Country Risk

India's Energy Security Rests on Fossil Fuels

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India is crafting a new energy security doctrine that in the short term leans heavily on polluting fossil fuels, including coal, oil and natural gas — a path eased by access to discounted Russian crude. Renewables, battery storage, green hydrogen and electric vehicles (EVs) are in the back seat, despite Prime Minister Narendra Modi’s government setting ambitious green targets, and trumpeting India’s clean air credentials at various public forums. In private, government officials admit that green power poses limitations with respect to tariffs, access to raw materials and availability of capital. This is prompting a turn back to more polluting alternatives, particularly domestic coal resources, in the short term — with sustainability taking a hit in India’s energy security policies.

  • Coal is back as a key fixture of India’s energy mix.

Solar and wind have failed to aid India during bouts of blackouts in the last few years, so much so that India was twice forced to invoke Section 11, a provision that allows the state to force largely private-sector generators using imported coal to produce at full capacity. Demand for electricity grew 10% this fiscal year, the fastest pace in a decade, up from 8.2% the previous year. This is something that "we didn’t expect,’’ a top government official said. Forecasts are for it to rise by another 6% in 2023-24.

"As for generation, renewable (non-hydro) sources are estimated to account for 11% of power this fiscal year, with the share rising marginally to 13% next year. That said, with storage capacities limited at present, thermal capacities continue to shoulder the burden of meeting any sudden surge in power demand, especially in the summer months when water levels in hydro projects drop,’’ said Hetal Gandhi, director of research at analytics firm Crisil.

Limited success with renewables forced the government to halt plans to retire some 15% of India’s 210 gigawatts of coal-fired capacity, and repeatedly postpone deadlines to install flue gas desulfurization units to control sulfur emissions at generators, with 2027 now targeted versus 2017 originally. Relaxed green targets have helped state-run miner Coal India grow output by 16% this fiscal year. That is still insufficient to meet India’s peak power demand of 230 GW this year from 216 GW last year, prompting higher imports of the fuel. "Coal will be key to our energy security, and we don’t plan to retire any [of] our old thermal generators as it was thought earlier," the top official said. "We will keep them in production."

  • Discounted Russian crude imports, seen as a key supply source for Indian refiners, are rising ever higher.

The discounted trade in Russian oil trade, which builds on decades of defense ties between the two countries, is increasingly seen as a strategic win. A few years back, India, which imported 80% of its crude, assumed that EVs would dominate its roads by 2030. Today, EVs are hardly 3% of the vehicle population, and crude import dependency is at 87%. Instead of slowing oil growth, gasoline use rose by 15% in the April-January period of this fiscal year, and diesel use grew by 14%. That's prompted New Delhi to make Russian oil a permanent fixture in its crude sourcing strategy.

There are also plans to jettison the dollar and shift to trading oil in United Arab Emirates dirhams with Moscow, heralding the internationalization of the rupee, a government official said. Russian Urals, similar to Arab Medium and suited to Indian refineries, has come to occupy a key position in India’s hierarchy of crudes. Last month, India bought 1.8 million barrels a day of Russian oil, around 39% of the total oil imported in February. In comparison, India's combined imports from its top three Mideast Gulf suppliers — Iraq, Saudi Arabia and the UAE — amounted to just under 2 million b/d in February, down from some 2.6 million b/d in the same month last year. New Delhi for now sees little risk to alienating those key term buyers, with Russian volumes bought on spot.

Along with an emphasis on oil comes a focus on strategic stocks, now reportedly at less than 8 million barrels, versus total capacity of 37 million bbl. New Delhi approving $600 million in spending to refill its strategic petroleum reserve in the new 2023-24 financial year starting Apr. 1, compared to no funding allocation in the previous two years.

  • India's renewables build-out has slowed.

The rise of coal and oil corresponds to a lower-than-anticipated growth in renewables generation. The intermittency of renewables, and its concentration in five or six Indian states, has led to limited success. Solar, wind and biomass make up just over 10% of India’s overall power generation despite accounting for 27% of installed capacity. Thermal generation is over 70%.

India needs 800 GW of installed renewables capacity if it has to achieve 50% of continuous generation from non-fossil fuel sources by 2030, according to the Energy and Resources Institute. That means the country must add 80 GW-100 GW a year as against around 15 GW currently. Meanwhile, tenders for solar and wind issued annually in India have fallen to 28 GW in 2022 from 40 GW in 2019, according to US think tank IEEFA.

India also lacks modern transmission infrastructure, and neither can it afford to pay over 10 rupees per kilowatt hour for a renewables plus storage solution. Coal is a much cheaper baseload in comparison, an official said. So India plans to continue using thermal power for baseload and gas for peak — with LNG prices seen as manageable — and instead of opting for humongous batteries to store power.

Policy and Regulation, Coal, Oil Demand, Crude Oil, Energy Storage
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