The Paris-based inter-governmental International Energy Agency (IEA) has in its latest report indicated a decline in investment in the oil and gas sector for a second year and increase in energy efficiency and energy networks. India, it says, is the fastest-growing major energy investment market. Michael Waldron, energy investment analyst at the IEA, to Shreya Jai on the subject. Edited excerpts:
While investment in electricity is more than in oil & gas, it has contrasting trends. Would renewables fuel its growth?
Investment in electricity declined by one per cent in 2016 but it looks more because the investment in hydrocarbons came down. The investment is more towards the low carbon side, clean power and networks. By and large, coal power is still the third largest in investment after solar and wind. But, in terms of the trend, investment in coal power has come down. In solar and wind, it is at least stable. Renewables continue to be the largest part of electricity investment, 40 per cent of the total here and 70 per cent of total generation investment. A lot of changes in renewables has got to do with change in cost.
How would the financing models and investment change with the energy transition?
One issue we see is that investors need to rely on multiple sources of revenue. So, having more differentiated pricing in terms of time and location would lead to more advantage for investors. It would help when different technology and sources have different bankability. Financing-wise, a lot of scope is there in the debt market. Large institutional investors are looking for longevity and predictable rate of return. Policy changes can throw some risks.
Would coal take a back seat for these investors as they move towards greener sources?
Even if there is noise of equity investors divesting from fossil fuel, it doesn’t necessarily change the debt available for these projects. Even if you have multilateral development banks and some countries like in the United States saying their commercial banks would not put money in coal power, there is debt finance from other places like Chinese and Japanese banks. The jury is still out on whether we are seeing any contraction in investment in coal power. Anyway, projects get funded based on their bankability. But, it has more to do with energy market fundamentals and policy decisions, rather than divestment campaigns.
In renewables, there is more investment in solar & wind and not in other clean sources like hydro or nuclear.
Cost is a good reason. The speed at which solar and wind projects can be built is less as well. Large hydro power projects take more time to build, given the complexities involved. It’s very site-dependent as well. Solar and wind can scale up very quickly. Obviously, there are complex projects in solar and wind such as offshore wind and large solar PV (photovoltaic) projects but with technology improving, more countries are adopting these and scaling up.
India is going through an energy transition where the base power will be coal but we would need peaking power to support growth of renewable energy. What energy mix do you envisage in this case?
In such cases, one should first focus on ways to deploy renewables which increases their value relatively. In most parts of India, there is an evening peak; so, demand-side management needs to be taken up. This is to reduce the peak or at least the growth in peak. This can be done by a combination of renewable and other flexible assets, without necessarily building huge amounts of peaking power. It could be storage or hydro or a combination of solar and wind. Having a well-connected system here in India would help. Such as connecting the hydro-rich northeast with areas that have solar and wind and not much hydro.
Investment in hydrocarbons has slowed but India continues to thrust the demand. What is your forecast here?
While we are seeing a lot of progress in electric vehicles (EVs) and vehicle efficiency, we are still seeing the size of the general car fleet increasing. That all tends to boost oil demand. In a way, it depends on the evolution in the role of energy efficiency in policies. And, a low oil price environment makes it attractive but it’s less energy-efficient.
In a low oil price scenario and a growing economy’s need, like that of India, do you think EVs are a long shot?
I think in many parts of the world, there is a great potential for EVs. Of course, it depends on the evolution of battery technology, ability of car makers to make their targets, putting the right charging infrastructure. Enthusiasm from the government is also important. The automobile sector moves rather slowly and my guess is that in 15 years or so, we will see the results.
The way investment and financing is undergoing change in the energy sector, will this impact the job market as well?
A blanket conclusion is difficult, as job needs are different for every sector. In power generation across different sources, when you combine job needs for manufacturing, construction, operations and fuel supply, this is more or less comparable across different technologies, even between fossil fuel and renewables. Investment has a huge bearing on jobs but it’s something governments should pay more attention to. When you are changing the investment in energy sources, this does shift the job prospects.