TIM BUCKLEY & PRAVEEN GUPTA. Energy is pivotal to India’s economic development and sustainability goals. Part 1 of 2.

Jun 4, 2020

In Part 1, Tim Buckley and Praveen Gupta explore the factors influencing India’s economic growth, energy and water security, natural resources, air pollution and environmental sustainability.

Praveen Gupta: Why is energy pivotal for any country in ensuring sustainability?

Tim Buckley: Energy is pivotal for economic activity. The more a country drives strong economic growth, the more energy is required. Different countries are blessed with different natural resources. In India’s case, it’s thermal coal, hydro, solar and wind energy resources.

Before I get to your question of sustainability, I’d start by saying that for sustainable economic growth, energy security is best served by a primary reliance on domestic resources.

When we consider India, the current economic model is unbalanced due to an excessive reliance on fossil fuel imports. This creates a massive drain on the trade account and the value of India’s currency, and generates excessive inflationary pressures that are keeping India’s interest rates at levels many multiples of global averages.

The Government of India is very focussed on two key energy strategies: renewables and electrification. Both strategies are a clear reflection of the pressing need to improve India’s energy security by reducing reliance on imported fossil fuels. This context is important when considering the drive to improve sustainability in India’s energy system. The acceleration of energy efficiency initiatives combined with a greater rollout of renewable energy investments reduces reliance on fossil fuels.

Driving electrification of India’s transport system, for automobiles, 2- and 3-wheelers, trucks and buses, will reduce India’s reliance on imported oil. Similarly, electrification of India’s enormous railway system will reduce reliance on imported diesel. And an acceleration of investment in wind and solar infrastructure will progressively reduce India’s reliance on imported thermal power generation.

For India, the dual move to electrification and renewable energy will also dramatically reduce pollution pressures and all the associated health costs. Fossil fuels are the largest source of air and particulate pollution, the largest contributor to carbon emissions, and the largest user of India’s precious water resources.

Where thermal power generation is enormously water intensive, renewable energy is almost zero-water reliant. It has significant sustainability benefits of reducing water scarcity in India as well as reducing the pollution in India’s water systems.

To limit the rise of more frequent and extreme weather events, we must all contribute to reducing the carbon emissions intensity of our economic footprint, as per the Paris Agreement. Energy is the single largest contributor to global warming.

The good news is that India has some of the best wind and solar resources in the world; the cost of renewable energy is already well below alternative fossil fuels; and the costs of renewables are expected to decline dramatically over the coming decade. Energy system deflation will help India deliver sustainable economic growth, and in doing so, will improve sustainability in the process.

PG: What makes fossil fuel / coal addiction so compelling despite its known downside?

TB: The global economic growth model of last century was entirely tied to an ever-greater use of fossil fuels – coal, oil, nuclear and gas/LNG. We have all benefited from these energy sources before knowing/believing the damage they caused to our planet, but by then, the financial power of the fossil fuel industry had entrenched itself into political power.

The fossil fuel industry is very effective at internalising the economic gains of their activity and externalising the costs – in terms of communities forcibly removed from their land, the inordinate use of the limited supply of water, and the right to pollute the air via carbon emissions.

Fossil fuel firms also rely on using public assets for largely private gain, more than any other industry globally. Following a Supreme Court ruling (2014) to address the Coalgate scandal, the Indian Parliament took decisive action in 2015 to address the growing portion of India’s coal resources ending up in the hands of a few billionaires by nationalising coal mining.

If we are to build sustainability, we need to change the economic paradigm of the last century by forcing polluters to value our common environment: the air, water, land, and national parks that we all rely upon.

Forcing a price on carbon emissions is a way to internalise the costs of fossil fuel use, levelling the playing field for cleaner alternatives. Requiring power generators to install pollution controls likewise puts the nation’s health at a higher priority. Mandating cleaner-burning vehicles and fuel also addresses sustainability pressures, as would the move to electric vehicles powered by renewable energy with mandated recycling of cars, solar modules and batteries.

PG: Would falling price of coal and oil not make it compete with the renewable sources?

TB: We have seen a dramatic decline in oil and gas prices in 2020 (dropping more than half relative to year-start levels). This price decline has had no real impact on renewables as electric vehicle penetration rates in India are immaterial and oil is not a primary fuel source in India’s power generation.

The vast majority of India’s coal is from domestic sources (some 80%). While international coal prices have fallen some 25% year-to-date (20% net of India’s currency devaluation), there has been little relief for electricity generators. And with electricity demand collapsing 25% in April 2020, the utilisation rate of coal-fired power plants has dropped dramatically, more than offsetting any fuel price relief.

A key lesson of the COVID-19 lockdown in India has been that once built, renewable energy has a distinct advantage over coal-fired power generation. Renewable energy has a zero marginal cost of operation (and is supported by a ‘must-run’ mandate predicated on the merit order dispatch model). This has seen coal-fired power generation wear 100% of the electricity demand destruction during the pandemic.

While spot international liquid natural gas (LNG) prices have fallen 80% in the last few years, there is little ability to lock these prices in for the long term. As a result, few investors are likely to build multi-decade gas-fired power generation assets and the associated import infrastructure assets (ports and pipes). By the time a project was approved and commissioned, the LNG price could have doubled or tripled, making the project just another fossil fuel ‘stranded asset’.

PG: How do you manage a transition plan? 1.3 billion people need to alter their lifestyles and aspirations dramatically. What would it take to achieve that?

TB: Ever lower cost renewable energy is fundamentally disrupting the world’s electricity markets, and therefore people’s behaviour.

Thanks to record low tariffs of Rs2.50-3.00 per kilowatt hour (kWh) for both wind and solar, India is a world leader in the global energy transition, motivated by economic savings and energy security improvements. The gains from deploying ever more renewable energy are also clear in terms of reduced water stress, improved air quality and lower carbon emissions.

However, let’s not pretend renewable energy, lithium ion batteries and electric vehicles are the perfect panacea. Any industrial activity has negative consequences. If India is to double its economic activity over the coming two decades to accommodate the near 20 million new people entering the workforce every year, there will be huge negative consequences for sustainability.

Despite the significant costs of large scale wind and solar, India’s industrial solar parks like Bhadla in Rajasthan and Rewa in Madhya Pradesh – the largest in the world – are some of the lowest cost. They do have an enormous land footprint; however, it is equal in size to the land requirements of a similar sized coal-fired power plant (when the coal mine area is also considered). And any utility scale renewable energy facility requires an enormous associated investment in grid transmission infrastructure, like any thermal power generation. Renewable energy microgrids, particularly when supported by rooftop solar, can address many of the negative externalities and are an ideal solution. At the moment however they lack the scale to meet India’s total energy needs.

Tim Buckley is Director of Energy Finance Studies Asia Pacific at the Institute for Energy Economics and Financial Analysis (IEEFA). Praveen Gupta is a former CEO of the insurer QBE India.

Part 2 will explore the strategies available to hasten India’s economic development, energy security and transition to renewable energy sources.

This is a slightly edited version of an article originally published in The Diversity Blog.

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