The poorest households in the Delhi area spend 25% more on fuel and electricity

According to a recent report by Cambridge Econometrics, fossil-fuel-related items, such as transport and household energy, contributed nearly 20% to India's annual inflation rate between April and May 2022. India's annual inflation rate (CPI) at that time was between 7 and 8%.

The report noted that between January 2021 and August 2022, fuel and electricity prices rose nearly five times faster (57%) than overall consumer prices in India (12%). This was reflected in consumer spending.

For example, it is estimated that households in the Delhi region spent 25% more on fuel and electricity in 2022 than in the previous year, and almost 50% more in 2020 – about Rs 4,100.

This was even more evident in the higher expenditure for rural households on electricity as a proportion of their income.

This is despite the fact that the Indian government budgeted the equivalent of about 0.5% of GDP to shield the public from the full impact of global fossil fuel price increases.

The discussions of the G20 Energy Transition Working Group held recently in Bangalore resulted in the continued use of fossil fuels for the next 15-20 years.

Carl Heinemann, the lead author of the report, said, “The cost of renewable energy has been falling rapidly over the past decade. It is now a well-known fact that renewable energy is now much cheaper than fossil fuel-based electricity generation. In fact, India is one of the cheapest locations in the world for new renewable energy projects and these costs are expected to fall further”.

According to RBI, the increased share of renewable energy in the grid is also the reason for the fall in wholesale prices. This should guide policymakers in India to increase spending on renewable energy to ensure that it remains the mainstay of electricity generation, rather than locking the country into costly energy that will inevitably lead to inflation.

While subsidies for renewable energy have increased over the past year alone, support for fossil fuels is still four times that for renewable energy in India. Fossil fuel-based energy carriers are heavily regulated through tariffs, taxes, subsidies, and price caps making it difficult to fully assess the full benefits of renewable energy in India.

India is one of the world's fastest-growing economies, responsible for more than 10% of total global energy demand growth, and is expected to grow rapidly in the coming decades.

Rather, high domestic energy costs and national import bills from the post-pandemic reopening and the Ukraine-Russia war suggest that countries like India should ensure energy security and growth by doubling down on investments in renewable sources of energy.

Rapid deployment of renewable energy is particularly important in diversifying India's energy mix away from coal. Over the long term, the expansion of renewables as well as increased electrification of transport and household energy consumption will reduce household and business consumers' exposure to volatile fossil fuel prices and limit the need for costly government spending.

The strong correlation between energy and inflation in India makes a strong case for India to decarbonize its economy. There is certainly evidence to support the argument that renewable energy can reduce the impact of energy prices on CPI in the long run.

The lifetime cost per megawatt (MWh) of new solar PV and wind power plants in India is estimated to be significantly cheaper than that of new coal-fired plants and natural gas-based power generation. The increase in the share of renewable energy in power generation has seen a reduction in spot prices in India's wholesale market.

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