As the world limps out of 2020, a new US presidency is likely to guide the global hydrocarbons and renewables industry in a new direction. The implications for India, the world's second largest oil importer, a signatory to the Paris Accord and the head of the International Solar Alliance, is likely to be profound.
Under the Trump administration, the US emerged energy independent for the first time since 1957. This reality contributed a large extent to a swift withdrawal from multilateral green energy deals and a drastic reduction in American military presence in the Middle East. With a high likelihood of a Biden administration steering the ship from 2021-25, America's new domestic energy policy will reverberate through the world. While the president-elect has backtracked on his initial comments suggesting that domestic fracking would be ended soon, the Democrats appear keen to taper over time, starting with a reduction in subsidies.
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Transitioning to a green economy is no mean feat for a country that relies on low-cost energy and fuel to keep inflation in check and the manufacturing sector running. Should there be an attempt to bring jobs outsourced to China back to the US, low energy prices would be needed to support American competitiveness in the international industrial space. With these elections accentuating the stark divide between rural and urban voters, the route the Democrats take towards re-industrialising will depend on the political calculus and expectations for 2024 and beyond. If, from the ideologically “left” quarters there is a push to aggressively phase out hydrocarbons and replace them with renewables, it would fit within the broader agenda of dominating a new, borderless international digital empire - where data is the new oil - to preserve American hegemony. For them, this is a necessary step to shift the theatre of US dominance, which to an extent relied on both strategic depth in the global oil and gas space and military interventionism. Establishment Democrats and Republicans alike would be keen to stave off a sharp turn in this direction as they fear it could alienate the rural vote base which is already suffering from rising inequality and a lack of manufacturing jobs.
The US-India Strategic Energy Partnership has been crafted to ringfence the relationship against changes in policies around hydrocarbons, with its strong emphasis on renewable energy technology sharing and gas and power grid development. In the US, the Democrats' cards are yet to be laid on the table to give the world a sense of timelines and precise policy measures, but it can be said with a degree of confidence that the US would re-join the Paris Accord and step up its involvement in the International Solar Alliance, which is headed up by India.
While much of the focus in election discourse was on oil and gas, the immediate impact would be felt by utilities. An increase in renewable capacity as a proportion of the generation stack to meet Biden's 2035 target of cutting emissions by 50 per cent, will bring with it a dramatic rise in demand for grid-stabilising batteries, and in turn, lithium, cobalt and rare earths. Much of the $2 trillion expected to be invested will be across the supply chain - from batteries to solar panels and from electric vehicle charging stations to smart grids. These natural resources embedded in equipment required for the transition to a clean energy ecosystem are firmly in the Panda's grip. The Chinese Communist Party (CCP) has worked assiduously over the years to snap up 80 per cent of the global rare earth production. Meanwhile, their domestic push for electric vehicles is as much about reducing local pollution as it is about growing indigenous end-to-end battery supply chains that can be used to control foreign economies. As of this year, according to Bloomberg New Energy Finance, China manages 80 per cent of global refining, 70 per cent of cell capacity, and 60 per cent of global component manufacturing. Meanwhile, the CCP controls 51 per cent of the world's lithium, 62 per cent of chemical cobalt, and 100 per cent of spherical graphite - all of which are key inputs for the clean energy technologies. The US meets 40 per cent of grid-storage Li-ion batteries from China currently, and if the Biden's administration doubles down on its decarbonization efforts, US clean energy independence will be all but impossible. Shifting supply chains to India could provide a degree of security, and the Modi government's Production Linked Incentives (PLIs) to attract international battery manufacturers might play a pivotal role for the US. That said, the upstream remains vulnerable to Chinese intervention. To counter this, both the US and India have been keen to explore new avenues with India taking the lead in commissioning deep-sea mining vessels set to sail next year which would extract lithium, critical metals and rare earths from Indian Ocean seabed.
Solar panel manufacturing in India is coming off a low base, but the next four years could end up seeing a major upswing in this sector if the US pursues a large-scale rollout. In tandem, India's own push to meet its Paris Accord goals will result in a 130 per cent increase above the current 36GW installed, by 2024. Against the backdrop of steep tariffs and non-tariff barriers imposed on Chinese solar panels and components, the Modi government received 10GW of manufacturing proposals in September this year. As end-to-end capacity gets built from the current base of 3GW, India will play a major role in the export of renewable equipment to the US and other signatories to the climate deal, while it simultaneously cuts back on its annual $2.2 billion import bill for Chinese panels to service its domestic needs. Backing these production schemes will involve green financing, and credit must be made available at low interest rates. The Biden team may incentivise sustainable financing through offering flexible payment schedules and tax breaks for those investing in domestic projects. For India, it would mean domestic manufacturers would step into the US market to execute project delivery. The green bond initiative has gained limited traction until now, but if there is a concerted effort to deliver on the climate change mandate, a surge in activity can be expected. Indian companies encumbered with high local interest rates would get access to low-cost financing which can assist in capacity growth to service local and international end users.