If India industrializes and quadruples its energy consumption to over 2 billion tons of oil equivalent per year, it needs to come up with a more thought out energy strategy than just the current “more of everything, whenever available”. Three countries comparable in size to India have been prominent in formulating and executing energy strategies. These are the US, Germany and China. This is part 2, looking at what India can learn from other countries. Read part 1 here.
- The US benefits from a large shale gas boost – but India does not have the same reserves
- Germany is a pioneer in transitioning from conventional to renewable energy, but faces many challenges
- China has built a large coal-based, centralized infrastructure, but at the expense of import dependence and pollution
In the US, the most striking aspect of the energy market is the shale gas and tight oil revolution. It has lead to falling energy costs and the current process of “re-industrialization” this brings about. According to an estimate, the US currently saves as much as USD 200bn per year on oil and gas imports and has created 2m new jobs in the energy industry – in addition to the jobs created through the development of its industry as a whole. Globally, it has changed the economics (and geopolitics) of oil and gas by reducing the cost of LNG and keeping a lid on oil prices. There is a danger for the US economy that the shale gas high will not last long and that the subsequent fall will be even harder. On the other hand, the country could use the windfall gain to invest into a sustainable energy infrastructure based on renewables.
While India will benefit from a softening of global gas and oil prices as the US will likely stop importing, it will be difficult to follow the US lead. India also has shale gas reserves, but they are likely far less. In addition, there are regulatory and technological hurdles to extracting them.
In Germany, the story is different: The country is half way into its “Energiewende” – a transition away from nuclear (and, in theory, coal) and towards renewables (especially wind and solar). Renewables already provide over half of the country’s installed power generation capacity and at peak times, more than half of the power consumed. However, there are significant challenges: the cost of power in Germany is high and rising, endangering German export industries. Renewables contribute partially (not wholly or even mainly) to this. In addition, the rise in renewables has ironically led to an increase in lignite coal production as a cheap balancing source and undercut more climate friendly gas power plants. However, a deeper look reveals a much more positive picture: Germany has created millions of jobs and become a technology leader in this promising industry. It is also in the – admittedly painful – process of creating one of the most dynamic and efficient power markets in the world, where generation, consumption, balancing and spinning reserves as well as storage are adequately incentivized. It also makes Germany, a country with insufficient own energy resources, significantly less dependent on imports.
Germany has made a political choice to shift from coal and nuclear to renewables and from centralized to distributed generation. It has done so under conditions of a stable power demand that was fully met. The main driver was to go green and reduce carbon emissions. In India the situation is entirely different: the main driver for its interest in renewables is to generate power as fast as possible and to do so at viable rates. The grid is weak and there is a power deficit, which encourages distributed generation, for which renewables are well suited. India is still at the early stages of development and not so path-dependent. It can choose what kind of energy infrastructure it wants to build. It can learn from German mistakes with respect to fitting renewables into a larger energy infrastructure through, for instance, incentivizing balancing power and spinning reserves.
China is perhaps most easily comparable with India as it shows how a rapidly developing country can solve its energy bottlenecks. It has decided to build a centralized energy infrastructure based mainly on coal through the largest investment program in the field ever seen. It was stunningly successful in this. However, the costs of success are high. China has become highly dependent on energy imports. Pollution is a major concern and the country is coming under ever more pressure with respect to its carbon emissions. As a result of these imbalances and in order to meet its continuous demand growth, China is now increasingly looking at large scale renewables development. It also has some of the largest shale gas reserves in the world that it wants to tap.
India could attempt to follow the Chinese example and try to rapidly expand its fossil power generation and grid infrastructure. There are, however, two fundamental questions: Can India really deliver on large infrastructure projects as well as China has done? And where will India find the foreign exchange necessary to buy all this coal? India is already running a substantial and unsustainable trade deficit, putting huge pressure on the Rupee. And even if India should succeed in doing so, it will likely just end up exactly where China is now: with too much import dependency and pollution.
Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.