ENERGY SECTOR TRANSITIONS: A Move towards the Future We Want

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Energy systems around the world are witnessing transformations at an unprecedented rate. There has been a very rapid increase in renewable energy technology, costs of which have been falling at an average of 60% since 2001. In terms of demand composition, more and more demand has been electrified; some of this demand is expected to be from increased penetration of electric vehicles, some from the newly electrified households in developing countries and increased intensity of electrification in the developed countries. In the last few years, especially since 2015, the majority of energy demand has been from emerging economies and not just the OECD (The Organization for Economic Cooperation and Development) countries. This has been a good step in terms of reduction of global energy inequality, which is a large gap. There were major changes in shares of consumption in 2016; the large part of this demand had been coming from China, which is a major manufacturing hub. However, China is witnessing a transition towards a more service oriented economy. This impacts the nature and intensity of demand for energy. China wants to make efforts to move away from a manufacturing intense base but towards a more innovation-based economy. This has implications on emissions and China’s target of peaking CO2 emissions by 2030. India also witnessed a steady increase in energy demand growth at an average of 5% per annum; however, this growth is lower than anticipated in the Indian intended nationally determined contribution (INDC).


Fossil fuel markets have also seen a churn in the past 2–3 years. The oil market has been on a correction path, with prices still on the lower spectrum and only recently started seeing an increase. Oil inventories are at record high levels and the sector is yet to see impacts of cutback in investments in the past two years. The US shale revolution has led to the US being the largest producer and also the swing producer, a position held by the OPEC (The Organization of the Petroleum Exporting Countries) since the 1970s oil crisis. The IEA, in its latest, World Energy Outlook predicts that the US may become a net exporter of oil by 2020, the US is already a net exporter of gas. This has implications on what is popularly called peak oil. In the past many have predicted that the world has reached the inflection point of oil demand—in other words, going forward the demand for oil will decrease rapidly and not increase. However, the recent changes in oil market show that it is too early to write about the demise of oil. If anything, this fuel has been more resilient than ever, with shale revolution leading to manufacturers being able to adjust the output in the shorter term.

output in the shorter term. Despite this resilience of oil demand, much of the changes in the energy sector are being made with the long-term aim of decarbonization. The UN’s Sustainable Development Solution Network (SDSN) lead ‘Deep Decarbonization Pathways’ Project has identified three so-called pillars of decarbonization: electrification, energy efficiency, and fuel switching. The world made enough headway in this direction. Electrification of demand saw a shift even in the transport sector. In 2016, the spending on electricity by consumers reached parity with spending on other fuels. Another way to look at this is twothirds of the increase in global energy goes to power. Even in India a major policy announcement has been the aim to stop sales of petroleum vehicles post 2030. This announcement further raises the question of management of power system.


Power sector has been the most dynamic sector in terms of changes. Most of the INDCs submitted for the 2015 Paris Agreement had some commitment on power sector. The costs of renewable energy technologies have been falling very rapidly since 2010—solar PV costs fell by 70%, wind by 25%, and battery by 40%. It is because of these falling costs that the conversations have now turned towards optimal management of renewables in the system. There is no longer a dispute that high renewables is the future, the question remains how do we manage them? Given that renewables such as wind and solar are only available at a certain time of day and month, it is important for the system to develop in a way to be able to complement these ‘fuel’ sources. For this, the world looks towards battery technology. However, the costs of battery are still too high and given the flexibilities around natural gas, it can be used as a bridge fuel—a fuel that can temporarily make this transition possible. While this solution maybe viable for the world, this solution is still not viable for India as there are questions around the availability of natural gas. To illustrate this for India, if people would prefer to charge their EVs at night, it may exacerbate the already existing problem of a night peak, when solar energy would be unavailable. Therefore, development of storage solutions is critical for India. These don’t have to be limited to batteries, it could also be through development of fuels that can help in balancing such as small hydro and other ancillary services.

Discussions on integration notwithstanding, renewables are making headway and have seen a large uptake. In 2016, 161 GW of renewable capacity was added to the global system. The total capacity addition globally was about 2017 GW, an increase of 9% since the previous year. Close to 20% of total energy generation is from renewables as compared to the less than 5% in 2001.


These trends can also be seen in the investment trends in the energy sector. Oil and gas sector saw a rebound in investment by 6%, the investment had previously seen a falling trend, falling by 44% between 2014 and 2016. Much of these investments have been in the US Shale upstream investment, other places of investment were Russia and Mexico. The oil and gas industry is undertaking a major transformation in the way it operates, with an increased focus on activities delivering paybacks in a shorter period of time and the sanctioning of simplified and streamlined projects. Investment in electricity sector after achieving parity with oil has stagnated with a modest 1% increase. The investments are also being made towards upkeeping networks rather than generation, which was the trend earlier. In terms of different fuel sources, investment in renewables has slowed down and was 3% lower than five years ago, but capacity additions were 50% higher. This is because of decline in unit costs. Also, technology improvements in solar PV and wind ensured that this increased capacity is 35% more efficient in terms of generation.

Investment in coal-fired plants fell sharply, with nearly 20 GW less commissioned in 2017 than 2016. This of course, reflects the concerns about local air pollution and also concerns about over capacity in China. India, being on a different development stage saw an increase in investments in coal. The total investment in power sector in 2016 was about $55 billion, with only 20 billion going in towards fossils and the other towards improving networks and renewable capacity addition. For the first time, India saw more investment in solar PV than wind.


In India, the demand for energy has been steadily growing at 5% increase than 7% increase in 2016. Some of this can be attributed to slower than expected growth in the country. However, this is not the whole picture; there were also claims of ‘excess demand’ in the system, meaning that there was power available at the exchanges but not being bought by anyone despite favourable prices. Currently, India’s coal capacity is double than the peak demand in the country. However, the utilization of this capacity has been very low. Coal plant utilization has been falling since 2005 and reached to a plant load factor of 60%. This would put pressure on the attractiveness of coal in India. In the past two years, 7 GW each of capacity has increased for coal, the lowest levels since 2005. It may be pragmatic for India to use the coal capacity as the balancing mechanism, until more reliable technologies are available to balance the grid. This may also help increase the PLF for these capacities. This may also go a long way in solving the financial viability of distribution companies (DISCOMs).

The DISCOMs also have been in a financially difficult position for a combination of reasons of low prices and high AT&C losses. The DISCOMs tend to avoid buying power leading to cascading problems in the system, such as delayed payment to the generators, unreliable power supply, and insufficient investment in the grid infrastructure. However, the government of India has taken some very significant measures to reduce risks in investments in the power sector. The Ujjwal Discom Assurance Yojana (UDAY) scheme is aimed at debt restructuring and also increasing efficiency of the DISCOMs. The reverse bidding process is also reaping benefits, with proposed tariff falling to as low as `2.2 per unit. This also helps in de-risking the investment and increasing cost-effectiveness. With the success of the reverse bidding in solar, the government has also announced reverse bidding in wind, the proposed tariff for which has been at parity with solar.

The changes suggest that we are going in the right direction but the speed of changes need to increase. While in terms of electrification we have seen many positive changes, changes towards fuel switching outside the power sector are rather limited. There has been very slow growth of renewables in heating and other industrial uses. The investment in network technologies is encouraging but it is by no measure enough. The dynamic changes in the energy system also demand innovations and solutions in terms of business models to suit the new dynamic market, governance structures and regulations to design incentives and disincentives to move towards the Future We Want.

Ms Aayushi Awasthy, Associate Fellow, Centre for Global Environment Research, Earth Science and Climate Change Division, TERI, New Delhi; Ms Neha Pahuja, Fellow & Area Convenor, Centre for Global Environment Research, Earth Science and Climate Change Division, TERI, New Delhi.