Listen: INDIA ELECTIONS: Navigating the new and old: what lies ahead on India’s energy transition map?

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Ruchira Singh:

Hello and welcome to the Platts Future Energy Podcast from S&P Global Commodity Insights, where today we'll be discussing how India has navigated its energy transition so far and what we can expect next, after the 2024 general elections amid the changing global narrative of energy security first on the path to energy transition.

I'm Ruchira Singh, Editor, Energy Transition, and I will be your host today. For this episode, I'm joined by three colleagues: Gauri Jauhar, Consulting Executive Director, who works on global energy policies and corporate energy transition strategies. Agamoni Ghosh, Managing Editor, who specializes in data for carbon markets, and Mohd. Sahil, Associate Director, Research, who specializes in technologies and policies for sustainable transitions. India has a goal of reducing carbon dioxide emissions intensity of its GDP by 45% below 2005 levels by 2030 and becoming a net zero country by 2070.

The task ahead is immensely huge. If the nation's energy consumption is seen doubling in a decade on the back of its growing economy, its emissions are seen growing substantially too. Currently, India is rolling out ambitious policies and plans such as that for renewable hydrogen production, wind, solar, and other renewables, expansion, blending of biofuels for transport, and the big one, a national carbon market. Gauri, you've just come back from CERAWeek in the US with the latest global view of where India stands with regards to its energy transition policy. Looking into the future, where do you see this policy headed, and also what considerations do you think the new policy choices could be based on?

Gauri Jauhar:

Thank you, Ruchira, for having me on the podcast. There is significant interest in the Indian approach to the energy transition. It is an approach which is one of a balance with energy security considerations. India also, as we know, happens to be one of the fastest-growing large economies, which puts it in a very unique position. So when we view all the trends associated with our long-term forecasts, the short-term market forecasts as well, we believe that India will continue to transition as India grows. And critical to understand this picture is to connect really the dots of India's energy and economic transitions.

We also believe that India will leverage the clean tech spectrum, which has certain near-term options, certain medium-term options, and certain long-term options. When we look to the future, as you suggested, we can see that India would have a more considered and timing towards net zero, as you mentioned of 2070, that while there will be a massive ramp up of near-term technologies like renewables, energy efficiency and also a stated target of 50% installed capacity for power from non fossil fuel-based sources by 2030. At the same time, India would utilize a coal resource base as well to ensure that, in the short term especially there is energy security considerations maintained. And to that extent, India will also be a key energy importer in terms of oil and natural gas.

Ruchira Singh:

Thank you, Gauri. Now, India's renewable hydrogen policy aims for a production of five million tons of renewable hydrogen by 2030. Sahil, will this plan manage to get that number, and what role do you see it playing in India's own domestic energy transition?

Mohd. Sahil:

Well, targets have always played kind of a strategic and indicative role in Indian policymaking, and this is largely the case with India's green hydrogen emission targets as well. To put everything into perspective from where we stand, it is about three to five times more expensive to produce green hydrogen with electrolysis compared to your conventional route, what we call grey hydrogen today, or even to displace fossil fuels in complementary use cases. We have done a detailed analysis of the levelized cost of hydrogen, which we estimate to be in the region of $6 per kg, the kind of magical figure of $2 per kg when everything becomes cheap and easy to use, in the green hydrogen ecosystem, does not arrive in 2045 to 2050 timeframe. So, like Gauri mentioned, this is definitely a longer-term option, but at the same time, we need to put the enabling conditions in place, and that's very important.

What I mentioned also doesn't mean that there's not work happening on the ground as of now. So under the site scheme for advancing the hydrogen mission, over 400,000 tons per annum of hydrogen ammonia tenders have been rolled out, and about 1.5 million tons of capacity is reported to be under various stages of development, and we expect a majority of this capacity to come online before 2030. But creating domestic demand through consumption mandate is definitely key to the agenda, and largely, I mean of the $2.4 billion fund for the green hydrogen mission, about 70% still remains unallocated. So we are still kind of on that journey, and we expect that the next tranches of allocation would also go towards promoting consumption and also creating an enabling ecosystem of infrastructure and logistics.

Ruchira Singh:

Thank you, Sahil. And I would like to add that parts of the hydrogen strategy is still kind of under wraps, particularly the mandatory consumption targets like you were mentioning, Sahil. And now, as far as carbon markets are concerned, Agamoni, you've been closely tracking the developments. While the policy itself is a work in progress for both voluntary and compliance markets, we are expecting it to start operating by 2025-26. So, how do you expect India's national carbon market to be? And what role could it play in decarbonizing the hard-to-abate sectors?

Agamoni Ghosh:

Thanks, Ruchira. So India's goal towards net zero is leading all the way to 2070, and while it may seem far away, it is quite ambitious. We are, as Gauri rightly pointed, amongst the most growth-oriented economies in the world, especially in the industrial sector. And the industrial sector is the second largest emitting sector after the bar sector in India. So the trick really is to realize how do you achieve this energy transition balance given the higher production targets to meet economic developmental goals is going to be a clear priority. Having kept that in mind, India's upcoming carbon market is designed to be a baseline in credit mechanism, which means by its very nature there will be an emphasis on looking at industry-specific emission intensities, which also puts it in alignment with our NDC target, which is focusing on reducing emission intensity of its GDP by 45% by 2030.

So more reason to start accounting for carbon intensity values. It'll also help going forward to establish a standard carbon intensity levels for products that will be acceptable on a sustainability scale. So the compliance system, like you said, will start somewhere around 2026, the accounting for which may start earlier, and some companies, as we have been hearing already started that, but the first compliance credits to be seen in the market could be by the end of '26 or somewhere around '27 as well, given that these may not be simple carbon allowances that are auctioned by the government, but credits that companies will earn if they remain below the baseline levels.

The larger push is also to encourage and standardize, at some point, the need to have emissions accounting through the country, which is only done by a handful of sectors right now. That too, if you see the larger companies. So the infrastructure first has to be built to have carbon accounting in the country before the market can completely kick off. And it's not enough to just resort to pure compliance mechanisms because going over and above those obligations is where the voluntary programs will take precedence. So voluntary-based projects can also help in meeting sustainable development goals and encourage investments in technologies that are hard to abate, like your prominent technologies as carbon capture. And we have seen the government come out and say that it will have its own voluntary market, most likely by the year-end itself. So we'll have to see how that pans out.

Ruchira Singh:

Thanks Agamoni. Now, what do you think are the primary challenges for India's energy transition? One of the issues is cost, and within that, investment is the biggest ask, and India has repeatedly pressed for $100 billion a year to come from the developed economies for the developing ones. But members in the government here in India put down funding needs to be at around 250 to $300 billion a year for India alone. Sahil, would you like to speak about how and when this fund could come, and as we move ahead, could there be new ways of sourcing these funds in the future?

Mohd. Sahil:

Yeah, firstly, it's very right that India has been quite stern on the early industrializers for not doing enough to [inaudible 00:09:31] for their past emissions. But in reality, India has well understood that its demands for finance will largely be satisfied from areas such as domestic resource mobilization and foreign investment rather than financing that comes some form of aid or the other. So accordingly, one of the recommendations of the New Delhi G20 was to quadruple the rate of global investment in developing and emerging economies to one trillion annually, and simultaneously, India is still doubling down on the $100 billion goal that you mentioned quite rightly is not coming forth. And so under the new financial framework under G20, a $100 billion becomes the flow of developed country flows to developing countries, known as the The New Collective Quantified Goal. Now, when it comes to operational strategies, we are finding that our renewable players are adopting a number of ways to circumvent the issues of lack of support and so on and so forth.

So we are finding that more stakes are being sold in operational as well as pipeline assets to foreign investors who are looking to diversify their portfolios by allocating resources across multiple projects at different stages of maturity and with different off-takers and payment arrangements. Then we have corporate renewable targets that are also driving investments in clean energy, such as RE100. There is a major voluntary push towards the renewable adoption and clean energy adoption at large. And then, finally linked to India's green hydrogen push is what we also see the entry of public sector behemoths such as Essar Oil and Gas companies and even the National Thermal Power Corporation, NTPC. These have some of the largest assets they are able to raise very relatively low cost finance. And then aside from that, there are other operational strategies, such as green bonds for refinancing. What is also being proposed is that the multilateral development bank rules have to be slightly eased off to accommodate greater private investment flows and thereby creating special purpose rates, leveraging blended finance, and then final pricing of carbon, right?

So that all these things together are means to increase the attractiveness and the scale of energy transition investments as well as to reduce the risk.

Ruchira Singh:

Thank you, Sahil. Now, Agamoni, as per our own data, India's emissions are seen peaking only somewhere in the 2040s. So what would this mean for the global carbon market? And also, we just spoke about the carbon pricing being the key to energy transition. Could you also tell us a bit about some of the discussions taking place about this carbon pricing in India?

Agamoni Ghosh:

So given the enormous capacity of emissions reduction that is expected from the hard-to-beat sectors in India, the first step is always going to be to decarbonize. Remember that carbon markets are your last resort after you've exhausted all your best mechanisms to decarbonize. So everything that Sahil mentioned and Gauri mentioned in terms of what is being done on the policy. Are all of those things done? And then you pay the additional costs for polluting when all the avenues of decarbonization have been exhausted. So which is where the carbon markets will come in. And in order to do that, there has to be first a concerted effort to reduce the emission intensity through replacing obsolete technology with clean technologies, raw material quality improvement, and most importantly, improving fuel efficiency where it's required. Now, typically energy-intensive and trade-exposed sectors will be hard to abate, which means that large-scale operations on the manufacturing side, particularly in iron and steel, and cement, may be challenging, but it is something that the industries are talking about and working on.

Having said that, there needs to be a mandated push at some point because, at the end of the day, emissions are a function of output level, while the fuel choice or a baseline that you choose to set as a function of mandated targets. So without those targets, not only will the use of a traditional energy source continue unchecked, but there will also not be any cost attached to polluting and which is where India is looking to step in because they want to have a recognized carbon price, which will help establish India's position on a global scale in terms of what the carbon cost exposure is.

And it is difficult to ascertain in terms of what that price may be, but with the announcements that the government has had till now and the market reactions, we have seen that price is more likely to be benchmarked towards what some of the Asian economies have, what some of the newer systems and mechanisms in terms of carbon pricing is developing in Asia than some of the traditional cap and trade fundamentally established market that exist in the EU ETS or California. We don't have a particular price point, but it would not be wrong to say that a very costly carbon price is something that is also not conducive to the industries right now.

Ruchira Singh:

So, Agamoni, in the conversations that you're having with the industry, are any stray numbers floating around which might be looked at as a possible carbon price level for India? Or is everybody shying away from it at the moment?

Agamoni Ghosh:

Yeah, I think mostly people are shying away, but if you wanted to benchmark it against some of the Asian prices, so your China price is somewhere around $12 right now, your Korea price is somewhere around $6. So I would say that it is difficult to see a price crossing somewhere beyond these levels as of now. Of course, if things change and you see demand pick up for carbon trading in these markets, you might have mechanisms in place that help do that. One of the other things also to establish is that we've had a previous similar system operate in terms of the PAT scheme, which is the performance and achievement trade scheme. But one of the things that has fallen short in that market is the non-availability of a cost-containment reserve price or a flow price, which has caused the price to plummet at almost, say, less than 20 rupees.

Now, the government probably might bring in mechanisms to help float a carbon price that doesn't go below a certain level. And that is something still that we are seeing because most of the Asian economy prices that I talked about have a cost-containment reserve price, and that is done to make sure that your carbon price to keep intact to a particular level. Now we don't know whether there'll be mechanisms for an upper cap as well because it's too new for the price to probably prop up that much, but it would probably be around the levels I just talked about.

Ruchira Singh:

Thank you. Gauri, you work very closely with the corporates, not just in India but around the world. So with the carbon border adjustment mechanism now in place in Europe and with the general expectations that other nations could also adopt a similar policy, how are Indian corporates planning to deal with this changing trade environment?

Gauri Jauhar:

So I think I'd link it back to some of the conversation and comments which Agamoni has made on carbon pricing. And Sahil has also mentioned the importance of carbon pricing. I think the way India Inc. is looking at it is that, if you look at the supply side of the picture, since 2016, an increasing number of corporates, in fact, there's been a widespread adoption of an implicit carbon price. I mean, it's called different things. It's called an implicit carbon price, a shadow price, but it is incorporated now in the decision-making framework of Indian companies. And when you look at those prices, those prices are very much in the range of the numbers which Agamoni had shared in terms of what may be a possible range, which may work out when Mahindra; and Mahindra started it in 2016, it was $10 a ton back then. And we've seen internal shadow pricing and internal carbon prices of companies for project decision-making, project selection, incorporating that from the supply side.

And I think that is a very important recognition because when you look at all these targets, you have to break it down to the project level, to the company decision-making framework, because it's after all the companies which will either direct investments which are coming in or form joint ventures, or undertake these projects as these new technologies are scaled up no matter which technology we look at. So we see that price range of internal shadow pricing of Indian companies who have been doing it in the range of $10 to about $20, $22 per ton. So that is a good sense of how the ecosystem, in a sense, will be ready to at least incorporate a certain carbon pricing assumption and thereby putting a value on clean air through a price on carbon. So I look at that as more of a way in which the supply side will address new regulations like CBAM, but at the same time, the regulation that we are all waiting for in terms of emission gaps becomes quite important as well.

We do know that India has, at the WTO, expressed its serious concerns on trade protectionist unilateral measures, which point to CBAM, but I do also see a certain readiness on the part of corporates to adopt carbon pricing and bring about basically a much higher sensitivity to addressing emissions, to addressing process and energy emissions. And of course, as we said before, there are different technologies for the near-term, there are different technologies for the medium-term, there are different technologies for the long term, which will be commercial at scale, but as the carbon pricing framework evolves into a country-level framework, I think that'll ease the adoption of these technologies.

Ruchira Singh:

Thank you. And also Gauri, if I may take your attention back to CERAWeek. There was an important conversation over there, and one of them spoke about the companies which are openly disclosing their climate policies and issuing standards for climate action. And a statistic there was that 85% of the companies in S&P 500 index are making climate disclosures now. So did you also note that, and what about companies in our part of the world? Are they making these climate disclosures and going strong on it?

Gauri Jauhar:

If you look at the US since you referenced CERAWeek, there are new regulations being looked at by the SEC to mandate disclosures on scope one and scope two emissions. In India, we have the BSRS framework, under which about a thousand companies do report similar scope-one, scope-two emissions and their activities which are linked to sustainability. And there is a sort of a core format of reporting, and then there is a more wider format of reporting. So I think the reporting is definitely picking up here as well in that universe of a thousand companies. So absolutely, I think climate action, whether we look at companies reporting under that 85% universe, is really under the science-based target initiative, SBTI framework, and also under country-specific reporting lines. I think where it becomes important is this type of reporting is to show a company's commitment towards its own net zero target.

So when you look at India Inc., you see companies having net zero targets in the range of 2030 to 2040, which will ready India finally as a country for a 2070 net zero target. So I think announcing that intention and then following it up with disclosures is important. Having said that, I think scope one and scope two emissions are depending on several sectors, are the easier ones to report. Scope three emissions is where it gets harder to measure and therefore report, so I think it'll be important to see what more progress can be done on scope three emissions to make a material difference to emission reductions.

Ruchira Singh:

Thank you, Gauri. Now let's have a look at the power sector. It is known to all that the power sector's emissions are the biggest in all of India's emissions. And for years, we have been speaking about power reforms, which are necessary to update a lot of the very defunct and old systems in all of the power sector. It is expected that this time around, some major reforms might be introduced for the power sector. And I know, Sahil, that you have been keeping a close watch on this. So what are your guesses? What is the biggest power reform we could be seeing?

Mohd. Sahil:

Well, you're very right that the power sector is the major culprit, but also the major solutions lie in the power sector for deep decarbonization. Let me mention two of them, so deepening demand electrification, right? Every time you electrify demands, you have energy efficiency benefit that you see instantly, so that's what we've seen across technologies in hard-to-abate sectors, whether it be industry and transport. And the second, of course, is deeper renewable energy penetration; we are at less than 15% today. We need to be somewhere around 30% of the generation by 2030 to really make a sizable impact and start accelerating the pace of transition. So to begin with, you have to have very resilient, stable DISCOMs, distribution companies. This is amongst the top conditions for a sustainable energy transition. And even within that, there are several steps for financial sustainability of DISCOMs; dynamic setting where prices are set by the market instead of being set by the regulator ex ante and then exposed when finally we come to realize that the actual costs of generation were much higher; the regulators are often very slow in pushing through these prices onto the consumers.

More and more DISCOMs will begin to find ways to adhere to that 20% cross-subsidy surcharge limits just to keep higher-paying consumers within their fold, that's one. The second one that we are going to see is market-based economic dispatch. This has been spoken about, framework has already been laid out, and so these will be two key mechanisms, and they will definitely help in terms of higher renewable penetration because pound-for-pound renewable is cheaper than coal, for example. So there is a collection of hard and soft measures, softer measure in terms of reforms and harder measures in terms of getting the infrastructure in place to be able to evacuate power between reaches, to balance between demand and supply in different areas, and to grow renewables sustainably rather than putting a lot of renewables and then ending up throwing most of the added capacity, the marginal capacity, outside the system because you're not able to accommodate them.

Reforms will help facilitate all of these things, and perhaps the most important ones are the ones that are essential for utilities or DISCOMs survival. So hopefully we will see some of these changes happening in the coming years, slightly quicker than we saw happening in some of the preceding years.

Ruchira Singh:

Thank you, Sahil. Now at the India Energy Week in February, the government indicated that India's energy transition policy is going to comprise multi-fuels baskets sourced from multiple locations. So in the future, global energy trade, Gauri, how do you see things changing looking at this strategy of India?

Gauri Jauhar:

Ruchira, what we see is that there are different scenarios that can play out under different global and India assumptions. So when we look at our base-case scenario, we believe India's energy transition will definitely be underway, but the share of fossil fuels will remain foundational. So we see the share of fossil fuels moderate from about 77% now to about two-thirds, a little more than two-thirds in 2050, but the share of renewables will also grow in the energy mix to about 14% by the end of 2050. If we take a more accelerated India and global ambition to the energy transition scenario in a more supportive global environment where clean energy supply chains are not disruptive, where global trade enables clean energy supply chains to work rather smoothly given the dependence on critical minerals and rare earths, in that case, there is a possibility that the share of fossil fuels in India's energy mix could decline as much as going down to 31% about by 2050.

And in that case, the renewable energy penetration also doubles to about 30%. So it really depends on a very complex interplay of both India-related growth and GDP and policy frameworks, as well as how well the global system is able to have a consensus on moving forward with the decarbonization agenda. In what is our third scenario, which is called the discord scenario, that is where the clean energy supply chains potentially get disrupted; there is a lack of a global consensus on moving forward, and you see a lot of very strong regional narratives emerge. In that case, when we look at our India numbers, we see that a just energy transition narrative plays out, and in a just energy transition narrative, not only do fossil fuels remain foundational to the energy mix, but also coal continues to supply close to about 50%, about 48%, of the total energy demand in 2050.

And renewables thereby do not make it much into the energy mix these days, about 5% in the energy mix. So I think there are no absolutes here. It's about how, as your question as you asked, how does global trade support Indian ambitions as well. Is a very important aspect. Having said that, of course, I think it is important to recognize that policymaking has been very progressive in terms of ambition and supporting that ambition also by bringing a lot of clean energy supply chain manufacturing to India. And we've seen the PLI schemes that have been announced, and I think that ambition will get accelerated in the future. We will also see electric mobility pick up, but we still believe it'll be about 2035 by the time based on our current estimates and the current view on policy. We will be about 33% of the light vehicle fleet.

We also see a very strong policy push acting as a driver for ethanol blending in India. So this is an all-of-the above energy strategy where, as I said before, there will be a mix of near-term options such as renewables and energy efficiency. There will be a mix of medium-term options, such as accelerating the whole battery energy storage ecosystem. And in the long term, we come back to hydrogen, as Sahil was mentioned before, and carbon capture and utilization, and storage becoming those net zero technologies which will bring material gains, especially in terms of the hard-to-abate sectors such as industry, which accounts for 20% of the emissions.

Ruchira Singh:

Thank you, Gauri. Now at the same India Energy Week, Agamoni, you were interacting with a whole lot of participants, many of who came from the corporate side; they were also members from the government. So what was the sense you got about the appetite for carbon trading in India?

Agamoni Ghosh:

So in terms of carbon trading, especially the carbon credits market, India has traditionally and still now is a supply-heavy market. We have not seen demand for buying carbon credits in India as much we've seen for supply, and mostly all of this is sold to foreign investors or foreign buyers. Now the government is looking to change that narrative and induce some buying domestically as well. So the announcement of the voluntary carbon market to have a domestic approach in terms of projects that are hosted and approved in India, that is one first step, but the corporates largely are sort of waiting and watching as well in terms of seeing if this voluntary market can be aligned to the compliance market in some capacity. Now, we've seen that happen in some systems around the world. It's a very, very new conversation about using voluntary credits in a compliance system.

Of course, there are many mechanisms which don't allow it at all, but we've seen some of that happen, especially in China and South Korea, where you can use five or 10% of your domestic voluntary credits to fulfill your compliance obligation. So if that were to happen, that would obviously open up a big demand for these credits. The other thing which is important in corporates is particularly focused on are developing the Article 6.2 credits in collaboration with international investors. For that, the first step, of course, has to be some MOU signed with investor countries, and India will be the host country.

Why that is particularly interesting is because the list of methodologies that have been announced by the government for Article 6.2 are capital intensive, but at the same time, they sort of align with what our NDC goals are. So if you look at the technologies of green ammonia, green hydrogen, offshore wind, right? So at some capacity, you are getting investment also from international investors, but you're also setting an avenue where companies score carbon credits out of this, and that could be used for achieving our NDC target. So you can count it as your host country's achievement as well. So that was a big part of it. But in terms of demand for carbon credits, that's something that we have to see how it materializes. Largely, we are still a supply a heavy economy in terms of carbon credit.

Ruchira Singh:

Thanks, Agamoni. Sahil, here's one for you. Looking at the picture the Indian government has painted about its future energy basket, multi-fuels sourced from multiple locations, and also the emphasis on domestic self-sufficiency, how do you see the supply lines being redrawn? How much of the fuel could be coming from the domestic production units, and how much could be actually taken from overseas?

Mohd. Sahil:

Thanks, Ruchira. Well, there have been efforts to put into perspective since the 2008 to increase the share of renewables in the energy mix. There was, if we remember, the first National Solar Mission launched in 2008, and although we had very ambitious targets back then and even when they were revised to 175 King Award by 2022, we find that the cumulative sum of all these efforts has resulted in, like I spoke before, a less than 15% renewable energy penetration in the country. And that's because India is so vast and coal is so dominant, and that's why we are going with all of the above approach. Like Gauri mentioned, I really like the term; it's really that the objective is to bring down coal to manageable proportions such that the energy transitions remain on track and there is significant appetite for the new fuels in different sectors.

So while coal is strategically important to us, reducing our excessive dependence on coal is also important because our coal won't last us for centuries. So what we will find is that while renewables will accelerate, of course their penetration and coal will definitely come down. It'll be fuels at the margins that will really be pushing, such as biofuels, on the one hand. Based to energy, we may find that when carbon markets, voluntary markets, especially pick up, we will find that some of these projects may see light of the day in terms of waste to energy, waste heat recovery, which are more capital intensive but have very quick payback periods. So we have to think in terms of the low-hanging fruits going up, the cost of fuel supply curve as it were. So in terms of the hierarchy of solutions, that's the pathway, starting with energy efficiency, renewable energy, and biofuels. Then in carbon capture for existing and new thermal power plants, followed by a vast green hydrogen network that is able to support energy transition at scale.

Ruchira Singh:

Thank you very much, Sahil. India's energy transition has been lauded for the progress made so far, but as it moves further ahead, markets and investors will look out for the development of key elements of the strategy, such as the carbon price, adoption of alternate fuels, and other reforms that could address the biggest challenges of decarbonization. Thanks very much, Agamoni, Sahil, and Gauri, for joining me today. And thank you, listeners, for tuning in. This episode was produced by Digital Editor Shikha Singh in Gurugram.