New Delhi: Fossil fuels’ prices are linked to the current cost of living pressures in India, Cambridge Econometrics, a global economics consultancy firm, said in a report released on Thursday, February 16.
Fossil-fuel-related items – transport and household energy – contributed about 20% to India’s annual rate of inflation between April and May 2022, the report said. Due to the rising prices, households in Delhi are currently spending 25% more on fuels and electricity than they did in 2021, and almost 50% more than they did in 2020.
Prices will increase further in 2023, the report predicted. However, renewables are also going to get cheaper. Hence, expanding such energy sources will be the “right policy choice”, the report said.
Links between inflation and energy
Between January 2021 and August 2022, fuel and power prices rose nearly five times faster than overall consumer prices in India, as per a report on fossil fuels and inflation by Cambridge Econometrics, a global economics consultancy firm.
The analytical report, titled “Fossil fuel prices and inflation in India” and supported by the European Climate Foundation also found that in April and May 2022, fossil-fuel-related items (transport and household energy) contributed to around 20% of India’s annual rate of inflation.
This showed in consumer spending. Due to the rising prices, households in Delhi currently spend at least 25% more on fuels and electricity than they did in 2021, and almost 50% more than they did in 2020, the report estimated.
For rural households, this was even more pronounced given their higher spending on energy as a proportion of their income. And it’s only likely to get worse.
The report estimated that the increase in household energy prices makes urban households in the Delhi area have to spend at least Rs 4,100 more in 2022 when compared to 2021. This is despite the Indian government having budgeted the equivalent of about 0.5% of the GDP to shield households from the full impact of global fossil fuel price hikes, the report noted.
Representational image. People get their vehicles filled with fuel at a petrol pump in Gurugram, Sunday, May 22, 2022. The central government reduced excise duty on petrol by Rs 8 per litre and on diesel by Rs 6 per litre, on Saturday. Photo: PTI
However, India has begun investing in the renewable energy sector in a big way. Its renewables plan is part of one of the Nationally Determined Contributions that India has listed as part of the Paris Agreement of 2015: to achieve 50% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030 (it was only 40% in India’s first NDC submission).
Apart from developing numerous projects on solar, wind and hydroelectric power, India has also launched a National Green Hydrogen Mission that lays the blueprint to develop and transition to hydrogen as a future fuel.
But despite these moves, “subsidies for fossil fuel industries remain far higher than support for green alternatives”, the report noted. “Coal continues to play a large role in meeting India’s fast-rising energy demand: coal-fired energy production increased by 30% in absolute terms between 2015 and 2021, while its share in electricity production remained unchanged at roughly 75%,” the report read.
Additionally, India’s increasing dependence on fossil fuel imports to meet its increasing energy demands is “a key energy security risk” in future, the report said.
Renewables to the rescue?
However, renewable energy production is now far cheaper than fossil fuel-based electricity production in India, the report pointed out. In 2021, new renewable energy projects in India had one of the lowest costs globally.
For instance, a 2022 analysis found that utility-scale solar photovoltaic projects in India had a lifetime cost of 35 USD per MWh, which was the lowest among major economies included in the analysis.
“A further expansion of renewables, therefore, appears the right policy choice to increase India’s dependency on energy imports, reduce the exposure of domestic consumers to global market prices, and bring down retail electricity prices in the long run,” per the report.
Indeed, the cost of renewables has been falling steeply over the last decade, said the report’s lead author, Carl Heinemann, in a press release. “It is now a well-known fact that renewables are now much cheaper than fossil fuel-based electricity production. In fact, India is among the cheapest locations in the world for new renewable energy projects and these costs are only expected to fall further,” Heinemann said.
“An increased share of renewables to the grid is also resulting in falling wholesale prices according to the RBI. This should guide policymakers in India to increase spending on renewables to ensure it becomes the mainstay in terms of electricity generation instead of locking the country in expensive energy, which will inevitably increase inflation.”