The Business of Green

INTRODUCTION: As we move closer to the UN Climate Change conference in Copenhagen this December, the debate on the actions that must be taken by governments, society and businesses worldwide is taking on a feverish pitch. The proponents of green technologies have argued that in the wake of the global financial crisis, we must seize the opportunity now to unleash the forces of creative capitalism to build a new energy supply architecture that is based on the paradigm of sustainable use of our natural resources. On the other hand, critics have argued that even under the most optimistic set of projections, green technologies are still years away from achieving the kind of scale necessary to make any meaningful impact. Furthermore, they argue that without the support from government subsidies and a market-distorting carbon tax, these technologies have yet to prove their economical viability and long-term sustenance capacity. Rapidly growing economies like India have argued, perhaps with some justification, that accepting mandatory emission cuts at this stage of their economic development would stymie their growth prospects and put an unfair burden of the costs of addressing the climate change challenge on them. But beyond the rhetoric and posturing, what kind of energy future should we envision for India and what are the kinds of structural adjustments needed in our economy today to become full participants in this potential new engine of growth?



Kirti Varun Avasarala: Time to Power India's Second 'Green Revolution'

By 2050, the world's population is expected to reach 9 billion, essentially adding two more Indias to the number of people alive today. Those billions will be seeking food, water and other resources on a planet which, scientists say, has already been exploited by humans and their unfriendly ecological practices. According to a Deutsche Bank report, maintaining status quo in energy consumption would lead to an emissions level of 59 gigatons of greenhouse gases and the maximum reduction that current policies could achieve will still lead to an excess 7-9 gigatons of greenhouse gases after accounting for a 2? C rise in global temperature. This entails the significant risk of crossing a climate "tipping point" which could lead to catastrophic impacts on the global ecosystem.



The U.N. Climate Change Conference to be held this December in Copenhagen provides an ideal platform for both developed and developing countries to display to the world their commitment towards countering Climate Change. India is already one of the world's largest and fastest growing economies and by 2030 it will become the third largest energy consumer in the world after the U.S. and China. This is both a cause for euphoria, as well as concern regarding the challenges that this growth presents in the form of rising energy consumption and demand, increasing greenhouse gas emissions, inefficiencies in energy supply and distribution, and depletion of natural resources such as land, coal, water and oil.

Whilst the environmental benefits of adopting Green technologies are well known, it's also extremely important from an economic growth and a cost-benefit perspective. Investments in clean technologies present a global market of about $1.5 trillion between now and 2030 and India can tap into this by increasing the demand for and supply of renewable energy sources like solar, wind and biomass. With a burgeoning global demand for Green technologies, India can capitalize on this opportunity by leveraging on its high quality engineering talent and low-cost manufacturing capabilities, and focus on R&D to develop "Green" products and services before the market matures. Growth in the renewable energy industry will spur technological innovation in India and lead to creation of millions of jobs in the coming years which would also support its growth aspirations. A classic example of this is Suzlon Energy. In a short period of time, it has become the world's fourth largest supplier of wind energy solutions and registered a 100% growth for almost a decade till 2008.

Green technologies have traditionally been derided as not feasible and too costly to replace conventional sources of energy. Whilst the upfront costs of setting up a solar or wind power plant are high, the running costs are very low because the fuel – air or the sun – is free. Also, with conventional energy sources like coal slated to be subjected to carbon pricing in the coming years, solar and wind energy seem like attractive investment propositions. A different perspective to cost-benefit analyses of these technologies would be by putting a price on the world's trees, water bodies and other natural resources. Treating nature and its benefits like other goods in the marketplace would also make it easier to calculate the "true" cost of energy. Skeptics of Green technologies, who only consider the monetary return on investment in such technologies, display an accountant's view of the world.

The Indian government needs to put into place the required policy infrastructure and market mechanisms in order to realize the clean technology opportunity. On the renewable energy demand side, India has already announced the launch of a "cap and trade" system whereby the government will assign energy efficiency improvement targets to businesses in energy-intensive sectors and businesses that beat their targets will generate Energy Savings Certificates that can be sold to businesses that miss their targets. On the supply side, India should look to implement innovative measures like "feed-in tariff systems" where regional or national electricity utilities are obliged to buy renewable power at above-market rates set by the government. This higher rate helps overcome the high initial cost requirements and thus incentivizes the setting up of a renewable energy power plant.

It is time now that India sets out a clear roadmap for adoption of Green technologies and benefits from the immense latent potential that these offer in fulfilling its twin objectives of economic growth and environmental sustainability.

Thomas Raymond Hyland: A Dose of Reality in Meeting India's Energy Challenge



Windmills fanned out across the Himalayas, solar panels on the rooftops of every village home, and clean nuclear power working quietly and efficiently to supply India's burgeoning energy needs. If this vision sounds too good to be true, that's because it is. Anachronistic as it may sound, India's energy future lay in traditional sources such as coal and oil.

Despite its position as the world's fourth largest emitter of carbon dioxide, India cannot meet its energy needs and faces massive electricity shortages, relying heavily on imports to help fuel its energy deficits; in 2008, only 27% of the country's oil needs were met by domestic production. A shortfall would put the country's economic trajectory at peril and derail the inclusive growth mandate aimed at lifting hundreds of millions out of poverty. As there exists a high correlation between energy consumption (and therefore emissions) and economic development, proposals that have the potential to disrupt the current path will be met with great resistance by elected policy makers. In the near term, however, the issue is off the table as it is a foregone conclusion that no reachable agreement will be reached when world leaders gather at the UN World Climate Change Conference in Copenhagen this December.

While Green technologies do hold longer-term future promise for India to help fill its energy void, the rhetoric does not match the reality as most are decades away from contributing in any meaningful way to overall power generation: They require high upfront costs and are poorly understood by the Indian public and they cannot offer steady stream supplies of energy as wind generation occurs largely during monsoon months and solar only during peak daylight hours. In addition, international firms have largely been reluctant to meaningfully commit to large scale projects in the country as the political and regulatory waters are murky and ill-defined. As a result, solar, wind, and geothermal power collectively contribute one percent to total energy consumption. It is estimated that a large-scale renewable energy program could generate 30 GW of power by 2020 (as part of the estimated 350 GW needed to keep pace with demand) subject to a cooperative regulatory environment and tax incentives. It is unclear if this is a step in the right direction or a premature distraction.

According to estimates by McKinsey, if the country is to maintain its high single digit growth for the next ten years, it will need a five to ten-fold increase in capacity generation. This will require a minimum investment outlay of upwards of $600 billion across the value chain; $300 billion for generation, $190 billion for distribution, and $110 billion for transmission to meet projections. In addition, the country faces an estimated deficit of upwards of 300,000 workers with the skills necessary to bring increased capacity online. To the extent government subsidies are available, it is crucial that they flow toward education and vocational training in the traditional fuel sector if the country is to maintain a secure energy future.

ABOUT THE AUTHORS:

Kirti Varun Avasarala is currently pursuing the Post Graduate program in management at ISB. He was previously with a FMCG major working in performance improvements and operational transformation in manufacturing..

Thomas R. Hyland is currently pursuing the Post Graduate program in management at ISB where he is pursuing his interests in the areas of financial inclusion, rural development and entrepreneurship. He was previously with SeaChange Capital Partners and Goldman.

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