The world’s energy landscape is changing rapidly. The emergence of new producers and consumers, regional instabilities, plummeting energy prices, the arrival of disruptive technologies and new climate commitments are all shaking up energy diplomacy and market balances. But who is gaining and who is losing from this ever-evolving panorama? And what are the implications for Europe?

This series of analyses will examine the main strengths and weaknesses of the key players in global energy geopolitics. The aim is to assess the causes and consequences of the ongoing shifts in geostrategic power balances, track energy sector transformations and highlight best practices

This first analysis focuses on India, the world’s fifth-largest energy consumer, eighth-largest producer and third-largest greenhouse gas emitter.

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India’s rapidly-growing economy, combined with its demographic weight, has lifted the country into the ranks of the key global players. Yet like many other emerging economies, the South Asian giant urgently needs to find sustainable solutions to its climate and energy challenges, while also maintaining economic growth and improving living standards. Its growing thirst for energy, heavy reliance on coal and fossil fuels imports, poor infrastructure and underinvestment are some of the biggest problems the country has to deal with. Will Prime Minister Narendra Modi’s leadership be enough to transform India’s energy sector and strengthen its influence in Asia and on the world stage?

Thirst for energy and reliance on fossil fuels

India craves energy, and its appetite has doubled in the last two decades, driving a 10% increase in the world’s energy demand. Continued population growth, urban expansion, improvement in life quality and industrialisation are expected to aggravate the trend further. Meanwhile, energy demand per capita remains vastly below the world’s average, as around 240 million people – 20% of the population – have no access to electricity, mainly in rural areas not covered by the grid.

The jury is still out on whether India is prepared to meet its growing energy needs in a sustainable way. But as the Modi government strives to provide access to reliable and affordable electricity to all by 2019, there are concerns that India will need to double its coal-fired generation. The use of coal, which already accounts for about 60% of India’s installed capacity, is likely to escalate the country’s soaring CO2 emissions and air pollution over the coming decades.

While the world has embarked on a low-carbon transition with the new Paris Agreement, the International Energy Agency (IEA) predicts that 81% of India’s energy will still come from fossil fuels by 2040 (49% from coal and 24% from oil), up from the current 73%, driven by industrial and transport sectors’ needs. Despite its abundance of energy resources, domestic production will however not be able to keep pace with escalating demand. India’s dependence on imports will thus continue to rise. The country is already the world’s third-largest importer of crude oil and petroleum products, and in the last decade has become a major importer of Liquefied Natural Gas (LNG), mainly from Qatar. It also imports thermal coal for power generation from Indonesia and South Africa, and coking coal from Australia. All of this will drive India to become the world’s largest coal importer by 2020.

Diplomatic power

India’s emergence as the world’s fourth-largest energy consumer has put the country in a strong diplomatic position. India is recognised as a very large and lucrative market, and the collapse in oil prices and the resulting buyers’ market have recently strengthened the country’s negotiating power. The high degree of dependence on energy imports, however, threatens the country with supply disruptions. The pressure on India to secure and diversify energy supplies has thus gained momentum in its foreign relations.

Modi’s energy diplomacy focuses on forging deeper and long-lasting ties with producing nations through ‘criss-cross investments’ – buying stakes in each other’s energy supplies to reduce mutual energy insecurity. With the aim of diversifying their supplies, Indian national energy companies have also been encouraged to purchase equity stakes in overseas oil and gas fields in South America, Africa, Southeast Asia and the Caspian Sea region.

In the last year, India has intensified its cooperation with smaller South Asian neighbours by bringing them all under a common regional energy framework and by assuring its support in case of an energy crisis. It has also renewed old ties with G20 members of the Nuclear Suppliers Group by signing a number of civil nuclear cooperation agreements, including a five-year uranium supply contract with Canada and a deal with France for the construction of six new nuclear reactors in India. On the renewable energy front, the country is an undeniable leader in promoting the expansion of clean energy technologies through bilateral knowledge-sharing agreements and international alliances.

India’s pipeline diplomacy is also back in play with simultaneous plans for constructing transnational crude oil and gas pipelines from Turkmenistan, Russia and Kazakhstan. The spotlight, though, is on India’s relations with Iran, which have received a visible boost since Iran signed the nuclear deal. The two countries have resumed negotiations on a project to bring natural gas to India by a subsea pipeline bypassing Pakistan. The decision will certainly affect India’s relationship with Saudi Arabia, currently its largest crude oil supplier, and broader Asian geopolitics.

Commitment to clean energies

The cornerstone of Modi’s strategy to boost energy independence while cutting CO2 emissions is an aggressive commitment to clean energies. Modi targets a five-fold increase in India’s renewable energy generation capacity from 32GW to 175GW by 2022, in the hope of generating 100GW from solar power, 60GW from wind energy, 10GW from small hydro power, and 5GW from biomass-based power projects. By 2030, the country aims to have 40% of non-fossil-based power capacity, as announced in its climate pledge (INDC) ahead of the 2015 Paris climate change conference. There are also plans to expand nuclear capacity from 6GW to 63GW by 2032, and to develop more complex reactors that instead of uranium use thorium, as India holds the world’s largest reserves of the metal.

As a particularly strong advocate of solar technology, Modi hopes to attract $100bn into the sector over the next seven years and to bring solar power to every home by 2019. He has also launched the International Solar Alliance in order to reduce the cost of finance and technology needed to deploy solar power in developing countries. Other policies already in place to meet the clean-energy targets include doubling the coal tax to fund clean energy, investing in energy efficiency and electric cars, enacting a national offshore wind energy policy and green energy corridors projects.

India has also foreseen generation-based incentives and other fiscal benefits (such as accelerated depreciation) for renewable energy investors, but a limited budget has reduced the cost-effectiveness of these instruments. Despite that, investment in Indian renewable energy rose over 2013 by 14% to $7.9bn, according to data from Bloomberg New Energy Finance. The integration of renewable energy into the electricity market will however require much more investment to modernise India’s infrastructure, as the current grid cannot absorb such a massive influx of intermittent renewables. Although the 2015 budget allocated $400m for grid connections and distribution networks for renewable energy projects, it is only a fraction of what is needed.

Poor infrastructure

India’s power system will need to quadruple in size to keep pace with the rapid growth in energy demand and the rise in renewable energy production, increasing the burden on already poor and unreliable infrastructure. The key problems are electricity shortages and blackouts, which result mainly from inefficient power generation and transmission capacity systems and frequency fluctuations. Power is also lost through outright theft and obsolete or damaged equipment. The IEA estimates that upgrading the grid and addressing the low rates of village electrification in some states would require a cumulative $2tn investment over the coming decades.

State utilities, meanwhile, are facing mounting debts. A World Bank study found that distribution losses, theft and unpaid bills have led to massive losses in productivity and profits for many companies that have then been forced to shut down, slow production or pay for back-up power units. Utilities are also forced by state governments not to increase tariffs, despite rising supply costs, and to offer below-cost power to rural consumers without compensation. The sector’s total debt reached $7bn in 2011, nearly 5% of India’s GDP.

The oil and gas sector’s transmission system is also lacking, and still does not cover the entire country. This means no access to the major pipelines for southern India and increased demand for more costly LNG. But as a part of the 12th Five-Year Plan, India’s national government is trying to enlarge the gas pipeline network from its current 9,200 miles to cover up to 18,000 miles by 2017, with a special focus on southern regions.

Ongoing reforms and modernisation

Narendra Modi has been confronted with the difficult task of modernising the largest and most unwieldy energy market in the world since his arrival as Prime Minister in 2014. With the aim of providing 24/7 power to all homes and an $83m investment in systems to bring electricity to rural areas, Modi hopes to revolutionise the power sector in India. Building on his track record of modernising energy infrastructure and making supplies more reliable in the state of Gujarat, Modi has decided to limit inefficient subsidies and discounts provided to farmers and grant them only to those in real need. He launched the National Smart Grid Mission to develop small grids and power storage systems. Green Energy Corridor projects worth $6bn are also being rolled out to transfer electricity from states rich in renewable energy potential to those with low potential.

Energy efficiency policies have gained significant importance with Modi’s “Make in India” campaign, which hopes to turn India into a manufacturing hub. As a result, India is expected to see a ten-fold increase in energy needs per unit of value added. Several measures have been put in place in the recent years to boost the country’s energy-saving potential, including mandatory energy efficiency targets for old coal-fired power stations, market-based energy efficiency trading mechanism for industry, financial support for small and medium-sized enterprises (SMEs), fuel-economy standards in transport and an energy code for commercial buildings.

India has also been implementing the much-needed oil and gas pricing reforms to help lower subsidy costs, as pricing of domestically-produced oil and gas were disconnected from global energy market trends. Reforms have also increased competition and paved the way for growing foreign investment in the sector long dominated by domestic players.

Complex governance system

Complexity in India’s energy governance and decentralised policymaking are adding to the country’s already pressing challenge. Energy responsibilities are split and uncoordinated between the federal and state governments, often leading to incoherent decision-making and policy duplication across the different levels of government.

The central government has control over inter-state trade, mineral and oil resources, nuclear energy and some taxes; state governments are responsible for water, land rights, natural gas infrastructure, taxation of mineral rights and the consumption and sales of electricity. The two share power over electricity, forestry and economic and social planning, as well as both often have a stake in state electricity boards. Within the national government itself, several different ministries handle energy policy issues. The outcome is the absence of a unique national authority for shaping India’s energy strategy.

Prime Minister Modi’s administration is currently working on a more ‘cooperative federalist’ model, replicating his experience as Chief Minister of Gujarat. The initiative would delegate more powers and responsibilities in certain areas to state governments. Efforts have also been made to streamline decision-making by bringing the Ministry of Power, Ministry of New and Renewable Energy and Ministry of Coal under the leadership of one minister, and an ‘Advisory Group for Integrated Development of Power, Coal and Renewable Energy’ has been created along with new inter-ministerial forums to improve coordination.

Implications for Europe

What does it all mean for Europe? The EU and India have held an energy dialogue since 2005, but Modi’s new energy direction opens up new opportunities for clean energy cooperation in research, trade and manufacturing, which would not only benefit both partners that hope to capitalise on the global growth potential of the renewables industry, but also contribute to further cuts in the cost of renewable technologies and trigger technological breakthroughs on a larger scale. Strengthening energy ties was one of the topics of the recent EU-India Summit held on 30 March 2016. The meeting led to the adoption of a Joint Declaration on a clean energy and climate partnership, aimed at sharing views on policy and regulatory approaches, promoting business solutions and supporting joint innovation activities.

The European Investment Bank (EIB) is also already investing in energy efficiency and renewable energy projects in India, while Germany has recently pledged to provide €2bn in loans for solar projects and green energy corridors. India’s fast-growing and increasingly business-friendly solar market is also very attractive for foreign private investors.

Conclusion

India occupies a prominent place on the global energy scene. Its soaring energy appetite, active diplomacy and aggressive policies are likely to shake up the world’s energy landscape in the years to come. Serious challenges, however, are still hindering the country’s ability to provide sustainable and reliable energy to all consumers and are affecting its international influence. Like many other emerging economies, India has to confront the difficult task of reconciling economic growth with the modernisation and decarbonisation of its energy sector.

Political sensitivities have long stalled any reforms. Yet Modi’s charismatic leadership has finally put the country’s energy policies on the right path. Major efforts have been undertaken to diversify India’s energy suppliers and sources, decarbonise the economy, upgrade the energy network, open up to foreign investors and streamline policymaking. Although some difficulties prevail, Modi’s leadership proves that if there’s the political will, the country will find the way and the means to make it happen.

Further reading

IMAGE CREDIT: CC / FLICKR – NASA’s Marshall Space Flight Center

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