A Tenfold Increase in Renewables Is Needed, Why India’s Energy Transition Requires a Structural Break from the Past
The external environment has given us fresh concerns about our domestic vulnerabilities. The conflict involving Iran disrupts energy markets and alters the calculus of risk. For India, the macroeconomic implications of oil-price shocks have been a problem since the early 1970s. The structural weakness is visible in the data. Imported crude oil constitutes 21.7 per cent of the total energy supply. Imported natural gas accounts for an additional 2.6 per cent. These add up to a vulnerability of 24.3 per cent. The strategic literature in India has long documented the risks of this dependence upon a politically unstable region. The intellectual consensus favours a transition. There is a ready answer: We are blessed—the Indian landmass receives abundant solar radiation. Modern technologies for renewables offer the foundations for energy independence.
Where are we in this journey? Over the past decade, modern renewables generation in India, measured in terajoules, grew by 8 per cent per year. This figure suggests motion. A growth rate of 8 per cent over a decade doubles absolute output. But with all this growth, we are really not in a good place. Modern renewables account for just 3.2 per cent of the energy supply. The achievement of decades of energy policy reduces to one number: modern renewables at 3.2 per cent of the total energy supply.
Modern economic growth is energy-intensive. Expanding gross domestic product (GDP) requires a commensurate expansion in energy supply. Demographics, urbanisation, and industrialisation guarantee that energy demand will scale up. The composition of this supply must undergo a structural transformation. At present, traditional biomass constitutes 20 per cent of the total energy supply. Economic modernisation implies the displacement of biomass. It involves deep electrification of industrial processes, transport logistics, and household consumption. To alter the macroeconomic profile and achieve energy security, the role of renewables cannot grow incrementally. The system requires an order of magnitude expansion. What is the path to renewables at 32 per cent of the total energy supply?
We took 20 years to get to a 3.2 per cent share. This won’t go to 32 per cent quickly within the present paradigm. It requires foundational changes in energy policy. Incremental adjustments to subsidies or public-sector mandates will not bridge this gap. Three structural shifts are necessary to mobilise capital and align incentives.
The first element is the transformation of the electricity sector. The prevailing architecture operates on central planning. State entities design procurement, determine quantities, and administer prices. This institutional arrangement miscallocates capital, deters risk-taking, and deters innovation. Central planning cannot process the complexity of a modern, decentralised grid dominated by intermittent sources of renewables. The system must transition to the price mechanism. The design of electricity markets must allow prices to clear based on supply and demand in real time.
Market prices and profit rates are the mechanisms that correctly organise economic activity. When the price system functions, it attracts private investment in renewables generation, transmission infrastructure, and energy storage. Capital flows toward solutions that resolve grid constraints. Central planners attempt to have a political-bureaucratic selection of the right technologies. Markets take risks and discover the lowest-cost solutions. The state must build the market framework within which millions of private agents optimise their energy production and consumption decisions based on unhindered price signals. India’s electricity sector remains heavily controlled, with state utilities dominating generation, transmission, and distribution. The result is a system that is slow to innovate, slow to adopt new technologies, and slow to respond to changing conditions. Moving to a market-based system would unleash the creativity and efficiency of the private sector.
The second element involves the taxation of externalities. Energy choices involve hidden costs. The combustion of fossil fuels damages public health through particulate matter, contributes to climate change, and creates a strategic vulnerability for the country through imports of oil and gas from an unstable region. Economic theory addresses this market failure through Pigouvian taxation. A carbon tax is the optimal intervention for India. It establishes a price for carbon emission, altering relative prices across the economy away from dirty fuels.
When carbon-intensive activities become expensive, private firms adjust their supply chains. Capital is reallocated toward energy efficiency and renewable alternatives. A carbon tax uses the profit motive to drive the energy transition. The Indian economy is taxed very heavily and nobody wants more taxation. The path forward lies in a revenue-neutral reform of indirect taxes. The current goods and services tax (GST) involves multiple and very high rates, and complex classifications. This structure imposes compliance costs and distorts resource allocation. Revenues from a carbon tax can finance the long-pending reform of going to a low, single-rate GST. Such a reform would not only make the tax system simpler and more efficient, but would also create a powerful incentive for the energy transition without increasing the overall tax burden.
The third element is finance. Renewable energy is capital-intensive. The viability of projects depends on access to low-cost equity and long-term debt. A tenfold increase in the renewable-energy share requires massive capital formation. The infrastructure build-out includes generation and storage capacity, grid expansion, and storage technologies. Big investment is required on the demand side, for example the shift to electric mobility. The balance sheet of the Indian state does not possess the capacity to finance this expansion. The domestic financial system is similarly constrained. The resource requirement exceeds domestic savings.
The solution lies in linking Indian infrastructure needs with global capital markets. Friction on the cross-border movement of capital increases the cost of financing. Regulatory barriers and hedging costs deter foreign direct investment and foreign portfolio investment. Financial liberalisation is required for the energy transition. Removing barriers to capital flows allows global savings to enter Indian clean energy projects, altering the mathematics of project finance. Countries around the world have successfully used foreign capital to finance their energy transitions. India can and should do the same. This requires not just policy changes, but a fundamental shift in how we think about capital flows. For too long, India has been wary of foreign capital, treating it as a source of instability rather than a source of growth. To achieve the energy transition, we must overcome this fear.
Geopolitical friction helps clarify our economic reality. The dependence on imported fossil fuels is a constraint on Indian stability. Escaping this constraint requires abandoning the methods that produced it. The current outcome of a 3.2 per cent share of renewables is the output of central planning, unpriced externalities, and capital controls. To get to the desirable 32 per cent renewables share, we need to change course. This calls for an electricity system based on the price system, a carbon tax, and capital account convertibility.
The path to energy independence is not a matter of incremental improvement. It is a matter of structural transformation. The technologies exist. The resources exist. What is missing is the policy framework that can mobilise those resources and deploy those technologies at scale. The three elements outlined above—market-based electricity pricing, a carbon tax, and capital account liberalisation—are not just policy suggestions. They are the essential building blocks of a successful energy transition. Without them, we will continue to muddle along, making incremental progress while remaining fundamentally vulnerable to the next geopolitical shock.
The choice is clear. We can continue with the present paradigm, making slow progress, achieving another 3.2 per cent share in another 20 years, and remaining dependent on imported fossil fuels from an unstable region. Or we can embrace the structural reforms that will unlock a tenfold increase in renewables, transform our energy system, and achieve true energy independence. The current crisis is a warning. It is also an opportunity. We should not waste it.
Questions and Answers
Q1: What is India’s current vulnerability in terms of energy imports?
A1: India’s vulnerability is significant: imported crude oil constitutes 21.7% of total energy supply and imported natural gas accounts for another 2.6%, totalling 24.3% dependence on imported fossil fuels. This dependence is on a politically unstable region, creating strategic vulnerability.
Q2: What is the current share of modern renewables in India’s total energy supply, and what is the required target?
A2: Modern renewables account for just 3.2% of India’s total energy supply. The article argues that to achieve energy security, this share must increase tenfold to 32%. This requires foundational changes in energy policy, not just incremental adjustments.
Q3: What are the three structural shifts necessary to mobilise capital and align incentives for the energy transition?
A3: The three structural shifts are:
-
Transformation of the electricity sector: Moving from central planning to market-based price mechanisms where prices clear based on real-time supply and demand.
-
Taxation of externalities: Introducing a carbon tax to internalise the hidden costs of fossil fuels (public health damage, climate change, strategic vulnerability).
-
Finance: Liberalising capital flows to link Indian infrastructure needs with global capital markets, allowing foreign investment to finance the capital-intensive renewable energy build-out.
Q4: How does the article propose to make a carbon tax politically feasible in India?
A4: The article acknowledges that India is already heavily taxed and nobody wants more taxation. The solution is a revenue-neutral reform—using revenues from the carbon tax to finance a long-pending reform of moving to a low, single-rate GST. This would not increase the overall tax burden but would create powerful incentives for the energy transition.
Q5: Why does the article argue that incremental policy adjustments will not achieve the required energy transition?
A5: The article argues that the current 3.2% share of renewables is the outcome of decades of “central planning, unpriced externalities, and capital controls.” Getting to 32% requires a complete change of course—an electricity system based on the price system, a carbon tax, and capital account convertibility. Incremental adjustments to subsidies or public-sector mandates will not bridge this gap.
