Industrial decarbonisation has taken centre stage in India’s efforts to reduce greenhouse gas emissions and meet its climate targets. The decarbonisation of the power sector alone will not be sufficient to meet the climate targets. Concerted efforts are required to decarbonise the broader energy sector, including oil and gas. This has to be achieved while considering India’s economic growth imperatives, which involve increasing per capita energy usage. At the ENRich 2023 conference organised by KPMG India, senior executives shared their views on industrial decarbonisation strategies, associated challenges, solutions and financial requirements. Edited excerpts…
India’s dependence on fossil fuels is more than 88 per cent. In comparison, the global average is 82 per cent. We import 88-89 per cent of our oil and about 50 per cent of our gas requirements. By 2050, one-fourth of the world’s incremental energy demand will come from India. Therefore, every energy source must address the trilemma of availability, affordability and sustainability.
As India’s demand for oil and gas continues to grow, we will need to produce these resources responsibly, with a much lower carbon footprint. ONGC has reduced its carbon emissions by 17 per cent in the past five years. This year, we have reduced emissions by 2.23 per cent. However, much more needs to be done. We have set ambitious goals, including investing $12 billion by 2030 to achieve 10 GW of renewable energy capacity (both organic and inorganic). Another $12 billion will be spent by 2038 to achieve our net-zero emissions target under Scope 1 and Scope 2.
At ONGC, we require shorter business cycles. The oil and gas industry can no longer afford long gestation periods, spanning 10, 15, or 20 years. Going forward, there is a need to increase oil and gas production while reducing carbon emissions. Lenders have been emphasising the need for an ESG (Environmental, Social, and Governance) strategy for financing. They focus on three key elements: clear targets, budget allocation and on-ground demonstrations.
In response to concerns about lower returns, we acknowledge that renewable projects cannot be evaluated using the same financial criteria as oil and gas projects at the board level. We are introducing stricter economic and carbon emission criteria for oil and gas projects.
We have readily available financial resources and technology. We are confident that, despite potentially lower returns compared to traditional oil and gas projects, we can successfully transition to cleaner and more sustainable practices, driven by our commitment to our country and future generations. With the full support of the government, we are resolute in our efforts to make this transition. We will continue to invest in oil and gas with greater consciousness, sustainability and responsibility while aggressively expanding our renewable energy capacity.
We have understood over the years that building renewable energy projects based on power purchase agreements (PPAs) was easier. The sector dynamics have changed now. Green investments are different from energy transition investments. Green investments primarily fall within the power sector and entail low risk, resulting in low to medium returns, depending on market conditions. Meanwhile, energy transition investments involve power-to-x projects, subsequently going deeper into the energy value chain. Although a lot of funds are marketing energy transition as a concept, energy transition is still not being understood. Energy transition projects fall under the high-risk category, which also makes them high-return projects. Such projects require business models to be driven by cost and not by offtakes. They rely on nuanced technologies and availability of a favourable ecosystem.
To really make industrial decarbonisation work, energy transition projects involving molecules and downstream chemicals are needed, and Greenko is working on that. Such projects demand a mix of strategic, financial and industrial capital. These projects will generate data over the next three to five years, and following this, traditional private equities may follow suit and provide such hybrid capital to stakeholders.
Two-thirds of the energy basket pertains to non-power investments for industries such as oil and gas. To achieve the net zero goal, we have to make progress in the two-third non-power segment. Clearly, that market is driven by commodities such as oil, gas, ammonia, chemicals, methanol, ethylene, propylene, chlorine. Moreover, we cannot bring in a PPA-driven power investor for building green ammonia and green methanol plants because the first question they ask is, “Who is the offtaker?” And our point is that this market does not work with offtakes and follows a cost-based approach. In addition, in the commodity market, a two to three-year contract is considered a long-term contract. Moreover, such commodity projects may not follow 80:20 or 70:30 debt-equity structures. It will be closer to 50:50, depending on the developer’s control on the value chain, cost of technology and the cost of manufacturing the product.
Multilateral development banks (MDBs) collectively lend around $125 billion in annual investments. There is space in our balance sheet to go up to $175 billion per annum through efficiency improvements and changes in instrument types. In addition, there are ongoing discussions around getting more capital, including hybrid capital, to increase annual investments to $375 billion. However, these efforts are only a drop in the ocean. The big question is whether we can increase this investment by six to eight times, ultimately reaching $2 trillion-$3 trillion per annum. To achieve this ambitious goal, MDBs need to move towards indirect lending, adopting a programmatic approach. In addition, MDBs need to come up with risk sharing instruments, first loss guarantees and partial credit guarantees, and recycle our capital more and more frequently. The process involves demonstrating projects, recycling capital, and once projects become operational, allowing them to get commercial funding from the market.
The challenges related to poor returns and financial constraints can be broadly categorised as weaknesses in the risk-return profile and structures in emerging markets. The Inflation Reduction Act (IRA) offers several benefits, but it also poses risks for emerging markets, where organisations such as the World Bank and IFC operate. This is due to capital flight from these countries to the US, where the IRA regulations are robust. India, being one of the largest emerging markets, struggles to compete in terms of the scale of subsidies compared to the US. The solution lies in blended finance.
IFC, as one of the largest providers or facilitators of blended finance, has observed that only 2 per cent of blended finance is in the form of pure grants that do not need to be repaid. It is often allocated for studies and technical assistance. The remaining 98 per cent of blended finance consists of returnable capital, where donors expect the funds to be returned. They provide some concessions to this finance, which may involve taking more risk, offering lower cost debt, and accepting higher equity risks, or different equity returns.
We view blended finance as a temporary subsidy provided to a sector in a specific geographic area until that sector can sustain itself independently. It should not be seen as a one-size-fits-all solution for every sector. For instance, blended finance would be well-suited for the hydrogen sector, and the World Bank and IFC have allocated $1.5 billion to support its roll-out in India.