Energy cooperation: First principles

As one of the world’s largest energy consumers – with a growing footprint – India has stepped up its international engagements on energy. There is continued interest in acquiring oil and gas assets overseas; continuing dialogue on importing nuclear reactors; long-running discussions on energy efficiency; and increasing focus on renewable energy. How could India ensure that its energy relations with other countries are suited to its long-term interests? Here are five guiding principles.

Price matters. The energy world is changing rapidly and disrupting national and global markets. Most energy investments have long gestation periods. In some cases, like nuclear, it takes a long time to build the plants. Coal-based infrastructure can last for five decades. Long-term contracts to import oil and gas give price stability but prevent consumers from taking advantage when prices fluctuate favourably. Energy cooperation cannot succeed if parties sought frequent renegotiation of terms. Nor could it find legitimacy with citizens if they felt their governments have locked them into prices that make little sense when technologies and business models change — and prices change as a result.

India faces this dilemma with regards to import of liquefied natural gas (LNG) and nuclear power. On the former, for instance, the landed cost of US LNG is expected to be $8.5/million British Thermal Units, which is higher than the price at which LNG can be sourced from West Asia or Africa. Although GAIL has contracted to import LNG from two US terminals, it has not found any domestic takers yet, especially with 16,000 megawatts of gas-based power capacity stranded for lack of demand. Thanks to the global disruption in the nuclear industry since the Fukushima accident, power tariffs from imported reactors might be more than double the rates of Indian reactors. Meanwhile, solar power tariffs have fallen from Rs 10.95 ($0.17) per unit in 2010 to Rs 2.44 ($0.04) this month. For both gas and nuclear, long-term supply contracts and foreign investment will be challenging until prices show a degree of parity with coal or solar power. Alternatively, an increase in aggregate demand could allow for more expensive power to be sourced (as long as utilities are able to pay generators).

Energy access will be the primary driver. Despite an uptick in the pace of village electrification, household electrification rates are still very low for millions of households. In addition, most rural households do not have access to modern cooking fuels. Partnerships on energy access would do well to focus on behavioural change on the part of households to consistently pay for energy; and technology agnostic solutions for cleaner cooking and electricity. Moreover, the financial health and technical capabilities of utilities impact the quality of electricity supplied, in turn creating a virtuous cycle of greater willingness to pay for better services. Supporting utilities should be an important plank for bilateral cooperation to improve energy access.

Energy efficiency is critical for India’s industrial and urban growth. Our energy demand trends (currently under 25 gigajoules per person each year) are in consonance with advanced economies when their per capita incomes were at our levels. But India needs to reach developed country income thresholds without profligate energy use. 

India’s industrial sector accounts for nearly a quarter of greenhouse gas emissions. Precision is needed in energy and emissions accounting at a granular level (as CEEW researchers have calculated for 200,000 units). But only large units are currently under the ambit of energy efficiency schemes, while most of the smaller units are languishing at low levels of energy productivity and experiencing high energy costs. Support for MSMEs would be valuable for more sustainable industrial growth. Similarly, international cooperation and partnerships on alternative transportation modes and fuel options (batteries, fuel cells, third-generation biofuels) would become increasingly important for a rapidly urbanising economy. Space cooling needs in India will grow five-fold in two decades, far more than for Chinese cities, opening another space for technology cooperation, building design and behavioural change.

Energy security on India’s terms. For India, energy security depends on availability of critical resources, at predictable prices, with minimum supply disruptions, while ensuring environmental sustainability for future generations.It has, traditionally, tried to “secure” its energy resources on a bilateral basis — and is deepening relations with the UAE, Qatar, Iran, Saudi Arabia, and Mozambique. But it will also seek security cooperation in the maritime domain to secure supply lines. In March, China, Japan and South Korea formed an alliance to jointly negotiate more favourable and flexible LNG supply contracts. As India’s LNG demand grows, it should consider such alliances for security of supply and prices. 

Two fuels in any economy: energy and finance. Without the latter, the former cannot lubricate economic growth. Renewable energy and energy efficiencyneed higher upfront capital investment, which bear risks of a different kind from risks pertaining to fossil-fuel prices. Such infrastructure requires large doses of de-risked institutional capital. It also requires patient capital to invest in energy R&D. India’s energy transition will be incomplete without international cooperation on innovative finance and new modalities for technology co-development. Some joint R&D initiatives have begun, and small bilateral lines of credit available. The real game-changers – such as energy storage technologies; hedging multiple financial risks simultaneously; deepened bond markets – are still largely absent. The opportunities are there to grab. 
 

The writer is CEO, Council on Energy, Environment and Water (https://bsmedia.business-standard.comceew.in) and co-author of Energizing India (SAGE, 2016) 

Twitter: @GhoshArunabha