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January 25

Energy Wishlist and Watchlist 2018

Energy sector investments are long term, capital intensive, and carry significant risks borne out of uncertainty. Below is a watchlist of key uncertainties, which would impact India’s energy transitions.

Question 1: How high will oil prices rise? Brent crude was $45 per barrel in summer 2017.

It is now just above $70 a barrel (November 2014 levels). A year ago, many commentators did not expect the deal between the Organization of the Petroleum Exporting Countries and Russia, to cut production and raise prices, to hold. In fact, the deal has now been extended well into 2018.

For India, volatility in global oil prices is undesirable. After prices fell from 2014, India progressively increased duties to raise tax revenues. Now, if consumers were shielded from rising prices, then duties should fall, along with tax recoveries. This is a critical uncertainty for Budget planners.

Rising prices have also prodded US shale oil producers to raise production. US shale output, already above 6 million barrels per day (mbpd) is likely to grow by 1.35 mbpd in 2018. US crude production is expected to exceed Saudi Arabia’s, and reach 11 mbpd by 2019. A surge in shale output could offset the price rise.

Last week, India launched its first auction in eight years for oil and gas exploration. The 55 blocks, covering nearly 60,000 square kilometres, would increase area under exploration by 50 per cent. Yet, volatility in prices would impact long-term investment. Other factors matter too: How fast electric vehicles substitute the internal combustion engine, and how rapidly oil demand for freight, aviation, and petrochemicals grows, especially in Asia. If these factors cancel each other out, a “long plateau” in oil demand is likely.

If prices settle around $60, then India’s response would have to be devised around the margins. Its budgetary planning and upstream investments have to balance short-term volatility, but not lose track of long-term global trends in flattening demand and rising supply.

Question 2: How low will renewable energy prices fall? In 2017, tariffs for solar and wind fell to record lows. A project in Saudi Arabia invited a bid of just 1.78 cents/kilowatt-hour (¢/kWh). The price of onshore wind fell to 1.86 ¢/kWh in Mexico. In India, solar and wind tariffs reached 3.8 and 4.1 cents per unit, respectively.

Will prices keep falling? Predictions vary depending on which factors one examines. China is expected to account for 50 per cent or more of global solar installations in 2018. Many developers are installing capacity even before securing government quotas. Consequently, manufacturers will keep supplying panels, which will continue to dampen prices globally.

In India, the domestic manufacturers and project developers continue to tussle around imposition of safeguard duties, which would raise prices. Delays in auctions, delays in signing power-purchase agreements (PPAs), and curtailment and offtake payment risk are other reasons why tariffs might not fall in the near future. Such risks raise questions about the tight margins at which very low tariffs have been bid. Tariffs could fall in India too, if regulatory risks were mitigated and contracting terms improved.

Question 3: What will happen to stressed thermal power assets? About 60 gigawatts capacity is stressed, thanks to absence of long-term PPAs, non-availability of domestic gas, and unviable tariffs as fuel costs have increased. Non-performing assets in electricity generation account for 5.9 per cent of total outstanding bank advances. Will power procurement now favour the stressed plants, or will owners be able to offload these assets? As renewables outpace thermal power in capacity addition, existing assets face an even more uncertain future.

Question 4: Where do electric vehicles fit in India’s transport and mobility policy? The government has made numerous announcements about a shift to EVs and is procuring fleet vehicles to reduce prices rapidly. But far less attention is given to shifting mobility patterns and reducing demand for vehicles.

If there were a rapid switchover to EVs, where would biofuels fit? A draft policy suggests blending 20 per cent ethanol in petrol and 5 per cent biodiesel in diesel by 2030, the same year when bulk of new vehicles are supposed to be electric.What plans does India have to manufacture EV batteries? Is there a strategy to source or recycle critical minerals (lithium, cobalt, graphite, nickel) necessary for batteries? A more comprehensive transport and mobility strategy is needed to send consistent signals to markets and technology innovators.

Question 5: Will India find value in distributed electricity? There has been a big push for electrification with nearly all villages connected to a transmission line. The government now plans to give every household an electricity connection. But there is still limited recognition of the value of distributed energy. This is not just for villages where it is unviable to extend the grid. Even dense urban areas have a case for combining distributed power generation, district cooling and heating, and charging EVs.

Losing electrons in transmission makes little sense if generation, consumption and end-use energy efficiency could converge in households, commercial and official buildings, and community infrastructure. Changing the narrative of electricity generation and distribution requires two main interventions: Assessing behavioural incentives for power consumers; and developing alternative business models to bring utilities and decentralised energy entrepreneurs together.

We might have many favourite elements in our energy wishlists. But making predictions is fraught with danger. We can only keep asking hard questions.

The writer is CEO, Council on Energy, Environment and Water (http://ceew.in), and co-author of Energizing India: Towards a Resilient and Equitable Energy System( SAGE, 2017) Twitter: @GhoshArunabha; @CEEWIndia

Credit: pressreader

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