JSW Energy is amongst India’s leading private power producing companies. Over the years, JSW Energy has enhanced its power generation capacity from 260 MW to 4,559 MW. The company has set a vision of becoming a 10 GW company by 2025 and a 20 GW company by 2030, with capacity additions coming predominantly from renewable energy sources. By embracing modern green energy as its foundation for dynamic growth, the company is transforming itself to ensure that it becomes a ‘net-zero’ contributor of greenhouse gas (GHG) emissions by 2050 or even earlier.
JSW Energy has committed to the Science Based Targets initiative (SBTi) and has set targets for CO2 reduction to 0.215 tCO2e/MWh, a 70% reduction from its 2020 emission level of 0.76 t CO2/MWh.
To fulfil these commitments, the company is using an internal carbon price (ICP) as a lever to drive clean technology implementation and diversify itself as a renewable and sustainable company.
Setting an internal carbon price (ICP)
As 2021 CDP research has shown, many companies are seeing the value of internal carbon pricing, with an 80% increase in the number of companies using, or planning to use, an ICP over just five years. In India, a total of 85 companies are either pricing carbon or planning to do so in the next two years (from 2021), an increase of 46% from 2020.
JSW Energy has adopted a shadow price of US$ 10-12 per tCO2e. The reasons for this approach are as below:
- A shadow price mimics the effect of all government policies and consumer/marker responses as a “proxy” for risk in the absence of one price signal. This is a derived cost of carbon emissions to better understand how pricing GHG emissions affects the business case of projects. It considers carbon tax levels/market price of allowances in trading schemes. It can also be used in risk analysis as well as in investment calculations, but no actual financial flows are generated. Benefits of shadow pricing for JSW Energy:
- Helps with both risk management as well as internal strategic planning;
- Tracks compliance prices without directly affecting business decisions.
- JSW Energy’s methodology of selecting a shadow carbon price primarily consists of five steps:
- Review and compile existing carbon pricing regulations and trends;
- Review future projections for carbon pricing regulations;
- Review of peer carbon prices;
- Mathematically analysing the carbon prices and its applicability context across sectors and regions; and
- Understanding the sectoral context (in this case, power/energy) and also understanding the regional context.
The company evaluated the carbon prices in developed and developing economies, including several Asian countries, and an ICP range of US$ 10-12 per tCO2e was taken.
Achieving science-based targets with ICP
JSW has committed to the SBTi to reduce its specific GHG footprint to 0.215 tCO2e/MWh by 2030 and to achieve net-zero by 2050. ICP provides the required leverage for low-carbon investments for the company, by calculating the impact levels of the same emissions in the future, as impact will significantly accumulate over time. For example, with emission levels equivalent to those in 2020-21, by 2030 JSW Energy would have an additional impact of around INR 2500 Crore, when compared to the emission levels at its SBTi target footprint.
JSW Energy also predicts its customer energy demands will increase from 4.5GW to 20GW by 2030. To provide this demand whilst maintaining its SBTi commitment, JSW Energy plans to significantly expand its use of renewables. By 2030, 85% of total generation is expected to be from renewables, up from the current level of 30%. With this decarbonization plan in place, ICP has been a very important tool in ensuring the flow of investments to make a shift towards renewables.
By adopting an ICP, coupled with other supporting decarbonisation strategies and levers, JSW Energy aims to:
- Prioritise climate-related risks and capitalize on opportunities;
- Make informed decisions and incentivize low carbon product developments;
- Use ICP as a preparatory tool for future climate change policies; and
- Better understand the potential impact of carbon pricing on the profitability of the projects and initiatives.
Challenges faced and pathways to overcome them
One major challenge faced by JSW Energy in its ICP journey was the fact that no Indian power sector companies had developed or disclosed their ICP in the public domain. Being new to the concept of ICP, the challenge was to collate and compile various data sets available, and to correlate them with the company’s climate tools and scenarios.
There were several rounds of discussion internally with various departments in the company. A study was undertaken, and a report was prepared, which communicated to all employees the concepts of ICP, SBT and the need for JSW Energy to adopt them as part of its commitment to net-zero. The adoption of ICP was also communicated to external stakeholders through the Integrated Report, and as well as to internal stakeholders through the company’s intranet and various awareness sessions and webinars.
Key message for peer companies
Organizations that take efforts to understand, and proactively manage, carbon risk will have long-term advantages as more countries and sectors move towards de-carbonization. By adopting an ICP, companies will be able to:
- Demonstrate climate leadership by contributing a fair share of effort to achieving India’s Nationally Determined Contribution (NDC) and the Paris Agreement;
- Future proof assets and investments against upcoming carbon pricing/climate change-related regulations;
- Respond to various stakeholders on climate change risks and preparedness for the same;
- Initiate the carbon pricing journey and use ICP as a management tool to support decision making and influence strategic planning, risk management and capital investment decisions;
- Assign a notional value to carbon emissions, to assess the risks of business investments under anticipated government policies that increase emissions-related costs;
- Accelerate reduction of GHG emissions and investments in clean energy; and
- Influence and increase the uptake of low-carbon technologies and products.
Call to action
By identifying potential risks and opportunities, an ICP is a potentially powerful strategic planning tool in the transition to a low-carbon economy. CDP encourages organizations to engage with key internal departments to establish whether an ICP can help their business achieve their strategic goals as their business transitions. Organizations should also consider setting an ICP at a level above any expected, or potential, laws or regulations to help alleviate any sudden shocks. This must also strike the right balance between ambition and business buy-in. To be effective, an ICP needs to be applied across all key business operations and cover all significant sources of emissions across an organization's direct operations and value chain.
For more information, refer to CDP’s 2021 report and Putting a Price on Carbon CDP India’s Handbook for Indian companies for putting a price on carbon and CDP India’s brochure on A case for science-based targets in India.