Energy Geo-Politics and Russia - Ukraine Conflict: Thoughts on India’s Energy Future | Hiranmoy Roy and Anil Kumar

by Hiranmoy Roy and Anil Kumar*

4th April 2022

In the backdrop Indian energy sector focus in the Union Budget 2022 and changing dynamics of energy sector due to current Ukraine crisis, it is imperative now to analyse the positive impact of Union Budget announcements and negative impacts of Ukraine crisis on the Indian energy sector to gauge the re-balancing of energy market, changing energy mix and energy security of India in the context of global disruption of oil and gas supply from Russia. There is a need to quickly measure the demand, supply and energy mix (coal, oil, gas and renewables) re-balancing may be caused by Ukraine crisis. It is also needed to see that situations like Ukraine war do not destabilise our energy scenario, since India is a net importer of oil and gas. At present, since there is huge focus on renewable energy by Modi government, let us analyse the announcements from the Union Budget to further strengthen the renewable energy sector of India.

The energy related focus of the Union Budget 2022 is on the renewable energy sector and the Distribution Company (Discom) viability. Schemes for Solar sector of worth Rs. 19, 500 crore for Production Linked Incentive for manufacture of high efficiency modules was announced in the budget [1]. This will strengthen the infrastructure and system upgradation, pre-paid smart metering, feeder separation, which will ultimately improve power supply quality and reliability. It is a strong policy directive at present in India that we need to increase our renewables usage to reduce our dependence on imported oil and gas and highly polluting coal. Planning is made to reduce Aggregate Technical and Commercial (AT & C) losses up to 12 % to 15 % to wipe out the gap between the average cost of supply and average revenue realised.

Privatisation under public-private partnership mode can be another way to decrease inefficiencies, provide consumer experience and increase revenue of Discoms. Prime Minister Narendra Modi announced India’s target to achieve net zero by 2070 in Cop 26 and India would expand its renewable energy capacity to 500 GW [COP 26] and meet its 50 percent of energy requirements from renewables by 2030. In the current energy mix, India has added 393.4 GW of energy generation capacity by December 2021 and fossil fuel provide 59.7% and non-fossil fuel provide 40.3 % [2]. Thermal capacity has the biggest share of 60 percent and renewable energy holds a share of 38 percent. We need to replace our ageing thermal power plants with clean energy technologies such as solar and wind, strategy to decommission old inefficient and polluting plants. Policies and financial incentives to boost electric mobility and develop battery charging and battery swapping infrastructure across the country to reduce the dependence on imported oil. Financial support also to be provided to much needed push to domestic solar manufacturing and strengthening the supply chain. 

Government has provided budgetary support to hydrogen economy. We shall need to invest from both public and private sectors to develop internal hydrogen supply chain including transportation and storage.

So our top priorities now the reforms of Discoms, replacing ageing thermal plants with solar and wind, strengthening EV sector and building hydrogen economy. This will expand India’s renewable energy portfolio and advance towards net zero future.

India’s progress in the renewable energy sector in recent years has been remarkable and it is one of the most attractive destinations in the world today for investment in renewable energy. To enhance renewable energy business in India, it is expected to include electricity in the GST framework as it will reduce cost and will benefit the consumers. GST compensation cess can also be utilised for making existing coal-based plants environmentally safer by installing FDG technology. Thus, going forward there will be much anticipated shift in the energy sector, with a very strong focus in renewables. It is also expected that government to reduce custom duty on electrolyser required for green hydrogen generation to make India global manufacturing hub.

The on-going geo-political crisis and energy market instability aroused by Russia — Ukraine war has raised several questions on re-balancing global energy sector, which has serious ramifications for Indian energy sector as well.

Figure 1: Nord Stream 2

Previously the European major gas supply from Russia was transported through Nord Stream 1 (gas pipeline) which passed through Ukraine which has been generating 10 percent to 15 percent of Ukraine’s GDP. Now Russia had constructed Nord Stream 2 [3], to bring gas from Russia to Germany and Europe. This is one of the starting points of conflict of interest between Ukraine and Russia and this is mainly due to economic reasons. Forty percent of gas needed for heating and cooking in Europe comes from Russia. The pipeline (Nord Stream 2) was in approval stage from German and European regulators. The critics argued that since there is Nord Stream 1 [4], why Russia need to create Nord Stream 2? The Nord Stream 2 is shown by 143.0 red gas pipeline in the trade flow Figure -1 above. This will increase the dependence of Europe on Russia. Therefore, the current turmoil has affected gas demand gap in Europe and US trying to plug this gap.

US has been opposing Nord Stream 2 as it may strengthen Russia’s political strength in Europe There was also expectation that Europe and Germany may put financial sanction on Russian except energy as Russia attacked Ukraine and this will destabilise the European gas market. US may also put sanction on Russian energy supply and it may happen at the cost of Europe to find quick alternative to Russian supply. The Nord Stream 2 is supposed to re-balance the European gas market. Germany said since Russia has attacked Ukraine, we should stop the pine line. Russia is forced to weaponising the energy as a part of geo-political and economic strategy.

Thus, there is a pressing need for India to go for further energy transition due to the present situation as stated above. The announcements in the Union Budget with respect to energy transition mentioned the risks of climate change have the strongest negative externalities that affect India and other countries. As Hon’ble Prime Minister said at the COP26 summit in Glasgow last November, “what is needed today is mindful and deliberate utilisation, instead of mindless and destructive consumption.” The low carbon development strategy as enunciated in the ‘panchamrit’ that he announced is an important reflection of our government’s strong commitment towards sustainable development [Union Budget, 2022] 5. This clearly indicate that there are huge requirements for adding more renewable energy in our energy mix.

Global energy mix is under transition due to various economic and environmental issues. We are moving from primary energy source like coal, oil and gas towards the renewable energy sources like solar, wind, biomass and others. In the transportation sector, we are slowly moving towards the electrical vehicles with relevant battery storage capacity and charging infrastructure in the coming decades. Thus, we can say that solar, wind, battery with electric vehicles are going to change energy and transportation world. Along with this a huge demand for green hydrogen fuel, which is at present introduced in most of the developed and few developing countries.

India is the third largest energy consumer after US and China but it is dependent on imports. About 82.1% of crude oil needs about 44% natural gas along with more than 10% coal we imported from other countries. Therefore, requirements of energy transition in India is much of urgent necessity than any other developed or developing nations.

We have prepared a plan for renewable energy for 2022, which is now extended up to 2023 where we have 1, 75,000 MW from renewable energy as installed capacity against the target, we have already achieved almost 1, 10,000 MW. We are lagging largely in Rooftop Solar power addition against the target of 40,000 MW. Although in solar and wind, we are not far below the target of 60,000 MW. As per Paris Agreement India and all other countries have given commitment to reduce their CO2 emission at least by 30% by 2030 compared to its level in 2005. Due to this India is preparing a plan of 4, 50,000 MW installed capacity from renewable energy excluding large hydro which includes around 2, 80,000 MW from solar 1, 40,000 MW from wind and 30,000 MW from small hydro and bio-mass.

On planning level, it seems to be fine. However, implementation of these things require many challenges to be met where our planning and execution are not very clear. There are four issues, which we want to bring to the fore are land acquisition, environmental and other clearance issues which are regulatory bottleneck as well as have many practical bottlenecks in implementation.

Discom is weakest link in the value chain in power sector as most of the Aggregate Technical and Commercial losses (AT & C) are because of them. We are not recovering average cost of services by realizing average revenue per unit (overall loss or gap 50 paisa per unit). Without distribution reform we cannot think of reducing AT & C losses up to 12% overall. For distribution reform one of the option is privatisation, the other option is joint venturing (PPP mode) or running discom as commercial entity. However, in prevailing political and socio-cultural scenario it is very difficult to run a power sector public entity as commercial venture. Therefore, there are three options of PPP — where one is complete privatisation, second is joint venture like Delhi and third is franchise. Therefore, we have to select any one of these modes for private partnership in distribution.

We also need private participation in big oil PSUs since oil PSUs failed to provide energy security for nation. Even today, we are importing most of oil and gas from outside. In addition, our cost of refining and distribution are much higher than the cost of private sector and our oil PSUs are getting money in terms of parity with global prices. Therefore, they are not trying for efficiency. Although coal and other PSUs have, no such type of question because they are getting price based upon actual cost. We need faster growth and development in oil and gas sector to meet our future energy under which it is difficult to achieve impressive private participation.

Regarding hydrogen economy, India at present in an initial stage of planning because we are not sure about the technology and future requirements. Actually, there are three types of hydrogen fuel. Blue hydrogen, green hydrogen and grey hydrogen. India is planning for massive green hydrogen base but it is not possible in coming few years because of technology and other commercial issues. Therefore, we are now trying with the non-green hydrogen fuel and the technology for it is well tested in advanced countries like those that those in Japan is ready to help India. Although no data and other needful infrastructure are currently available in India but it can be developed within one or two years. Recently we have some information regarding hydrogen fuel one that government is coming up with green hydrogen policy and one of the big Indian companies has established one hydrogen fuel. For creating buzz on hydrogen fuel, Union Transport minister Mr. Gadkari came to parliament on a vehicle driven by hydrogen fuel. Hydrogen economy is bound to come because of geo-political conditions and above all need for energy security in an import dependent country like India although on paper no concrete plan and information are on place.

On the technology and production front, we are indirectly dependent on China and other countries e.g. 70% to 80% solar plates are imported from China. Therefore, it require to produce locally up to global standard where only few policy initiatives have been announced but no concrete action has been seen. Second is the battery and charging infrastructure that needs much more to be done for utilisation of renewable energy and electric vehicles in a proper and adequate manner. The alternative financing should be available for these renewable energies, electric vehicles and storage projects as these requires huge investments. This is the third biggest challenge for Indian government and investors.

Thus, it is right direction and policy choice for India to focus on strengthening its renewable energy sector to reduce dependence on imported oil and gas form external sources. This will also save our high value foreign exchange, ease balance of payments deficit, strengthen macro economy and counter the Ukraine war like situation.

* (Authors: Dr. Hiranmoy Roy (teaches Economics and International Business), Sr. Associate Professor, School of Business, UPES. Dr. Anil Kumar (teaches Power Management), Prof School of Business, UPES. The authors can be contacted at h.roy10[at]gmail.com, anilkumar[at]ddn.upes.ac.in )