India and China, are catching up with the west in several key development metrics. As a billion people rise up the standard of living ladder, how the two countries navigate the energy demand – increased emissions equation will determine the fate of our planet.
Collectively, India and China hold within them 2.6 Billion people with the numbers rising and set to hit the 3 billion mark by 2025. These countries rank 130 and 86 on the UN’s Human Development Index respectively, far behind the countries in the west where rankings do not fall below the 20th mark. With both their GDPs growing at 6%+ figures while the GDPs of the western countries grow only in the 2-3% bracket, India and China will soon become the world’s biggest economies, and as a consequence – the largest carbon emitters on the planet. In this 3 pronged analysis, I break down the moving factors that are going to affect our energy future and explain why and how a symbiotic relationship between the two might be the only way to save the world.
1. Energy demand is set to rise around the world and will be driven majorly by India and China. Emissions will increase as well.
- The energy sector contributes to 66% of global CO2 emissions [more energy demand = more emissions]
- There is a strong causal link between the development stage of a country and its energy demand [increase in development = increase in energy demand] Throughout history, energy demand has mirrored growth in GDP and this trend is not set to change despite improvements in energy efficiency since most of the GDP growth in the coming decades will come from developing nations, whose citizens will be climbing the HDI ladder (in graph) and basic needs and prosperity will be prioritized over efficiency. Therefore through simple transitive logic: [increased development = increased emissions]
- The major causes of this rising energy demand will be the expanding service/ digital economies around the world and rapid urbanization in the developing world. Analysts now predict that energy demand will rise by about 25% leading up to 2040.
- Most of this growth will stem primarily from Asia, which will make up 40% of the energy demand share by 2040, while the U.S and Europe will account for only 20%. The figures are exactly opposite as things stand in 2019.
Now, onto the question of how this energy demand will be met…
2. Renewable Energy has been catching up with several other generation sources but challenges remain. Therefore, a large chunk of this additional demand will be met through fossil fuels.
- Renewable energy currently supplies just under 20% of the world’s capacity, and this percentage is set to rise up to 40% going into 2040 based on current trends
- We believe that this will happen because solar costs have fallen by 73% since 2010 and are expected to fall by 59% more in the next 5 years. At this pace, solar will overtake coal in the world energy mix by 2040. At the same time, wind costs have fallen by 22% since 2010 and are expected to fall by 26% more in the next 5 years.
- Several countries have shown their willingness to move to renewables – over 57 have committed to decarbonizing their power sectors including oil-exporting UAE. Denmark, Costa Rica, Germany, and Portugal have in fact shown periods where they have entirely relied on renewable sources for their energy.
- Falling costs, national policy support, and corporate willingness have boosted the sector exponentially over the last few years, but the sector is yet to combat the intermittency of these generation sources (solar stops producing when there are clouds/ at night, and wind is extremely seasonal) which often requires other firmer sources (natural gas, coal, etc.) to produce reliable power.
i.e renewables are on track to occupy a larger chunk of the energy pie, but the pie is growing too, meaning that coal and oil will continue to grow for the foreseeable future even if they occupy a smaller share of the overall mix. Having said that, as renewables overtake oil in the energy mix, we will see tectonic shifts in global relations.
3. When Oil’s relevance declines globally, massive geopolitical shifts will occur, and India and China will be in the thick of it
- If renewables and other cleaner sources of energy continue to gain prominence, countries will seek to protect themselves from price fluctuations in the oil market, while clean energy leaders will seem to maximize hold over the market i.e Energy security, Income Security, and Profit will be the major drivers for national policy decisions in the time to come.
- Countries that are currently dependent on oil imports for their energy needs will look to centralize their energy production in house by doubling down on clean energy investments and/or looking to other alternative sources – Nuclear, LNG, etc.
- Oil exporters, on the other hand, will look to diversify their income to hedge risk and will look to develop relationships with countries that will continue to have the need for oil – i.e expanding economies like India and China
- Similarly, countries that have a high potential for renewable energy deployment will look to maximize profits through energy trade once their own needs are met.
Source: IEA Global Energy Outlook 2018
Source: IEA Global Energy Outlook 2018
- As you can see – China, Australia, China, Greenland, Iceland, and parts of Africa are well-positioned to exploit renewable sources for profit while the Americas and parts of India will be adequately rewarded as well.
- In this context, any country which holds the most important IP or monopolizes manufacturing in the clean energy space will dictate market terms.
- A brief glance at the chart attached in this section will show you just how that story is playing out – China is far ahead of its peers in terms of technological innovation in the field and is currently the largest producer, exporter, and installer of solar panels, wind turbines, batteries, and electric vehicles, globally. [China is doing well]
- India, on the other hand, is heavily exposed to oil imports, holds close to no significant patents in clean energy tech, and is yet, poised to be the fastest-growing energy market over the next decade i.e could end up relying too heavily on oil/ energy imports. There is, however, significant policy intent from India to become a clean energy powerhouse with the government announcing an ambitious 500 GW clean energy target for 2030 (currently only 70 GW is installed), and taking a leadership position in the International Solar Alliance. [India is in trouble but moving in the right direction]
Let’s get this straight – because of their move towards prosperity and the challenges of renewable energy, both India and China will have an increased demand for coal and oil over the next 2 decades and the atmosphere just cannot afford to hold that amount of CO2 emissions if we are to restrict global warming to 2 degrees.
Having said that, both of them have shown serious intent in decarbonizing their power sectors to move towards a cleaner future – with China evidently ahead in its effort of setting up the policy and infrastructural foundation for an imminent energy transition.
With global temperatures rising and set to rise due to increased emissions into 2040, I would argue that if India and China do not collaborate and re-calibrate up their energy policy for an emission-free future, the entirely just motive of raising a poor nation to prosperity, will, unfortunately, kill any hopes for an environmental recovery as our planet descends into a hothouse state. Here are a few ways in which this can work:
- India needs to emulate China’s progress so far by increasing R&D efforts in clean energy, developing a coherent decarbonization policy (and have the state & corporate machinery align with it), and incentivizing local manufacturers of EVs, solar panels, etc.
- China and India need to trade knowledge for profit as India will be the fastest-growing energy market in a few years while China will continue to remain the leader in clean energy IP, manufacturing, and deployment. Based on an analysis of the clean energy target (500GW) vs current deployment in India (70GW), I wager that the challenge is larger than can be met by Indian players alone. Chinese players have a massive opportunity to collaborate with Indian players through a knowledge/ resources vs profit exchange arrangement to meet this demand while making easy money.
- A unified grid may have significant benefits. Okay so this is a risky one, typically an electricity grid is an asset of national importance and sharing one with a neighbor as aggressive as China might not be the safest move, but there are several benefits if executed. A major problem in solar and wind sites is curtailment – i.e the cutting off of a plant because it has produced more than can be handled by the local grid. A unified national grid followed by a shared grid policy between India and China will be able to shuttle electricity across borders to balance out excesses and shortfalls – a plant in Rajasthan which overproduces electricity will be able to sell it to buyers in Shanghai, and the same will be true for Chinese plants as well. If there is one thing that unites people across borders – it is the opportunity to make money.
It is unfair that the responsibility to save the planet now lies with us, but we have no option but to respond with courage. When things cool down the winners of the energy transition will reap disproportionate rewards.