May 28, 2020 Read More →

IEEFA India: Energy is pivotal for any country to ensure sustainability

Q&A between Praveen Gupta and Tim Buckley

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.

The more a country drives strong economic growth, the more energy is required.

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.

Fossil fuels are the largest source of air and particulate pollution

Driving electrification of India’s transport system, be that 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. 

The global economic growth model of last century was entirely tied to an ever greater use of fossil fuels

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 cost 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.

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

Tim Buckley: 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. 

Fossil fuel firms also rely on using public assets for largely private gain, more than any other industry globally.

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.

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

Tim Buckley: 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. 

Once built, renewable energy has a distinct advantage over coal-fired 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.

Few investors are likely to build multi-decade gas-fired power generation assets

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’.

Praveen Gupta: What in your vision would be an ideal energy mix for India?

Tim Buckley: Prime Minister Modi has outlined a clear and ambitious vision: 450GW of renewables by 2030. The whole-of-industry and regulatory buy-in to this goal is really impressive. 

However, achieving this vision requires a fourfold increase in annual investment, with a clearly overdue immediate step-up in the deployment of distributed renewable energy (particularly rooftop solar). Further, all coal-fired power plants should either be put on a formal closure path over the next 5-10 years or immediately retrofitted to reduce their environmental impact (the centre government has mandated this but enforcement is entirely lacking till date).

INDIA HAS HUGE HYDRO-ELECTRICITY RESOURCES, YET WATER IS GROWING SCARCER. This is a key constraint to sustainable economic growth. It would be in India’s interest to incorporate a plan looking at the viability of a limited expansion of hydro-electricity capacity as part of a wider flood management and whole-of-system clean water plan (bounded by the constraints of the loss of too much fertile rural land). 

All coal-fired power plants should either be put on a formal closure path over the next 5-10 years or immediately retrofitted

The country should also immediately embark on a retrofit and modernisation of India’s existing 46GW of hydro capacity, given its key value for peaking electricity generation (pumped hydro storage (PHS)). This would require an accelerated modernisation and expansion of India’s national grid infrastructure, including firming capacity (batteries, PHS, coal- and gas-peakers and demand response management). 

India should also leverage its surplus electricity capacity via a tenfold increase in two-way renewable energy electricity exports to adjacent countries like Bangladesh, Sri Lanka, Nepal and Bhutan. 

Along with this, India should leverage the technology convergence of the transport and energy sectors to accelerate deployment of electric vehicles (starting with buses, taxis and 2- & 3-wheelers) and continue with the electrification of Indian Railways. 

India should leverage the technology convergence of the transport and energy sectors

This progress should be combined with a stepped-up focus on the many “Make in India” manufacturing opportunities that come with transforming and modernising the combined energy and transport needs of 1.35 billion people. The scale of domestic market opportunities means global capital will flood in, thereby supporting the government’s sensible long term investment plan. 

In turn, the progressive replacement of fossil fuel imports by lower cost, clean, domestic energy alternatives would reduce currency devaluation risks and lower inflation, and hence interest rates, in India. This in turn would create a virtuous cycle, as lower interest rates are the key to lower renewable energy tariffs.

INDIA SHOULD ALSO ENFORCE A MORE POSITIVE CENTRE-STATE DIALOGUE TO INVITE BUY-IN and regulatory compliance nationally, including mandated and enforceable recycling or reuse systems of all end-of-life components, be it fly ash from coal-fired power plants, solar modules or lithium ion batteries.

Achieving a sustainable energy system means finding a path to ongoing economic viability of state electricity discoms. Cross-subsidies from industry must be progressively removed, and a national Direct Benefit Transfer (DBT) scheme put in place to support those most in need in the rural sector. This would replace the problematic system of trading ‘free’ electricity for votes, which is in turn preventing sustainable economic growth for India as a whole.

India has the potential to be a clear world leader in embracing and benefiting from the current technology-driven, deflationary, energy system disruption. Post COVID-19, a central focus on sustainability and accepting the advice of scientific experts is more important than ever.

This is an excerpt from an article that first appeared in The Diversity Blog

Tim Buckley is IEEFA’s Director of Energy Finance Studies Asia Pacific.

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