Two men standing by the sea in Kanyakumari, Tamil Nadu, India with wind turbines in the background

India’s Leapfrogging Energy Transition: Sustaining Economic Expansion, Enhancing Grid Reliability, Flexibility, and Achieving Net Zero Policy Goals

Explore how leapfrogging India's energy transition is pivotal for its economic growth and NetZero ambitions. This article delves into India's journey towards a flexible energy grid, addressing challenges like grid reliability, renewable integration, and the role of next-gen technologies in achieving Prime Minister Modi's vision of a developed nation by 2047. Join us in understanding India's potential to transform its energy sector and sustain economic expansion.

February 12, 2024
By Colin Tang
15 min read

To achieve Prime Minister Modi's vision of India becoming a developed nation by 2047, its central bank set a high bar: an annual GDP growth rate of 7.6% for the next 25 years, a sustained and high rate of growth only last seen with China in the late 20th century. Achieving this goal hinges on substantial capital investment, rapid productivity growth, and, fundamentally, transformative reforms through leapfrogging India’s energy transition.

Despite ambitions of nationwide economic prosperity, parts of India are still stuck in the dark ages. A village in Pandaria district, Chhattisgarh, is one of many examples where, due to the lack of electricity, the livelihoods of people have suffered, adversely impacting economic growth and labor productivity. While the government has earmarked billions to provide continuous energy supply to rural India, electricity unreliability remains a pressing theme.

Energy is widely recognized as the primary catalyst for fostering economic growth and development. Consequently, the accessibility, availability, and affordability of energy resources are pivotal determinants in driving economic prosperity. Ensuring consistent energy reliability is a significant next milestone. From our perspective, this requires adopting next-generation grid technologies through leapfrogging.

While not every nation can effectively pursue technology leapfrogging, we firmly believe that India has the greatest potential among developing nations to adopt innovative technologies within the energy sector and adapt them to its unique circumstances. Let’s delve into India's potential to catalyze a transformation in its energy sector.

The Next Step in Electrification: Improving Grid Reliability

To start, India has made remarkable strides in transforming its energy sector. At the beginning of the 21st century, only 60% of its population had access to electricity, but today, an impressive 99.6% of India's populace enjoys electricity access. Over the same timeframe, 415 million Indians have exited poverty, representing nearly 30% of the nation’s population. That being said, India's per capita GDP in 2023 stands at US$2,610, materially lower than the threshold of around US$22,000 required to contend for the status of a developed country. Going forward, we anticipate significant increases in per capita GDP growth, primarily driven by increasing labor productivity. A readily achievable way to foster this is by addressing the frequent power cuts that affect 85% of Indian households daily.

The lack of a reliable electric grid hampers GDP growth in India; according to the World Bank, businesses in countries with higher energy outage durations experience larger sales losses, with countries exhibiting longer outages experiencing business sales losses in an almost exponential pattern. Data from the World Bank suggests that the percentage of annual sales lost due to electrical outages by affected firms in India is 3.6%, which falls within the bracket of a “middle-income” economy, at 4.3% (Graph 1). This underscores the potential for India to significantly enhance its economic growth through a more reliable grid.

India's sales loss from electrical outages within middle income economy range
Source: World bank (2023), Corinex

Poor electricity supply in India can be attributed to transmission and distribution (T&D) losses, which are substantial and averaged around 21% over the past five years, more than twice the worldwide average. For comparison, current T&D losses in the United States, China, and Germany are all around 5%, with acceptable T&D losses ranging between 6 – 8% (Graph 2).

India's transmission & distribution losses rate surpasses the acceptable threshold
Source: T&D India (2023); EIA (2023); Statista (2024); EnerData (2022), Corinex

Primary factors behind India’s high T&D losses can be attributed to (1) the pilferage of electricity (energy theft) and (2) the lack of grid maintenance, attributed to the poor financials of India’s energy distribution companies (DISCOMs). India is among countries such as Pakistan, Turkey, and Brazil, who observe the world’s largest losses from energy theft – The World Bank conducted a study in 2004 suggesting that India lost as much as 1.5% of GDP due of electricity theft. Although we lack access to updated data, we anticipate that this issue may have become even more pronounced today, particularly considering the significant surge in India's electricity demand.

To sustain India's nationwide electrification momentum and rectify the unreliability of its grid system, it is imperative to make critical investments in next generation grid technologies.

Addressing Soaring Energy Demand with Grid Flexibility

India, being the most populous country globally, holds the position of the world's third-largest energy consumer, trailing only behind the United States and China. The nation's energy demand continues to trend higher, propelled by industrialization – India’s electricity demand grew by 6.3% in 2023 compared to 2022. Over the next ten years, India’s electricity demand is expected to soar by more than 70%, marking the most substantial growth rate among the world's top electricity producers. This aligns with numerous studies that have established a clear link: as an economy expands, its energy requirements typically increase. China is a great example of this, where per capita electricity use grew from 538 kWh in 1990 to 5,985 kWh in 2021 (Graph 3), representing a compound annual growth rate (CAGR) of approximately 8%.

Economic prosperity and rising energy demand are highly correlated
Source: Our World in Data (2023)

With the growth of India’s economy and the associated rise in disposable income, more households are set to increase their adoption of various energy-consuming devices, further driving electricity demand. According to the IEA World Energy Outlook 2023, India’s demand for electricity to run household air conditioners is estimated to expand nine-fold by 2050, outpacing the growth in every other major household appliance (Graph 4a). In the IEA’s stated policies scenario (STEPS), cooling equipment is forecast to account for nearly half of the increase in India’s marginal electricity peak load demand increase from 2022 to 2030 (Graph 4b).

Air conditioner in India is top growing home appliance while peak electricity demand rises
Source: IEA (2023), Corinex

Electric vehicles (EVs) are also energy-consuming devices anticipated to be a meaningful driver of electricity demand in India. According to Bain & Company’s India Electric Vehicle Report 2023, India’s EV market is at an inflection point, with penetration expected to grow eightfold by 2030, jumping from 5% to 40%. EVs are a significant consumer of electricity – for example, the average kWh usage per year a Tesla Model 3 is 3,566 kWh. This is more than double that of a central air conditioning unit for a small home, which uses an average of 1,485 kWh per year.

A challenge posed by energy-consuming devices such as air conditioners and EVs is their potential to impact the electricity load curve, causing spikes in demand at certain times of the day. If not effectively managed through a flexible grid, these spikes could overwhelm the grid's capacity, leading to substantial grid constraints. This issue was highlighted in a 2022 California case study, which showed that the increasing number of electric vehicles (EVs) in the state of California is expected to strain the electricity distribution infrastructure due to the rising demand for electricity. Consequently, with more energy-consuming devices being connected to India's grid, having a flexible grid that can automatically adjust energy loads over certain time periods is a necessity.

The growing demand for electricity in India, fueled by economic growth and the increasing adoption of energy-consuming devices like air conditioners and EVs, highlights the urgent need for substantial capital investments in India’s grid infrastructure. These investments are crucial for expanding the electricity supply and increasing the grid's flexibility to handle peak electricity load demand within the network.

Integrating Cost-Effective Renewable Energy with Modernized Grid Infrastructure

India's energy sector currently relies heavily on coal as the primary energy source, accounting for nearly 60% of the country’s energy needs. Despite having the fifth-largest coal reserves in the world, which represent 9.5% of global share, India is currently facing a critical coal shortage due to the rise in industrial demand. With India’s goal to be net-zero by 2070, the transition to renewable energy will play a pivotal role in the country's energy generation and economic growth strategy.

Currently, renewable energy in India is a more financially attractive alternative to coal, with the cost of power generation from coal exceeding that of renewables by a factor of 4.2. This economic advantage extends globally, with BloombergNEF indicating that India has the lowest solar and second-lowest wind power costs in the world (Graph 5a-5b), owing to abundant land, cheap labor, and reliable sunshine and breezes.

Solar cost in India is the lowest and wind cost is the second lowest in the world
Source: BloombergNEF (2021), Corinex

Despite the clear cost-effectiveness of renewable energy, a crucial question arises: Why has India not already shifted away from coal? The answer lies in years of insufficient investment, which have resulted in an underdeveloped and outdated grid infrastructure. This means India’s grid is currently unable to handle the intermittent nature of renewable energy, necessitating grid modernization to effectively harness this inexpensive and clean energy source.

India possesses a substantial opportunity to shift towards renewable energy, a move that is not only cost-effective but also aligns with the country's ambition to achieve its net-zero goal by 2070. To capitalize on this opportunity, significant investments in grid modernization are paramount. Such investments would enable the adoption of cutting-edge technologies essential for effectively integrating intermittent renewable energy sources.

From Challenge to Opportunity: Leapfrogging India’s Energy Transition Through Limited Grid Infrastructure

Historically, India has garnered a reputation for underinvesting in its infrastructure. Decades of underinvestment have resulted in significant deficiencies in crucial sectors, such as electricity generation. The absence of adequate infrastructure has been identified by business leaders as a key limiting factor hindering both economic growth and corporate performance.

However, in recent years, India has taken great strides towards revolutionizing its infrastructure. In 2023, the Indian government allocated nearly 20% of its budget on capital investments, the most in at least a decade. Infrastructure spending has witnessed a substantial increase, surging from under 2 trillion rupees (US$24 billion) in 2014 to nearly 8 trillion rupees (US$96 billion) in 2023 (Graph 6). The surge in government infrastructure spending has had a notable impact on Indian stocks. In 2023, the S&P BSE Industrials Index, encompassing companies involved in a wide range of activities from bridge construction to wind turbine manufacturing, soared by over 50%, reaching an all-time high. This remarkable growth has notably outpaced the broader S&P BSE Sensex, underscoring the market's positive response to India's infrastructure advancements.

Further, foreign direct investment (FDI) flows to India have been significant. Per the United Nations Conference on Trade and Development (UNCTAD) World Investment Report, India secured the third-highest FDI for new greenfield projects in 2022. Annual FDI inflows to India grew from US$2.2 billion in 2000 to over US$70 billion in 2023  (Graph 7), ranking within the top 10 destinations for FDI globally.

Infrastructure spending surge in India
Source: Bloomberg (2023), Reuters (2023), Corinex; Converted at USD/INR exchange rate of 83 as of January 24, 2024
Rising foreign direct investment flows in India
Source: Visual Capitalist (2023), Corinex

Despite the substantial investment in infrastructure, one critical area that still lags is grid infrastructure. As of 2021, only 2% of Indian households had smart meters (Graph 8). This situation underscores a significant opportunity for India to harness its existing capital investment base to adopt next generation grid technologies, leapfrogging to a flexible energy grid. The Berkeley Lab, a federally funded U.S. R&D center, endorses this perspective. Their 2023 study highlighted India's unique advantage in leapfrogging toward a clean energy future, given the substantial portion of its energy infrastructure that is yet to be developed.

India's residential smart meter deployment ranks among the least globally
Source: IEA (2023), Corinex

Moving forward, India has allocated significant resources to accelerate the improvement of its energy and grid infrastructure:

Despite India's goal of equipping more households with smart meters, this effort falls short in light of the country's current and future energy requirements. The projected growth in energy demand, coupled with the increasing number of energy-consuming devices needing grid connections – which will necessitate grid flexibility – and the demand for a modern grid capable of efficiently integrating clean energy, presents a compelling case for transitioning not just to smart grid technologies, but to next-generation grid technologies. India's current deficiencies in energy and grid infrastructure offer a unique opportunity to sidestep the constraints of grids in developed nations by developing an entirely new grid tailored for renewable energy integration, one that is both reliable and flexible. This approach could enable India to 'leapfrog' to a more sophisticated, renewable-centric infrastructure.

India's Grid Revolution: Navigating Financial and Capital Challenges

While there is significant potential for India to revolutionize its grid through technology leapfrogging, two structural challenges persist: (1) the financial health of Indian energy distribution companies, and (2) the cost of capital for renewable energy projects. The IEA has a similar take, stating: “…challenges related to high perceived risk and cost of capital, as well as to poor financial health of utilities, are hindering investments in grids across many countries”.

DISCOMs Struggle with Financial Losses and Grid Improvement Incentives

One of the significant challenges in the energy sector is the substantial losses accumulated by state DISCOMs (Graph 9). This predicament largely stems from political parties offering free or subsidized energy to crucial sectors like agriculture. Consequently, over time, DISCOMs have found themselves burdened with substantial debt, with generating companies facing similar challenges. As a result, DISCOMs have limited incentives to enhance efficiency or curtail losses when they heavily depend on external support. Progress in electrification and increased energy supply can potentially further strain DISCOM finances, resulting in heightened reliance on transfers from the state government.

Source: The India Climate and Energy Dashboard (2024), Corinex; Converted at USD/INR exchange rate of 83 as of January 24, 2024

The Challenge of High Capital Costs in Energy Projects

Despite the lower costs associated with renewables such as solar and wind in comparison to coal, the cost of capital needed to finance these renewable projects pose a hindrance to their expansion. In emerging nations like India, the cost of capital is significantly higher compared to other major economies, primarily due to factors such as currency risk, credit risk, political and economic instability, and the substantial levels of non-performing assets (Graph 10). Indian banks currently contend with some of the highest non-performing loans in the world. For comparison, the percentage of non-performing loans in advanced economies such as the United States and the United Kingdom were 0.7% and 1.0% in 2022, respectively.

Source: Bloomberg (2021),Corinex

In a report published June 2023 by the Climate Policy Initiative, the cost of debt and required rate of equity return for renewable energy projects in India is 11.4% and 17.2%, respectively (Graph 11a-11b). This compares to the United States, with a cost of debt and required rate of equity return of 5.3% and 10.3%, respectively. India’s cost of capital sets a relatively high bar for renewable energy projects to raise debt finance and offer sufficient returns on equity.

High cost of debt for climate projects
Source: Climate Policy Initiative (2023), Corinex
Climate projects required high equity returns
Source: Climate Policy Initiative (2023), Corinex


India's journey towards economic growth and becoming a developed nation by 2047 is intricately linked to its ability to transform its energy sector through technology leapfrogging. Despite achieving near-nationwide electrification and significant poverty reduction, India faces challenges such as unreliable electricity supply and substantial transmission and distribution losses, which hinder GDP growth. The demand for electricity in India is surging, driven by industrialization and the increasing number of energy-consuming devices connecting to the grid. Renewable energy, particularly solar and wind, offers a cost-effective alternative to coal and a pathway to achieve India’s net-zero goal, but their integration requires modern grid infrastructure.

India's potential for smart grid technology leapfrogging is significant, given the existing grid infrastructure gaps and substantial capital commitments. However, challenges such as the financial health of distribution companies and the high cost of capital for renewable energy projects pose structural hurdles. Overcoming these challenges will be crucial for India to leverage its considerable capital investments effectively and realize the full potential of next generation grid technologies. This energy sector transformation is essential not only for India's economic growth but also for its ambition to play a leading role in global energy dynamics and climate change mitigation.

India has momentum. As the world watches, India is not just poised to technology leapfrog; it is ready to soar.

About The Author

Colin Tang is the Senior Investment Officer at Corinex, where he leverages his extensive experience in finance to drive the company's investment strategy and portfolio performance. With a proven track record of identifying and capitalizing on investment opportunities, Colin plays a crucial role in supporting Corinex's financial objectives and growth.

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India’s Leapfrogging Energy Transition

February 12, 2024