Reliance Industries recently announced plans to invest $10 billion in the clean energy sector by 2030, including the setting up of giga factories to manufacture solar modules, battery storage, electrolysers and fuel cells. Several other Indian companies are accelerating plans for growth in this direction. Adani Green Energy Ltd recently announced the acquisition of SB Energy, NTPC has announced a target of 60 gigawatt (GW) wind and solar energy by 2032 and recently floated a global tender for 1 GWh of grid-scale battery storage.
These moves could accelerate India’s energy transition journey by 12-24 months and potentially help India emerge as a global leader in sustainable energy.
McKinsey’s research confirms the inexorable trajectory of energy transition globally. Electricity could increase its share of final energy consumption from 19% to 30% by 2050. Renewables are emerging as the lowest-cost long-term option, out-competing fossil assets in some regions even before 2030. Green hydrogen is expected to speed up decarbonization of hard-to-abate sectors such as steel, heavy transport and refining. Energy storage will play an important role in stabilizing grids and reducing intermittence of renewables.
In India, too, change is underway, with strong recent growth in the renewable energy sector and falling solar-power tariffs. According to Central Electricity Authority of India projections, wind and solar energy could contribute 31% of gross electricity generation by 2029-30, up from 9.2% in 2018-19. The sector has attracted global institutional investors, with 60-70% of equity investments coming from sovereign wealth funds, pension funds, infrastructure funds and private equity.
Our analysis indicates that four fundamental shifts could accelerate the momentum of energy transition in India over the next decade.
Rupee solar: We now have reasons to expect the levelized cost per unit of solar energy to drop to half of current levels. The main drivers of this shift would include higher scale in manufacturing and project sizes, and the commercialization of newer solar technologies such as thin films and perovskites. We observe several industrial and commercial companies scaling up the contribution of renewables in their overall energy mix, largely driven by compelling economics.
Round-the-clock renewables: Hybrid models combining solar and wind generation with energy storage—which could potentially deliver close to 24X7 clean energy, mitigating the intermittency of renewables—are in the realm of the possible.
The economics of hybrid models is likely to improve rapidly in the next 3-4 years and promise to be inflation-proof over the life cycle of their assets. Our analysis indicates that renewable hybrids could produce at ₹4.50-4.70/unit today, at 80-85% round-the-clock fulfilment. This figure is expected to turn competitive with newly-built coal-fired power plants by 2023 and perhaps with existing operational conventional power plants by 2028.
Hydrogen at hundred: The current cost of producing green hydrogen is around $4.50, or about ₹330, per kg. With the falling cost of solar energy combined with a fall in the cost of electrolyser equipment, we see a line of sight that will take the cost of green hydrogen production down to about ₹100 per kg. At this level, huge demand for hydrogen will open up from sectors that are already using it by drawing from fossil fuel sources, such as refineries and fertilizers, and also new sectors like steel and transportation. We can expect many new business models to emerge around hydrogen use.
Digital energy: The adoption of digital, advanced analytics and automation will drive out structural inefficiencies and increase utilization across the energy value chain. Examples include an aggressive reduction of aggregate technical and commercial (AT&C) losses, thanks to smart metering data analytics, improvements in the efficiency and yield of renewable generation through digital means, and faster asset build-outs through automation or peer-to-peer energy-trading platforms that leverage blockchain technology.
Going along with these four shifts could accelerate India’s decarbonization and have a transformative impact on the economy. Industrial and commercial sectors currently consume 309 million tonnes of oil equivalent annually, of which only 13% is electricity. Energy is a significant component of the cost of doing business. Deeper penetration of renewables could shift the balance in terms of both cost and carbon footprint. Accelerating the transition could reduce India’s energy import bill, which exceeded $150 billion across crude oil, liquefied natural gas, coal, solar and petroleum finished products in 2019-20. Creating manufacturing capacity at global scale for solar modules, batteries and electrolysers could generate many jobs.
Finally, an accelerated transition gives India the opportunity to create an export-oriented industry of green products/technologies and services. For example, solar and storage equipment, green hydrogen and metals such as steel and aluminium made through low-carbon methods.
Over the next two decades, India could well emerge as a global energy transition innovation hub and become the home for clean energy giants. The right set of policies, regulations and incentives would be essential to speed up the journey.
Suvojoy Sengupta & Kamya Jaiswal are, respectively, a partner and an associate partner at McKinsey & Company, New Delhi.
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