Accelerating Sustainable Energy Transition for the Goliath of Future Energy Demand

by Pawan Mehra, Arsalan Ali Farooquee, and Jayant Prasad

The largest contribution to the growth in global energy demand for the next 20 years is likely to come from India, which is twenty seven percent more than that expected from China and much above the expected growth in energy demand anywhere in the world.It is imperative that this energy demand is met through sustainable means.

Historically, energy transition has globally been a slow and protracted process taking several decades to unfold. However, there have been several instances of accelerated transitions in selected segments. While it took an average of fifty years in the United Kingdom for sector-specific energy transitions, Brazil shifted from an oil-based transportation system to one based on sugarcane-ethanol in only six years . As a percentage of total car sales, the sales of cars that operate on alcohol-based fuels in Brazil increased from less than 1% in 1979 to 96% in 1985.

With the current per capita energy consumption in India being less than one-tenth of that in the US,the rapid growth in the energy demand over the next two decades will be a result of an organic increase in energy usage associated with economic development. As highlighted in the table below, India’s GDP is expected to increase from $2.4 trillion in 2017 to $15 trillion in 2040. In the same period, the peak electricity demand is expected to rise from 162 GW to 526 GW.

However, Economic growth and development can run in parallel with the need to decarbonize energy systems.India has committed itself to reducing the emissions intensity of its GDP by 33 to 35 percent by 2030 from 2005 level under the Intended Nationally Determined Contribution (INDC). While a slew of policy measures to promote low carbon strategies and renewable energy have already resulted in the decline of emission intensity of India’s GDP by 16% between 2009 and 2014, the absolute emissions during the same period increased by 28%.Given the need to control the absolute increase in the carbon emissions as well, it is prudent to structure policies and market interventions that facilitate faster energy transition.

Source: IMF, PWC, International Energy Agency, Central Electricity Authority

The World Energy Outlook 2017, projects India’s energy demand to increase by 1005 MTOE (Million Tonnes of Oil Equivalent) by 2040. To put it in context, an increase of 1 MTOE is approximately equal to the annual electricity generated in a country like Georgia.

Meeting this additional energy demand and also meeting the climate change commitments made by India in its INDC and the Paris Accord would entail bringing about efficiencies on both the demand as well as the supply side. By transitioning to sustainable energy sources, India can save approximately 2300 million tons of carbon dioxide each year. This estimate is equivalent to carbon dioxide emissions from 2500 billion pounds of coal.

This sustainable energy transition, is expected to happen on 3 key fronts:

Increasing the amount of renewable energy generation
Accelerating industrial energy efficiency, and
Improving transportation efficiency

A full scale energy transition in a developing country like India could take several decades. However, transition in selected segments can be accelerated with appropriately structured capital and policy action. There are several efforts underway such as World Bank providing $625 m to State Bank of India, and Asian Development Bank providing $500 m to Punjab National Bank for lending in grid connected solar rooftop projects. Financiers exclusively focused on sustainable energy are also quickly growing in India and energy specialists such as cKers Finance are taking leadership in emerging segments such as distributed solar and energy efficiency.

In India, 20 GW of energy savings can be realized through efficiency measures, which is more than the combined generation capacity of Ireland and Morocco. The development of a market for energy efficiency-as-a-service is an effective measure which can accelerate the adoption of Energy Conservation Measures (ECMs). Energy savings performance contracts (ESPC) are a means to execute commercial and industrial ECMs. Under the contract, the customer pays for an energy efficiency project over time using savings from utility bills, thereby avoiding upfront costs. The Energy Service Company (ESCO) executes the project and guarantees a certain level of savings on energy costs. The market for ESCOs offering energy efficiency as a service needed capital to the tune of $5 billion for India. In India, ESCOs lack access to traditional finance owing to risks perceived in a new business segment. However,some newer financiers are stepping in to fill this void. For example, cKers Finance is offering innovative financial products for energy efficiency contracts for lighting, heat pumps and other industrial applications in India. Examples of such efforts in developed markets include $32 million funding of UrbanVolt by a Swiss energy efficiency fund.

Globally, 1.2 billion people are without access to electricity, and more than 2.7 billion people rely on biomass for cooking. Out of that, India is home to 244 million people without access to electricity. Providing these segments of the population with access to clean and affordable energy is critical to India’s transition to sustainable energy.

While expanding the national grid to rural areas is among the most economical options to increase access to electricity, such expansion is restricted by financial and operational constraints.Years of subsidized electricity has turned most public utilities in India into financially burdened entities, hindering their ability to extend services into remote areas.Alternatively, renewable Energy mini-grids are emerging among the cheapest sources of energy in rural areas.However, adequate financial and policy interventions are required to support faster deployment of mini-grids. A market-making approach is needed to further develop this solution and attract commercial capital for investments. As the business viability of mini-grids gains traction, the segment will attract private capital. This can be facilitated through project finance at micro-scale, capacity building of local project developers and policy articulation to mitigate risks in mini-grids.

Globally,the deployment of utility-scale solar and wind energy has seen rapid growth. For example, in 2016 alone, 161 GW of renewable energy capacity was added globally with investments of around $241 billion. In India, the share of non-fossil fuels in the total installed capacity is projected to change from 30% in 2015 to about 40 % by 2030. This also includes large hydro projects, many of which are stalled. To offset the slow growth of hydro projects, wind and solar power, both utility scale and distributed, need to be ramped up faster then ever.

The Government of India has set the target of 100 GW of solar by 2022. Out of this, 40% is estimated to come from distributed solar projects. However, unlike the utility-scale projects, the deployment of distributed solar power has been slow due to lack of access to adequate capital. One of the effective ways to unlock the mainstream and institutional capital for rooftop solar is through aggregation and subsequent securitization of distributed solar projects.

Local expertise and institutions are essential to catalyze the transfer of capital and technology. By accelerating the combined public and private sector efforts to provide capital in selected areas such as energy efficiency, distributed renewable energy and transportation, India can achieve a low-cost and timely transition to sustainable energy. And what happens in India can determine the discourse of climate action globally.

Image "Off the grid, but on the up"
Courtesy UK DFID Photo / CC BY-NC-ND 2.

About the Authors

Pawan Mehra is Director at cKers Finance in India. In the past he has served on the guidelines drafting committee for Responsible Banking, has been on the advisory board of the Impact Investing Policy Collaborative, and was on the founding board of the Global Impact Investing Network.

Arsalan Ali Farooquee is a Senior Associate-Investments at cKers Finance in India. He has worked on renewable energy, designed innovative financing initiatives and has advised public agencies on energy finance and policy. His writings have been featured in Elsevier and Institutional Investor Journals.

Jayant Prasad is Executive Director at cKers Finance in India. He is a senior banker with two decades of experience across different banking verticals at ICICI bank where he led several initiatives in India and internationally. He also headed the Financial Inclusion group at the bank.