MACROECONOMICS

TERM PAPER

Renewable Energy:
A Macroeconomic Analysis

Under the guidance of

Mrs. Shalini Prakash

PREPARED BY:-
1. Viksit Chaudhary
(BMS2B-20240)
2. Ujjwal Kumar Jha
(BMS2B-20228)
Introduction
The energy sector is an integral part of modern society and in general one of the most
important sectors in an economy. It plays an essential role in production processes and is an
intrinsic component in value creation and fulfillment of needs. It contributes to the economy
in two major ways. Firstly, According to WEF 2012, energy is an important economic sector
that creates jobs and value by extracting, transforming, and distributing energy goods and
services throughout the economy. Secondly, as energy is required as an intrinsic component
in almost every product and services its impact ripple throughout the economy. An efficient
and developed energy sector enhances the economy, creates energy security, keeps prices
stable, helps in fulfilling other economic effects, and is essential for sustainable growth.

Due to the negative environmental impact of using traditional fuel sources as a way to
generate power, over the last few decades new methods of generating power, mainly
renewable energy, are being looked into to achieve sustainable development.

Renewable energy refers to all energy resources that are naturally replenished at a rate that is
equal to or faster than the rate of their consumption or permanent resources that are available
in nature in abundance (van Vliet, 2012). Renewable resources include solar energy, wind
energy, hydropower, the energy produced from biomass, geothermal energy, and ocean
energy, which includes wave power, tidal energy, and ocean currents (Armstrong, Hamrin,
2000).

India’s Energy Outlook

India is one of the largest economies in the world and has seen extraordinary development
after the liberalization. In recent years India has brought electrical connections to millions of
homes. As of now India is the third-largest energy-consuming country in the world after
China and the USA and consumes about 6% of global primal energy. Energy usage has more
than doubled since 2000 with 80% of demand still met by coal, oil, and solid biomass.
Around 85% of Indians have access to clean cooking fuel but due to the inability to afford
LPG, many households especially in rural areas depend on solid biomass. Earlier it was
expected that India's energy demand would increase by 50% from 2019 to 2030 but the due
impact of COVID 19 energy demand will now only increase by 35%. India’s oil demand is
seen increasing by 74% to 8.7 million barrels per day by 2040. India will become the fastest-
growing Natural gas market with demand more than tripling by 2040. We will also see coal
demand rise to 772 million tonnes by 2040 from the current 590. Along with all these the
demand for renewable energy is also increasing. Its growth for India is only second after
China. Some problems faced by renewable energy sources are reliability of energy supply,
the need for affordability, etc.

India’s power sector is also facing a rather major problem of low utilization of generation
capacity. The primary reason for this is the shortage of fuel and unviable power purchase
agreements. There is also the increased borrowings of state-owned discoms. The accumulated
losses of these companies rose significantly resulting in increased borrowings. Consequently,
the interest cost on these loans worsens the poor finances of state discoms. Poor finances of
the discoms affect their ability to buy power, thus leading to power deficits.

Effect of Renewables on Macroeconomic variables of an Economy

The economic influence of renewable energy can be directly or indirectly felt on GDP,
investment, welfare, and trade. The GDP is one of the most commonly used and preferred
methods to measure economic development and growth. Increasing the share of renewable
energy in the energy mix has a significant impact on the GDP. According to an analysis by
IRENA 2016, doubling the share of renewable energy sources from the 2010s level increases
the GDP in 2030 between 0.6% to 1.1%. Most of this positive impact on GDP can be
attributed to an increase in investment in renewable energy deployment which creates a ripple
effect in the rest of the economy. Increased investment causes an increase in the production
of goods and services in an economy which in turn can increase consumer spending,
international trade, etc. The increased investment in the renewable sector can stimulate
capital spending flow in the economy and can stimulate direct and indirect growth in the
various sectors. At the sectoral level, increased investment can lead to increased output, not
only that, sectors that produce capital goods and services will also reap high benefits. The
output of major sectors like manufacturing, engineering, construction depends on the volatile
demand for capital goods and services. There is also a significant increase in output of the
service sector mainly due to induced effects i.e. improvement in the wider economy. For
example, if the electricity prices decrease, that can increase consumer expenditure in sectors
such as hospitality, retail, etc. Such changes can significantly improve employment as many
of these sectors are labor-intensive.

The benefits of renewable energy are not limited to increasing GDP and investment which
provides a rather broader picture of economic growth. Similarly important are improvements
in welfare and social benefits which are excluded from GDP but provide rather important
measures of development. Maximization of benefits in terms of income, health, education,
employment, and general human wellbeing. According to IREA Jobs are instrumental to
achieving economic and social development. Beyond their critical importance to wage
generation and individual well-being, they are the core of many broader societal objectives,
such as poverty reduction, economy-wide productivity growth, and social cohesion. The
importance of renewables as a method of addressing issues of unemployment is being
increasingly recognized.

New job creation can be in three ways: (i) linked to scientific research and renewable energy
technology development, commercialization, installation, operations, and maintenance; (ii)
Decentralized rural energy enterprises operated by private entrepreneurs, for example, private
entrepreneurs are emerging as a model for providing efficient and reliable power for meeting
basic and productive needs of local communities, generating jobs where they are required and
thereby reducing out-migration. (iii) By contributing to grid generation, renewable energy
will help in reducing dependency on fossil fuel-based electricity and hence enables improved
economic opportunities, for example, in manufacturing, services, etc. . The induced
employment benefit of renewables can also be seen as described earlier.

Along with the investment, GDP, and employment, renewable energy sources will also help
fight environmental problems. Environmental problems such as air pollution, climate change,
etc have serious economic consequences. The market impacts of outdoor air pollution are
reduction in labor productivity, increasing hospital expenditure, reduction in agricultural
yields, etc which can cause an economic loss of up 1% of Global GDP by 2060. The most
impactful consequence is the economic loss due to the loss of output from the number of
premature deaths. and morbidity from air pollution which was 1.4% of the GDP in India in
2019.

Another advantage of renewables is that they are primarily indigenous sources so most of the
energy dollars can be kept at home. The switch to a greater share of renewables has
potentially favorable trade implications. Reducing fuel imports can improve the trade balance
and improve GDP.

RECENT POWER CRISIS IN INDIA

As evident from the above data and supported reasons, it was almost a predictable thing to
have an unprecedented power crisis due to the coal shortage in India.

The crisis can be attributed to the following reasons:-

1. Revival of the economy after the second wave of coronavirus pandemic

2. Heavy rains in coal mines during September 2021.

3. Increase in prices of imported coal to unprecedented high level

4. Legacy issue of heavy dues of coal companies from certain states.

5. Failure to build adequate coal stocks before the onset of monsoon

Results: - All this resulted in coal-fired power plants in many states like Punjab, Rajasthan,
Delhi, and Tamil Nadu being left with coal stockpiles of a week or less. Generally, the stock
level is maintained for at least 15 days or more.

Conclusion
A big chunk of India’s energy generation is dependent on non-renewable resources like coal,
petroleum, and natural gas (approx 60%). It's high time that India needs to shift itself from
nonrenewable to renewable resources for its energy requirements. This shift will not only
help the economy to grow in terms of GDP, Unemployment and per capita income, etc but
also will help in the environmental and sustainable development of the country.

The need is to pump more investment in the renewable sector for research and development
to make it more available economically, geographically, etc. This investment will have a
multiplier in the economy and will help India to grow at a faster pace.
References

India Energy Outlook 2021

https://www.iea.org/reports/india-energy-outlook-2021

Renewable Energy Benefits: Measuring the Economics by IRENA

https://www.irena.org/-
/media/Files/IRENA/Agency/Publication/2016/IRENA_Measuring-the-
Economics_2016.pdf

Economic Effects of Renewable Energy Technologies by Dario Maradin,

Ljerka Cerovic, Trina Mjeda
(PDF) Economic Effects of Renewable Energy Technologies (researchgate.net)

Assessing Economic, Social and Environmental Benefits of Renewable Energy

in India by Nitya Nanda

*Microsoft Word - PEP Call Proposal Final TERI 15 January 2015 (pep-
net.org)

Role of Renewable Energy in Indian Economy by Aaditya Ranjan Srivastava

https://iopscience.iop.org/article/10.1088/1757-899X/404/1/012046/pdf

Renewable energy in India's economic development: An analysis of reforms

https://energy.economictimes.indiatimes.com/news/renewable/renewable-energy-in-indias-
economic-development-an-analysis-of-reforms/79325236

India should use renewable energy to meet its economic growth targets
https://www.downtoearth.org.in/blog/energy/india-should-use-renewable-energy-to-meet-its-
economic-growth-targets-78111

India to overtake EU as world's third-largest energy consumer by 2030: IEA

 https://economictimes.indiatimes.com/news/economy/indicators/india-to-
overtake-eu-as-worlds-third-largest-energy-consumer-by-2030-
iea/articleshow/80766446.cms
Health and Economic Impact of Air Pollution in India
https://phfi.org/health-and-economic-impact-of-air-pollution-in-india/