Unsettling the energy mix, clawbacks

The volatility in the price of natural gas has been exacerbated with the Russia-Ukraine war. It has amplified the pain of power retailers in the UK, at one end, and re-ignited the debate on the benefits and risks of nuclear power, on the other. For those companies that have ended up on the right side of the price surge — which include several companies generating renewable energy —  clawbacks are being designed to take away supernormal gains.

Billionaire entrepreneur Elon Musk wrote on Twitter that nuclear was “critical” to national security. The radiation risk is overplayed, he added. Venture capitalist Marc Andreessen called for “1,000 new state-of-the-art nuclear power plants in the US and Europe, right now”. Small modular reactors, or SMRs, are part of the conversation again, as are the demerits of forcefully retiring the young European nuclear fleet. Uranium prices have spiked. For the first time in more than a decade, a narrow majority of Japanese support restarting idled nuclear reactors, according to a recent Nikkei poll. 

The energy markets are in a flux and the ideal mix is changing. The quest is for an environmentally benign fuel with a reasonable stability of supply (and price) which is domestically sourced. Renewables fit the bill. They are in fact a key part of the European plan to reduce reliance on gas from Russia. There is a catch, however. While the wind and solar resource is necessarily local and available for free, the equipment is typically not. The solar supply chain is dominated by one set of countries, and there is another set for wind and batteries. 

Various nations are trying to boost local manufacturing of renewables equipment, offering compelling incentives to make it worthwhile for investors. India announced the winners of its $2.4-billion production-linked incentive (PLI) scheme for advanced battery production last month; those include Ola Electric, Hyundai Motor and Reliance New Energy. BloombergNEF sees India emerging as the fifth-largest energy storage market by 2030, following China — which is being seen replacing the US as the world’s largest storage market soon — the US, Germany, and Australia. 

Metals used in batteries are also facing severe price volatility, with nickel prices surging to $100,000 per tonne recently. Russia is the world’s second-largest producer of refined nickel used in batteries.

India aims to increase the share of natural gas in its energy mix to 15 per cent by 2030 from about 6.7 per cent currently, Union Minister of State for Petroleum and Natural Gas Rameswar Teli reiterated in Parliament last month. The country plans to expand the national gas grid, the city gas distribution network, LNG terminals and associated infrastructure. There may be a case for a rethink to this fundamental plank of the energy strategy.  

Gap-to-target

India managed almost 51 gigawatts of solar installations at the end of February against the target of 100 gigawatts by December 2022. Being aggressive on solar targets makes sense for the country, given its resource map. The large gap-to-target comes from the lack of progress on rooftop solar installations. 

Solar is one of the most price-competitive sources of power in the country. The lowest tariff discovered in the auctions held last year was Rs 2.14 per unit. The current market structure with one monopoly provider in each area — usually state-owned — disincentivises rooftop installations. Commercial and industrial consumers paying premium tariffs have, however, been able to source renewables while individual household customers have yet to find an easy route for that.  

Most of the solar panels installed, however, have been imported from China, given the limited capacity to manufacture domestically. There is an ongoing attempt to expand domestic solar equipment manufacturing by offering incentives. The outcome depends on multiple factors, including the intensity of the push by power plant developers to keep the import channels open and free so that the delivered cost of power can be kept low. 

Could there be a large export market for cheap solar power? The future could involve solar power swishing around the world through high-voltage wires. The $23-billion Sun Cable project to export solar power from Australia’s Outback to Singapore moved another step forward this week. A 4,200-kilometre cable will carry power from a giant solar and battery complex in northern Australia to meet 15 per cent of Singapore’s demand. The targeted start date of the project is 2026.

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The writer is the New York based editor – Global Policy for BloombergNEF, reachable at vgombar@bloomberg.net