Renewable energy may provide South Asia relief from energy price shocks

Originally posted in Institute for Energy Economics and Financial Analysis on 14 February 2023

Imported fossil-fuel-dependent South Asian economies, India, Bangladesh and Pakistan, have not been able to escape the perils of volatile and elevated prices of oil, gas and coal in the international energy market.

High energy prices have impacted different sectors, from power to industries, to varying degrees across the three countries. Unaffordable fuel prices have also impacted economic scenarios with rising inflation and depleting foreign currency reserves resulting in reactionary measures from the respective countries. Government interventions, however, appear to be insufficient to some extent.

As external shocks drive these impacts, renewable energy promises to ensure affordable energy and shield the foreign currency reserves of South Asian countries.

Energy price shocks for countries

The countries have struggled to afford fuel imports for power generation, transportation and industrial activities.

For India, oil and gas imports declined in volume even as the value rose, indicating their priciness. High energy prices have added fiscal pressure with increased current account deficit and subsidies. For the ongoing fiscal year, subsidy in the gas dependent fertiliser sector may rise to more than US$30.86 billion (Rs.2.5 trillion).

The current account deficit of India stood at US$36.4 billion during the second quarter of the fiscal year 2023 (FY23), 100% higher than the first quarter.

Elevated fuel prices have resulted in high inflation worldwide, and India is no different. Due to high prices of crude, gas and minerals, wholesale and retail inflation are rising in India. This is impacting food inflation as well – the Wholesale Price Index (WPI) crossed double digits (15%) while the Consumer Price Index (CPI) breached the comfortable 6% mark in May 2022. Only recently have prices started reducing and CPI eased to 5.72% and WPI to 4.95% in December 2022.

States cancelled exorbitant imported coal tenders even as India’s peak demand reached a record high in April 2022, leading to a daily electricity deficit of up to 1% during the month. Coal imports to bridge the shortfall in domestic supplies have proved expensive and unreliable. Looking at Australia, South Africa and Indonesia, the leading suppliers of imported coal to India, rates have increased. The supply shortfall led to electricity tariffs on the exchange hitting a high of Rs13.76 per unit compared to the average of Rs3.86.

Likewise, the unaffordability of energy led Bangladesh to cancel liquefied natural gas (LNG) imports from the spot market in July 2022 and adjust oil, gas and electricity prices to reduce growing fiscal burdens. Bangladesh also resorted to power rationing with directives for energy conservation measures to save expensive energy. As a result, the outputs of Bangladesh’s major industries shrank due to the energy crunch. Average inflation shot-up to 7.7% in 2022.

Similarly, Pakistan faced massive electricity shortfalls in May-June 2022 amid high energy prices. As its government drastically increased electricity tariffs for industries, many textile industries were reportedly on the brink of closure. Furthermore, the increase in coal prices left the cement and steel industries with no choice but to suspend operations or continue at lower capacities.

Without any immediate solution, Pakistan opted for energy conservation measures for shopping malls and government offices and diverted the saved energy for other useful purposes.

Measures appear to fall short in addressing challenges

While the three South Asian countries spearheaded measures based on their respective circumstances to protect their energy sectors from external price shocks and keep their economies afloat, their efforts have not yet yielded the desired results.

For instance, with foreign currency reserves barely sufficient to meet one month’s imports, Pakistan cannot increase energy imports drastically. As such, a daunting summer seems ahead for the country. Moreover, lowered credit rating due to political and banking risks makes it difficult to secure medium to long-term LNG contracts for the country.

Bangladesh may again experience load-shedding from March 2023 as coal shortages and fiscal strains caused the Rampal power plant to suspend operation. The Payra power plant may face a similar fate, at least temporarily, unless the price of coal falls significantly.

To ensure power supply amid rising energy demand, the Indian government has advised not to retire any thermal unit till 2030 and carry out renovation and modernisation to extend the life of existing units to improve their reliability and use it as flexible generation.

India is also trying to increase domestic coal production by opening more mines for private production. In May 2022, the government approved 10 mine expansions with 9.65 metric tonnes of capacity without environmental assessment and opened more mines for auction for commercial mining.

Renewable energy promotion could safeguard foreign currency reserves and contain energy-related inflation

While eliminating dependence on imported fossil fuels may not happen in the short term, renewable energy expansion could shield South Asian countries from massive price volatilities in the international energy markets and reduce energy security and current account risks.

For example, India saved fuel costs worth US$4.2 billion on account of solar power generation during the first half of 2022 and avoided associated imports.

India already aims to install 500 gigawatts (GW) of renewable energy by 2030. In addition, it recently rolled out a green hydrogen plan with an initial allocation of US$2.45 billion to lead research and development works to demonstrate the feasibility of green hydrogen.

Likewise, Bangladesh drafted a long-term plan of achieving a 40% renewable energy target by 2041 as part of the Mujib Climate Prosperity Plan.

In the same breadth, battered severely, Pakistan announced a plan for setting up 9GW of solar energy. Investors in solar energy would receive waivers on import duties and tax.

If supported by conducive policies and incentives, these long-term plans to deploy renewable energy could go a long way. Moreover, falling prices for renewables in these countries will support these clean energy plans and could be a game changer to counter high global energy prices.