Energy, Security, and Climate

This guest post is co-authored by Joshua Busby, associate professor of public affairs at the Robert S. Strauss Center for International Security and Law at the LBJ School at the University of Texas at Austin, and Sarang Shidore, a visiting scholar at the LBJ School at the University of Texas at Austin. This is the third post in a series on the topic of scaling up solar power in India, following posts in December 2015 and February 2017. The authors would like to acknowledge the support of the IC² Institute at the University of Texas. In late 2014, in the lead up to the Paris negotiations, the Indian government established an ambitious solar target of 100GW of installed solar generation capacity by 2022. At the time, India had about 2.5GW of installed solar capacity. Since then, India has made significant progress towards the goal and has installed 20 GW, perhaps as much as 9.6 GW in 2017 alone (for a slightly lower estimate, see here). However, while the 100 GW target was always going to be difficult to achieve, we are less optimistic than we were last year in the future prospects of India’s solar scale-up. The overall target might not be met by 2022, and the solar scale-up seems likely to slow down. Bridge to India, an energy consultancy, has estimated that India will not meet its 100GW target by 2022. Its current estimate is that India will install only about 55GW of solar by 2022, including about 44GW of utility-scale solar and 10.8 GW of distributed solar. Here are the reasons for our increased pessimism. Solar projects are threatened by rising costs. Solar developers have built projects at very low cost, and these projects are threatened by rising costs of Chinese solar panels and likely increases in taxes. Nearly all of the installed capacity (18.4 GW of the 20GW) has been large, utility-scale solar parks rather than distributed solar power on residential, commercial, and industrial rooftops. India has deployed large-scale solar power through competitive auctions, whereby would-be solar developers compete to offer the lowest cost of electricity to the grid and in return earn the right to build solar projects. As prices for Chinese solar panels have plummeted, there has been a steep decline in the electricity prices offered by solar developers. Bid prices have come down from more than 8 rupees, or 12 cents, per kilowatt-hour (kWh) in 2011 to as low as 2.44 rupees, or 4 cents, per kWh in 2017 for some projects. As we warned in our February 2017 piece, the price declines have been so steep that there is some concern that solar developers have not built in enough of a profit margin to ensure business viability if their costs increase. Since we wrote our last piece, the Financial Times warned of a bubble in solar auctions as the number of projects has ballooned. With Chinese solar panel prices increasing for the first time in years and with the imposition of a new goods and services tax (GST) of 5 percent on solar equipment, costs have increased, threatening the economics underpinning many of the low-cost project bids. One Indian solar developer of ACME Solar lamented his bid: “When we made our bid, we factored in a price for every solar panel of 30 cents per watt of power, but since then it has risen to around 35 cents. Our bid works at 30 cents.” Moreover, other costs associated with solar, namely financing costs, remain high in India, though they have come down somewhat over the past years. As panel prices have declined significantly, other costs, particularly finance, have become more important in determining the total costs of solar. In 2016, the Council on Energy, Environment and Water (CEEW), a think tank that works closely with the Indian government, evaluated the costs of a solar bid in the Indian state of Telangana. They found that 70 percent of the bid cost was composed of financing costs, compared to only 20 percent for a comparable project in Dubai that had a much lower price per kilowatt-hour. CEEW noted that while cost of debt is around 5 to 7 percent in the United States, it exceeds 10 percent in India. The quality of many imported panels is unclear. As we signaled last year, there are concerns about the quality of imported solar panels, and it is unclear if these panels will hold up over 25 years as intended. A lack of quality controls means that it is difficult to tell what caliber of solar panels are being purchased by Indian firms, and there may be diminished generating capacity over time because panel quality is poor, particularly in rooftop installations. There has been some effort to roll out guidance on panel quality and inspections for panels, with standards to be enforced beginning in April 2018. Rooftop solar has taken off but has limited room to grow. The government had an initial goal of expanding rooftop solar to 40GW as part of its 100GW plan. This aim has largely been shelved. Though rooftop installation has tripled over the past year and is now up to over 1.5GW, most analysts think that this growth will slow, and India will have at most 10-12GW of rooftop installed by 2022. Developers have found that rooftop solar on commercial and industrial properties makes for good business and have quickly implemented a lot of projects with customers who can reliably pay them. As developers are financing most of the capacity, it is getting harder for them to find customers who they think are low risks for non-payment. Some assessments see the rooftop sector’s growth having occurred despite of, not because, of policy decisions by the Indian government. Few policy instruments have supported the sector’s growth, save for $625 million in subsidized credit from the World Bank and $500 million from the Asian Development Bank that were approved in 2016. Efforts to support net metering, which allows solar system owners to get credit for electricity they produce, have been met with considerable resistance. There is excess power generating capacity in many states. Economic growth and industrial demand have not increased by as much as anticipated, meaning that expected demand shortfalls have not materialized. As a consequence, new solar projects are coming online at a time when there is excess generation capacity in many states. In November 2017, India had an installed capacity of about 330GW of electricity while its peak demand was much lower at 164 GW. This surplus could tempt electricity distribution companies to renege on their contracted payments for solar electricity if excess coal-fired electricity is on offer for a lower price. So far, coal has borne the brunt of the consequences of market oversupply, and some firms have had to shut down older, less efficient coal burning power plants and to run some coal plants below their typical plant load factors. That trend may soon run its course, however, because the remaining old coal plants are often the cheapest source of available power. In comparison with new coal power plants, though, solar remains a much more attractive proposition. Of the 50 GW of new coal plants slated to be built through 2022, it is not clear if many of them will ultimately be constructed. Distribution companies are still in trouble. We also warned that the electric distribution companies (DISCOMS) in India–which purchase electricity from solar projects and distribute it to end-customers–remained heavily indebted, despite aggressive efforts by the government to help them clear their balance sheets of debt. This increased the risk that distribution companies would fail to pay for solar electricity in the long run, which would make the solar projects unprofitable to build. Enacted in November 2015, UDAY is the acronym for the government’s effort to bail out the struggling distribution companies by transferring their debts to state government balance sheets and trying to help them become solvent by removing the factors that led to losses, such as reducing transmission losses and chronic underpayment. Even with the UDAY scheme, many of the same factors that led to unprofitability in the first place, like the need to offer low-cost power to farmers, have not gone away (except for undercollection of electricity bills, which is improving). Technical losses in the system, which are high at more than 20 percent of the generated power, are not being reduced fast enough. Most distribution companies are still not in good shape. In May 2017, about half of the distribution companies were graded as B or lower for below average operational and financial performance capability or worse. This was comparable to the previous year’s ratings.  The government is sending mixed signals about its commitment to its renewable energy goals. On the positive side, the Indian government has announced plans for solar mega-auctions of 20GW for 2018. We have seen fewer auctions than some anticipated, but there are efforts to keep the pipeline of projects going with a lot of capacity being bid out at once. The International Solar Alliance (ISA), an intergovernmental organization launched by Prime Minister Modi, headquartered in India, and signed onto by 121 countries, also entered into force in December 2017. The visibility of the ISA enhances the on-going political significance of solar to the Modi government as it prepares for elections in 2019. However, on other fronts, the government’s commitment to solar is wavering. Revenue collections from a tax on coal that went to the National Clean Energy Fund aimed to fund climate and renewables goals will now fund other programs, including compensating states for revenue lost through recent tax reform. Though solar panels were exempt from taxation under the old fiscal regime, the newly introduced tax reform, known as GST, taxes solar panels at 5 percent. The government is also considering applying two new tariffs on imported solar panels, which could have serious implications for the costs of new solar projects.  The Modi government may issue new solar tariffs. India tried to develop its own subsidized panel production industry, but this has largely failed. The U.S. successfully pursued a WTO case against India for unfair local content rules in support of solar. Without the local content rules, Indian firms have had trouble competing with the Chinese panel producers that now dominate the market. The Modi government is poised to rule whether Chinese solar firms are dumping their panels in India. Recent reports suggest India’s Commerce Ministry is considering a 7.5 percent tax on imported solar panels. The Modi government would like to boost domestic manufacturing capacity under its Make in India campaign, including domestic manufacturing of solar. More worryingly, a 70 percent additional safeguards tariff explicitly aimed to protect domestic manufacturers from “serious injury” is being considered by India’s Ministry of Finance. Although projects currently in the pipeline are expected to be exempted from this tariff, subsequent additions will almost certainly be dealt a heavy blow, as it may increase the sustainable price of bids by 20 percent to 40 percent, making solar more expensive than new coal power in most cases after extra costs of grid integration are taken into account. The United States just imposed tariffs of its own on imported panels, which will likely, as Varun Sivaram argues, lead to job losses in the U.S. solar sector and do little to make U.S. companies more competitive. These decisions could cause a sharp increase in the prices of Chinese solar panels at a time when both India and U.S. solar installations are heavily reliant on cheap Chinese panels to keep the costs of their projects low. Domestic demand in China for panels is also picking up, making Chinese panels more expensive. Restricted imports or pricier Chinese panels could damage the Indian solar sector’s ability to build out more capacity. Concluding Thoughts The solar space remains a lively area for growth and experimentation in India. Some of the obstacles, such as distribution company finance, endure. New tensions have emerged as the Indian government would like to revitalize and support domestic manufacturing, including for solar panel manufacturers, which may conflict with its own aggressive solar deployment targets. With energy demand rising slower than expected, India will be faced with more challenges of integrating solar polar as coal plants are run even further below optimal capacity. We look forward to filling you in on developments in 2018 a year from now.

This post is co-written by Sagatom Saha, Fulbright Fellow in Ukraine and Visiting Fellow at the Dixi Group. Read Varun Sivaram and Sagatom Saha’s new book chapter, “The Geopolitical Implications of a Clean Energy Future from the Perspective of the United States” in the edited volume, The Geopolitics of Renewables (Springer, 2018, ed. Dan Scholten) here. Clean energy’s explosive growth is good news for the global quest to confront climate change, but its geopolitical effects might not be uniformly beneficial. This should come as no surprise. Fossil fuels have driven not only global economic growth, but also global conflict. For decades, the United States has waged wars and built international institutions to keep a thumb on the scales. As they replace fossil fuels, leading clean energy technologies—wind, solar, hydro, and nuclear energy—as well as emerging ones, such as electric vehicles and batteries, will reorganize power balances between energy producers and consumers and shift U.S. diplomatic interests. Recognizing the massive shifts ahead, this week the International Renewable Energy Agency (IRENA) set up a commission to examine the geopolitical effects of clean energy technologies as they displace fossil fuels. The commission will examine changing trade patterns, cybersecurity risks, and rare-earth mineral access. And in a timing coup, we’ve managed to simultaneously publish a new book chapter on exactly this topic! Our chapter adopts a U.S. perspective and examines many of the same themes that IRENA will take up, as well as several others. We imagine a future in which clean energy has substantially displaced fossil fuels by midcentury, and we describe five ways that the geopolitical landscape could shift as a result. Anticipating these shifts will require farsighted policymaking to safeguard U.S. interests and retain leadership through the transition from old to new energy systems. Here are the five most important geopolitical implications of a clean-energy future: 1. America’s Military Footprint in the Middle East Could Shrink In a plausible future in which electric vehicle sales skyrocket and countries around the world stock up on strategic petroleum reserves, the U.S. economy will require less oil to function and will be more resilient to potential supply shocks. This could clear the way for America to scale back its longstanding strong military presence in the Middle East. This is likely to bring benefits to the United States, which could cut spending or redirect its military elsewhere, for example to the Asia-Pacific region, to address other pressing threats. Importantly, the United States does have regional interests beyond securing the free flow of oil; in a future dominated by clean energy, the Middle East’s oil-producing states might succumb to instability owing to lower oil revenues, posing security threats to the United States. Still, America could maintain a lighter footprint that mirrors its current military posture in sub-Saharan Africa, where its fewer bases focus more narrowly on counterterrorism operations.  2. Russia and China Could Dominate the Nuclear Industry, Thwarting U.S. Geopolitical Goals Although nuclear energy seems to be in secular decline in the developed world, it may well thrive in the world’s emerging economies in the future. Many developing nations may opt for nuclear generation to fuel economic growth while working toward increasingly ambitious emissions reductions plans. And innovative reactor designs might also attract new countries to nuclear energy by lowering financial and geographical barriers to entry. However, the United States, which created and led the global nuclear market for decades, is not positioned to benefit. Instead, Russia and China, America’s two greatest geopolitical rivals, lead the growing market. They may use their dominance in nuclear exports to build up coteries of client states willing to advance their geopolitical interests. In a double whammy, global nuclear security standards—an important U.S. security concern—might degrade under Russian and Chinese leadership of the nuclear industry. 3. A Modernized Power Grid Could Strengthen North American Cooperation but Create Cyber-Threats Clean energy technologies could transform the North American power grid. To balance increasing amounts of intermittent wind and solar generation, Canada, Mexico, and the United States will be tempted to band together to interconnect their national grids. In such a scenario, solar energy from Baja California could power San Diego while wind power from the Oklahoma panhandle could light houses in Mexico City. Such connectivity would require deep levels of intergovernmental cooperation, which could anchor the continent even if other tensions over issues like trade persist. The modern grid will also integrate an exponentially increasing number of internet-connected devices. While these technologies will help grid operators manage the complex two-way, decentralized electricity flows, they also expose the United States to cybersecurity risks. Unless the U.S. government invests in cyber-defense, resilience and deterrence, savvy adversaries like China, Iran, and Russia could credibly threaten the United States. 4. The Rise of Clean Energy Could Provoke Global Trade Wars The clean energy transition could fundamentally reshape the global economy. Clean energy products are not inherently tied to resource rich nations like fossil fuels. As wind turbines, solar panels, and batteries supplant fossil fuel predecessors, trade disputes could become more frequent, as countries seek to stake their claim as the new energy exporters. Indeed, the benefits an energy-dependent nation could yield from domestically producing and exporting its own energy may outweigh any penalty from flouting international trade rules. Yet the slow erosion of trade norms could threaten the global trade order from which the United States has reaped prosperity. 5. America’s Stance on Climate and Clean Energy Technology Leadership Could Profoundly Affect Its Global Standing While our chapter lays out grave geopolitical risks posed by a clean-energy transition, there are also important opportunities for the United States. If America leads on climate action and energy innovation in decades to come, it could carve out a new axis of international cooperation. As climate change rises on many countries’ diplomatic agendas, so too would the benefits that America yields from helping other nations address it. Such a strategy would also grease the wheels of diplomacy in other international arenas critical to U.S. interests. By contrast, if the United States cedes leadership to countries such as China, it will not only jeopardize prospects for limiting climate change but also alienate allies and adversaries alike. A transition to clean energy will shake up the geopolitics of energy. IRENA’s commission on the topic recognizes the tectonic shifts ahead. Now it is up to U.S. policymakers to determine whether the shifting energy landscape will serve America’s interests or force it to cede its privileged position at the center of global geopolitics.

This guest post is co-authored by Joshua Busby, associate professor of public affairs at the Robert S. Strauss Center for International Security and Law at the LBJ School at the University of Texas at Austin; Sarang Shidore, a visiting scholar at the LBJ School at UT Austin; and, Xue Gao, a PhD Candidate at the LBJ School at UT Austin. This post discusses the findings in two recent papers by the authors investigating the feasibility of reducing emissions in China and India. With the current U.S. administration turning sharply against the Paris agreement and carbon mitigation actions, attention has turned to other countries to take the lead, notably China and India. The two countries have reaffirmed their commitments to the Paris agreement even as the United States has announced its intent to withdraw under President Trump. The ability of both China and India to meet or even exceed their Paris commitments will be critical to the accord’s success. However, both countries face serious barriers to reducing emissions, motivating critical inquiry into how feasible their decarbonization plans really are. From China, we have seen mixed signals in recent years. Though some reports show a sharp turn away from coal-fired power, China’s greenhouse gas emissions are projected to rise in 2017, raising questions about whether declining coal use in China was an artifact of a slow economy or faulty government data. In India, as we have written previously on this blog, the scale-up of renewable energy has begun with vigorous government support, but challenges remain. While declining prices for solar have brought it to near grid parity with coal, rock-bottom prices in solar auctions have raised concerns about low margins for developers and a potential solar bubble.   Assessing the Major Sectors One way to assess the feasibility of greenhouse gas emissions mitigation in China and India is through sectoral analysis. For both countries, we have completed separate sectoral studies in the journal Energy Research and Social Science (the China piece is free to download until January 20, the India piece is behind a paywall.  we are happy to provide readers with copies via Twitter). In the articles, we analyze the feasibility of reducing greenhouse gas emissions (GHGs) in the main sectors responsible for emissions. The figures below break down emissions by sector in each of these countries in both 2010 and 2030 (projections). We assess feasibility in two dimensions: what we call political/organizational feasibility and techno-economic feasibility. Political/organizational feasibility is underpinned by the premise that government or market fragmentation is harmful for collective action. A government with power fragmented among many different agencies or between the central government and state and local governments would have difficulty formulating and implementing coherent policy. And in an economic market where production is divided among many firms, behavioral change by any one of them would have limited impact on the overall market. By contrast, in more concentrated political institutions and more concentrated economic markets, the actions of a few policymakers and firms can have far-reaching effects on limiting greenhouse gases.   We first assessed the degree of fragmentation in the government and market spaces. Sectors where both the state and the market were fragmented were graded as low. In sectors where there was concentration, our grade was higher with some additional consideration given to the relative power balance between the government and firms. The second dimension, techno-economic feasibility, also depends on two factors. First, for each emissions-producing sector in each country, we assessed how close the technologies in use were to the cleanest and most advanced technologies available worldwide. For example, we asked if cement plants in India were as efficient as the best plants worldwide (they were close). And second, we assessed how costly it would be to upgrade the technologies in use to get to the global gold standard. If a particular sector in either China or India already used efficient technologies and it would be very expensive to upgrade them, we graded the techno-economic feasibility of reducing emissions as low. By contrast, if the technologies in use were inefficient and it would be cheap to upgrade them, we scored techno-economic feasibility as high. Other combinations yield mixed cases. In our final analysis, we evaluated the intersection of both dimensions of feasibility to make an overall judgment on the potential for greenhouse gas emissions reduction in India and China. Here are our key takeaways from both studies:   The electricity sector is a challenge in both countries. Electricity production in both China and India tends to be quite fragmented from the market standpoint and relies heavily on coal. We found that the scope for emissions mitigation in the coal sector in China was more promising than that in India, given government concentration in the largely state-owned industry. For both countries, we found that there was ample room for efficiency gains in the electricity sector, but these would likely be expensive.  In China, where the renewables sector is more established (indeed, China was projected to install an extraordinary 54 GW of solar capacity in 2017), we also found further renewables scale-up to be challenging given a more fragmented regulatory environment. While these barriers are not insurmountable, both countries will require sustained government attention and expenditure to reduce the role of coal and scale-up renewables in order to reduce emissions.   Buildings are low-hanging fruit but ironically just out of reach. In both countries, energy consumption in buildings is responsible for a significant share of emissions through electricity consumption and, in China, heating demand. The countries’ building sectors have a lot of potential for low-cost emissions reductions, and energy efficiency technology is easily available. However, in each country there are thousands of construction companies, and the state’s responsibility for regulating construction  is fragmented between the central government and state/provincial/local governments. This market and political fragmentation stymies rapid efficiency gains.   Cement and fertilizers in India are already efficient, but there is room for improvement in China. The cement and fertilizer industries already are near world efficiency standards in India, limiting the scope for further gains given current technology. Neither sector in China had achieved global efficiency standards, so there was considerable scope for further efficiency gains, though fertilizers were more expensive to reform than cement.   Steel, cement, and oil refining are the most feasible sectors for reducing emissions in China. In China, steel, cement, and oil refining were the most feasible sectors for major emissions reductions. In all three, we assess the costs of efficiency gains to be manageable. Both steel and cement markets are fragmented, but given high government concentration and power in both, we think the Chinese government is in a good position to regulate these sectors. Oil refining is a little different. Production is concentrated between state-owned companies CNPC and Sinopec. Because government policy is fragmented (hence limiting the impact of public policy), we actually found that the two companies have enormous room to make major emissions reductions if they were so inclined.   Road transport and petrochemicals appear promising in India. Road transport and petrochemicals were evaluated as the most feasible sectors in India for emissions reductions, with a range of technical interventions that were judged to be economically viable. In India, both sectors have a limited number of producers. Automotive production is both concentrated and lightly regulated with the power balance favoring a handful of automobile producers, meaning Indian car makers could potentially organize and collectively improve their efficiency standards through market-led interventions if they were so inclined. While assessing the motives of actors was beyond the scope of our study, the potential loss of market share to foreign competition might be one reason the auto industry might try to improve efficiency.   On the petrochemicals side, both government power and the market are concentrated, and powerful regulators ought to be able to improve energy efficiencies.   Road transport in China is a mixed bag. The vehicle production market is very concentrated in China. The government is fragmented but still possesses more power than producers. This limits the scope for self-regulation by auto companies, but the government lacks the capacity to issue coherent policies. That said, many interventions in this space are reasonably inexpensive. The sector could improve efficiency potentially through centralization of government regulation or more liberalization that encouraged private producers to self-organize and bring their vehicles up to global efficiency standards. China may well be trying the former with bold plans to ramp up electric vehicle production.   Addressing agriculture-related emissions tends to be difficult in both countries. There are hundreds of millions of farmers in India, many of whom are quite poor. Because they constitute the largest electoral constituency in the country, imposing costs on them through emissions mitigation actions is especially challenging. Fertilizers in China also appear to be a difficult industry to decarbonize. Fertilizer production is fragmented, the market is liberalized with limited government regulation, and the costs of policies to improve efficiency were judged to be costly.   Steel has a ways to go in India. Steel production is fragmented in India, and many of the measures to bring the sector up to international standards are expensive. Though government concentration is high, the sector has liberalized with power residing more on the market side, making efficiency gains through regulation also a challenge. The government might need to enhance its authority, particularly through tougher enforcement of efficiency standards under the so-called Perform Achieve and Trade (PAT) scheme, to be able to make gains in the steel space.   Conclusions We recognize that there are major differences between the two countries. India is an long-established federal democracy with a legacy of a strong bureaucracy, while China is an authoritarian one-party system in which the central government has further expanded its authority of late. While both face severe air quality problems, China is more industrialized but also richer and better able to invest in climate mitigation goals. Despite their differences, both countries face strong challenges of developing coherent national policy. As Elizabeth Economy and others have documented, China has long faced difficulties enforcing environmental policy at the provincial and local level, given strong preferences for economic growth. Indeed, the now classic model of Chinese governance in the reform era is called “fragmented authoritarianism.” While the Chinese government has re-centralized authority in some domains in recent years, some sectors such as fertilizers and renewables remain decentralized. For its part, India faces a similar, though perhaps magnified, problem. Some sectors are constitutionally concurrent responsibilities of both the Indian federal government and states. That complicates policy coordination. That said, the current government of Narendra Modi is the strongest in thirty years, which has enabled the Indian federal government to impose its will more decisively in a some areas, notably its ambitious effort to scale-up solar power. Even in these cases however, implementation requires state-level collaboration so the problem does not entirely go away. What these brief observations signal to us is that large countries face some common problems, and factors other than regime type may matter as much or more for whether countries can mitigate their greenhouse gases in different areas. This is one of the most important takeaways from our comparison between these two large, politically dissimilar Asian giants. In sum, we see this stylized sectoral analysis as a way to reveal the structural barriers to and opportunities for collective action and emissions mitigation. We hope that the analytic approach we have developed can help practitioners anticipate the barriers to implementation and where it might be most productive to focus policy action.