In an interaction with PB Jayakumar of Fortune India, Saugata Saha, President of US based S&P Global Commodity Insights talks about future changes in the global energy landscape as countries have committed to reduce carbon footprint. Edited excerpts:
India has now become an unavoidable market and do you see a perception change among Fortune 500 companies on doing business with India and Indian companies? Which are the sectors where you see that change coming?
Overall, India is seen as a huge potential growth story. The direction India is taking, both in terms of attracting capital and policy changes internally, are providing stability for sustained growth and there is excitement around the globe on doing business with India.
Services sector is obviously the easy priority because India has a unique value proposition in what it offers for the width and depth of talent that is available - English speaking, trained, qualified, highly productive talent. Services sector has been growing over the last 20 years and continues to be very exciting. For all companies, including us at S&P Global which has a very large workforce in India, there is a huge potential for doing work in India that can be used globally. Now I am seeing more and more interest in manufacturing and industrial activities in India.
There still tends to be a bit of a perception around challenges with infrastructure, supply chains, continuity of policy, and people want certainty. There is excitement, especially as companies look to diversify their supply chains. One of the things which India offers is scale. If you look at the energy sector, India is of high interest for energy companies globally. India is going to grow and get richer, per capita income is going to grow. If you believe in that growth story, when economies get richer, energy intensity goes up. Now per capita energy consumption is low and that needs to grow as the per capita GDP goes up. So, energy, for example, is an area where there's a lot of interest. There are challenges, like domestic production of traditional oil and gas. I think companies have had mixed experiences in the past. However, if you look at renewables, there's a policy thrust from the government. The fact is that the market will need a lot of renewable energy creation and a lot of excitement around investing to build it. Also, one shouldn't forget that India has very sophisticated and capable domestic players.
The Indian economy is growing at 6-8% and that will demand a lot of energy to sustain the growth. Considering the kind of energy requirement in future, is it advisable to discard primary energy resources like coal, which India depends on for over 50-55% of the fuel basket. How does this fuel mix change going forward and what are the new renewable forms coming in the fuel mix?
One of the things I have been talking about over the last couple of years is a concept called energy trilemma. There is an increasing realisation around the world that it is not only about energy transition, you have to solve two other things at the same time, energy security and energy affordability. All three are equally important. The transition is important because we need to reduce emissions and need more sustainable forms of energy consumption. Energy security is important, especially for a country like India, which imports most of its energy. Transition or moving to renewables helps because a lot of the renewable forms of energy will potentially be domestic. And then the third thing is around affordability. Given where India is, and from an overall per capita income perspective, you will need low-cost sources of energy to drive economic growth and uplift the overall economy. All policymakers are concerned about equality of growth and making sure that growth is available to all segments of the society, all segments of the population, and having affordable energy is an important aspect. Policymakers and the business community in India will have to solve for all three of them, not just one.
There is one wildcard in all of this. Today if you look at most of the forecasts of S&P Global Commodity Insights, we are not very optimistic about the world getting to a one point degrees Celsius scenario by 2050. Most of our models predict there will be higher global warming because the energy mix won’t shift fast enough. But there are two things. One is that most major economies have taken very aggressive goals towards getting to net zero, India is at 2070. Many countries look at 2050, so that is going to help. The second thing we underestimate often is the power of technological innovation.
Most of the models today are based on forecasts of what we know is possible. Look at history, technological innovation tends to be inflection points. And there is no doubt that in energies, quoting sources and consumption, there will be technological innovations, which will help towards the goals. Companies, policymakers, and everyone will have to balance all three. If you do just one of the three, it’s going to be really hard.
All the developed nations were aggressively saying that 2050 should be net zero. They usually accuse India and China as major major polluters. But when the Ukraine war started, many EU(European Union) nations shifted back to fossil fuels for their energy needs. What should be the ideal way of going forward to ensure energy security for any nation?
Historically, we see countries and blocks putting out policies that make sense for them. And that goes to the fact that a lot of OECD(Organization for Economic Cooperation and Development) well-developed countries have set 2050, China 2060, India 2070 as their target. And that is the kind of trajectory which acknowledges that each of these countries are at different starting points. The pragmatic approach will be an all-of-the-above approach. It is going to be incredibly hard to have a meaningful, successful transition if we said “only zero emission energy sources are permitted starting now, we will only do solar” I think that would be very hard to do.
Is net zero transition really possible?
Zero would essentially mean zero emissions. That is not feasible, because there are and there will continue to be a lot of hard to abate sectors, like cement, many manufacturing areas, some petrochemicals, agriculture, etc. Those will need offsets. There is no single source of energy which can help meet all the energy needs anytime in the near future. We have to try many options. Everything is not perfect, but some are better than others. Gas for example, which has emissions. Using gas to replace coal is probably a good thing. If you are building a new power generation unit, you have choices, what makes sense in the context of security, affordability, and sustainability. Hydrocarbons as a part of the overall energy mix, today is about 80%. Our models show that by 2050, 80 will go down to somewhere between 40 and 60. It is not going to be zero, which essentially means that the pragmatic approach will be an all of the above approach, an energy mix, which includes different sources. You absolutely want a portfolio approach where you have multiple diverse sources of energy with different sourcing and security and supply chain design considerations.
A country like China has already established a monopoly in supply chain and manufacturing of renewables and many future energy systems. How is that going to have an impact on future transition plans?
Covid has taught us we want supply chains that are easier to manage, located in places where there are less bottlenecks and we will see more and more of that. The US, for example, brought the Inflation Reduction Act, called the IRA. That was a huge policy thrust to both nearshore a lot of supply chains, create domestic investment and create energy security. Over the last several decades, the US has gone from being a net importer to a net exporter of crude oil. Now the focus is on doing the same for renewables. We will see more and more push like this by countries to create domestic sources of sustainable energy. Hydrogen in India is a good example, a huge policy push. Countries, policymakers and companies are actively trying to get more secure sources of both components and energy forms.
Green hydrogen is emerging as a source of new energy. What are its possibilities and challenges?
There is a lot of interest in some of the mid latitude countries with abundant sunshine, right, North Africa, the Arabian Peninsula, etc. If a country can secure a fundamental source of energy, which is renewable, it is relatively easy to make green hydrogen. You could even do it with nuclear, for example. Hydrogen is a really good means to transport energy, you can take out hydrogen from water, compress it, use a ship or pipeline to get it to another place, and you have the energy. But, there are challenges, you have to convert it into ammonia, etc. and there are technological challenges and a lot of capital is needed to solve that and probably, more work needs to be done. It might be a lot easier to transfer and transport many other forms of energy, but most renewable forms of energy today are not cost competitive. That is partly why you need the portfolio approach and the trilemma affordability, which is a big part of it. If renewable sources of energy were the cheapest sources right now, then that would be an easy conversation? But, the fact that it is not across for most areas, that is also why you need public policy intervention.
What will be the energy scenario in 2050 and what will be the role of green hydrogen in that transition?
The reality is that it will vary a lot by market to market. Some markets will have higher components of green hydrogen, some will have higher solar, some will have higher nuclear, etc. The whole conversation around energy transition is that the energy itself is not the enemy, the enemy is emissions associated with energy. One of the areas we are spending a lot of time is figuring out good quality data on carbon intensity of various sources of energy. Not every barrel of crude oil that gets delivered has the same carbon intensity, it varies. Our customers are very interested to know and make differentiation between different forms of energy, even hydrocarbon-based energy. We are thinking about what customers need tomorrow and the day after tomorrow and that is a challenge for every business.
In this whole transition landscape, what kind of disruptions are going to happen in jobs and technology?
One of the biggest challenges for the transition, especially in developed countries, and to some extent, even in developing countries, is going to be availability of skilled labour. You are talking about rebuilding large infrastructure for energy creation and distribution which hasn't been done in many years, the last time it was done was 50 years ago. We are talking about replacing all that over the next 20 years and it requires a lot of skilled manpower. India inherently has an advantage there, at least domestically, with pretty nice supply over the next 20-30 years. The challenge is going to be to make sure that they get upscaled, and they have the right skills, and there is infrastructure to help them to be productive. Already we are seeing companies making decisions to deploy capital differently. For example, in traditional oil and gas, now there are very few non-state owned oil and gas companies which are actually doing primary exploration. They are focused on extracting maximum value out of their existing assets and are not making new investments. We will soon see a whole new set of sectors which will become big, the battery industry is already big.
