The change in the dynamics of the energy sector could solve its deep-rooted problems.
Environmental concerns arise rationally. Our society is built upon the ability to generate energy. Obviously, depletion of fossil fuels is a concern. So are broader issues of pollution, and potential climate change.
The economic rationale is simple. The prosperous wish to maintain or improve standards of living. The less prosperous aspire to prosperity. So energy needs will rise as fossil fuels become scarce.
New solutions will come from technical breakthroughs driven by economic rationales. Rising fossil fuels prices create incentive to develop alternates that are efficient, renewable, sustainable, clean, etc. Indeed, we've seen such outcomes. Between 2006-2008, as crude prices shot up, so did global capacities in biofuels, wind, solar and geothermal.
Unfortunately, climate change also draws irrational, violent reactions. The issue has been heavily politicised and caused a North-South divide. Scientific understanding doesn't provide unambiguous answers to basic questions like “Is the world getting hotter?” and “What are the consequences if the world gets hotter?” Interpretations range from “No, it's not getting hotter” to projections that Bangladesh and the Maldives will drown. Time frames for Doomsday scenarios also vary from two decades to centuries.
The prosperous nations of the North demand that the developing countries of the South cut usage of “dirty” energy that may contribute to climate change. The South cannot see alternate routes out of poverty. China and India in particular, which means over 2.5 billion people, have per capita energy consumptions at 3-5 per cent that of the US and will inevitably see rising energy consumption.
It wouldn't matter if alternate technologies were reliable and cost-effective. They would be adopted anyhow. Eventually technology will mature to provide such solutions. Until such time, there will be fierce ideological battles like at Copenhagen. There will also be policy-driven incentives such as tax breaks and the carbon credits market as well as new energy-efficiency norms. Of course, there is also a natural tendency to cut energy consumption. As populations in developing economies move up the income ladder, they will also demand cleaner environments.
That creates revenue opportunities, though there could be distortions. For example, the diversion of maize to biofuel led to a spike in prices of staple food items in US and Mexico. Tax breaks for adoption of wind and solar energy systems can lead to scams.
The green economy is one of the big growth stories of the near future. “Green” covers a wide gamut from renewables, to cleaner, more energy efficient processes across industries, recycling, waste-management, the construction of energy-efficient buildings, etc.
Large amounts of venture capital are already committed and a huge number of jobs could be generated. India's green economy could see growth across everything from the wind, solar, biofuel, biogas sectors, to electric scooters and automobiles, energy efficient construction materials, and waste recycling. In addition, traditional industries will look to cut consumption and emissions, and generate carbon credits. So, energy consulting is also a likely growth area.
There are few listed players at the moment. Praj Industries and Suzlon are two obvious choices in the renewables field. Majors such as Reliance and Moser Baer are also invested in the solar value-chain. Thermax is developing a portfolio in energy consulting along with its industrial products. Dozens of small businesses have attracted VC. These range from biogas plant manufacturers, to solar lantern makers, to cheap water purifier makers, to specialised microfinance outfits. Some of these will be up for IPOs in the next couple of years and they could be multi-baggers because the sector is high-profile and fashionable.
The impact on the Indian energy sector could be interesting. The current power generation mix is close to 70 per cent thermal and of course, India relies heavily on imported crude and increasingly, imported coal. There will be ever-increasing emphasis on efficient technologies. This could alter the business case for traditional power sector plays such as ABB and BHEL.
Also, the creation of smart grids (which implies better power markets), and better transmission and distribution systems is likely to be strongly backed at policy level. There may well be a revisit of the current (absurd) system of differential power tariffs. The dynamics of the sector will therefore, change – not a bad thing, given its deep-rooted problems. Entrenched players across the power sector value-chain must respond positively to these changes. How they do it will change the valuation perspective.
