Despite EV hype, will India be the last major economy to ditch auto fuels?

On a smog-filled Mond­ay, a colleague hailed a cab. The chirpy, middle-aged driver enquired if she owned a car, and, if so, was it an electric vehicle (EV). On hearing that it was an old vehicle, he suggested that she opt for an EV. The colleague, a slow adopter of new technologies, wondered if EVs would be a smart investment given the lack of infrastructure. But the driver opined that EVs would multiply, led by a proliferation of charging outlets.

The driver’s enthusiasm for alternative-fuelled vehicles is shared by S&P Global’s India unit. Mumbai-based Crisil’s latest report paints a dismal picture of transport fuel use. “Diesel consumption will log a compound annual growth rate (CAGR) of around 4 per cent between fiscals 2022 and 2025, but slow to around 2.5 per cent between fiscals 2025 and 2030, given the continuous penetration of CNG vehicles. The brakes will slam harder on petrol sales, slowing it from an already low CAGR of around 2 per cent between fiscals 2022 and 2025 to a mere 1 per cent CAGR between fiscals 2025 and 2030,” Crisil said in a Novem­ber report. The lost demand amounts to over half of India’s annual refining capacity. Around 40-60 million tonnes of proposed refining capacity may need to be shelved because of the slump in road fuel demand, Crisil pointed out. India consumed 700,000 barrels per day (b/d) of petrol and 1.7 million b/d of diesel in pre-pandemic 2019-20.

But the driver’s and Crisil’s prognoses may be misplaced: India will be the last major economy to call it a day for transport fuels. EVs and biofuels are likely to make a smaller impact this decade on petrol and diesel sales because of inadequate government investments and incentives, lack of clarity in energy policies and expensive technologies in one of the world’s most price-sensitive markets.

State refiners are optimistic over a fuel demand resurgence post-Covid-19 and plan to spend a combined Rs 2 trillion to boost capacity to 6 million b/d by 2025 from 5 million b/d now, according to oil ministry data. Refiners will add another one million b/d by 2030 if the government sorts out location issues over a west coast refinery investment by Saudi Aramco and Adnoc. And the successful privatisation of BPCL, valued at Rs 1.1 trillion, and perhaps of more oil companies later is contingent on India’s growing demand for fuel.

“We expect demand for diesel and petrol to continue at pre-pandemic levels for the next five years,” said HPCL’s Chair­man and Mana­ging Director M K Surana. “India’s peak oil demand is not expected before 2040, and diesel use may last longer than petrol.” Diesel accounts for around 40 per cent of India’s oil products consumption. Surana expects petrol demand to be strong at 6-7 per cent a year and diesel use to grow at around 3 per cent for the next five years, and then reduce marginally when EVs and biofuel start expanding.

Neither state-run compan­ies nor the Paris-based Inter­national Energy Agency (IEA) believe that India’s fuel market will come to a halt this decade. Demand growth is expected to slow, more so in the 2027-2030 period but not crash. The blow to the use of diesel and petrol will come in the decade to 2040, by when India re­finers will have recovered investments and charted a course to convert more of the crude in their plants to chemicals.

The IEA expects India to experience the largest increase in energy de­mand of any country worldwide over the next 20 years. Much of the increase is attributed to road fuel use, which will double to 3.8 mil­l­ion b/d in 2040 from 1.9 million b/d in 2019, as the vehi­cle fleet increases by 300 million by then.

A transition from petrol and diesel will not happen in a short time because they are the most affordable and accessible compared to CNG, ethanol or EVs, said R Ramachandran, former refinery director of BPCL, adding, “Our country cannot afford a rapid change” to alternative fuel vehicles. In 2019, for instance, around 80 per cent of freight transport relied on diesel, a share that remains largely unchanged to 2040.

Gas is expensive and its use is restricted to taxis and autos. There are over 3 million CNG-fuelled vehicles registered in India, 92 per cent of which are concentrated in Gujarat, Maharashtra and the National Capital Region. The fuel is indirectly subsidised because the government allocates cheap domestic gas to city gas companies. An extensive rollout of city gas infrastructure will leave the sector reliant on imported LNG, which is more expensive than oil as countries scramble to use it as a transition fuel on the road to clean energy.

Ethanol poses different problems, delaying by several years India’s plans for a 20 per cent ethanol blending target by 2025. Processed from sugarcane, molasses and waste, it is blended with petrol for use in vehicles. But once the blend reaches 15 per cent, automakers need to modify vehicle engines. The fuel also tends to absorb moisture and needs dedicated transport infrastructure, prompting oil companies to blend the fuel in depots rather than at refineries. Sales of the blended fuel are res­tricted to sugarcane growing states such as Uttar Pradesh and Maharashtra where blending ratios are close to 10 per cent. The rest of the country has little access to ethanol.

EVs will struggle to gain tra­c­tion in the absence of dema­nd-side incentives. The IEA pre­dicts the stock of all passen­ger cars to grow fivefold bet­ween 2019 and 2040 to reach 200 million. However, fewer than 4,000 electric cars were sold in India in 2019. The impact of EVs is expected to be more pronounced towards the end of the decade but would be contingent on issues such as battery costs, range anxiety and resale value, said Prashant Vasisht, vice president and co-head, Corporate Ratings, ICRA Limited.

Affordability and lack of ad­equate charging infrastructure in a country as vast as India will crimp EV sales for several years. The IEA expects seven million electric cars on the road by 2030, and 27 million by 2040, less than 10 per cent of the total car population. There will be 55 million electric two-/three-wheelers on the road in 2030, around 19 per cent of the total stock, and 160 million in 2040, accounting for over half the stock of such vehicles. But despite rapid growth in EV sal­es for two-/three-wheelers, ele­ctricity consumption grow­th constitutes only 7 per cent of the overall growth in road tr­a­nsport energy demand to 2040 — which means petrol and diesel will continue to dom­inate the transport landscape.