The Direction of India’s Climate Policy

19 Sep 2022
Ms Dorothy Ashmita Biswas

The Energy Conservation (Amendment) Bill and the Electricity (Amendment) Bill, 2022, show intended action toward enhanced NDCs

The Direction of India's

Two recent developments in the Indian Parliament indicate that climate policy is getting stronger not only in long-term targets but also in its legal backing. On August 3, the Indian Cabinet approved the updated Nationally Determined Contribution (NDCs). A few days later, two Bills were introduced in the Lok Sabha amending the Energy Conservation Act and the Electricity Act of India.

The proposed amendments to the Energy Conservation Act 2001 aim at promoting aggressive uptake of non-fossil fuel energy sources within heavy industries, the transport sector, and commercial and large residential buildings. This will be enforced by penalties on industrial polluters for carbon emissions and setting up a regulatory framework for carbon credit trading. This is well aligned with the national push for an energy transition towards promoting faster decarbonization of the Indian economy and facilitating the climate targets announced at the COP26 summit in Glasgow. This bill has already been passed by the Lok Sabha.

The bill provides for setting up minimum non-fossil energy consumption benchmarks in heavy industries. It is further supported by the provision of a penalty of up to Rs 10 lakh in case of failure of compliance. To facilitate compliance, biomass and ethanol for energy and feedstock along with the use of green hydrogen and green ammonia are permitted. This is notable as the country’s growing energy needs will not be met by RE alone and alternative fuels and energy sources will be essential, especially for energy-intensive sectors and their processes. Overall, these provisions should not only give more speed to efforts by the industries on renewable energy and energy efficiency but also provide a much-needed impetus for creating a larger market demand for non-fossil-based power, an essential first step towards a net-zero economy. In addition, the option to directly buy renewable energy also supports the industries in meeting the benchmarks. The impact of these modifications, however, would depend on how steep the benchmarks would be set by the regulating agencies. The bill also includes energy consumption standards for vehicles and vessels and brings the large residential buildings under the Energy Conservation Building Code.

The other major amendments relate to setting-up India’s own carbon market scheme. While carbon trading under a voluntary mechanism has already been actively taking place in the country, and indirectly the tradeable Energy Saving Certificates and Renewable Energy Certificates exist, this has been the first regulatory push from the government towards formalizing an explicit domestic carbon market structure. Carbon trading will further incentivize people to reduce costs, earn more revenue and thereby ensure faster decarbonization of the Indian economy. However, the price of carbon, the value of the issued certificates, and the target set on carbon-intensive industries need to be high and ambitious in order to disincentivize polluting behaviour. In other words, the proposed penalty would have to be as high as possible for the target industries so that they comply with the Bill.

The bill also empowers the State authorities by allotting regulatory powers to the State Electricity Regulatory Commissions and proposing that state governments should constitute a fund to be called the ‘State Energy Conservation Fund’ for the purposes of promoting the efficient use of energy and its conservation within the state. Giving more agency to states is certainly a welcome step towards low carbon transition, however, states’ capacity to set up such funds and draw-up commensurate regulatory mechanisms would be a major challenge. Unfortunately, it lies outside the scope of this bill, and more governance reforms would be required to strengthen states’ financial independence and capacity.

The other Amendment Bill (to the Electricity Act 2003) did not convince the House and has been referred to the parliamentary standing committee on energy for wider consultation. The Bill proposed amendments laying a foundation for privatization of electricity distribution in the economy by increasing the participation of the private power companies in the distribution of electricity to the end consumers and allowing multiple power discoms to operate in the same area in order to boost competition and give more choices to the consumers. This provision to promote competition and a market environment might result in more entities entering lucrative and urban areas, while loss-making areas may continue to be underserved. Furthermore, this competition puts more pressure and responsibility on the states to still provide in all areas while also taking away from the profits earned in urban areas. This is why the opposition objected to the amendments arguing it takes away from the market of the state authorities.

Significantly, the bill empowers the central government to prescribe a minimum percentage of renewable purchase obligation (RPO) to discoms, not meeting which will lead to sanctioning of penalties. Therefore, the inclusion of set targets and penalties for not meeting them will likely serve as a strong deterrent to the use of fossil fuel-based energy sources if passed.

Both amendment bills suggest significant regulatory changes proposed by the government in line with meeting the targets set about by the recently announced enhanced NDCs. Both promote more efficient use of energy, a more aggressive move towards non-fossil fuel sources of energy and lay the foundations for a competitive domestic market mechanism. However, the targets set by these bills for renewable energy and market mechanisms need to be ambitious over and above the existing targets set by companies in order to have a significant impact on the ground.

Overall, these are significant policy changes toward operationalizing market mechanisms to facilitate the transition toward a low-carbon emitting economy. If brought into effect, these laws will prepare Indian industries for the foreseeable formation of a national carbon market. The global market mechanism under Article 6 is set to be operational from 2024, by then India will need to have strong regulations, frameworks, and standards in place in order to participate in a sustainable and transparent way. These bills, though still requiring some adjustments, portray a promising start to developing these mechanisms from a regulatory perspective and will strongly support the road to meeting the NDCs.

Electricity policy/regulations
Energy acts, regulations
Energy conservation