India is one of the fastest-growing major economies in the world, having grown at 7.6 per cent during 2015-18. The country aims to become a $5-trillion (Dh18.3 trillion) economy over the next five years. The Economic Survey 2019 of the Government of India identifies the need to spend 7-8 per cent of GDP on infrastructure every year, translating into an annual infrastructure investment of $200 billion-$300 billion. Energy sector investments will constitute a key component of this figure.
British Petroleum’s Energy Outlook 2019 suggests that India’s primary energy consumption will grow by 156 per cent by 2040. The sector has seen a number of reforms over the past few years aimed at providing 24x7 power for all citizens and initiatives around energy efficiency, utility sustainability and coal reforms. Additionally, driven by climate change concerns and the Intended Nationally Determined Contributions (INDC) commitment, there has been a keen focus on renewable energy with a plan to reach a capacity of 175GW by 2022 to constitute a significant proportion of the then overall estimated installed capacity base of 480GW, up from the current 80GW.
Energy investments in India witnessed the highest growth in the world at 12 per cent between 2015 and 2018, standing at $85 billion in 2018.
With a very low per capita energy consumption level and a burgeoning population and infrastructure development, India’s energy sector presents a picture of enormous demand and considerable investment opportunity.
Transform supply and demand
Energy investments in India witnessed the highest growth in the world at 12 per cent between 2015 and 2018, standing at $85 billion in 2018. The renewable energy sector has been soliciting larger investments relative to fossil fuels for the third year in a row, despite investments in coal supply growing by 5 per cent during 2018. India’s renewables sector has witnessed strong growth, with installed capacity increasing from 34GW in 2014 to 80GW in June 2019.
Investment strategies for the Indian energy sector going forward will strongly need to take into account significant shifts in demand and supply. On the supply side, the thrust towards renewables, environmental regulations for coal plants, the push to cleaner fuels in transport and the emergence of electricity storage technologies will shape the nature of future investments. Investment opportunities in areas such as ultra-mega solar plants, offshore wind, energy storage projects and battery manufacturing will be strong themes in the coming decade.
On the demand side, a major shift is expected in the form of electrification of transportation. Electric vehicles are expected to play a large role in the coming decade, starting with public transport vehicles and smaller personal transport vehicles such as two-wheelers and three-wheelers. Further, emergence of energy efficiency-related technologies will create significant investment opportunities. These include energy-efficient consumer appliances, data analytics and digitalisation-based energy management systems and technologies used in production and distribution of electricity.
It is imperative for India to accelerate the pace of reforms to address investment uncertainties as the energy sector transitions. The energy sector has started to respond to some of the triggers through reduced investments in carbon-heavy technologies, larger investment allocation to renewables and steps towards mitigation of risks. Apart from the thrust on renewables, the government has also been focusing on the hydrocarbon sector and introduced various policies such as the Hydrocarbon Exploration Licensing Policy (HELP), Open Acreage Licensing Policy (OALP) and plans to set up a gas trading hub.
To accelerate the momentum, it would be important for the government to step up risk mitigation measures by continuing efforts to strengthen the policy and regulatory environment and providing long-term visibility in those areas. It is important to develop efficient market structures and mechanisms that will help players to manage risks better and provide incentives for innovation and efficiency. Further, contractual designs need to improve to make these less rigid and ensure a fair risk allocation.
Utility sustainability is a key concern and the government needs to continue its efforts to strengthen utilities by rationalising tariff structures, encouraging cost optimisation and deploying technologies to improve information flows.
Innovations in financing will need to continue. Some examples include instruments such as credit guarantees, infrastructure investment trusts (InvIT) and masala/green bonds (rupee-denominated international bonds). Learnings from sectors that have developed innovative PPP models, for example, Hybrid Annuity Model (HAM) for asset financing in the roads sector and the toll-operate-transfer (TOT) model for assets recycling, need to be carried to other sectors as well. Alongside, increased awareness and access to new technologies will be critical
for transitioning the country to a new energy paradigm.
The many constructive steps taken by the government and the demands of a large growing economy indicate significant opportunities in India’s energy sector.
- The writer is the CEO and Chairman, KPMG in India