion of LED uptake during the 2010’s in India is a huge success story that was achieved by fostering synergies between actors and delivering timely policy interventions, that unlocked incremental and cross sectoral change.
India’s bulk procurement policy for LEDs helped prices fall by 85%, with LED sales going from just 3m in 2012 to 670m in 2018. These innovative policy instruments enabled the massive growth of LED technology even in the presence of relatively cheap alternative lighting technologies, while CNG adoption in the transport sector has endured a similar positive experience thanks to a systems thinking approach.
The LED experience has lessons for new low carbon policies. Policies to promote electric vehicles, batteries, and green hydrogen now also seek to build domestic manufacturing industry and supply chains.
By adapting EEIST’s alternative approach to the policy making for the energy transition, India can realise its renewable energy potential and accelerate the energy transition to bring its 2070 net zero target into reach.