Global capital racing towards clean energy

Vibhuti Garg | Updated on June 17, 2021

India must accelerate its shift to renewable energy to attract more ESG funding and, thereby, meet its net zero emissions target

The International Energy Agency’s net zero emissions (NZE) roadmap by 2050 sets out the massive investment required to cut emissions and achieve the Paris goal of restricting global surface temperature increase to below 1.5 degree Celsius.

Under the NZE roadmap, the use of unabated fossil fuels declines sharply to just over a fifth of the total energy supply. More than two-thirds of the energy supply in 2050 will come from renewables and around a tenth from nuclear.

To meet these targets, total annual energy investment will have to surge to $5 trillion by 2030, more than tripling from just over $500 billion annually over the last five years to more than $1,600 billion in 2030. Further, the NZE roadmap requires annual investment in transmission and distribution grids to expand from $260 billion in 2021 to $820 billion in 2030.

Also, the number of public charging points for electric vehicles (EVs) will have to rise from around 1 million to 40 million during the same period, requiring annual investment of almost $90 billion by 2030.

Global capital is already fleeing fossil fuels and moving towards more profitable clean energy — a shift that is now accelerating in response to net zero pledges last year by China, Japan and South Korea, a ratcheting up of climate ambition by President Biden’s administration and the recent announcement by G7 countries that they will exit all international coal financing by their export credit agencies.

In the first quarter of 2021, assets in investment funds focussed partly on the environment more than tripled in the three years, amounting to $2 trillion. Big banks and financial institutions with large funding portfolios in fossil fuel assets, such as BlackRock, JPMorgan Chase, Korea Development Bank and the Japan Bank of International Cooperation, are announcing coal exit policies in increasing numbers.

India is experiencing the effects of global capital shifting away from fossil fuels. In 2020, in order to boost domestic coal production, the government invited bids for the public auction of 41 coal blocks to encourage private investment. However, absence of any international interest in these bids showed that such fossil fuel assets are no longer viewed as lucrative investments.

In recent years, States like Maharashtra, Gujarat and Chhattisgarh and public and private sector developers like NTPC and Tata Power have announced pivots away from coal.

Energy outlook

In February, the IEA published the India Energy Outlook 2021 which presented various scenarios including the Sustainable Development Scenario (SDS), wherein India will witness an early peak and rapid subsequent decline in emissions, consistent with a longer term drive to net zero. This scenario illustrates the NZE roadmap for India, but the IEA has shifted the global goal post from 2070 to 2050. This implies that transition to renewable energy and firming capacity will have to accelerate relative to that mapped out in the SDS scenario.

The expected annual investment for deployment of renewable energy, battery storage, electric vehicles and network expansion and modernisation of the grid is $110 billion in the SDS for India. This is around three times the current annual investment ($40 billion) in these sectors, however, to achieve the NZE roadmap, the corresponding investment requirement will be much higher than the SDS.

Given investors are guided by the profit maximisation principle, as well as the desire to avoid high emissions stranded assets, investment will flow to where returns are maximised. A look at the share price performance and return of Adani Transmission, Adani Green and Coal India Ltd between July 2018 and June 2021 reveals Adani Green’s share price has increased 10 times and Adani Transmission’s by 8.5 times. Coal India, on the other hand, has halved its share price relative to three years ago.

While India is rightly focussed on enhancing its energy security and for development reasons cites increasing use of its domestic fossil fuel resources, the availability of international capital is drying up for investment in high emissions sectors. India is a capital taker and so new capital is being invested in more bankable renewable energy, firming capacity and grid modernisation. Investment into fossil fuels is a recipe for stranded assets and many banks and financial institutions in India face increasing pressure from international investors to no longer invest in dirty fuels.

In India, there is also a false promise of ‘Second Life’ coal. Any new investment in the highly capital-intensive greenfield, speculative investment in carbon capture and storage (CCS), underground coal gasification (UCG), coal-to-gas, coal-to-oil, or coal-to-fertilisers projects, or any similar ‘second life’ pipe-dreams is a myth predicated on huge carbon emissions, and should be avoided for the environmental and financial risks involved.

With the availability of renewable energy at ₹2/kWh level in India and further with deflationary prices of renewable energy, battery storage and electric vehicles, the competitiveness of fossil fuels will be further compromised. The contrast to the inflationary nature of fossil fuel firms is illustrated by the likely 15-20 per cent wage rise facing Coal India in 2021.

There is a temporary rise in the price of solar modules and thus solar energy in India, in the face of import duties and commodity price rises to-date in 2021. However, to IEEFA the long term pricing of solar energy is likely to see a record low of ₹1/kWh within the next decade. If the events of the first six months of 2021 are any reflection of the future, then transition will happen much earlier that expected.

With the G7 countries’ coal finance exit, the likely introduction of a carbon border adjustment mechanism by the Europe administration (and possibly replicated by the US) and the ratcheting up of climate goals by the Biden administration in US, the direction of funds has changed irreversibly. India is no exception and while there may be a last tranche of investment into fossil fuel development available, increasingly there will be shift away from fossil fuels and the rising stranded asset risks.

Economic, social and governance (ESG) investing has become part of the mainstream of the global financial system and increasingly more ESG labelled funds are coming up in India. ESG funders are constantly ratcheting up their ambitions and goals in the clean energy financing space.

With the Reserve Bank of India now joining the Network for Greening the Financial System, policies should be designed to fully incorporate environment and climate risk management in our country’s finance sector, steering limited public and private sector investments towards a green recovery for a more sustainable economy.

The writer is IEEFA Energy Economist, Lead India

Published on June 17, 2021

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