Modi's climate target poses upside risks: Fitch

Fitch Solutions on Thursday said the new climate targets announced at the COP26 summit by Prime minister Narendra Modi pose an upside risk to its outlook for renewable growth in the country.

With the new targets, it expected to see attempts to alleviate the issues regarding supply chains, manufacturing and project development that have long plagued renewable proliferation.

"The market's rapidly growing need for electricity will keep the market highly reliant on coal power, posing challenges to the country's decarbonisation plans," it said.

"Hydrogen will offer a unique pathway to decarbonisation in the power and wider energy sectors as the market seeks to cut one billion tonnes of carbon dioxide emissions."

At the 2021 Climate Change Conference, also known as COP26, Modi outlined a net zero emissions target by 2070 for India.

"As the fourth-largest carbon-emitting market globally, India has lagged behind much of the world's leading power markets including China and the US who have outlined a net zero target by 2060 and 2050 respectively," Fitch Solutions said.

The new announcements put forth a clear ambition of the Modi government to tackle climate change more aggressively. India is targeting to increase its low-carbon power capacity to 500 gigawatts (GW) by 2030 and meet 50 per cent of its total energy requirements by 2030.

"We highlight that these pledges pose a mounting upside risk to our forecasted 313 GW of installed low carbon power capacity, including nuclear, hydro and non-hydropower renewables by 2030," Fitch Solutios said.

It added that non-hydropower renewables will make up the vast majority, 83 per cent, of this growth highlighting the significance of the wind and solar sub-sectors.

"We highlight that the market will not reach the Modi government's previous plans to develop 175 GW of renewables capacity by 2022 and will fall short with just 116 GW installed by end 2021.

"We also highlight increased risks to the successful continuation of renewables auctions as well as the development of recently selected projects within those tenders," it said.

Ongoing challenges, including project realisation risks, stemming from bureaucratic, financing and logistical delays and the country's underdeveloped and inefficient grid system, also underpin conservative outlook.

"We have seen the government take steps to ease bottlenecks in the country's grid infrastructure, particularly in the integration of renewables generation. However, we are bearish on the prospects of this being sufficient to ensure the smooth integration of renewables capacity into the grid," it said.

Ongoing Sino-India tensions will also cause increased supply-chain disruptions, project delays and reduce the viability of certain projects in the pipeline due to cost pressures.

In July 2020, the Ministry of Power said it will impose restrictions on all imports of power equipment from China.

However, Chinese imports account for 80 per cent of the equipment and components in the Indian solar power sector.

The safeguard duties on Chinese and Malaysian solar cell and module imports are set to end over 2021-2022.

Currently, India has manufacturing capabilities of 1.5 GW per year, which is set to expand to 3.5 GW in the coming year.

Some estimates highlight that the potential for an additional 14 GW of production capacity could be forthcoming by 2022.

"If the country is to increase its cumulative low carbon capacity from our forecasted 313 GW to 500 GW, significant increases in domestic manufacturing will need to occur or import regulations will need to be lifted," Fitch said.

"The market's rapidly growing need for electricity will keep the market highly reliant on coal power, posing challenges to the country's decarbonisation plans."

Fitch expected power demand in the country to grow strongly over the coming decade, in conjunction with robust macroeconomic and demographic fundamentals.

Economic growth will continue to be driven by the construction, manufacturing and services sectors over the coming quarters; these sectors are all large-scale consumers and will boost power demand.

We also highlight the market's rapidly intensifying energy consumption per capita each year.

Photograph: Guglielmo Mangiapane/Reuters