Many (new) avatars of energy (in)security

For an economy hoping to get to $5 trillion, energy security remains a paramount concern. But the scenario for energy security is changing rapidly. Energy security for India depends on the availability of adequate quantities of critical resources, at prices that are affordable and predictable, with minimum risk of supply disruptions, to ensure sustainability for the environment and future generations. On all four dimensions, there are either new complications for old concerns or emerging anxieties in an energy transition. 

 
First, security of supply is threatened due to shifting of energy geopolitics. India imports nearly 84 per cent of its oil, a rising share despite the aim to reduce oil import dependence to 67 per cent by 2022. Reliability is affected when suppliers shift frequently year on year. Immediately before the 2015 Iran nuclear deal, India’s main crude oil suppliers were Saudi Arabia, Iraq, Nigeria and Venezuela. From 2016, Iran became one of the top three suppliers, regaining an earlier position. It has again slipped down the ranks. Further, if US-Iraq tensions grow, then another major source of oil gets threatened. 

Meanwhile, US crude reached India for the first time in 2017. It has already become the sixth largest supplier (relatively small at 5.7 per cent compared to 25 per cent from Iraq in the current fiscal). India is reportedly negotiating a long-term contract for a major increase in crude imports from Russia’s Far East region. Yet, West Asia is critical in the medium term. Until November, the region supplied 55 per cent of India’s oil imports. China, the world’s largest oil importer, has far lower dependence on the region (43 per cent). What happens in the region will remain a headache, despite attempts to diversify sources. 

Affordability and predictability persist as challenges because of uncertainty in the oil import Bill. There have been large variations (in $ billion): 112.7 (FY15), 64 (FY16), 70 (FY17), 88 (FY18), 112 (FY19) and 87.7 (FY20, until January). Such variance makes it difficult to budget for tax revenues or fossil fuel subsidies ($16.8 billion in FY15 versus $9.4 billion in FY18). Such fluctuations adversely affect industrial competitiveness, especially when the share of energy in input costs is high.

Imported gas prices add another dimension. The gas glut has lowered spot market prices in Asia to under $4 per million British thermal units (MMBTU). India is locked into contracted prices of $9-10 per MMBTU from Qatar for 8.5 million tonnes, triggering efforts to renegotiate contracts. Petronet is likely to take an equity stake in a US firm, Tellurian, hoping to get 5 million tonnes at lower rates. The eventual price would determine whether India can have a more gas-based economy.

Thirdly, safe passage for energy security of course involves maritime security cooperation. In future, it might also include the stability and security of transborder electricity grid if we increased trade of (non-fossil) electricity beyond our national borders. There are incipient discussions around an Asian supergrid, which would have inherent technical challenges and political implications. 

In order to minimise supply disruptions, India has been investing in strategic oil reserves. However, our understanding of secure storage must evolve beyond vast caverns in the ground. The evolution of battery technologies would influence options in several ways. It would determine the speed of electrification of the economic system, particularly for millions of micro, small and medium enterprises, which cite poor quality electricity as a top concern. Energy storage would also impact the share of renewables in the electricity mix. Recent successful bids for solar plus storage at rates competitive with thermal power are encouraging. And developments in alternative electrochemical battery chemistries would impact how much we can rely on distributed electricity and, in fact, add to the resilience of the grid-based system. In addition to strategic oil reserves, India has to seriously think about a circular economy and strategic reserves for critical minerals that are likely to be used in various energy storage applications. 

The energy transition brings a fourth set of risks, namely financially stranded assets. Efforts to combat climate change raise doubts about the value of fossil fuel reserves on company balance sheets. According to the Financial Times, in a two-degree-Celsius scenario, nearly half the reserves of state-owned oil companies would be unusable, with grave implications for many oil exporting countries. The 13 largest international oil companies would lose $360 billion in value under a two-degree-Celsius scenario; even more with a 1.5 degree Celsius target ($890 billion). 

The world’s largest investors are shaping this changed reality. In December, 631 non-American investors representing $37 trillion in assets urged governments to elevate climate action. Last month, BlackRock, the largest asset manager with $7 trillion under management, announced that it would start exiting investments with “high sustainability-related risk” and make reduced environmental impact a core goal of its investment strategy. 

Coal is more at risk. Less than a quarter of remaining coal reserves can be burnt under a two-degree-Celsius scenario. Coal mining companies have lost 74 per cent of value since 2011. Despite pronouncements to increase coal production, India needs to seriously evaluate the risk of stranded assets. At what stage does a long-term investment in new coal capacity stop making sense because it would stop earning returns before the end of its economic life?

Historically, energy security has been affected by shifts in either technologies, economics or geopolitics. Now, there are transformations on all these fronts, as the fulcrum of energy demand shifts from west to east. Old concerns and new anxieties are juxtaposed. India must frame the debate to stay ahead of the game.
____________________________________________________________________

The writer is CEO, Council on Energy, Environment and Water (http://ceew.in). 
@GhoshArunabha @CEEWIndia


Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel