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Wednesday, March 30, 2022

Energy transition investment in India and in the world

by Akshay Jaitly and Ajay Shah.

At a time when the 20th century has returned, in terms of geopolitical conflicts, we should not take our eyes off the climate change problem. CO2 is a global pollutant, and it will be harder than ever to get the world economy to safety, so we will need to make more of an effort.

Measuring energy transition investment in 2021

BloombergNEF builds an important annual statistical picture in the `Energy Transition Investment Trends' report. The 2022 report measures global investments into the carbon transition. They break this down into two groups: the direct energy transition investments, and the investments in R&D for improved technology.

The headline numbers for 2021 are that there was \$755 billion of energy transition investment and \$165 billion in technology development, adding up to \$920 billion. Under `energy transition investment', the sub-components that are tracked by BloombergNEF are (a) Renewable energy; (b) Energy storage; (c) Electrified transport; (d) Electrified heat; (e) Nuclear; (f) Hydrogen; (g) CCS and (h) Sustainable materials.

For the Indian economy, it is largely a story of learning, purchasing and implementing the technology developed elsewhere in the world. As an example, many people all over the world invested in, and took the steps on the journey to, cheap solar photovoltaics. We in India are the beneficiaries by being able to buy solar panels or the machines that make solar panels, without needing to invest risk capital in developing the technology. We also can do M&A, like Reliance Industries’ buyout of solar cell and panel manufacturer REC Solar Holdings for \$771 million in late 2021. Hence, for the remainder of this article we focus on the \$755 billion of energy transition investments (worldwide) in 2021.

The big facts

Of the \$755 billion, there are two large components -- \$366 billion into renewable energy and \$273 billion into electrified transport. But there are also many other things going on (energy storage, electrified heat, nuclear, hydrogen, CCS, sustainable materials), adding up to the remaining \$116 billion.

Investment into the energy transition has grown well. A decade ago, this was at \$264 billion, thus giving an average compound growth of 11% per year in USD.

The report estimates that to get to net zero, these numbers need to triple to 2025 and then double to 2030. Overall, a six-fold rise is required from 2021 to 2030.

The values seen in India

Energy transition investment in 2021 in China was at \$266 billion (out of the total of \$755 billion), and in India it was \$14 billion. The Chinese GDP is about five times larger than India, but their investment in the energy transition last year was 19 times larger than India's.

If we apply the Indian share in world GDP of 3%, the value of Indian energy transition investments should be at \$23 billion. If we relate this to the Indian share in world CO2 emissions of 7%, this should be at \$53 billion. By these two normative yardsticks, then, energy transition investment in India needs to be 1.6 or 3.8 times bigger than it is.

What impedes the energy transition in India?

If we multiply the present value of \$14 billion a year by 6 x 1.6 or 6 x 3.8, we get to the estimated required investment in India for 2030 of \$134 billion or \$319 billion. Such values cannot be obtained from the fiscally stressed Indian exchequer. They can only be obtained from the private sector. But the private sector is still skeptical about energy investment in India (as is evidenced by the relatively low value of \$14 billion in 2021).

The present policy frameworks for the sectors that receive energy transition investments have been in place for decades. Intensification of these frameworks, or better implementation of the present policy paradigm, is unlikely to shift the needle sufficiently. For instance, persisting along this path will mean that electricity in India will continue to be unreliable, expensive and carbon-intensive.

When we look at the landscape of \$755 billion of investment in 2021, it is not, China apart, taking place in a world of central planning; it is in a world in which the government sets up the foundations through which the price system operates, and then the precise decisions about technology and business model are made locally by private persons. This is the key transformation that is required in India. The decision to put up a solar plant or build an electrolyser should be made by an individual looking at the prospective profit, not a government official who puts out a tender. The decision to put up a storage facility should be made by a private person who sees opportunities in a large gap between the highest price of the day and the lowest price of the day.

As we argue in a recent paper, the problems of the Indian climate transition are now beyond the calibrated control of officials. The government controlled system is experiencing substantial stress, owing to the contradictions inherent in it. A centrally planned system is ill equipped to think about technical and business model problems in each square kilometre of India. Government control will tend to push simplistic solutions that will drive up the cost imposed upon society for the energy transition.

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