India’s Blackouts And The Dark Future Of Emerging Markets: More Disruptions, More Coal

Read the original article at Forbes

The good news is that power has been restored in Northern India after a grid failure left over half its population (600 million people) without electricity. The bad news follows, and does so on three levels. The most obvious is that vast tranches of the developing world currently lack access to energy supplies. The second is that more explosive outages will hit in a wide range of emerging markets where import dependency for fuel is high, but subsidised prices for domestic end users are even higher. The third, and perhaps most disturbing fact, is that coal is the global fuel of the future to plug enormous demand side gaps across the developing world. Forget OECD renewables greenwash; the world is going to get exponentially dirtier in future.

1. Blackout = Normal

It’s ironic that it required a major blackout in India from a bad monsoon season to draw attention to a chronic problem – over 1.3bn people simply don’t have sufficient access to electricity globally. Unsurprisingly 95% of them are in sub-Saharan Africa and Asia; 84% of which are in rural areas according to IEA estimates. The real numbers are considerably higher given the IEA takes a narrow definition (and a very low kw/h allowance) for household energy use. Economic and social gains from reliable energy supplies for business are totally ignored. That’s pretty fundamental when you consider how growth and wealth is created.

So what’s been flagged as a temporal crisis in India is actually a structural reality for over 80% of people living in Ethiopia, DR Congo, Tanzania, Kenya and Myanmar without access to energy. Even with the grid back up in India, 300 million citizens (aka 25% of the population) won’t be able to turn their lights on today. While energy economists will argue all day long about what could and should be done about this with public and private money (the Paris based agency reckons we’re looking at around 3% of global energy investments to 2030 to get the 1.3bn number down), the actual figures could again, be far bigger.

2. High Prices & High Subsidies = Bad Mix

That’s a major problem for India, a nation that not only aspires to a global political stake, but’s supposed to be a lynchpin of the BRICs growth narrative (clocking up 8.8% growth in the last quarter). India’s oil import dependency stands at 75%, and will hit 90% in the next few years. The difficulty is the same story will start applying to gas and coal. India will be importing 40% of its gas and up to 20% of its coal by 2015. The Singh government is painfully aware of this reality.

Not only did the Indian Geological Survey clip coal estimates from 207mt to 106mt recoverable reserves in 2009, Indian coal has far lower calorific value compared to major coal producers elsewhere. The government has already fallen behind its targets to increase power generation to 220GW in 2012, rather than the 165GW it’s still stuck on from 2010. And even where new plants have been built, filling them with sufficient coal is becoming harder and harder for ‘Coal India‘, the incumbant national champion feeding 82 out of India’s 86 thermal coal plants. India is nowhere near meeting peak demand, lacking around a fifth of installed capacity it needs for those fortunate enough to be plugged into the grid. Delhi literally can’t get its hands on enough cheap coal to build serious inventories to cushion supplies. Little wonder most of India’s new power plants have been built close to ports, with Indian companies such as Adani, GVK and Lanco Infrastructure consistently outbidding international rivals for coal concessions in Indonesia and Australia.

Nice stuff, but it actually compounds India’s domestic problems. Endemic corruption afflicting all levels of the Indian economy really doesn’t help; rail lines run far below capacity, mining licenses are notoriously hard to ‘secure’. But the core problem remains a chronic lack of investment – a reality that everyone in Delhi accepts – but one that involves political trade-offs they’re unwilling to make on subsidies. Indian utilities are already bleeding cash due to domestic energy tariffs, meaning they’re selling energy at a loss. They have debts around $54bn, with import bills racking up, that’s going to get markedly worse over the next three years. Governmental loans might paper over some of the cracks to absorb incremental losses, but in the longer term, something has to give if Indian banks are supposed to keep writing blank cheques, let alone international players moving into the Indian market.

3. Coal High = Emissions Higher

It’s therefore all the more staggering we keep hearing about the clichéd ‘energy transition’ in the West from a high carbon to low carbon world. On a global scale, it’s utter nonsense. The real transition underway is energy demand shifting from West to East and how that’s handled across the board. Expect exactly the same formula used for their industrial OECD progenitors; emerging markets will draw on the cheapest energy they possibly can to propel growth. That means indigenous coal.
Having seen 5.4% consumption growth last year (the highest of any fossil fuel), coal now accounts for a staggering 30.3% of the global energy mix. That’s the largest figure since 1969. Coal is literally going to be the fuel of the futurein Asia. China saw blistering 9.7% growth last year, with India not far beyond at 9.2%. China has managed its growing import dependency far better than India so far by collectivising small mines into giant conglomerates; which by default, places India as the main market mover for seaborne trade. That dynamic could change towards 2015 with Chinese demand continuing to soar, but be in no doubt, both nations will continue to plug whatever gaps they can with coal to drive domestic growth. What’s more, a raft of other emerging markets are joining them on the coal growth roster in Asia, Africa and even Latin America.

That’s great news for major exporters (and certain trading houses), but from an emissions perspective, it means any chance of keeping global warming below 2°C is close to zero. Without a miracle in Carbon Capture & Storage (CCS) technology, we’re basically going to go from a world of climate mitigation (i.e. preventing emissions going into the atmosphere) to one of climate adaptation (i.e. dealing with the downside effects of climate change) from 2020 onwards. Those playing carbon markets beware; CO2 will no longer be deemed a relevant externality to price in.

But the bigger geopolitical kicker is whether China and India work together internationally to meet energy demand (coal was what got the EC going back in the 1950s), or whether it drives them further apart. Either way, the energy challenges India and China face today, are being mirrored across the developing world. They all have the same three inconvenient truths to ponder, just as the rich world needs to work out the inconvenient consequences that derive from economic growth and increased emissions. Pretending this link doesn’t exist, is only going make matters inexorably worse.