India: The Next Green Growth Champion?
India, the third largest energy consumer in the world, has often been flying in the slipstream of the United States and China when it came to the global energy debate. This is set to change soon, however. Looking ahead at the next two decades, the International Energy Agency (IEA) projects that India will almost add 30 percent to global energy demand growth, consuming 11 percent of global energy by 2040 (up from around 6 percent in 2018). India’s energy production and consumption will not only impact global markets but will also be an important factor in global efforts to address climate change. The expected decline in Indian coal consumption is already good news for the global climate (albeit not without domestic political and financial risks). Coal as a share of India’s electricity production capacity is expected to fall from currently 57 percent to 38 percent by 2026, while the share of renewables will rise from 29 percent to 50 percent in the same time.
The private sector plays an important role in this development, as initiatives such as Shell’s waste-to-energy technology highlight, seeking to address India’s waste and energy issues at the same time. However, “over 70 percent of global energy investments will be government-driven, and as such the message is clear – the world’s energy destiny lies with decisions and policies made by governments,” as Fatih Birol, executive director of IEA, pointed out during the launch of the World Energy Outlook 2018.
This holds particularly true in India, given the strong state-involvement in the country’s energy sector. The government of India holds a key role in ensuring energy security at home and preventing climate change globally, and the government and its state-owned enterprises are currently the process of defining their vision for 2040. According to India’s Draft National Energy Policy, India’s energy consumption will increase fivefold by 2040, with the NITI Ambition Scenario (NAS) 2040 providing further details on the expected changes and aspirations. At the same time, India’s largest state-owned energy company (known as a public sector undertaking, or PSUs, in India) the Oil and Natural Gas Corporation (ONGC) is currently developing its “Strategic Roadmap 2040.”
The combination of India’s ambitious targets, its initial success in adapting renewable energy, and the energy sector’s development opportunities offers a chance for India to establish itself as a champion on the international stage, if the government and its PSUs dare to think big and leverage some key factors the right way.
First, the Indian government needs to get ready to transform the country’s energy PSUs. Of India’s eight Maharatna (top state-owned enterprises or SOEs with the highest investment freedom of SOEs) PSUs, five operate in the hydrocarbon space, providing employment to at least half a million people and generating around $85 billion of revenue per year. Knowing that renewable energy will take up a larger share of the energy mix in the mid-term, and assuming that the global energy system will eventually switch to renewable energy entirely, the Indian government should encourage its PSUs to start transforming into more holistic and integrated energy companies. This transformation would ensure continued state-ownership in the energy sector, including the provision of jobs. Norway’s state-owned energy company Equinor is an example of a SOE making this attempt recently, strategically reorienting its business model and corporate culture to operate beyond oil and gas (and changing its name from Statoil in the process).
Second, adapting a pragmatic approach to the energy transition will reap more political and economic benefits than misguided protectionism and contribute more to preventing further climate change. Mid-2018, the Indian government introduced a 25 percent safeguard duty on all solar technology from China and Malaysia, the source of over 85 percent of India’s solar technology. However, as the example of the German solar industry shows, competing with China in the renewable energy space can be difficult. Chinese firms, supported by heavy state subsidies, produce renewable energy technology at scale with prices expected to drop even further over the coming years. India’s renewable energy industry (whether private or state-owned) simply cannot compete sustainably in this space at this time. Christoph Klunker, in a recent publication for the Observer Research Foundation (ORF), asks why the Indian government simply will not let China pay for the Indian energy transition: “instead of a threat to India’s security and economy, China’s subsidized solar sector can be seen as a gift” as it effectively finances India’s energy transition.
Third, the Indian government has the opportunity to encourage innovation in energy and climate finance, and potentially establish itself as a global leader in this field. ORF’s Samir Saran points out that India “will be the first large country that must transition to a middle-income economy in a fossil fuel-constrained world… Given the weak efforts of the developed world to assist the developing countries so far, India has had to chart a path largely through its own economic and financial arrangements.” While the challenges are obvious, the Indian government has an opportunity to pave the way for other developing countries and establish itself as a hub for financing. India is currently on track to overachieve its “2 degrees compatible”-rated Paris Agreement climate action targets, outperforming several other states including China, the combined EU member states, and the United States. Despite infrastructure and financing issues, India targets to increase renewable energy capacity to 175 GW by 2022 (and 275 GW by 2027), putting the sector at the forefront of capacity addition. As Rahul Tongia and Samantha Gross from Brookings point out, this “target implies annual growth of 25 percent — a targeted buildout rate even faster than China’s, which is widely seen as the world’s leader in deploying renewable energy.” With all contradictions and challenges built into this plan (and inherent to India’s state-dominated energy sector), this ambitiousness offers India the chance to differentiate itself globally and establish climate leadership among developing countries.
Fourth, to attract foreign investors and establish itself globally, the Indian government needs to leverage its domestic market to a much greater extent. Providing complete and transparent data on hydrocarbon reserves, infrastructure development opportunities, and financing opportunities would allow foreign investors to engage more easily in the Indian market and Indian firms to leverage their home market in any overseas engagement. (When investing abroad, Chinese energy companies in the past only granted international oil companies access to their home market in return for access to their joint ventures in Africa and other geographies; the Chinese domestic market was too attractive to ignore.)
Fifth, the Indian government and its PSUs have the political and commercial opportunity to benefit from the increasing resistance against China’s influence in Africa and partner with the continent eye-to-eye. India’s ties with Africa are old, multidimensional and the country enjoys significant goodwill across the continent, as Ajay Dubey from Jawaharlal Nehru University in Delhi points out. The Indian government and its PSUs should leverage this to a much bigger extent, especially in times when China’s engagement across Africa is seen less and less positively (both in China and Africa). Facing similar development issues in the energy space, Indian and African states can learn from one another and cooperate eye-to-eye on how to best leapfrog past hydrocarbons and straight to renewable energy and mini-grids.
The challenges surrounding India’s energy sector are manifold and significant. However, the Indian government has the unique opportunity to establish itself as a leader in the adaptation of renewable energy and a global climate change champion. It can showcase that a leapfrog to renewable energy does not have to come at the expense of slower economic development. The decisions that the Indian government makes today will be the foundation for India’s strategic energy planning in the coming decades and will shape its contribution to the global efforts to counter climate change. India’s success in transforming and developing its energy sector successfully is in the interest not only of its government and people – it is increasingly in the interest of all of us.
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Tim Steinecke works at Xynteo, an advisory firm headquartered in Norway. He holds a Ph.D. from St Andrews University for which he specialized on Asian state-owned energy companies. He regularly comments on the global energy industry and Asia-Africa relations. The views expressed here are the author’s own.
