INNOVATING FORINDIA’S ENERGY

NEEDS:PATHWAY FOR A RESILIENT AND

SUSTAINABLE ECONOMIC RECOVERYOctober 2020

knowledge and resources, coalescing global coalitions on vaccines etc. Thisexperience could be invaluable forcountries in setting aside their differences that are currently slowing down climate action and come together with greater resolve to overcome an existential threat far greater than the current pandemic i.e. global warming induced climate crisis.While countries have been largelysuccessful in “flattening the curve” as a response to the pandemic, this has not been the case with GHG emissions that cause global warming. Emissions have been increasing every year despite three decades of international consensus on the need for action. The unintendedconsequence of the pandemic andensuing economic lockdowns has been the fall in emissions in 2020 – and it is a necessity now to use this lower base to taper the growth of future GHG emissions. It is sobering to note that despite the near cessation of all economic activity over a quarter, the fall in global emissions in 2020 would only be 5.5% while achievement of the below 1.5 degree C target would require annual declines of 7.5% all through the coming decade. It is essential thatglobal cooperation leads to flattening of the GHG emissions curve so that mean temperatures do not exceed the limits that would trigger a vicious warming cycle – while providing time for maturation of technologies for removing GHGs from the atmosphere or direct emissions on acommercially viable scale.

As countries prepare for an economic reboot it must be recognized that notevery country has access to the same level of resources and the challenges are also unique. While the clarion call across the globe seems to be for a “green” recovery under a “new deal” – there is no magic bullet and each country would need to be creative in structuring their stimulus responses according their specific circumstances.

The year 2020 was expected to herald the decade of sustainability and climate change action with countries not only ramping up their efforts in achieving the goals of the 2030 Agenda forSustainable Development, but alsoincreasing their climate action ambitions in pursuit of the objectives of the Paris Ac-cord to limit global warming to 1.5 degree C above the pre-industrial level. This was to be the year when countries wereexpected to submit more ambitiousNationally Determined Contributions (NDCs) as well as their mid-century,long-term low greenhouse gas emission development strategies and meet at UN Climate Change Conference (COP26) in Glasgow to resolve the unfinished agenda of the Paris Agreement for creating the enabling framework for successfulimplementation of the Paris Agreement. Unfortunately, a global pandemicpresented a more near-term existential crisis that has taken away some of the attention on climate and sustainability – resulting in the postponement of COP 26 to November 2021.

The lethal nature of the Covid 19 disease, its rapid spread across the world in amatter of weeks and the subsequentresponse has been well documented. While the pandemic is far from over, the world is learning to live with the disease. There are a few rays of hope that have broken through the dark clouds of the pandemic which can well provide the basis for a pivot for more sustainableeconomic development as well as deeper and more robust internationalcooperation. The first sign was thatgovernments across the world agreed to be informed by science as they went on to make very difficult choices often risking their political capital. The second sign of hope was the impressive degree ofinternational coordination andcooperation in the timing of the lock down and the graded reopening, sharing

RURAL ECONOMY

Migrant labour move out of rural,agricultural and tribal communities as there is little gainful employment beyond agriculture, which is unable to absorb the workforce available. To put this in context, various estimates suggest that between 10 to 12 million able bodies join the Indian job market every year – and most of them come from these non-urban geographies. The Government has a programme to double farmer’s income by 2022 and some measures have been announced recently that will go some way to make thathappen. However, it needs to berecognized that, viewed through thesustainability lens, there are many areas where the rural communities can contribute, provided society recognizes thatcontribution and pays a just remuneration for the positive externalities created. Land degradation and dwindling forests are recognized as key challenges. The rural and tribal youth can be engaged in projects to stop land degradation, afforestation/reforestation, recharging waterbodies,rainwater harvesting, reduction ofagricultural methane emission – just to name a few. This needs a “whole of economy” approach that would include the possibility of electricity self-generation usingrenewable energy technologies making available enough supply for poweringproductive commercial loads – thereby increasing the earning potential of theconstituents. The rural economy is far easier to convert to a circular economy byminimising waste, converting waste to value (upcycling and converting to energy for the rest) and manufacture ofbiodegradable products. The range ofopportunities is too numerous to bediscussed here. The challenge is around the financing of these projects purely on a social benefit basis and thus limiting the sourcing to philanthropies or development finance. However, if creation of natural capital was monetizable – then the returns would attract a wider array of investors – helping prime a virtuous cycle of sustainability.

CLIMATE ECONOMY FOR INDIA –A VISION FOR THE FUTURE Prior to this pandemic, India had embarked on an economic growth trajectoryenvisioning a USD 5 trillion economy by 2024 - requiring a double-digit annual GDP growth rate. With predictions of economic recession across all countries, it remains to be seen whether and how quickly the Indianeconomy can bounce back – and the Indian Government has already signaled a slew of reforms and interventions to kickstart the economy. India’s economic growth is of paramount importance if India is to achieve her SDG goal #1 – that to remove poverty. Equally, in charting the futuredevelopment pathway, Indian policymakers need to consider the needs andexpectation of the current populationwithout, in any way, compromising theinterests of the future generations. This ispossible if India swiftly pivots towardreshaping the current economicarchitecture to one that meets the criteria of a “climate economy” - out of aconviction that only such characteristics will allow for a sustainable and “just” transition. To sustain the rate of economicdevelopment, build a USD 5 trillion economy and alleviate poverty over the coming years and decades, India will likely need toattract large investments in infrastructure and productive capacities. It is vital that these investments not only remain viable through the energy transition but are also able to access ‘new capital sources’,create jobs and continue to build India’s technological capabilities. This is bestexamined through some of the core sectors of the economy.

Climate Economy Recommendation #1 – Develop a framework for a domesticemissions trading system which monetizes the ‘natural capital’. This will enable the rural economy to directly benefit from effort on emissions reduction but also accelerate the development of bio-products and create new revenue streams while increasingattractiveness for private capital investment

This will revitalize the rural, agriculturaleconomy through a plethora of initiatives in the area of nature-based solutionsespecially agro-forestry. Given an enabling framework, these incentives can attractcorporate and institutional investment that seek to enhance climate action or benefit from the tradability of carbon offsetscreated by such projects. Secondly,bio-energy represents a very significantrenewable energy source for India that could benefit from some more policysupport. Viability of these projects aresensitive to input pricing and a framework that establishes an equitable but stable pricing of inputs would help mitigate a key economic risk. This will also ensure that inputs are directed to the projects that extract the highest economic and social value either through technological superiority or asuperior product slate.

MOBILITY The pandemic induced pause provides an opportunity to review India’s strategicchoices for the energy transition over the coming decades. The Indian Government has often stated the intent to reducedependence on fossil energy imports. The transportation sector contributes to asignificant demand that the Government is keen to increasingly replace withdomestically sourced energy. Hence the policy support for electric mobility, biofuels and the interest in methanol. India’smobility landscape is a rich tapestry ofsolutions depending on the specificnuances of the consumer needs. The urbanconsumer preference is for specialized applications for commuting or carriage of

numbers by far – the spectrum of vehicles in use range across three wheelers, Light Commercial Vehicles (LCVs’), tractors, and increasingly customers are being offered a choice of fuels viz. petrol, diesel, natural gas, biofuels and electricity.

During the pendency of the pandemic, the prospects for shared mobility remainuncertain but the fundamentals remain in place for a strong comeback. In the short term, the demand for two wheelers isexpected to be robust and if suitableelectric options are available consumer preference could well shift to these.Electromobility is expected to alleviate air quality issues. There is an opportunity for the very sizable auto OEMs and the auto component manufactures to pivot towards indigenising electric vehicles and build on the potential size of the domestic market for international competitiveness.

Climate Economy Recommendation #2 – Develop a mobility policy framework that creates a mosaic of energy solutions and services for Mobility - incentivising the most appropriate solution for the consumerapplication.

INDUSTRIAL ACTIVITYThe opportunity space for industrialdecarbonisation is too vast to cover here - from replacement of fossil fuels by low/zero carbon alternatives, deepen energy efficiency though a systems approach, maximize electrification using renewables, reduce process emissions by replacingcarbonaceous reactants and eventually capture carbon for usage and storage. While every industry may have its own unique challenges requiring bespokesolutions for that industry – digitalisation is a common theme that would help companies transition faster. Access to technology is not that significant a barrier that it is made out to be. International partnerships between companies or between subsidiaries of a global company are already delivering this and there are enough and more instances that can be cited. Sustainability has been on the radar for most progressive minded larger corporations – even though the focus areas have been around pollution, water conservation and waste disposal. Policy measures like the Perform -Achieve - Trade scheme, Renewable Purchase Obligations and enabling Open Access powertransmission arrangements nudgedindustries to make significant gains inenergy efficiency and uptake of renewable energy. In view of this success – which has largely contributed to India’s staying ahead of the curve in NDC achievements – there is a case to modify the framework to cover decarbonisation in all its facets. Companies are increasingly considering carbonreporting and adoption of science-based targets. The global investor community is driving a decarbonisation agenda and companies that would look to attractinvestors for future capex programmes would need to meet the sustainabilitycriteria set out by such investors.

If India wishes to be a provider of low/zero carbon technologies, rather than buyer and price-taker, this is the right moment toparticipate in the R&D for thesetechnologies. Again, the existing framework and eco-system needs an urgent overhaul

to incentivize industry and academia to feel comfortable in accepting risks with the knowledge that they would have thesupport of the Government to mitigate some of these risks. Specific target areas could be – carbon capture utilisation/storage (CCU/S), hydrogen production andutilisation, advanced biofuels,decarbonisation of steelmaking, cement manufacture etc.

Given the deficit in technological readiness there is a strong case to encourage through incentives, R&D in this area – and potentially position Indian firms for global leadership. CCU/S should be seen as a vital piece of a larger carbon eco-system involving multi-ple sectors to provide scale and a network effect.

Climate Economy Recommendation #3 – Next generation technologies such as Hydrogen, CCUs, advanced waste-based biofuels etc. require R&D support to make the technology commercially ready and economically viable. As an interim step, development of an open market structure to create a gas-based economy.

Policy can play a role to ensure thatIndia does not lag behind and could be achieved via compliance mechanisms and/or market mechanisms. While the global race on technology development hasalready begun, India has the scale and technical capability to potentially establish itself as a leader in these next generation technologies. Equally Indian exporters offinished goods would need to mitigate the risk of Carbon Border AdjustmentMechanisms being considered in Europe and which may extend to other markets by either reducing the embedded carbon in their products or negotiate a tariff barrier. A carbon market-based mechanism thatallows the “hard to abate” industrial sector to access offsets from the domesticeconomy would be helpful in providingmomentum to the transition.

continues to accelerate its transformation. The power sector may well prove to beIndia’s Achilles Heel unless the malaise of the sector is urgently addressed.

While India has announced ambitioustargets for Renewable energy (RE)capacity additions over the comingdecade, it is unlikely that the electricity system would be able to shift away from coal earlier than mid-century. The increasing share of intermittent RE generation requires a complementary supply system to keep the grid in balance and gas based powergeneration is eminently positioned toprovide this service.

Climate Economy Recommendation #5 – Urgent overhaul of the power marketarchitecture to facilitate the absorption of digital technologies and market-basedsystem improvements to providecompetitive advantage to Indian industry and the wider economy.

In the interim, the contribution that natural gas can play in lowering emissions in power generation, mobility and industrial sector needs to be better harnessed for theeconomy. The risk of climate obsolescence for gas infrastructure is minimal and can be repurposed for future energy carriers viz. hydrogen. The existing regulatory and policy framework needs to be dynamic to ensure infrastructure investments materialize in a timely manner. The Government’s ambition to increase the share of natural gas in the energy mix from 6.5% to 15% is therefore well founded and now needs speedyimplementation of the infrastructuredevelopment initiatives in play.

Climate Economy Recommendation #4 – Indian industry would benefit fromacclimatisation to a low carbon growth pathway by operating within a “cap and trade” system – and employ the range of levers available from low carbon fuels to advanced technologies.

POWERThe power industry, globally, is witnessingdisruptive changes driven bydecarbonisation, digitalisation anddecentralisation leading to a transformative change along the value chain. It isimperative that India harnesses thesetechnologies and market innovations to ensure reliable, competitive and sustainable supply of electricity to be able to support the ambitions of economic growth and prosperity of the nation. This would require the legacy architecture to be leapfrogged into a modern, efficient technology driven system with service competitivenessestablished through transparentmarket-based mechanisms while moving away from the current system ofadministrative price determination involving complex subsidy arrangements. The need for radical power sector reforms has been recognized since long and steps wereinitiated as early as 1991 with economicliberalisation – but the process has been slow, and the industry seems to be falling further behind as the global industry

LABOUR, FINANCE ANDTECHNOLOGY – CONSTRICTOR KNOT OR THE TRIPLE HELIX FORCLIMATE ECONOMY?

India’s biggest internal challenge, arguably, is unemployment. Elections have been won or lost around the promise or failure of delivery of development with its implicit assurance of employment. India’s flagship “Make in India” programme encapsulates this very thinking. While industrialisation and growth inmanufacturing yield a number of economic multipliers – increasing automation limits the scope for large scale employment in large manufacturing facilities. The recent lockdown triggered the reverse migration of labour from the urban economic centres – and bothemployers and employees would reconsider their options before reverting to the earlier model as it clearly demonstrated its fragility. The core of the sustainability thesis needs to be grounded in sustainability of employment. The climate economy provides moreopportunities and better resilience as has been mentioned across the rural, mobility, power and industrial sectors.

It is worthwhile to recognize the fiscalconstraints that the government is operating under. The economic impact has bothreduced its usual revenue sources such as tax collections and increased outgoes forpandemic control and large stimuluspackages. Increased borrowing risks other financial challenges, hence, it is increasingly obvious that private capital will need to be tapped into and that too internationalcapital. The need is to look beyondphilanthropic capital and access the ESGlabelled capital that would be moreamenable to funding sustainability drivenprojects and initiatives that have embedded robust Measurement, Reporting andVerification (MRV) features.

It is also of paramount importance that jobs associated with investments do not face risks on account of early abandonment of assets (for climate reasons) requiring additional costs in workforce retraining or severance. In any case, private and/or institutional capital is already on top of these risks and

CARBON PRICING FRAMEWORK Over the years Indians seem to havenormalised the unsavoury side-effects of economic development viz. poor air quality, diminishing access to clean water,congested urbanisation etc. and a distorted view on affordability ensured exclusion of the cost of externalities and consequentperpetuation of these issues causing deepimpact on public health that has perhaps never been evaluated. The lockdown,however, demonstrated that in a relatively short time these ill-effects can be reversed – as evident from excellent air quality in cities across the country and clean water in therivers. This gives rise to the hope that thecitizenry will be more interested inpreserving these environmental gains anddemand action by the government to not allow status quo ante to creep in. This,therefore, is the right time to considerframeworks that reflect the cost ofexternalities in the pricing of utilities andservices and consider premia for thecreation of beneficial externalities such asnatural capital. In recent years, India has faced frequent natural disasters in the form of cyclones, floods and drought causingimmense loss and damage to life andproperty. Experts have posited that thesecalamities are attributable to globalwarming – with the globe having already warmed up by about 1 degree Celsius over the pre-industrial level. The costs of disaster relief and reconstruction, largely borne bytaxpayers through the exchequer, canalready be seen as a proxy post factocarbon tax. A more transparent carbon price on various economic activities would lead to creation of more sustainable and resilient assets that would be better equipped to deal with the climate threats of the future.

Climate Economy Recommendation #6 –Expeditiously design and implement aneconomy wide market-based mechanism for carbon to drive the right investmentbehaviours across sectors and on anequitable basis – rewarding the creators of natural capital and disincentivising those that draw on such capital.

successful financings would require careful project design based on sound evaluation of sustainability and climate risks. This presents more of an opportunity than a constraint, as for the right projects not only capitalmobilisation should not be a problem –capital would actually be chasing suchprojects if they are “shovel ready”.

On the other hand, India is well endowed to produce clean energy through solar, wind, hydro and biofuels. Developing the supply chains for the equipment required for these projects represent a huge economicopportunity that not only supports importsubstitution but contributes to economic growth and employment generation. The construction and operations of these facilities also provide local employment potential, and these are often distributed all over the country in areas that are not industrialized.

Finally on technology, the global quest forcarbon free fuels is propelling technology maturation in the production of hydrogen for a variety of uses but most significantly fortransportation applications addressing the needs of the “hard to abate” heavy duty transport sector like trucking, shipping andpotentially, even aviation in the medium to long term. The technology of producing “grey” hydrogen via steam methanereformation of natural or synthetic gas is well established – and integration with CCU/Srenders the “blue” hydrogen decarbonized. This is a very capital and energy intensiveprocess with severe cost penalties associated along the chain. Increasingly, industrial scale electrolysers are being scaled to produce “green” hydrogen using renewable electricity and water. With the consistently increasing share of intermittent renewable electricity generation in the power grid presenting grid management issues – the market is seeking storage solutions to mitigate curtailment risks to renewables. Green hydrogen production can provide the grid with this valuableancillary service – with hydrogen beingproduced with the excess electricity which can be spiked into natural gas pipelines and fired in gas turbines at time of peak demand in the grid. There is an opportunity for India to position itself as a manufacturing hub forelectrolysers before any other country

achieves competitive advantage through economies of scale. Early stagetechnologies are exploring the possibility ofhydrogen production from waste – which would be particularly useful for India as the country is struggling to cope with theburgeoning waste problem. Hydrogen could then truly represent a carbon free local fuel resource than addresses almost all the asks of the Government. As technologies for use of hydrogen as a reducing agent (in place of coal) in steel making make progress – India can emerge as the world’s largest producer and exporter of green steel. It is, thus, quite obvious that hydrogen is well poised to be the renewable resource of the future. Timely decisions could position India in anadvantageous position along themanufacturing as well as production value chain and the prize is certainly large enough for this to deserve focussed attention by the triple helix of government, industry andacademia.

Climate Economy Recommendation #7 – Judicious choices that rank high onsustainability and climate resilience willmaximize employment, attract private capital and foster an environment for creating global technology leadership in frontier technologies and manufacturing.

SUMMARY

The pandemic has already taken a heavy toll on India and the future remains uncertain. However, there are many reflections and learnings from this experience that can inform us about preparing for another disaster that humans have unleashed upon themselves.India may not have contributed to thecreation of these crises, but the size of itspopulation and the levels of poverty presentsenormous dangers in the form of everintensifying extreme weather events causing loss and damage to life and property. As with the pandemic, countries will need to equip themselves to cope with the impacts ofclimate change – and a post pandemiceconomic recovery anchored aroundsustainability and climate action could well be the prudent way forward to safeguard the interests of citizens and fortify resilience.

Image and illustration courtesy: www.freepik.com and unsplash.com

ABOUT THE AUTHOR’S

NITIN PRASADChairman, Shell Group ofCompanies

Nitin Prasad is the Chairman of Shell Companies in India. He is a dynamic and accomplished business leader with 20+ years of cross-cultural professional experience spanning industries from technology to energy and geographies from USA, Singapore to India.

Nitin, a Fortune 40 under 40 awardee, has a proven track record of managing large diverse global teams, developing/implementing strategy, innovating and leading change across cross-functional and multi-jurisdictional roles. He ispassionate about Shell’s purpose of powering progress together for better and cleaner energy and believescollaborations and partnerships are key to solving country-wide growthchallenges.

Nitin did his schooling from the Doon School, India before completing anengineering degree from GeorgiaInstitute of Technology, USA andthereafter went on to complete hisMBA from INSEAD.

Prior to his current role, Nitin was the Managing Director for Shell Lubricants for the cluster of India, Sri Lanka and Bangladesh, which combined is the 3rd largest lubricants market in the world. This role was preceded by several other roles in Shell across verticals of strategy, marketing, project delivery and supply chain in geographies of APME,APACMEA, China, South East Asiaand USA.

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