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“Energy is the single largest contributor to global warming: To limit the rise of more frequent and extreme weather events, we must all contribute to reducing the carbon emissions intensity…”

May 26, 2020

Electric power plants are responsible for almost half of global CO2 emissions the world over. At the peak of the global coronavirus shutdown – pinpointed by researchers – plant emissions were down only 7.4% compared to 2018 averages, from about 44.6 million metric tons per day to about 41.3 million. Given that India is world’s third largest emitter of CO2 – calls for a radical shift from fossil fuels to renewables, to ensure a sustainable future.

Tim Buckley addresses all related concerns, the required transitioning and the need for urgent strategic shift. A very erudite and hands on energy expert, Tim is the Director of Energy Finance Studies, Australasia at Institute for Energy Economics & Financial Analysis (IEEFA). He covers the global electricity markets, with a focus on India and greater Asia. Tim also did a long stint with the Citigroup as Managing Director, Head of Equity Research.

India has the potential to be a clear world leader in embracing and benefiting from the current technology – driven, deflationary, energy system disruption, believes Tim. However, he has a word of warning, too – that policy conflicts need to be resolved before they are announced. The long term opportunities for strong, sustainably – driven economic growth across India are too important to be undermined by short term contradictions and missteps.

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.

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, 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.

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 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.

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.

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.

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.

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.

PG: Any thoughts on incentives and disincentives?

TB: Let’s look at the facts. India is the world’s second largest producer and consumer of coal, behind only China (having overtaken the U.S. in the last year or so). Government owned Coal India Ltd contributes around 80% of the country’s total coal production.

While many environmentalists tend to consider only the adverse impacts of Coal India Ltd, I’d balance that by saying the company is playing a key role in India’s current economic development.

Coal India Ltd is a massive employer with almost 280,000 direct employees, most of whom are in the least developed parts of the country. Indian Railways gets more than half of its revenue from transporting coal and this is used as a cross-subsidy to reduce the cost of passenger rail transport. Finally, Coal India Ltd is most probably the highest taxed coal company in the world. Some 40% of Coal India Ltd’s total revenues are returned to government in the form of GST, duties, royalties, corporate tax and the Rs400/t coal cess. (Most of the coal companies I examine in Australia are either tax-haven based and/or structured to ensure they pay next to no corporate tax. On top of this, Australia’s coal industry is adept at extracting subsidies.)

India requires a financially strong government, and despite the destructive downsides in using fossil fuels, at least Coal India Ltd is contributing to state and centre coffers.

With coal paying its way to a large degree, the key opportunity now for India’s energy system transformation is renewables, which are the least cost source of new power generation and the lowest cost in terms of externalities.

With this in mind, the government is correctly focusing on accelerating renewable energy deployments to deliver on its target of 450 gigawatts (GW) by 2030. Achieving this ambition would rightly put India on the centre stage globally.

The government is correctly focusing on accelerating renewable energy deployments to deliver on its target of 450 gigawatts (GW) by 2030. Achieving this ambition would rightly put India on the centre stage globally.

The Paris Agreement identified the “common but differentiated” emission reduction requirements of developed and developing nations. India is on track to deliver more than its share of this globally important goal, even as richer countries like the U.S. renege on their treaty obligations.

PG: In a most optimistic scenario, how long do you think it would take India to accomplish the Paris Agreement target?

TB: In the area of energy, India made three key commitments under its nationally determined contributions – the (intended) reductions in greenhouse gas emissions under the United Nations Framework Convention on Climate Change (UNFCCC). Firstly, to drive energy efficiency by decoupling energy needs from economic growth; secondly, to aggressively invest in renewable energy; and thirdly, through reforestation.

Under Prime Minister Narendra Modi’s leadership, India could well be five years ahead of its 2030 Paris commitments. As a result, this is driving energy system deflation and improving India’s energy security.

The technology driven disruption of the world’s energy system has huge economic, political, and environmental prospects for India, and the country is responding well to these opportunities.

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

TB: 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).

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.

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). 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.

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.

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.

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.

PG: Could the Covid-19 be a game changer for good?

TB: Yes. COVID-19 has reinforced a key lesson for many countries: real leadership means relying on the advice of experts, in this case medical experts. There is another crisis in which the experts have long been ignored – the scientific experts calling for emission reductions to reduce catastrophic global warming. Ignoring climate science and the need for sustainability in the mindless pursuit of short term economic growth ignores the power of nature to give us system shocks of enormous economic and personal cost. The COVID-19 lesson is that we must work together for the common good and put the benefits of a safe and healthy environment ahead of the questionable merits of unsustainable economic growth.

Ignoring climate science and the need for sustainability in the mindless pursuit of short term economic growth ignores the power of nature to give us system shocks of enormous economic and personal cost.

PG: Imposition of duty on imported panels, does it make the economics of renewables unviable? Any thoughts on the local capabilities?

TB: This is an important question. The COVID-19 pandemic has highlighted the shortcomings of global supply chains and the risks associated with the loss of domestic manufacturing expertise.

The “Make in India” strategy provides India with an opportunity to expand its domestic manufacturing expertise, leveraging huge ongoing demand growth across a range of new low emissions industries of the future.

This opportunity was not realised with India’s temporary solar module import duty of 2018-2020. Due to poor implementation of this policy, and state-centre and centre-centre policy contradictions, no new manufacturing capacity has been established. After extremely positive renewables momentum evident in 2018, India installed with just 8GW/US$7bn of solar in 2019/20, including rooftop. This was just a third of what should have been possible absent massive regulatory uncertainty and confusion, much of which stemmed from the unexpected cost impost of the solar module import duty. Some $15-20 billion annually of new additional investment in zero pollution, zero emissions, low cost domestic power generation was lost. The 15-25% import duty undermined investor confidence and reduced the well-established value gap between solar and thermal power.

The “Make in India” strategy provides India with an opportunity to expand its domestic manufacturing expertise, leveraging huge ongoing demand growth across a range of new low emissions industries of the futureDue to poor implementation of this policy, and state-centre and centre-centre policy contradictions, no new manufacturing capacity has been established.

By comparison, the 2GW/6GW manufacturing-linked solar tender won by Adani Green and Azure Power in January 2020 should achieve the policy objectives in a win-win manner (the Rs2.92/kWh pricing is still 20% below the wholesale price of electricity in India, while the 25-year contract provides investor certainty), without negative installation issues and disruptions.

Policy conflicts need to be resolved before they are announced. The long term opportunities for strong, sustainably-driven economic growth across India are too important to be undermined by short term contradictions and missteps.

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.

PG: Many thanks Tim – for these exceptional insights into the Indian energy sector.

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