As the world gathers once again for global climate talks at COP28 in Dubai, several outstanding priorities will hang over negotiators. Chief among them will be the issue of climate finance. In 2022, richer countries barely fulfilled the $100 billion they promised to poorer countries each year to help reduce greenhouse gas emissions and guard against the worst impacts of a warmer world.
A bright spot in this financing gap has been the emergence of Just Energy Transition Partnerships (JETP), a series of climate finance deals in the works between the G-7 and several developing countries: South Africa, Indonesia, Vietnam, and Senegal. The agreements are in various stages, with political declarations and investment plans released as negotiations progress. The exact terms of the deals vary, but they include a combination of loans and promises of private finance to fund clean energy projects, retrain fossil fuel sector workers for employment in other sectors, and most visibly, retire coal power plants.
Conspicuously absent has been a deal with India, arguably the crown jewel in these efforts to finance greenhouse gas emissions reductions in developing countries. The country ranks third in global emissions, and about 70 percent of its electricity production (also the world’s third-largest) is powered by coal. Coal electricity capacity in India outnumbers that in South Africa, Indonesia, Vietnam, and Senegal combined, exceeding that of every country but China.
India also enjoys growing relations with G-7 countries. Despite it being a logical choice for a JETP deal, negotiations with the country have languished. India has balked at any effort to tie climate finance with coal power retirements.
Several factors contribute to the failure to get India on board. The first is that surging post-COVID-19 electricity demand in the country means that early retirement of coal-fired power plants threatens blackouts. The country has added power-generating capacity approximately equivalent to that of Brazil in the past decade, but it continues to face regular challenges to keep the lights on.
While India’s ambitious renewable energy goals make it a top market for clean energy globally, one-to-one alternatives to coal—such as renewables and energy storage—have yet to reach comparable cost. Reducing available capacity to meet electricity demand would make efforts to keep the lights on even more difficult. The West faces similar problems: Amid power crises in Europe, the United Kingdom, France, and Germany are refocusing their attention back to coal to stabilize their energy grids.
Second, the financial health of the Indian power sector is not amenable to the solutions—mostly loans—offered in JETPs. India’s ailing electricity distribution companies still face trouble raising enough revenue to pay generators. These distribution companies are under the purview of state governments, where raising electricity rates remains a contentious topic for voters. In addition, many of the stressed financial assets in the Indian banking sector have been private coal power plants. After careful consolidation and haircuts, the magnitude of these bad loans from the power sector has decreased. Loading more debt (especially international debt) onto the sector when cash flows already fail to cover the cost of power increases risk and, ultimately, the chances of blackouts.
Third, the Indian political economy and legal frameworks pose an impediment to JETPs. The central government and state governments jointly administer the power sector in India. This federal structure is unique among candidates for JETPs. Most coal mines and the cheapest coal power plants sit in a handful of poorer states where the sector is vital to government budgets and employment, with nearly 13 million people employed directly or indirectly in the coal industry.
Existing JETPs tend to pay limited attention to this intragenerational inequity, let alone intrastate inequity. Given that JETPs address two key areas of policy that are overseen with delicate federal relations within India—electricity and fiscal policy—any deal for India must account for the sensitive balance that separates powers between India’s states and New Delhi.
Lastly, energy independence, however vaguely defined and attainable, is a political objective for the government of Prime Minister Narendra Modi. Despite being one of the world’s largest fossil fuel consumers, India’s reliance on coal is less import-dependent compared to oil and natural gas. Consequently, domestic coal is a vital source of energy security and furthers the government’s objectives for self-sufficiency. Any international deal perceived to reduce India’s sovereignty in energy will face political hurdles to its adoption.
Many of these factors are not unique to India among JETP candidates, but given the sheer scale of the impending transition in the country, they require careful consideration in the design of such an agreement. While the JETPs are bespoke to match individual countries, the failure to reach a deal with India necessitates a rethinking of the approach to be sufficiently different from those announced for other countries.
Any effort to revitalize an India JETP must first consider its states, which rival blocs such as the European Union in their heterogeneity. A plan for India would require different transition plans for different states. Such plans would need to consider the varying demands of the energy infrastructure across those states. For example, in South Africa, there is a single national public utility, Eskom, which owns and operates the coal fleet. In India, electricity generation, transmission, and distribution are spread across 28 state governments, the central government, and the private sector.
A state-centered India JETP must also consider disparities in energy mixes between Indian states and their implications for any phaseout for coal power. Under its 2070 net-zero emissions target, India will likely retain coal for at least the next two decades. Like coal in its eastern states, renewable energy production remains disproportionately sited in southern and western states due to geography and state investment prerogatives. Therefore, target years for coal retirement will differ by state, with those states that are more bullish on renewable energy likely retiring coal first.
Until this happens, the existing coal fleet needs to be managed more efficiently, with a view toward reaching its retirement as soon as practical. An India JETP could ensure this by facilitating funding so that developers recover efficiency investments made in such plants.
A state-centric India JETP must also work to translate energy transition investment to investability. Unlike other countries where transition finance instruments have looked to pump substantial investment through one-time expenditure, India requires the scaling up of investment for a fairly attractive, functioning clean energy investment market, which is unique among JETP countries.
For example, India has largely depended on domestic financial resources to fund renewable energy. In 2020, the country attracted $44 billion of finance for the energy transition, and over 80% of this sum came from domestic sources. This is just a quarter of the country’s needs, so a JETP could look to increase the scale of such investments from international sources by encouraging Indian states to adopt more market-based instruments.
Lastly, beyond the power sector and renewable energy investment in mature technologies such as solar and wind, an India-JETP could focus on finance for emerging technologies. India has announced policy initiatives in energy storage systems, green hydrogen, carbon capture and utilization, and small modular nuclear reactors. However, these technologies are still maturing, and their widespread deployment faces financing and technical challenges. A JETP could be an effective way to reduce costs for the early commercialization of these systems through technology sharing. Technology waivers such as intellectual property right waivers would be a key enabler in reducing emissions for India and may be included with any financial deal.
The JETPs are bespoke investment deals intended to channel global focus and resources to the energy transition in developing countries . While they have succeeded in directing attention to a handful of smaller countries, the G-7 and other donor countries need to revitalize the approach to strike a deal with India. India already attracts a sizable (albeit insufficient) share of global climate finance and attention, so adopting a JETP approach that’s too similar to the existing deals will offer little added value for the country.
The political, economic, and technical barriers hampering a India JETP are mostly not unique, but their size and scale are much larger than those in other JETP countries. A deal that’s centered around Indian states—and the delicate balance they share with New Delhi in determining the pace of India’s energy transition—is key.
Likewise, moving past coal retirements to an agreement that targets finance for new energy technologies will likely yield palatable results for New Delhi. Striking a deal with India will yield a success for not only climate finance, but also for global climate progress.