Impact of Global Shift of Funds Away From Fossil Fuels on India: IEEFA

The International Energy Agency’s (IEA) Net Zero Emissions (NZE) roadmap by 2050 is compatible with the Paris goal of restricting the temperature increase to below 1.5 degree Celsius. As per the NZE roadmap, the use of unabated fossil fuels declines sharply to just over a fifth of the total energy supply. More than two-thirds of the energy supply in 2050 will come from renewables and around a tenth from nuclear.

The NZE roadmap is a global game changer. It sets out firmly the direction investment needs to go in for countries to restrict global emissions and achieve their Paris Agreement goals, writes Vibhuti Garg, Energy Economist and Lead India, Institute for Energy Economics and Financial Analysis (IEEFA).

Total annual energy investment will have to surge to US$5 trillion by 2030, with annual investment in electricity generation rising from just over US$500bn over the last five years to more than US$1600bn in 2030. Further, the NZE roadmap requires annual investment in transmission and distribution grids to expand from US$260bn in 2021 to US$820bn in 2030. Also, the number of public charging points for electric vehicles (EVs) will have to rise from ~1 million to 40 million during the same period, requiring annual investment of almost US$90bn by 2030.

The author says that global capital is already fleeing fossil fuels and moving towards more profitable clean energy as board room decisions are made more on economic than climate grounds. Increasing numbers of lenders are switching and redirecting their finance and insurance away from fossil fuels exposures. In the first quarter of 2021, assets in investment funds focused partly on the environment more than tripled in three years, amounting to US$2 trillion.

Recently, oil and gas giants Shell and Exxon experienced huge setbacks in court and from investors over their inaction on climate policies. A Dutch court ordered Shell to halve emissions and Exxon lost two board seats to activist investors. Also, with the ongoing erosion of fossil fuel shareholder wealth, there is a call for board members to diversify portfolios and shift investments to clean energy.

India is also experiencing the effects of the shift of capital away from fossil fuels. In 2020, in order to boost more domestic coal production, the government invited bids for the public auction of 41 coal blocks to encourage private investment. However, absence of international interest in these bids showed that such fossil fuel assets are no longer viewed as lucrative investments. In recent years, states like Maharashtra, Gujarat and Chhattisgarh and public and private sector developers like NTPC and Tata Power have announced pivots away from coal.

Garg argues that given investors are guided by the profit maximisation principle, as well as the desire to avoid high-emissions stranded assets, investment will flow where the returns are maximised. A look at the share price performance and return of Adani Transmission, Adani Green and Coal India Ltd. between July 2018 and June 2021 reveals Adani Green’s share price has increased 10 times and Adani Transmission’s by 8.5 times. Coal India, on the other hand, has halved its share price relative to 3 years ago.

Globally, the shift away from fossil fuels is accelerating in response to net zero emissions pledges last year by China, Japan and South Korea, a ratcheting up of climate ambition by President Biden’s administration and the recent announcement by the G7 countries of an exit from all international coal financing by their export credit agencies by the end of 2021. An increasing number of banks and financial institutions are setting enhanced climate targets and shifting their investment to green energy.

With the availability of renewable energy at Rs2/kWh level in India and further with deflationary prices of renewable energy, battery storage and electric vehicles, the competitiveness of fossil fuels will be further compromised. The contrast to the inflationary nature of fossil fuel firms is illustrated by the likely 15-20% wage rise facing Coal India Ltd in 2021. There is a temporary rise in the price of solar modules and thus solar energy in India in the face of import duties and commodity price rises to-date in 2021.

With the G7 countries’ international coal finance exit, the likely introduction of an EU carbon border adjustment mechanism (possibly replicated by the U.S.) and the ratcheting up of climate goals by the U.S., the direction of funds has changed irreversibly. India is no exception and while there may be a last tranche of investment into fossil fuel development available, the shift away from fossil fuels and rising stranded asset risks will continue to gather momentum.

With the Reserve Bank of India (RBI) now joining the Network for Greening the Financial System (NGFS), policies should be designed to fully incorporate environment and climate risk management in our country’s finance sector, steering limited public and private sector investments toward a green recovery for a more sustainable economy, concludes the author.