The contents of this essay are based on conversations during the 7th India-US Forum
The worsening climate crisis and instability in energy markets due to the Russia-Ukraine war have created a compelling environment for climate action to become a top-tier agenda. It has dawned on the private sector that the ongoing transition is among history’s biggest political and economic transformations. This recognition is fuelled by both a shift in government policies as well as the profound impact of customer demands.
This is accompanied by the need to ensure supply chain security. Many companies have moved from a focus solely on energy to a broader perspective encompassing energy, climate, and natural resources. The evolved discourse around climate change now prioritizes a whole-of-economy approach.
In order to achieve major climate goals, a strong feedback mechanism with the political economy is critical. The energy transition conversation should be centered around monitoring not only exogenous economic factors like interest rates and supply chain costs, but also feedback from the political economy, and the willingness to adapt. These aspects are interconnected and crucial for the effective management of the decarbonization process.
While climate discussions often focus on national emissions reduction targets, it is crucial to explore the practical steps beyond these targets. For example, an analysis of the nationally determined contribution (NDC) target of the US reveals a cascade of goals, beginning with deployment targets for EVs, which are dependent on manufacturing targets. These manufacturing targets, in turn, rely on sourcing critical minerals and materials for batteries, cathodes, and anodes. The conversation has to address these upstream challenges and recognize their importance in achieving climate objectives.
Manufacturing and Integration Challenges
In terms of manufacturing stability, it is noteworthy that grid parts are manufactured by just three major players worldwide. These manufacturers, facing orders for the next decade or more, demand upfront payment, making customers pay not just for the product but also for the cost of capital over the entire period. This dynamic, compounded by occasional bidding wars, puts purchasers in precarious situations, particularly affecting sectors like onshore wind. A regulatory approach is necessary to address this and provide long-term market size certainty. This is key to navigate the challenges of decarbonization effectively.
Manufacturing trends also serve as leading indicators of whether NDC goals will be met. The recent surge in battery factory announcements in the US is significant in this regard. By 2030, with 15 gigafactories planned, the country could build nearly 10 to 12 million EVs annually. This increase in battery production capacity will be crucial to determining the fate of its NDC goals.
Similarly, small and medium-sized companies often struggle to participate in the transition due to limited knowledge about technology and supply chain management. As the focus on Scope 3 or ‘value chain’ emissions increases, integrating these companies into the chain becomes crucial. In India, creating value chains within industries can prove effective. The automobile industry can, for example, mentor its tier one, two, and three suppliers, ensuring that buyer-seller relationships prioritize climate considerations alongside price and quality. This approach promotes inclusivity and sustainability. Additionally, establishing centers of excellence for each vertical and engaging with them on a one-to-one basis while addressing policy issues concurrently can effectively advance progress.
Expanding Electric Infrastructure
While EVs have an important role in the transition, there is uncertainty about the preferred mix of hybrid, plug-in hybrid, and battery electric vehicles. The economic considerations include a comparison of the competing cost profiles between traditional internal combustion engine (ICE) vehicles with added electric systems versus purely electric vehicles. Automakers operating in different regions will need to adapt to unique market demands. For instance, the Chinese market shows a preference for strong hybrids, whereas early adopters in the US have largely favored battery-electric vehicles.
The expansion of electric infrastructure, particularly for public transportation, is a focus area in India. Given the high population density in cities, there is a pressing need for a larger network of electric buses to alleviate congestion and reduce emissions.
Achieving a value proposition for EVs requires a more coordinated strategy, especially for transit systems. For instance, in the US, through the infrastructure law, efforts are underway to shift the traditional diesel school buses to electric. While this supports the reduction of upfront capital expenditure, it is not the most efficient approach. A more promising approach is to migrate bus purchases to an ‘as a service’ model. This not only offers a standalone value proposition but also opens up opportunities for partnerships with investor-owned utilities in the US. By integrating buses into this model, utilities can monetize vehicle-to-grid attributes, such as providing ancillary services to the grid. Transit systems can explore purchasing arrangements that embrace such service-based financing and, as a result, leverage partnerships with electricity providers. This also facilitates the integration of renewables and other decarbonization efforts, as well as aligning various value streams for a more sustainable outcome.
Charging infrastructure has to expand exponentially to support the levels of EV penetration required for fleet decarbonization. While the advantages of hydrogen in heavy-duty applications are established, the primary hurdle continues to be the lack of charging infrastructure. Heavy-duty vehicle manufacturers in the US, such as Daimler, Navistar, and Volvo, along with other international companies, are resistant to EVs due to the required grid modifications. Therefore, the rapid scaling of modular electrolyzers that can utilize grid power to produce hydrogen is crucial for accelerating adoption. In this expansion, the key question is whether to opt for distributed electrolyzer infrastructure or centralized production with piping, each of which presents its own infrastructure challenges.
Additionally, it is essential to establish a global architecture with standardized rules for what constitutes green hydrogen. The policy in India, for instance, may not align with European standards for green hydrogen. Such discrepancies create islands of regulations around hydrogen, severely limiting the development of a hydrogen economy and supply chain.
Opportunities Amidst the Inflation Reduction Act (IRA)
Amidst the regulatory landscape, initial doubts around the US Inflation Reduction Act (IRA) now manifest themselves as opportunities for investment and growth. While some governments remain hesitant about change, international companies have forged ahead, actively investing in the US. Significant investments over the past year include the establishment of solar manufacturing firms from around the world, and Hyundai’s large-scale deployment of EVs. This shift aligns with similar policy reorientations in other countries, all geared towards a rapid clean energy transition.
The IRA's durability amid potential government changes is a pressing question. It is pertinent to recognize that the deeper a policy embeds itself in the economy, the more difficult it becomes to reverse it. Notably, the IRA has not only attracted foreign investments such as Korean ventures in the US, but has also catalyzed tangible domestic developments such as the production of solar panels and batteries nationwide. This has generated jobs and revitalized local economies, evident in the reuse of abandoned coal plants as renewable energy hubs. These investments have become integral to the real economy, rendering policy reversals difficult and fostering political resilience around the IRA’s objectives.
However, it is crucial to acknowledge the broader influence of leadership on energy transition initiatives. While the IRA serves as a pivotal component, changes in smaller regulations, such as liability laws for carbon capture or rules around green hydrogen, can significantly shape the trajectory of the transition. Often overlooked, these finer details play a crucial role alongside the hard economics addressed by the IRA.
Nuclear energy holds significant potential to advance the Net Zero goal. In India, projections indicate that there is a need for over 200, possibly 230 gigawatts, of nuclear power compared to the current capacity of 6.7 gigawatts. This necessitates a 30-fold increase in nuclear capacity over the next 45 years. Nuclear energy has to be approached from three angles: technology selection, partnerships for manufacturing and supply chain, and financing. This requires rapid capacity-building. While pressurized heavy-water reactors (PHWRs) remain India’s mainstay, rapid deployment must avoid technology substitution. Instead, an amalgamation of technologies can support this bid. Similarly, possible liability issues, suitable international partners, and financing challenges, including non-monetary hurdles such as land acquisition and social acceptance, also require policy attention.
Across India and other countries in the Global South, and the US, there is a pressing need to make clean energy careers more accessible to young people. To meet sustainability demands, an estimated 65 million green jobs will be required across various sectors, including energy, waste management, water resources, and agriculture. However, the current approach to skill development primarily focuses on modular training for specific tasks such as panel fixing and wire connecting. This piecemeal approach lacks the depth and breadth needed to address the multifaceted challenges of the transition. The American Climate Corps is an initiative that offers a low-friction, low-barrier entry point to correct this.
Shifts in approach to transition
Finally, three major shifts in approach are required. First, to move away from a highly centralized approach to energy supply towards a more decentralized and distributed model. Constraints in supply chains and grid interconnectors make this shift essential. Distributed energy should not be treated as an afterthought; scalability and resilience are features of distributed energy systems. However, this shift does not imply the complete disappearance of large centralized systems which continue to be integral to energy infrastructures.
The January 2024 announcement by Prime Minister Narendra Modi on rooftop solar installations for 10 million households is a significant example. This capacity, estimated at 30 GW, does not rely heavily on grid interconnectors and offers increased resilience by decentralizing power sources. It is also imperative to integrate distributed energy into a larger interconnected system rather than adhering to a rigid model of centralized generation, transmission, and consumption.
The second shift is to transition from a capital expenditure (CapEx) model to an operational expenditure (OpEx) one. Traditionally, energy systems are approached from a CapEx perspective, where costs continue to rise, even for clean energy alternatives like solar, wind, or nuclear. This often leads to a temptation to revert to fossil fuels due to their perceived cost advantages. However, an OpEx perspective presents a different picture. For instance, the upfront cost of electric buses is significantly higher than that of diesel buses. Yet, innovative models such as reverse auctions based on the lifetime cost per kilometer traveled, display that the OpEx of electric transportation can be lower than that of diesel. This approach can be extended beyond buses to other sectors like green steel, where initial costs may be higher but the overall lifecycle costs, particularly in end-use applications like cars, can be competitive.
Finally, there is need for a shift in perspective so that resources put into climate and energy are considered not as cost but as investment against future risks. While these investments may seem like an expense in the initial phases, there is need to measure their value against the losses they prevent in the future. By leveraging complementary skill sets, India and the US can scale clean technologies more quickly, address each other’s gaps, and enable environments that will accelerate energy transition. This collaboration will help fulfil the promises of a sustainable future.
