Heatwaves, Energy Shocks and Crashed — Issue #4
The Big Picture
This week supplied further proof that ‘climate change’ is not just an environmental problem.
When Indian financial daily Business Standard went to manufacturing hubs like Manesar (auto-components), Surat (textiles and diamonds) and Ludhiana (textiles, cycles, farm implements), it found them reeling.
Two reasons explain why. On one hand, Coal India is prioritising coal supply to thermal power plants over industrial users like aluminium and fertilisers. On the other, cash-strapped discoms, faced with rising demand but unable to afford the costly merchant power on offer, have turned to load-shedding.
The fallouts are predictable. There is the human cost. As Veer Das, a daily wager in Manesar told Business Standard: “We are unable to sleep at night because our stomachs are empty and because there is no power to give us some relief from the heat.”
And there is a larger economic cost – mostly in the form of lowered industrial production and further marginalisation of small and medium enterprises. Larger players in India Inc will survive this crisis. This week saw one large corporation, Vedanta, buy Athena’s stranded thermal power project in Chhattisgarh for captive use. Manufacturing clusters, however, are a very different story.
Home mostly to smaller firms, several of these clusters have already been leaching manufacturing competitiveness for long. In Ludhiana, predatory extraction and the high cost of power (the state government balances its books by levying a series of surcharges and cesses on industrial users of electricity) have resulted in the cluster facing deindustrialisation. In Surat, the entry of bigger players had left smaller players struggling to compete on price. GSTworsened matters further.
Then came the lockdowns. And now, these power cuts.
For exports to rise, Indian manufacturers need to be dependable
and
competitive cogs in global value chains. The heatwave – and our poor response to it – damages our chances of becoming an export hub.
Heatwave News
On other fronts too, the heatwave made news.
India saw more reports explaining the factors responsible for this heatwave as well as the power crisis that followed.
What really went wrong? Even as Indian Railways denied any shortage of rakes for moving coal, in an interview with Economic Times, Sambitosh Mahapatra, a consultant with PwC, ventured beyond the oft-reported lack of coal and spoke about the country’s continuing failure to estimate “emerging” electricity demand. “Institutions entrusted with planning are supposed to forecast demand profiles across the day ahead as well as in the short, medium and long terms. However, they are failing. The need to improve forecasting methodologies and adopt available and requisite technologies is felt.”
This is a vital point. Barring strong climate action, heatwaves will be around. If India doesn’t fix forecasting, 2022 will presage what future summers will be like.
For now, the country is seeing a cat and mouse game between the State and power producers. Even as global coal prices rise, India has capped the price of power in domestic exchanges at Rs 12/unit but told imported coal plants to run at full capacity. To soften the blow, the government has told PFC and REC to offer short-term working capital loans to these plants. Given the mismatch between the cost of coal and the capped price of power, however, power producers continue to baulk at the thought of switching on their idle units. Instead, two power exchanges introduced "unapproved" products which allow power producers to sell electricity in the uncapped term-ahead market.
Elsewhere, a clutch of states has begun paying pending dues to power producers. And India is weakening green laws to make it easier for coal blocks to expand production.
Even as these processes continue, temperatures are rising again.
News Of The Week
Last week started with the Indian government reiterating its asset monetisation plans.
On Monday, it said it would float Infrastructure Investment Trusts (InvITs, where individuals and institutions invest in existing infrastructure projects and get a part of their income thereafter) in sectors like railways, shipping, ports and gas pipelines. The government also wants to mop up funds by selling coal and mineral blocks.
On Wednesday, however, Economic Times reported that the plan to “monetise oil and gas pipeline assets" of Indian Oil Corporation (IOCL), gas utility GAIL (India) and Hindustan Petroleum Corporation (HPCL) has lost steam due to a lack of investor interest and reluctance of the companies to part stake.”
Monetisation through InvITs had been first announced in 2021, it said. “The investor community is not excited about oil and gas pipeline assets as much as it is about green energy," an investment banker told the paper.
Seen in conjunction with the Holcim sale, the world does seem to be cleaving between clean and dirty firms – with starkly dissimilar access to markets and finance.
Other news. India has not hiked petrol and diesel prices since 6 April even though international prices continue to climb. Oilcos say they are incurring a loss on every litre of petrol and diesel they sell. Reliance is cutting down on supplies to its pumps – and mulling alternative ways of compensating them. Gas, as we have seen in previous newsletters, is a similar tale. There, even as the Centre allows GAIL to buy imported Gas and sell to city gas distributors, firms are grabbing discounted Russian LNG.
In other words, across coal-based power, oil and gas, the government is pushing the price of expensive energy onto companies. This, as CarbonCopy had written last year in the context of Gas, cannot last. At some point, if energy prices stay high, these companies will be overwhelmed as well. At that point, costs will fall on state oilcos and then on the centre.
At that point, the government will face two unattractive options. It will either have to push these prices onto consumers who are already struggling with high prices. As The Hindu reported this week, in the last year, as many as 90 lakh beneficiaries of the Ujjwala scheme did not refill their LPG cylinders; another 1 crore (of the total 9 crore beneficiaries) refilled them just once. Alternately, the Centre will have to allocate ever-rising sums for buying energy, cramping its other expenditure plans.
And now for something completely different. Renewables. India saw a flurry of announcements on hydrogen this week. GAIL and Pipelines Infrastructure Ltd, which is owned by Brookefield Asset Management, announced a plan to collaborate on hydrogen transportation in India. GAIL also said it will set up a 10 MW green hydrogen facility in Madhya Pradesh. This project will be up by November 2023, the PSU said. It didn’t mention the name of its partner, however.
In the private sector, Ayana Renewable Power and Norway’s Greenstatt announced their collaboration as well. They will develop “large scale green hydrogen products” for industrial and commercial customers.
Everyone is not convinced about Green Hydrogen, though. Dastur Energy said this week that hydrogen produced from Coal will be 1/4th the price of green hydrogen. At a time when global energy prices are high – and India is wondering what to do with her coal reserves – the Indian government will be interested in such experiments and pilots.
In EVs, Elon Musk is not bringing Tesla to India.
The government has concluded faulty batteries are to blame for the spate of electric scooter fires.
Imported EV Cells, said Niti Aayog member VK Saraswat, might not be suitable for Indian conditions. In the meantime, in Telangana, one electric scooter exploded while being charged. Across the country, sales of electric two-wheelers had picked up partly as a response to rising petrol prices. Between the chip shortage and these fires, their sales are slowing.
Ola made headlines again. Another senior manager quit the firm.
India banned wheat exports. It wants to avoid reprising ongoing food riots in Sri Lanka. It’s an odd decision. Till two days ago, we were told we had enough food stocks. This time too, as with the country’s decision to stop exporting Covid vaccines, the costs will be global. India is the world’s second-biggest wheat producer.
Climate Long Read
Climate Faultlines: India’s Lessons from the Glasgow COP26 Climate Negotiations
, by Navroz Dubash
Book Of The Week
Crashed: How a decade of financial crisis changed the world
, by Adam Tooze
A large part of today’s newsletter has focused on the long tail of rising energy prices.
As coal, gas and oil prices rise, India is forcing companies to absorb rising costs. In tandem, discoms are switching off power to manufacturing hubs ignoring all the attendant costs that come along.
In Crashed, historian Adam Tooze looked at another economic crisis – subprime housing defaults in the US – and how its far-reaching effects spread across the world. As the US economy slowed, US Treasury responses drew the dollar back to the country. Its imports from countries like China slowed as well. Which, in turn, turned the screws on a number of countries that supplied raw materials to China. Those economic costs, writes Tooze, were just the start. In country after country, as a botched response saved the banks but left the vast majority economically insecure, the stage was set – across the world – for the rise of populists and demagogues who promised to bring back better days. A regional economic crisis, in essence, resulted in the wider crisis of democracy that we see today. See a longer review here.
As the world faces this global spike in energy and food prices, we need to keep this inter-connectedness described by Tooze in mind. What perils and possibilities lie ahead?