India has the world's second-largest population and its rapid growth rate and low per-capita energy consumption means an insatiable thirst for energy in the years ahead
India’s record-breaking heatwaves are the canary in the coal mine of the climate crisis and without urgent action to accelerate renewable energy, such episodes will become more frequent and intense.
As the world’s third largest emitter of greenhouse gases after China and the US, India has a critical role to play in the fight against climate change. And while global warming is a collective problem, India has an acute vested interest in tackling the issue.
UN Climate science body the Intergovernmental Panel on Climate Change (IPCC) released a February report noting among other things that more than 40% of India's population will face water scarcity by 2050, and at the same time the country's coastal areas, including big cities like Mumbai, will be affected by rising sea levels.
The problem is compounded by the economic and demographic backdrop. India has the world’s 2nd largest population and its rapid growth rate and low per-capita energy consumption means an insatiable thirst for energy in the years ahead. Gross Domestic Product is expected to continue growing at 7.5% this year and between 6.5-7% until 2025, according to the World Bank.
India’s increase in electricity consumption in recent decades has been fueled primarily by coal. Greater reliance on fossil fuels is in direct conflict with efforts to lower greenhouse gases.
Commitment to net zero
India has pledged to reduce the emissions intensity of its economy by as much as 35% by 2030 compared to 2005 levels, and to meet 50% of its electricity requirements from renewable energy sources by the end of the decade. That would increase non-fossil energy capacity from 159 GW to 500 GW by 2030 and put India on the path to achieving net zero emissions by 2070 as pledged by Prime Minister Modi at the UN’s climate conference, COP26, in Glasgow.
India has already made inroads to transition towards green energy with approximately 23% of its total power generation last year coming from renewables. Today, with India’s commitment to net zero, it has the chance to showcase its “green ambitions” as one of the most exciting renewable markets globally by doubling down on the growth momentum to date.
The current policy backdrop is adding to the favorable investment climate created by sectoral tailwinds in recent years. Between 2014 and 2020, Indian renewable energy attracted global investments of about $67 billion, according to the REN21 Renewables 2021 Global Status Report. Domestic and international strategic investors, sovereigns, pension funds and private equity have been providing the full breadth of capital solutions to the market.
Meanwhile, Indian corporates have tapped international equity and debt capital markets, resulting in a good diversification of capital sources. Renewables have also witnessed several success stories where international investors have backed greenfield and brownfield platforms, grown the businesses and successfully exited the projects with a profit, cementing investor confidence in the sector.
A multi-decade growth opportunity
India has a conducive and evolving ecosystem for renewable energy with a transparent reverse auction mechanism to procure power, which has achieved a lower levelized cost of electricity than coal. The cost benefits of going green for Indian citizens have never been greater, and are expected to continue to improve.
And the Indian government has been successful in creating a favorable regulatory and legal environment to promote energy transition through measures including a solid on-time payment track record with power purchase agreement counterparties such as Solar Energy Corporation of India Limited.
Looking ahead, India is at the confluence of several exciting and emerging areas for investment, such as the adoption of dispatchable renewable energy – able to be used on demand - and harnessing wind-solar hybrid solutions. Additionally, the declining trajectory of battery prices globally will drive cost economics for adoption of renewable energy storage systems and also propel India’s electric mobility mission.
Finally, the green hydrogen revolution has significant potential in India. The country consumes about 6 million tons of hydrogen every year to produce ammonia and methanol in industrial sectors, including fertilizers and refineries. This could increase to about 28 million tons by 2050, with 80% of it being green. Considering the nascent stage of the green hydrogen market, Indian companies may look to partner with global players with relevant capabilities and technology to gain an early mover advantage in a big market.
As the energy transition accelerates, India’s macro environment and energy backdrop offer a compelling, multi-decade growth opportunity for green-leaning investors to deploy long-term capital.
A version of this article was first published in Business Standard on July 3, 2022
Global Co-Head of Investment Banking at Nomura Holdings
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