In its first updated Nationally Determined Contribution under the Paris Agreement to United Nations Framework Convention on Climate Change (UNFCCC) in August 2022, India has committed to first, adopting a climate-friendly and cleaner path to economic development; second, reducing the emissions intensity of its GDP by 45% by 2030 from the 2005 level, and third, achieving about 50% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030 along with other six commitments. Currently, thermal power has the dominant share in India’s electricity basket. Under the new regime, thermal power will also have a 50% share.
An agent of emissions
Thermal power production results in a huge amount of carbon emission. The power producing States bear the burden of all this pollution to provide electricity to the consuming States. So, who should pay for the pollution burdens of thermal power plants? This article looks at thermal power production under the central sector and recommended compensation mechanisms for thermal power producing States.
India has a total installed capacity of 4,56,757 MW in which the central sector has 22.9% share, the State sector has 23.7% and the private sector, a 53.4% share. Out of the total electricity generation capacity from thermal power plants (2,37,268.91 MW), private sector power plants have a capacity of 85,899.095 MW (36.20%), the State sector has 75,991.905 MW (32.03%), and the central sector has the capacity of 75377.91 MW (31.77%). Central sector power plants which are located in several States, have 31.77 % of the total electricity generation capacity. NITI Aayog data show that India accounts for 20,794.36 kg of carbon emission from electricity generation.
According to the Ministry of Coal, Government of India (April 1, 2023), the total reserves of coal in India are 378.21 billion tonnes, of which Odisha alone accounts for 94.52 billion tonnes. Around 59.12% of the total energy supply in India is from coal. In India, around 73.08% (11,80,427.19 million units) and 1.48% (23,885.04 million units) of electricity are generated from coal, oil and natural gas, respectively, in 2022-23. Thus, the thermal power sector remains a major contributor to carbon emissions in India.
According to the Central Electricity Authority (CEA), Maharashtra had the highest non-renewable electricity generation capacity (31,510.08 MegaWatt or MW), followed by Uttar Pradesh (26,729.374 MW) and Gujarat (26,073.41 MW) in 2022-23. Rajasthan had the highest renewable electricity generation capacity in India at 22.398.05 MW of installation capacity. Despite having the highest electricity generation capacity, some States consume more than their generation.
Thermal electricity generation by the National Thermal Power Corporation (NTPC) also shows that the States producing the maximum electricity do not consume most of it — Uttar Pradesh, Odisha, and Chhattisgarh only consume 40%, 38.43%, and 29.92%, respectively, of the electricity produced by NTPC in their respective State. Gujarat is the biggest consumer of NTPC produced electricity (4,612 MW) despite the State’s meagre generation of 17.7 MW by the NTPC. Gujarat and Maharashtra purchase electricity from different States from what is produced by the central sector and in other sectors.
Thermal electricity-producing States bear a disproportionate pollution burden when compared to the consuming State. Data from the CEA show that Tripura has the highest (96.96%) share of thermal power in the total electricity generation capacity, followed by Bihar (95.57%), Chhattisgarh (94.35%), Jharkhand (92.69%), Delhi (87.96%), West Bengal (87.72%), and Uttar Pradesh (81.84%). Not all the electricity generated in the State is being utilised inside the State. Bihar sold 16,529.62 MW of electricity in 2022-23.
NITI Aayog data show that Chhattisgarh is the highest net seller of electricity among all Indian States with 535.29 MW in 2022-23, followed by Madhya Pradesh (379.19 MW), Himachal Pradesh (153.43 MW), Rajasthan (135.14 MW), Odisha (95.40 MW) and Meghalaya (55.22 MW). These are the States where the central sector produces more thermal electricity and sells to others. Gujarat is the highest importer of electricity (528.17 MW), followed by Haryana (212.63 MW), Maharashtra (187.50 MW), Delhi (162.97 MW), Punjab (160.82 MW), and Tamil Nadu (128.37 MW) in the year 2022-23.
No compensation
India’s electricity and environmental regulatory structures do not compensate States that generate electricity from central sector thermal power plants. Therefore, net exporting States of central sector power producers bear the burden of all pollution, and net importing States enjoy clean electricity. Central sector thermal power is mainly produced in coal-rich States such as Jharkhand, Chhattisgarh, and Odisha. Even though coal-rich States produce the maximum thermal electricity, per capita electricity consumption remains substantially lower than other economically better-off States. Thus the coal-rich States face a new form of resource curse.
Under the Corporate Social Responsibility (CSR) scheme, although thermal power-producing companies spend a small amount of funds to develop the periphery, this is far from compensating for environmental damage. The National Clean Energy and Environment Fund was created to promote renewable energy, and to assist States with cleaner technology.
Electricity is a Concurrent subject (Entry 38 of List III of the Seventh Schedule of the Constitution), which allows both the central and State governments to legislate on electricity matters. States are constitutionally permitted to levy taxes on electricity consumption and sale, but not on its generation. Similarly, the central government does not impose any specific tax on electricity production.
In October 2023, the Ministry of Power issued a directive that prohibits State governments from levying additional taxes or duties on electricity generation, clarifying the constitutional boundaries. As a commodity, electricity is exempt from Goods and Services Tax (GST). Services related to electricity transmission or distribution by utilities are also GST-exempt. Therefore, the consuming States receive the electricity duty levied on electricity sales. The electricity-producing States do not get any tax revenue but only the burden of pollution.
A formulation to pursue
Electricity produced and consumed within the State internalises all the benefits and costs. However, when the electricity is produced in one State and consumed in another, it creates a pure negative externality for the producing State. In such a situation, the States producing thermal power under the central sector should be compensated for all the electricity consumed by other States.
This can be done in two ways. States where central sector power plants are located can tax thermal power generation. Otherwise, the Union government can collect and transfer the generation tax to the producing State. The other mechanism would be a compensation mechanism through the Finance Commission of India. The last three Finance Commissions have recommended a formula to transfer funds to States under environmental and climate change concerns. This has been done through grants and horizontal devolution criteria. The Sixteenth Finance Commission should seriously consider India’s international climate commitments and develop a fiscal road map to achieve those goals. Whatever the mechanism, thermal power-producing States under the central sector should be compensated adequately for carrying the burden of other States’ electricity consumption.
Amarendra Das is an Associate Professor at the Department of Science and Technology Centre for Policy Research on Energy Transition, National Institute of Science Education and Research (NISER) Bhubaneswar, an autonomous institution under the Department of Atomic Energy, Government of India. Naneshwar Jagat is a PhD scholar at the School of Humanities and Social Sciences, National Institute of Science Education and Research (NISER) Bhubaneswar
Published – February 18, 2025 12:16 am IST