For a country driving the global energy consumption, and set to surpass China in that process, India has made significant progress in rewriting its power playbook and sustainability endeavours. To start with, an ambitious target to generate 160 GW of wind and solar energy by 2022 was set up in 2014. It was more than a fourfold increase from previous goals. Additionally, the country's hydropower capacity is being beefed up to 60 GW. And in 2015, India promised to the world that 40 per cent of its power production would be through non-fossil fuels by 2030. The country remains on track to not only achieve but also exceed that target.
The aggressive push started to deliver results as India doubled its energy production through renewables over the past four years. Solar power saw the maximum upward swing, and in 2017, its tariff touched a record low of Rs 2.44 per unit for a Rajasthan project, marrying sustainability with affordability. All this has generated huge optimism regarding future energy security. "We have come a long way in terms of renewable energy installations. Today, we are close to 75 GW of capacity in wind and solar energy, and are on track to achieving the COP21 commitment," says Ashish Nainan, Research Analyst at CARE Ratings. COP21 was the landmark Conference of Parties held in Paris where India pledged that it would implement long-term measures to protect the environment.
The increased capacities are, however, only a small part of the total energy basket. The country is still heavily dependent on fossil fuels for its energy needs, which are growing at a fast clip as India's economic growth gains momentum. The key questions: When will renewables embrace cost advantage at scale, keeping in mind profitability and variability? And how should India tweak its energy policies to optimise the use of fossil fuels until the country can be weaned off them?
According to BP Energy Outlook 2018, India's energy consumption would grow by 4.2 per cent per annum, which is faster than all major economies. In a decade from now, the country would also overtake China to become the largest growth market for energy. By 2040, India's demand for energy would grow by 165 per cent, nearly three times the overall non-OECD growth of 61 per cent. It would also be higher than any other BRIC nation as China (41 per cent), Brazil (60 per cent) and Russia (6 per cent) would be expanding slowly. India would then account for 11 per cent of global energy consumption from just 5 per cent in 2016.
The ramifications of this will be significant for an economy that imports much of its energy resources. Imports are substantial for two primary energy sources, coal and oil. For instance, in FY2017/18, the country imported 161.27 million tonnes of thermal coal, nearly a fifth of its consumption, while thermal coal accounts for 56 per cent of the total power generation. The import of coking coal (used for steel manufacturing) stood at around 47 million tonnes, accounting for close to 70 per cent of its usage. As for oil, the second-biggest energy resource after coal at about 30 per cent, imports account for a bigger share, more than 80 per cent of its overall consumption.
The government has taken several steps to raise production. In February this year, the Cabinet decided to open up coal mining for private players, in a bid to end the monopoly of Coal India (CIL), the country's biggest coal producer. The company owns the maximum number of coal mines compared to others across the globe, but the demand-supply gap has been rising.
Issues with power distribution also undermine any real attempt at energy security. According to the World Bank, India's transmission-and-distribution losses stand at nearly 20 per cent of the total output, one of the highest in the world. It is a crucial factor behind the poor financial health of most state distribution companies or discoms. Moreover, these companies cannot revise end-user tariffs and sourcing a primary fuel like coal from a state-run monopoly that often reneges on its supply commitments is hindering them further. Such hurdles have lowered the utilisation of power plants and their overall viability. As of FY2015/16, discoms had a cumulative debt of over Rs 3.96 lakh crore. Also, the stressed assets of power producers stand at $19.2 billion.
The government launched its much-vaunted Ujwal DISCOM Assurance Yojana, or UDAY, in November 2015 to make discoms more viable by transferring the bulk of the debt from their books to that of state exchequers, but it has only helped partially. Out of the 31 states and Union Territories that have joined the scheme, only four states have seen a significant turnaround. The target of achieving meaningful energy security will remain a pipe dream unless power producers and distributors become financially viable in the long run.
For oil and natural gas, the disparity between what the country produces and what it consumes is even more prominent. India is home to only 0.7 per cent of the world's oil reserves but accounts for more than 4 per cent of global consumption, next only to China. In the case of natural gas, the country owns 0.8 per cent of the global reserves but accounts for more than 2 per cent of global consumption. As a result, it imports more than 45 per cent of its natural gas consumed through LNG and more than half of it comes from Qatar.
The Hydrocarbon Exploration and Licensing Policy, Open Acreage Licensing Policy and Discovered Small Field Policy, along with liberalisation of the regime for mining unconventional hydrocarbon resources with a single licence and marketing freedom are all aimed at enhancing production. Authorities have also replaced the cost-recovery-based system with an easy-to-administer revenue-sharing model.
"The government is doing all it can. It has been reasonably progressive in its policies. At least, the vision is there," says Dilip Khanna, Partner, Transaction Advisory Services, EY. "We are a large, growing economy and clearly, very import-dependent. But in oil and gas. I do not think it is going to change in a hurry. It can take even 10-12 years, from the time an oilfield is awarded for exploration to discovery, development and actual extraction. Whatever we have on production right now, those fields will start seeing some decline while new discoveries will be made. But there is nothing to suggest that domestic oil and gas production will increase in a way that will ultimately lead to a meaningful reduction in imports."
India is also working on diversifying oil and natural gas imports. This not only prevents supply disruption caused by geopolitical tension in a specific country but also provides better bargaining power. India's deft handling of diplomatic relations also helped as it was given a six-month sanction waiver by the US for importing crude from Iran. Additionally, India imported more than 8 million barrels of American crude in 2017 and followed it up with a first-ever import of natural gas from that country earlier this year. It has also added Russia and Australia as natural gas suppliers to reduce its dependence on Qatar.
However, natural gas has never been a priority for the power sector and growth has been stymied. Primarily used by the fertiliser industry, gas-based thermal power plants in India have a combined capacity of about 25 GW, and even these are struggling due to non-supply. In 2017/18, the total supply of domestic gas in India was 22.80 MMSCMD, leading to a decline in average plant load to 22 per cent. The government is planning to increase the share of natural gas in its energy mix from 6 to 15 per cent by 2022 and will add at least 11 more LNG import terminals to the existing four.
Solar in trouble
The renewable energy story is gaining strength but it faces pressing challenges as well. The national tariff policy, notified in 2016, mandated 8 per cent solar RPO (renewable purchase obligation) for every state but most states are not in compliance with it. Only five states (Karnataka, Himachal Pradesh, Andhra Pradesh, Nagaland and Meghalaya) and one Union Territory (Andaman and Nicobar Islands) have managed to meet their respective targets. If the states do not fulfil their commitments, the entire renewable journey may go off the rails.
"The one thing that is missing is a stable policy for those who have invested in this space," says Nainan of CARE Ratings. "We need a clear policy mandate. Each state has a renewable power obligation, but that has not been implemented yet. Unless we have a policy where the renewable energy suppliers know that the government has to buy from them, the transformation will not happen. You cannot expect that the demand will be there (automatically) and the entire renewable power sector will take off."
Nainan is not wide of the mark. The exuberance surrounding solar's affordability is wearing off as tariffs have started to rise across auctions over the past six months compared to the low pricing of 2017. An auction for 1,000 MW of capacity, held by Uttar Pradesh New and Renewable Energy Development Agency in July this year, received a winning tariff of Rs 3.48-3.55 per unit. Another auction, also held in that state in June and conducted by the Solar Energy Corporation of India (SECI), had seen a winning bid of Rs 3.32 per unit. Some auctions were cancelled as the bids were deemed too high. SECI cancelled a 300 MW solar tender awarded to Adani Green Energy and another 950 MW tender. The Renewable Energy Department of Uttar Pradesh also scrapped tenders for 1,000 MW grid-connected solar projects in July as the lowest bid was Rs 3.48 a unit.
Two major policy interventions have exacerbated matters. The government imposed a 25 per cent safeguard duty on solar panels and modules imported from China and Malaysia in July to allow domestic manufacturers a competitive advantage. This was immediately challenged in the courts but was reinstated in September, apparently to curtail the outflow of foreign exchange and encourage local manufacturers. But it ended up in hurting solar's profitability. The Ministry of New and Renewable Energy has further capped tariffs for all solar bids at Rs 2.50 per unit, with an additional margin of 18 paise per unit when the safeguard duty will be factored in.
"With the primary objective being tariff reduction, the government has forced too much of risk into the system," says a senior industrialist who does not want to be named. "The price cap should be up because costs are up and funding has become more expensive. At such a low cap, there could be no reasonable returns."
Given the current scenario, there is no shying away from the need to make oil and gas exploration more attractive to investors, both domestic and foreign. "The need is to encourage existing players or incumbents so that they are motivated to invest more in the sector to have better outcomes. Foreign investment will follow when existing private players are also investing, which sends the right message to the outside world that India is a great place for business, that some of the historical bottlenecks are cleared, and the risk-reward equation makes sense," says Khanna of EY.
"India has a great entrepreneurial spirit, but it needs to be channelised in a way that they (investors) feel excited about investing in oil or gas. It is easy to get in this business; the government also facilitates that, but it is very difficult to exit. In a more dynamic M&A market, investors get more enthused and you have more market participants. We need a stable regime where tax laws or incentives are not changed frequently," he adds.