The energy sector globally is going through a transition. Oil prices have rallied to a four-year-high, on the back of increasing demand and production cuts by both Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members. Now it has reached a point where India and other oil importing countries are starting to feel the heat. The Petroleum Planning & Analysis Cell (PPAC) estimates that even at an average crude price of $65 a barrel, India’s import bill could reach almost $110 billion in FY18-19, a jump of almost 25% over $88 billion in FY17-18.
This would imply a significant deterioration in the current account deficit, increase in inflation and adverse effect on the overall growth prospects of the economy. India continues to be the fastest growing large economy in the world. The Jan-March quarter of 2018, saw a 7.7% GDP growth rate, with more than 7% growth in electricity consumption, and more than 5% growth in consumption of petroleum products. And this trend in energy consumption will continue in the medium- to long-term. International agencies including International Energy Agency (IEA), OPEC and BP etc. are projecting India’s energy demand to grow in excess of 5% over the next two decades, fastest among major economies in the world.
Interestingly, as the world transitions towards a low-carbon economy, the impact on ‘import dependent’ nations is likely to be more profound and rapid. India is heavily dependent on fossil fuel imports (83% for crude, 50% for LNG and 18% for coal, though coal imports have come down in the recent years). Falling prices of solar photovoltaic (PV) power generation costs, expectations of falling battery storage costs, and adoption of electric vehicles (EV) is going to transform the energy landscape in the coming two decades.
Prime Minister Narendra Modi, while elaborating on his vision for energy sector in India, alluded to the ‘seven horses of the chariot of the sun God,’ emphasising on the need for India to tap into all affordable and sustainable sources of energy. With overwhelming focus on solar, wind, biomass, diversifying supply reliance beyond the conventional coal, hydro-, nuclear-, and gas- based power generation would be a key imperative for future. India would need to explore all possible sources of energy for greater access, security, affordability and sustainability.
Government initiatives over the last four years are a clear indication of the fact that India is gearing up to embrace this transition. It has accelerated the target for renewable energy capacity to reach 225 GW by 2022. The PM has set the target of reducing oil import by 10%, by 2022, through an increase in domestic exploration and production activities, and harnessing the potential of bio-fuels. There is considerable thrust on moving towards a gas-based economy and massive investments have been planned on developing pipeline infrastructure, LNG facilities, and expanding the City Gas Distribution (CGD) network, to support this move.
In the wake of these developments, Deloitte came out with a thought paper on energy transitions and investment opportunities in the Indian energy sector, as a part of the IEF Summit in April 2018. Emerging trends reveal a plethora of investment opportunities across the value chain. While part of this investment would be towards capacity ramp-up and development of supporting infrastructure, a large share of it would also be attributed to systemic innovation and digital interventions across the value chain.
In the power sector, electricity generation has shown considerable growth in the last few years, and India has successfully transitioned from an era of chronic power shortages, into a situation of over-capacity. This will lead to almost negligible or no investment in the conventional coal- based generation capacity in the next 5 to 7 years. The focus in generation segment will largely be on renewable energy, solar power in particular.
Electricity distribution, however, remains an area where state utilities have considerable ground to cover, as the government is targeting universal access of 24*7 electricity to all Indian households, having reached all villages in April 2018. The government is therefore focusing on developing initiatives around smart grids, smart metering, and automation solutions for the utilities. Digital transformation of utilities to improve asset utilisation and reliability, is another area which is likely to see growth. Battery and storage solutions market could also see growth spurt in foreseeable future, and is garnering considerable investor interest. Overall, power and utilities, together with the renewable energy sector, could attract investments of over $425 billion.
Oil & gas sector in India has also seen several transformational reforms in the last four years. Access to clean cooking fuel has expanded rapidly. Through PM UJJWALA Yojana, nearly 40 million households have been given free LPG gas connection and the government is targeting another 40 million through this scheme. Through HELP, the entire licensing regime in the upstream sector has been liberalised and through continuous rounds of bidding, India’s sedimentary basin will be fully covered from an exploration & production (E&P) standpoint.
Over the last two decades, India has emerged as a refining hub in Asia, serving a massive domestic market for refined petroleum products and also catering to the exports market. Some of the key areas of focus in the downstream value chain include overall energy efficiency, upgrading refineries to produce BS-VI compliant fuels and so on. Petrochemicals also offer a great opportunity for the incumbents and is likely to grow at a CAGR of 10% over the next five years, to reach the $100 billion mark by 2022. Oil & gas segment could witness investments to the tune of $325 billion over the next decade.
Overall, what comes out clearly is that India’s energy use will grow at a rapid pace to fuel economic development, urbanisation, improved energy access and improved manufacturing base. This provides a $750 billion investment opportunity for investors in the energy sector over the next decade.
( Views expressed are personal. )
Debasish Mishra is partner, Deloitte India and Ajit Nafde is manager, Deloitte India.