New analysis reveals the impact of rising fossil fuel prices in India
New Cambridge Econometrics analysis for the European Climate Foundation explores the role of energy prices in recent consumer price inflation in India, with a view to understanding the potential for faster energy transition measures to ease inflationary pressures and risks.
Cambridge Econometrics analysed energy system and inflation data from a variety of sources to understand the role of energy prices in Indian consumer price inflation. The report also takes stock of India’s wider energy transition strategy, the Indian government’s response to the recent energy price increases and discusses how the future energy system can better protect consumers from sudden price hikes.
3 key findings
1. Fuel and power prices have risen nearly five times as fast as overall consumer prices in India.
- Despite significant government intervention in energy markets, fuel and power prices have risen nearly five times as fast as overall consumer prices in India between January 2021 and August 2022.
- We estimate that the poorest households in the Delhi area have been spending 25% more on fuels and electricity in 2022 compared to 2021, and 50% more than in 2020.
- As rural households in India spend a greater share of living expenditure on energy, they are disproportionately affected by rising energy prices.
- The impact of higher global oil and gas prices is not fully felt by Indian consumers, thanks to government control of fuel prices and tax cuts worth around 0.5% of GDP.
2. The Indian energy transition is accelerating, but subsidies for fossil fuels remain far larger than government support for clean energy sources.
- Government support for fossil fuels is currently four times higher than public spending on renewables, and while the measures help households in the short term, they also alter price signals and reduce incentives for accelerating the energy transition and uptake of greener technologies in households and businesses.
3. Installing new solar and wind power capacity is cheaper in India than almost anywhere else globally.
- Boosting capacity would reduce India’s energy import dependency and could shield households from rising energy prices in the future.
- IRENA figures show that new onshore windfarms and utility-scale solar PV capacity in India have one of the lowest cost per MWh globally. The cost-competitiveness of renewables in India has already led to falling wholesale prices as the share of renewables in the electricity mix increases, recent analysis from India’s central bank has shown.
- India’s energy demand has risen fast over the past decades as a result of population growth and strong economic development. Going forward, shifting public investment away from coal-fired power generation and towards renewables would save emissions, reduce average electricity prices for Indian households, and help India’s energy independence.