Defaulting to Decarbonization? Financial Insolvency and the Energy Transition in India’s States

How do financial constraints shape the energy transition in developing countries? I study this question in India, where electricity procurement is governed at the subnational level. Electoral politics motivates state governments to subsidize electricity consumption, resulting in financial stress for electricity distribution utilities (DISCOMs). Using multiple sources of original data on utility and plant operations, I investigate the relationship between financial distress and decarbonization. I theorize that the effect of utility insolvency depends on the margin considered—dispatch vs. capacity investment—and on institutions. Counterintuitively, but consistent with my theory, I find that financial stress is associated in the short run with greater relative procurement of renewable energy and less procurement of fossil fuels. Mechanism tests suggest that coal dispatch is more sensitive to liquidity constraints, as distressed DISCOMs cut back on coal deliveries while renewable energy remains protected by “must-run” dispatch regulations. In contrast, I find at most weak evidence that insolvency raises challenges for decarbonizing electricity in the long run: insolvency shows no relationship with renewable-energy tendering, only suggestive evidence that it slows renewable capacity investment, and similarly weak evidence that it curtails expansion of transmission lines that renewables need to scale. The results qualify the conventional wisdom that electricity utility insolvency is a binding constraint on the energy transition.