India is not a participant in the sanctions imposed by multiple bodies with the participation of the EU, USA, Australia, Canada, Japan, and South Korea. China is also not a participant. The trade in Russian crude oil has been acknowledged publicly by the USA in November 22 with Treasury Secretary Yellen saying, “… [W]e’re happy to have India get that bargain…”. A year later navigating sanctions is more complicated.
In this release EkaLore looks at the continuing benefits, and problems, facing India’s energy economics in world trade.
China and India (2 of 3 largest oil importers) are seeing gains to their economies from buying less pricey Russian crude oil. In the Chinese case this is an expansion of energy ties growing over the last decade. In India’s case this is a growth in imported Russian crude from almost nothing to a level larger than former Middle Eastern sources.
Clearly India needs short term and long term energy planning to match supply and demands in an expanding economy. Crude oil is also valuable for India as a baseline stock to produce the plastics, chemicals, and pharmaceutical precursors needed by many other industrial sectors for domestic and export manufacturing. Domestic energy production in India is not keeping pace with growing demand creating imbalances costly to remediate.
Electrical demand in India is far outstripping supply in the mid-term. The green energy transformation projects of the Government are encouraging renewable sources of electricity. Latest estimates are for a peak power demand, in 2030, of 335 GW. The current 2023 growth rate was 18-20% larger year-on-year. The forecast growth rate is 6%, and will be sustained, from the current peak generation capacity of 240 GW, thru 2030.
The growth of 95GW is forecast by the Government to be met with renewables, coal, and new sources. The existing plans for coal generation are forecast at a net gain of 58GW thru 2030. Renewable generation and shifting will provide a mix of 50% low-carbon generation with fossil fuels the balance. Investment plans range from hydrogen fuels to larger roles for solar and wind. A gap of more than 30GW of electrical generation remains unfilled thru 2030. Unless this gap can be closed the economic growth and public perceptions of Government planning will worsen.
The Government is thus turning to the private sector enterprises in India to build more than 30 GW of new electrical generation capacity by 2030. It is imperative this start soon to compensate for the long paperwork lead times, gride integration constraints, and construction projects. The mix of low-carbon electrical generation, fossil fuel availability, and likely energy distribution needed have caused the Government to identify coal as the most likely energy source to fill the 30 GW gap by 2030.
In 2018 the total investment by the governments and private sector in electricity generation were closer to even. The drop in private investment to 36% by 2023 shows problems. Little foreign investment is likely due to discouraging profit margins and barriers to foreign direct investment. Government investment is limited due to continuing emphasis on government initiatives like “Make In India”, the semiconductor, electric vehicle, and defense equipment investments. Many large India enterprises have investment plans in these markets and aren’t looking to invest in new energy projects. Investments in electrical generation capacity are being “crowded out” of government investments due to competing needs with better business cases.
The likelihood of Indian enterprises spending large investment monies for coal-fired electrical generation is lower. Indian governments, serving as public utilities, have not indicated a strong preference to enter into the long-term binding contracts to ensure investors a profit margin in new electrical generation capacity. Higher inflation, globally, makes private borrowing for new energy initiatives more expensive than the last decade and more. “ESG” investors eager for “low-carbon” projects are looking for higher returns rather than a problematic return in a developing market. Governments from India, to the U.K., to the USA/Canada, and China are finding investments in the energy sector to be viewed with skepticism about profit margins (and therefore capital returns). Indian enterprises are likely to find it difficult to generate the front-end cash flows (needed to conceive, design, build, integrate, and finally, generate electricity) running in the Rp Trillions to independently build this generating capacity.
This all comes back to navigating the sanctions for profits in the Indian energy sector. India is enjoying a lower rate of crude oil costs (if not as favorable as mid-2022) and will for a near term. A failure in 2030 will occur if this extra “profit” can’t be used to restructure favorable energy investments. Higher logistics costs will further increase costs of coal, LNG, oil-based fuels, or wind turbines purchased for import. The Government has lowered the “windfall profits” taxes, from 2022, whose enactment brought the windfall cash to the Government. Raising energy taxes again will likely result in lower corporate enterprise earnings needed to make investments. Channeling a dedicated set of “carbon” or “energy consumption” taxes will lower cashflow availability of Government initiatives to encourage “matching” private industry investments. Navigating the Russian energy sanctions is also the imperative for planning and performing on green energy transformation plans for India by 2030.
India must use this “lull” in global energy price increases to multiple segments of the energy sector. Composing segments will be affected like fuels distribution, electrical grid sophistication, transportation use of energy, energy/fuels import and logistics facilities, and downstream energy-dependent users. The Indian integrated green energy transformation must acknowledge the role for fossil fuel electrical generation starting now and upgraded. A Dynamic India must use high quality forecasts, to conceive a new green energy transformation result, with recognition of the realities of unmatched supply and demand. In 2030 failures are almost assured unless actions are well underway by 2025.
For additional looks at the energy sector in India see http://www.ekalore.com/india-business
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