An enormous opportunity
Coal and oil will be the mainstays of Indian energy demand for decades, but gas and renewables can play a bigger role than many expect
"Fewer than 10,000 houses are fully air-conditioned in a country of 1.3bn people who are always complaining about heat," says a New Delhi businessman. "Demand for all forms of energy is going to be explosive-much higher than any economist has predicted."
Its a widely held view in India. Huge pent-up demand lurks in every strand of the economy and, over the next two decades, consumption of any form of accessible, reasonably priced energy will soar.
And economists' predictions are already very high. Take cars: in the EU, there is almost one car for every two citizens; in the US, about 800 cars per 1,000 people. In India-although the idea feels improbable at rush hour on Delhi's congested, smoggy roads-the figure is fewer than 20 in 1,000.
The disparity is similar in air travel: according to Airbus, a builder of planes, Indians took 0.07 flights each in 2014, compared with 1.63 flights per capita in North America and 1.21 in Europe. Per capita energy consumption in all forms of transportation, at 0.06 tonnes of oil equivalent, is a sixth of the world average, says the International Energy Agency (IEA). Per capita energy consumption in all areas of the economy is around 15% of the OECD average and less than 10% of the North American average, according to the World Bank.
Given such a low starting point, a growing, economically ambitious population, an upwardly mobile middle class and projections for stellar economic expansion- the IMF forecasts GDP growth of 7.4% in 2016 and 2017-demand for all forms of energy is set to surge. The IEA's New Policies Scenario (NPS), for example, describes a future in which car ownership rises to around 175 vehicles per 1,000 inhabitants by 2040-growth of 775%. On top of major upgrades to the road network, this would mean an extra 250m passenger cars, 185m two- and three-wheelers, and 30m trucks and vans.
In the NPS, total primary energy demand in India almost triples in the next quarter century-rising from 0.775bn toe in 2013 to 1.908bn toe in 2040. Even then, the average Indian's energy demand will still be 40% below the world average, says the IEA. Other data sources paint a similar picture.
The right label
Rapid industrialisation-as the economy shifts from services-sector-led growth to manufacturing, under the government's embryonic Make in India initiative-and large-scale urbanisation are two primary forces driving all this. "Industrialised-led economic growth is 10 times more energy-intensive than service-sector-led growth," says Dagmar Graczyk, India programme manager at the IEA. "A huge shift is happening." Then there's urbanisation: by 2040, another 315m people-almost equivalent to the population of the US- are expected to move to cities.
The question is how all this extra energy will be supplied. India needs it to be clean and appropriately priced for a range of social segments, from the poorest to the wealthiest. It needs to supply electricity to the 240m people presently without it and clean fuel to the 0.84bn using, with considerable health risks, solid biomass for cooking. It needs to guarantee low-cost energy supplies to manufacturers, if Make in India is to be a success. It needs to curb chronic pollution in its major cities. It needs to make huge investments in the long-neglected power sector to keep pace with demand: as incomes rise and the grid expands, India's power system will need almost to quadruple in size by 2040, says the IEA.
In hydrocarbons, it needs to encourage domestic oil and gas production and reduce the energy imports on which it is overwhelmingly reliant. And it needs to manage large investments in refining to achieve a government-mandated jump from Bharat stage IV emissions standards (based on Europe's Euro 4 standard) directly to Bharat VI (Euro 6)-an essential step in improving air quality.
Beyond that, the refining sector will need to make further large investments if it is to remain an exporter of petroleum products: refining capacity is now around 4.62m barrels a day; oil consumption amounted to 4.159m b/d in 2015, according to BP. But the export margin won't last long without new investment, given the pace of growth in domestic demand- which could almost hit 10m b/d by 2040, says the IEA.
Indeed, while India now gets almost three-quarters of its primary energy from fossil fuels, the share could exceed 80% by 2040, the NPS suggests. Coal-tough to beat on price in power generation would account for nearly half of all energy consumed. Oil use would be up by a factor of more than 2.5. Gas use would more than triple, but given that consumption was a paltry 30bn cubic metres in 2015, its share of the primary energy mix would still only amount to around 8% by 2040. Meanwhile, the share of renewables-excluding bioenergy and hydropower-will increase marginally, from less than 1% to around 3%.
Yet many energy executives, business leaders and politicians are convinced that gas and renewables will play a bigger role than this-curbing some projected demand for coal and oil between now and 2040. Oil and natural gas minister Dharmendra Pradhan wants to lift gas's share of primary energy demand to "around 20%". Petronet LNG, a liquefied natural gas importer, believes huge new markets for gas are within touching distance. And the Petroleum Federation of India (Petro-fed), an oil and gas industry body, wants to see gas far exceed an 8% share of primary energy demand by 2040-"maybe reaching 18-20%", says RK Malhotra, Petrofed's director general.
Promoting gas makes sense because it can cut pollution. It's also much cheaper than oil on an energy-equivalent basis, and government and industry officials believe that will remain the case for the long term. The hydrocarbons industry is hopeful that the introduction of market-oriented end-user pricing mechanisms will boost investment in domestic gas exploration.
Gas is also an obvious partner to renewables, which the government is encouraging with the ambitious target of a fivefold increase in installed renewable-energy capacity to 175 gigawatts by 2022, including 100GW of solar capacity and 60GW of wind power. Growth in renewables will also beat the IEA's projection of around 3% of primary energy supply by 2040, many industry and government officials believe. Malhotra suggests the share could reach "5%, 6% or even 7%".
India certainly has enviable renewable resources. Land availability and population density remain constraints to their development in many areas, but political and commercial momentum are demonstrably building. "Solar can definitely disrupt the conventional use of power supply," says Arun Chaturvedi, a cabinet minister in the sun-rich, desert state of Rajasthan. The cost of solar capacity, he says, has fallen by two-thirds in just four years and domestic solar systems can generate a return within four to five.
Even the smallest examples of microgeneration could start to make inroads into demand if applied at a wide enough scale. Solsken Energy, a Jaipur-based start-up, is making a solar-powered device to replace the coal-fired irons used by street-corner pressing services-healthier for the people operating them, and, once the cost of the device has been covered, cheaper and more convenient too. Similar devices are being developed to provide ancillary power on boats or for street vendors to charge mobile phones. Throughout the country, domestic consumers are erecting solar panels on rooftops.
Technology could disrupt assumptions about oil demand in transport too. Petronet believes it can quickly develop road haulage as a gas market, reducing air pollution and offering trucking companies large savings on fuel costs as they switch to LNG from diesel. The government is even trying to encourage the country's huge two-wheeler market to move to compressed natural gas.
Other emerging transport technologies offer potential. The efficiency and cost of hybrid cars is improving. And, although the fragilities of India's electricity grid and lack of charging points will make widespread use of electric vehicles unfeasible for decades, some commercial vehicles are nibbling at the fringes of oil demand. Tuktuks, for instance, are starting to go electric. "Electric tuktuks work just as well as conventional ones," says a driver in Jaipur. "But they're cheaper, quieter and cleaner."
The government's $1.2bn Domestic Efficient Lighting Programme, the brainchild of prime minister Narendra Modi, shows how concerted government ction, attractive end-user pricing and simply better technology can foster swift, nationwide change in energy-consumption habits. As of June, India had distributed over 140m LED bulbs under the $1.2bn scheme, which aims to replace 0.77bn incandescent lightbulbs by 2018-with significant savings in generating capacity, energy use and emissions.
As millions of people move from a rural way of life to cities, Graczyk says India has an "enormous opportunity to improve energy efficiency"-a central aim of the government's flagship project for urban transformation, Smart Cities. As the IEA puts it: "If a well-managed expansion of energy supply can be achieved, the prize in terms of improved welfare and quality of life for India's 1.3bn people is huge."
This article is part of a report series on India. Next article: The making of an LNG bonanza