‘Investment that’s going into the private sector is increasingly focused on clean energy technologies’
The US establishment under President Donald Trump made its intentions clear of moving away from their commitments made to the international community on climate change at COP21 at Paris. But other two big polluters China and India are sticking to their words. Business Today’s Anilesh S Mahajan, spoke to Tim Gould, Head of Division, World Energy Outlook, IEA and Ajay Mathur, Director General, TERI to understand, which way the pendulum is oscillating in present global scenario.
Q: If Tim you can help us understand, how you know globally people are seeing India’s push for renewables… and commitment to stick along with the Paris Convention. There is an undercurrent that scenario may change because of President Donald Trump’s statements and follow up actions… so if you can help me in understanding that how organizations like yours, evaluate the situation…
Tim Gould: I think in this context, there are different forces that are pushing these energy transitions that we are seeing today. One of them are the policies pursued by national governments. Another is the level of innovation, cost reductions that you are seeing coming from the industrial side. And the third force is, in a sense more of a bottom-up force so… city-level, municipal, community-level initiatives, and all of these are contributing to the movement that we are seeing today. And even though our headline conclusion is that we are still falling short, very short, of the goals agreed in Paris and it is equally possible to look at the things that are going right and one of the things that is going right is the way that the private sector is transforming, and India is a very good example of that because the investment that’s going into the private sector is increasingly focused on clean energy technologies.
And we’ve discussed a few of the implications of that. You may need to rethink the way you look at some energy security issues. You need to look again at some areas of market design. You need to think about the operational flexibility of your system in order to accommodate that shift in the power mix. But, one thing that we’ve understand quite clearly is that people are thinking about those issues. This means that you are moving from an environment where you are pushing more wind, solar and other low carbon technologies into the system to the next stage of thinking is you know so what does that mean?
What does our future electricity network look like? And how do we use some of that electricity and in perhaps some new areas of your energy economy and I think in all those areas. And India is in a sense… I mean it is at the leading edge of some of that. It is working with other countries and also working with the IEA to think through what the implications are for policy.
Q: But Tim, in the last 2-3 months we have seen that India is sticking to the commitments, China is also sticking to their commitments, but the biggest polluter of the world, US is backing out. So even if you know lesser developed countries like China and India, they stick to their commitments, do you think that the Paris Convention will head for success if US goes out of it?
Tim Gould: Again, you need to look at the things that are driving change at the moment and I mean you are focusing on policies but there is also a very strong economic component so people are making choices not just because you know they receive a certain benefit.
Q: But Donald Trump’s argument is that this is not economical so that is why he is backing out.
Ajay Mathur: No no, but let’s not get into individuals and policies. But the point remains that one of the things that the World Energy Outlook tells us is that the US is now already becoming a major exporter of oil, and particularly gas, already. And the price at which they sell the gas is far less than what other people do. So it’s become the default price which anybody has to achieve if they have to remain in the market, otherwise you are out. A very large amount of the new oil and gas that is being produced in the Middle East is going to be used by them, so their share in the market will decrease, the share of US in the market will increase. This is what’s happening globally. But think of it what will happen in the US. As cheaper gas becomes available more and more and more, irrespective of who is in the White House, if I am going to set up a power plant, will I buy coal or will I buy gas? I will buy gas, because of economic reasons. And therefore there are many people who believe that the US will, irrespective of whether they remain in the Paris Agreement or not, will largely meet most of their commitments. There are commitments, which were made, largely, they will not fully, but they will largely meet.
Q: But, this raised 2 questions in my mind – First, most of the countries, whatever commitments they made, are they actually, serious commitments of cutting the carbon content or they made these commitments just for the heck of making it because there is an argument against India as well that most of the commitments which India made in the INDC, they will be fulfilling it in maybe in next 5 years or 6 years. They might not have to wait till 2030. Secondly, sir, there is another question is that you know if economics is at play, which means even if Donald Trump pulls America out of the picture, it will have no implication on Paris Agreement.
Ajay Mathur: First of all, I don’t think it will happen in 6 years. To reply second part of your question first, It may… no, I did not say that. It will have an impact on the Paris Agreement. It may have a smaller impact on the global trajectory of CO2. The two are different things. The Paris Agreement is about an international agreement and the other is what happens as a result of that agreement.
Q: Ok, and what about the first argument?
Ajay Mathur: That’s a political question that we will have to discuss separately, sometime we will sit down. But you know you think of it, what this global debate has done is that is if we look back maybe 10, I think it was your 2005 or ’06 or ’07, one of those which focused on India… WEO… maybe ’07, that said that the 2030 emissions… that was the first year you did 2030. They said that the emissions in 2030 would be about 65 gigatonnes of CO2. Now, since then, lots of countries have done a lot. They have invested in technologies, technologies have come in, they have made an impact. So with things that have already been done, we are now looking at going to something like 47. That’s already happened.
Q: If countries achieve everything they have said in their INDCs, we will go to something like 42.
Ajay Mathur: So imagine, in a matter of 20 years or so, we would have come down from looking at a 65 gigatonnes to looking at 42 gigatonnes. Where we have to be, is about 31. So, I would suggest that everywhere in the world, including in India, there has been a change of actions, there has been investment in technology development, there has been change in policies which have led to those technologies coming in which have started showing that we already have an impact. The impact may not be as much as we want, but you know, 65 to 42 is pretty good.
Tim Gould: I think as well. Also, pointing out there is a bridge between the technology side and the commitments the countries are willing to make because as you know the Paris Agreement also contains the mechanism by which countries increase their ambition all the time and that also intersects with overall technology costs are coming down and understanding of how you get to some low carbon outcomes particularly in the power sector but also in some other sectors it’s increasing. So, it may be that with time, with lower costs, with greater understanding. You know, when it comes to the next round of commitments, countries may be more comfortable with a higher level of ambition, because they see that it can be done. And so, there is… and you know that’s in a way… that’s the way that the Paris Agreement has been designed to progress and to close the gap that Dr. Mathur was talking about between where we’re heading and where we would need to be.
Ajay Mathur: So this is very clear this drove India’s INDCs. India had always made the point that of course we can go to low-carbons, not an issue, it’s only a matter of getting the right technology and the price at which we, you and I, will be willing and able to pay for it. The two or three years before 2015, taught us in two areas that the kinds of thing that Tim was talking about that you can actually take control, over both technology and prices. And those two examples were solar and there were LEDs. In both of these areas, performance increased, price decreased, penetration dramatically increased… did not increase (but) dramatically increased. This gave the confidence that you know we can achieve this. And that’s why India’s stance at Paris was, as long as we promise what we can deliver, we will deliver on that. So, we saw, based on 2015, where will we be in 2030, and we said this is what we’ll promise. Now if the technology becomes cheaper, performance becomes better, we can probably promise more. So, yes, what we would achieve in 2030 is based on (in) 2015 what we could achieve.
Tim Gould: I think it’s probably also worth watching out that there are things that we know today and a lot of the things that are making noise, are promising are in the power sector and some related sectors. But there are also some parts of the energy sector where that path to decarbonization is that much more difficult. And that’s why the research and development side, the innovation side, remains very important. For some of the industrial sectors, for some bits of transport that are not passenger cars but are the heavy duty or the maritime.
Ajay Mathur: If I use LEDs, I use much less energy but give the same amount of light. So, the first goal is how do I enhance energy efficiency as fast as I can. That’s number one. Number two, how can we get more and more of the electricity to be low and zero-carbon. And today, I’m seeing that is, that may be possible. So the amount of technology, the amount of research that has gone in, has brought the prices of renewables down. And if the price of storage also falls, in a similar manner, then it is possible that in 5, 6, 7 years, the price of electricity from solar, plus battery, may be less than the price of electricity from coal. If that happens, why will I build a new coal plant? Or, why will I as a bank, fund a new coal plant? I will go for solar options. We are seeing that possibility. There are still some technological issues, but we are moving in the right direction. Now if the electricity sector becomes decarbonized, then it’s great, if we can use electricity where today fuels… fossil fuels are used.
Cars, for example. Electrification of the urban transportation in each sector… So as I move more and more of my fossil fuel use to electricity and I use… I move my electricity to renewables, I have got a greater bank for the buck. Ok, work is happening in the direction. Huge huge amount of technology, huge amount of business models, huge amount of policy work remains. But, we are already seeing that at a micro-level it is possible. Then we come to the 4th, what Tim was mentioning. There are those areas where we don’t know how we’ll do decarbonization. Trucking, aviation, some industry. There we have not even invested, or we’ve hardly invested, in low and zero carbon technology development. So that’s an area where much more investment in innovation is needed. So that’s why I like these 4 buckets – energy efficiency, decarbonization of electricity, increasing electrification and then, looking at this big chunk of ‘difficult to decarbonize’ or ‘difficult to electrify’ sectors. And since we have got relatively positive trends in the first 3, I tend to be an optimist.
Tim Gould: On a couple of those areas… for instance, in the first bucket, I very much like the typology. You know, similar things to India has done, particularly in relation to LEDs. I mean that is an example which other countries are also looking at very closely. Because this intersection between public procurement at scale and costs and then, the ability to really move the needle in term of the impacts on the energy sector. So that’s been a very positive example which a lot of countries are paying attention to.
And the other, additional point is the intersection of some of those with the energy security discussion because in India, I mean, there is a tendency to think about energy security sometimes as a supply-side problem. But the sorts of developments that we are talking about here, renewables plus efficiency, and have a tangible impact on imports.
Q: But, this brings us back to the other argument that we may be able to you know, meet these INDC commitments, much before 2030, right?
Ajay Mathur: Possible, quite possible. In which case, we will do more. That’s what the Paris Agreement has, what calls the “stock-take”. It will happen in 2022, at which time countries will see where they are, what is their total commitments, what does the world need, and then they will review and see if we can do more. So, its… when we were at Paris, we all knew the INDCs will not get us where we want. And so there is a necessity to ratchet it down. And everybody and again, I do, I believe that still we will have to have bottom-up pledges because you know, if you tell me I will meet you somewhere at 10.30, the chances are you will, traffic jam or something apart, because you committed to it. If somebody says you have to reduce your carbon emissions by 20 million tonnes, that’s a lot more difficult to achieve. So anything which I pledge myself and I’m able to achieve it, that builds up my confidence that I can do more. And it builds his trust, that this guy will deliver, on what he promises. So it leads us to a virtuous cycle of trust and confidence, instead of one in which we are looking at ways to get out of our commitments.
Tim Gould: You can certainly see that dynamic in at least some of the numbers that we have in here. If we compare last year’s energy-related CO2 emissions for India versus this year…and this year we are lower by around 400 million tonnes in 2040, and… so India’s emission are, projected India’s emissions are significantly lower this year than last year and a lot of that has to do with exactly what we are talking about. So, it’s this real-world implementation of economically viable approaches to reducing the carbon…
Ajay Mathur: So as we build confidence, we will promise more.
Q: if I could move towards oil… you know, oil prices are at very subdued level for roughly around 3 years now. So do you still feel that you know, because of the subdued oil prices, low carbon fuel, you know, marketing has become tougher? What sort of impact this oil market has created?
Tim Gould: So, I don’t see large impacts there, primarily because there are not many areas where the price of oil intersects with you know, the expansion of renewables, which is primarily something that happens in pet generation.
And, so in a sense, there are not many competitive points of intersection. And I think where it does have an impact is on issues like electrical mobility. And clearly in a low-price, or lower price environment, reaching competitive parity with conventional gasoline-fueled vehicles is that much tougher.
So, when a consumer is faced with a choice of a new vehicle, you know, the operating costs of that gasoline-fueled vehicle are clearly going to play into that calculation. And perhaps, but with renewable technologies in the power sector, not so much.
Q: Maybe if oil could have touched you know, 100 dollars, the evolution of storage and storage capacity could have been faster. How do you see this?
Tim Gould: there was a period when, some key renewable technologies were moving towards cost competitiveness, where governments were, and they continue to put money into it in some countries and other firms, but those are becoming gradually less… less important as support mechanisms for renewable technologies. What’s more important are the sort of things that we were talking about before, broader questions about market design and flexibility, and you know, the oil price is important for many areas of transformation and not so much there. What does matter to a degree is the linkages between oil… the price of oil and the price of gas, and as I’m sure you’re aware, the traditional way of pricing gas, particularly in Asian markets, was through oil linkage. and gas is of course something that’s used in different parts of the energy system and so, via the linkages to the gas prices, then you can see more interactions with the world of renewables. That’s in our view… you are increasingly seeing a gas market that operates on the basis of its own dynamics so as a function of gas supply and demand. So, you know, the way that the gas market operates is increasingly distinct from the dynamics of the oil market. However, there is one thing that we do think that both have in common, and we remain a bit concerned about the implications of today’s price environment for upstream investment.
So for many companies in a lower price environment, revenues have squeezed, investment in new projects goes down and meanwhile, the world’s consumers continue to demand more oil, I mean, the increasing demand is going at a rate well above 1 million barrels per day per year of growth.
And while there are some bits of the upstream that are very dynamic, particularly in the United States, the shale revolution, other bits of the traditional upstream, the more conventional upstream, we remain concerned that there is not enough new activity in those areas. And that for us, is a warning sign potentially for markets, not next year, but sometime into the 2020s. You know, the risk of tightening of markets, and so on.
Q: India is moving faster towards matching the global standards of automobile fuels, and is also investing massively in expanding refineries. Simultaneously is talking about moving towards Electric Vehicles and replacing many of the auto fuels with electricity. Is there similar trend globally as well?
Tim Gould: One trend that is unmistakable is towards higher quality fuels. So, and you know, we are looking very closely at the regulatory changes in India as the move to euro 6 over the next few years. That is part of a much larger broader global move towards high-performance fuels. And it has some other parts of the energy sector so the IMO decision on the Sulphur content of maritime fuels… and India is also an exporter of refined products and so in order to keep finding those export markets, it needs to keep producing those fine quality fuels that the market demands, not just at home, but also in other countries.
Q: But that would mean that India needs to spend roughly around 10-15 billion dollars to upgrade their existing refineries, right? But you know, the projections are that in next 10 years, the consumption of fuel may go down drastically right… so do you see maritime making investment in refineries?
Tim Gould: We’ve discussed electric mobility… I think we need to keep some elements of that in mind. You can have a debate over how quickly that would affect new vehicles coming into the Indian fleet, but even if you had a very aggressive push towards electric cars, gasoline and diesel-based transport is going to remain the backdrop of the India’s transportation system for many many years to come. And so in our projections, India’s oil demand continues to increase very substantially over the next few years. Indeed, its crude oil import needs also go up. So we don’t see yet in India a peak in gasoline demand or a peak in diesel demand.
Q: Indian Oil companies are going through this debate, how much they can invest refineries and government is also pushing them for the same, but if these vehicles come up, what will happen to the consumption of gasoline as well as of diesel. Many oil major doubt the electricifiation data, and argue that most of the projections are based on assumptions – that batteries will come up with a certain capacity and their price will also go down, and electric vehicles will become more friendlier.
Secondly, they are saying that you know, they need to make refineries flexible so that they can switch over to petro-chemicals as soon as the demand started going down. But do you also see a similar kind of confusion in the minds of oil producers across the world? Are they also going through the same dilemma?
Tim Gould: Yes, absolutely. There are discussions going on throughout the oil and gas industry about strategic positioning in a fast-changing energy world. Companies are positioning themselves differently in that changing environment. Some are pushing more towards natural gas or are slightly increasing the rate of natural gas in the basket and a lot of them are staking for integration with the mainstream and also the integration with the petro-chemical side. There are a lot of efforts on the research and development side. Also, companies feel better prepared for the future. Some companies are also diversifying into activities beyond the oil and gas sector. You see in Europe, for example, some of the biggest investors in offshore wind, oil and shale, in totality, there are large investing in solar.
So, there is a variety of processes underway, which reflect in a sense, some strategic positioning in relation to a fast-changing energy world. At least, if you look at our projections for the main scenario… we still have a long way to go before we start moving away quickly from gas in particular, but also for oil. There is sufficient momentum in areas that we talked about, growth areas such as trucks, such as aviation, such as the maritime sector, such as petro-chemicals, that pushes our global oil consumption at least until we get into the late 2020s-2030s, when in our view, growth slows to an absolute.
Q: Tesla, along with some Chinese players are working on trucks and buses and other HMVs.
Tim Gould: So… I mean there are different initiatives in the trucking sector. Elon Musk has come out with semi- which is a large, heavy-freight option. Many other companies are looking at the commercial sector as the sector that’s easier to switch fuels, to electrify… and we’d probably agree that the pace of change is likely to be fastest in that light, commercial sector where you have urban fleets of delivery vans and so on. But the area that still makes the biggest difference in our projections is really fuel-efficiency standards. Fuel-efficiency standards for trucks are not as common as they are for passenger cars. So, if you are buying a passenger car, 4 out of every 5 cars sold worldwide are subject to some kind of fuel-efficiency regulation. With a comparable figure for trucks, it’s less than 50%. India is one of the very few countries that have regulations in place. So, Canada, US, China, Japan and now India, if I understand right, have some efficiency regulations for trucks coming in 2020-21 and that puts India in a forward-leaning position when it comes to… So, that’s the big area where… that affects the amount of oil used in the trucking sector. Then there are various other things that make also make a big difference in how we kind of… logistics, optimization, using digital technology to make sure that you are using your fleet as efficiently as you can. After that then comes the question of to what extent you can electrify. But the difficulty is that for very heavy loads, your battery has to be extremely large, and that has implications for cost, but it also has implications for the size and the weight.