Foundations for an Indian JETP

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Source– The post is based on the article “Foundations for an Indian JETP” published in the Business Standard on 26th December 2022.

Syllabus: GS3- Infrastructure: Energy

Relevance– Issues related to clean energy in India

News– The article explains the issue of financing for energy transition in India.

What are climate financing channels that are addressing the distinct problems of investability and investment in energy transition?

The first is The global environmental, social and governance or ESG phenomenon. It has created ample cheap financing for clean energy. But it requires investability that is the foundation of a mature market economy in the energy sector.

The Just Energy Transition Partnership, or JETP, is the nascent second channel of climate financing. It is related to investability.

What is the concept of climate justice? It is the idea that advanced economies polluted the atmosphere. It is impacting the fortunes of poor countries getting to prosperity by doing similarly.

Poor countries therefore say that developed markets must transfer resources to help fund their energy transition.

What is investment and investability in the case of Indian energy transition?

Investment is the business of private firms in generation, storage, distribution, and transmission. It adds up to a market-based electricity sector.

The firms that make decisions that are shaped by prices and prospective profits. Prices would fluctuate at all levels so as to clear supply and demand. It thus induces energy transition by both demand and supply sides.

Investability is existence of necessary conditions for investment

What is the current scenario of financing for energy transition in India?

Climate financing for investment is a largely solved problem. There is near-infinite resourcing from foreign capital in the form of ESG investment. This involves pensioners and insurance customers in Developed Markets. They get a sub-market rate of return for their investments in return for funding the Indian energy transition.

The ESG world is quite able to support the Indian energy transition. But, it is subjected to the limitations of present and future Indian financial regulation, capital controls, tax policy and rule of law.

Our foundational problem is that we have an electricity sector that operates through state control instead of one which operates through the price system.

A one-time expenditure of substantial sums of money is to solve the policy problems and to get up to investability for boundless investment.

JETP is the mechanism for this aid.

What is the way forward for the JETP mechanism in India?

India should keep the investment problem aside. Indian financial firms are well plugged into global ESG circles and  able to access global private capital into Indian private electricity investment. The focus of an Indian JETP should be upon investability.

We should emphasise four principles-

  1. India is a diverse sub-continent. It is comparable with the EU in its heterogeneity. The optimal strategy for electricity sector reforms is quite different across the different states.

The JETP engagement should be with one state at a time. It should prioritise exporting states such as Gujarat, Karnataka, Maharashtra or Tamil Nadu that will face the brunt of carbon taxation in their export destinations.

  1. JETP should be seen as a financing component of the reforms programme that achieves an electricity sector grounded in the price system. External resourcing is a necessary but not sufficient condition for this reforms programme. Three sources of money can play an important role in financing this reform programme: Budgetary resources, the proceeds from government exit, and aid from rich countries.
  2. Discussions around donor and government money should focus only on money that supports this reforms programme, not private ESG money.
  3. The climate community looks for the date by which a state electricity sector will be free of fossil fuels. But the “climate policy transmission mechanism” runs through the price system. The precondition for net zero is thus the date by which a state electricity sector is investable in the eyes of private persons.
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