India has laid out an ambitious agenda to expand energy access to all its people, reduce air pollution, increase energy security, and reduce carbon emissions intensity. It has made tremendous progress providing access to electricity and clean cooking to its people. It rapidly increased the deployment of renewables even as coal still supplies two thirds of its electricity mix. The country’s oil consumption is expected to grow faster than any other major economy, as are its CO2 emissions. In short, with a population of 1.4 billion people, and rapidly rising energy demand, India will be a key country, perhaps the key country, for energy markets and climate change in the decades to come.
In this edition of Columbia Energy Exchange, host Jason Bordoff is joined by Dr. Ajay Mathur, Director General of The Energy & Resources Institute in New Delhi, to discuss the energy outlook in India. Ajay was in New York City in February to attend a workshop hosted by the Center on Global Energy Policy on engaging state-owned enterprises in climate action, based on a recent report from the Center.
Ajay is a member of the Prime Minister's Council on Climate Change. He served as Director General of the Bureau of Energy Efficiency in the Indian government from 2006 until 2016, and previously headed the Climate Change Team at the World Bank, as well as the interim Secretariat of the Green Climate Fund.
Jason Bordoff: Hello and welcome to Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University, I’m Jason Bordoff. India has laid out an ambitious agenda to expand energy access to all its people, reduce air pollution, increase energy security and reduce carbon emissions intensity. It’s made tremendous progress providing access to electricity and clean cooking to its people, rapidly increase the deployment of renewables even as coal still supplies two-thirds of its electricity mix. The country’s oil consumption is expected to grow faster than any other major economy as are its CO2 emissions. In short, with a population of 1.4 billion people, rapidly rising energy demand, India will be a key country, perhaps the key country, for energy markets and climate change in the decades to come. To understand the energy outlook in India in more detail and he’s in town to join us for an Energy Center hosted workshop on engaging state-owned enterprises in climate action based on a new report we’ve put out, I’m delighted to be joined today by my friend Dr. Ajay Mathur, Director General of The Energy & Resources Institute in New Delhi, Ajay is a member of the Prime Minister’s Council on Climate Change, he’s served as Director General of the Bureau of Energy Efficiency in the Indian Government from 2006 to 2016. Ajay previously headed the Climate Change Team at the World Bank and also headed the interim Secretariat of the Green Climate Fund. Ajay, thank you so much for joining us today on Columbia Energy Exchange.
Dr. Ajay Mathur: Jason, it’s wonderful to be here.
Jason Bordoff: So, let’s start for our listeners just at a very high level for those perhaps not familiar with the current state of play in India, talk about where things stand today, what the main policy priorities are and how you see the mix unfolding and then I’ll go into a little more detail about certain pieces of this?
Dr. Ajay Mathur: Well, I think there are four big pieces, the first one is that -- for the first time in its history the Indian energy sector has more capacity than they need. So, for example in the electricity sector the installed capacity is now something of the order of 360 gigawatts, but the maximum amount of electricity we have sold till now it’s about 180 gigawatts. In other words, we have more capacity than economic demand. This is a huge change from the situation about 15 years ago. So, that’s one. The second is energy efficiency is now big in India, it’s come to the extent that in the past one year there’s been hardly any growth in electricity and energy demand which obviously is a result of the slowing down of the economy, but also result of the growing energy efficiency.
Jason Bordoff: Can I stop you there and just sort of stay on that because I think of the many important roles that you have played in your career maybe the most important your leadership at the Bureau of Energy Efficiency within the Ministry of Power and you pushed really hard for energy efficiency standards, talk a little bit about that experience which wasn’t -- or was framed as reducing consumption, but increasing service delivery. What lessons do you think there are there for other countries and what kind of progress do you see India making right now on efficiency?
Dr. Ajay Mathur: So, I think as far as the first question is concerned, what are the kinds of lessons? So, I think there are three lessons -- two lessons that we’ve learned, the first lesson is energy services are of great value to consumers and therefore people are willing to pay for energy efficiency. This wasn’t obvious, it was said that the Indian consumer extremely cost conscious and will not pay for energy efficiency. However, what we’ve seen is very different. The second is that energy efficiency is valued for a lot of things including competitiveness, including staying in the market, including the ability to expand market share. In other words, it’s got huge amount of traction in the economy. Certification or labeling works, a system that we setup called the perform, achieve and trade which was for the large energy intensive industries works extremely well, it’s been now going on for about eight years. What this has done, it’s created a move in which people expect energy efficiencies in their homes, in their offices, in their factories. It’s also created an environment in which people expected their energy bill next year will in less than their energy bill this year instead of being more. This has completely changed the dynamics of the energy system. The second thing that we have learned is that it is possible --
Jason Bordoff: Where do those show up mostly, is that -- is that lighting, appliances, where did you see --
Dr. Ajay Mathur: It happens everywhere. First, for example the biggest place which has happened is air conditioning and refrigerators. An Indian air conditioner sold today is approximately half as much energy guzzling as an air conditioner sold in 2010. So, in 10 years the energy efficiency has doubled. This is big because this is the single largest user, largest driver of energy use, electricity use in the country.
Jason Bordoff: And going to be one of the fastest growing and especially with the impacts in climate change.
Dr. Ajay Mathur: Absolutely. We expect that energy growth due to air conditioning will be of the order of 20% a year, this is big and therefore efficiency is extremely important. The other thing that we have learned is that it is possible to bring in energy efficiency, start an energy efficiency program relatively soon. Data is available, countries can establish their policies. You can keep waiting for the best data, but we can start now and then have a data system which brings in better data you’re able to tweak your standards and move on and move faster, but there are so many well-established things like standards and labeling for appliances, like energy efficiency codes for buildings. Those are things that can start now, this is something that makes great sense for people everywhere.
Jason Bordoff: And even with that, you still I think – well the IEA projects, tell me what TERI projects, something on the order of doubling energy demand in India over the next two decades or so, right?
Dr. Ajay Mathur: That’s right, that’s right. I think, Jason, it’s important to remember that India starts from a very low base. The energy use in India is approximately half of the global average approximately one-sixth of the average U.S. consumption. And we know the only way we know to develop is by using more energy. And if we want people to have a life style which is good, we’re expecting energy use to increase six times if not eight times, what we want is that this energy is clean. Energy is there, but the CO2 emissions are not, that’s the challenge.
Jason Bordoff: And right now, I think India is dramatically growing clean energy, it’s also growing not so clean energy just because as you said the energy demand is growing so quickly. Just finishing on the efficiency point before moving on to some other things, do you think -- so we’ve seen over the past decade India’s energy intensity improve significantly even as the economy -- and then the economy was growing quite quickly do you think the current slowdown in the Indian economy will affect its path toward energy efficiency and reducing the use of carbon intensive fuels. Is that going to be -- create a more challenging environment?
Dr. Ajay Mathur: There’s no doubt that the pickup of energy efficiency reduces when the economy slows down, there is no doubt about it. Nevertheless, energy efficiency is almost like a truck, once you starts take -- when you start taking it, you need it. And people who are used to energy efficiency and now it’s the whole economy, we will see this movement towards greater energy intensity going on, it will not increase at the same rate as which did in the past. But the energy intensity deduction will continue.
Jason Bordoff: So, I interrupted you, you’re walking through sort of four big themes, you wanted to touch on and then I think number two is efficiency and I paused there because I wanted to get into it, so please continue and then let’s dig into those?
Dr. Ajay Mathur: The third issue that I wanted to focus on was the fact that despite the fact that there’s enough electricity and energy available, the tariff structures for various classes of consumers for example in agriculture continue to be subsidized. As a result, the electricity distribution companies lose money for every kilowatt hour of electricity that they supply to these consumers. They would rather drop a load than buy electricity even though it is available because they spend more on buying it than they recover in selling it. This I think is a key issue as far as Indian energy system is concerned.
The fourth point that I wanted to cover was that on the renewable side, we have seen a huge growth occurring. Wind and solar alone have increased from five percent of the electricity generation in 2015 to more than 10% now. More importantly, solar electricity became the cheapest form of electricity in India, but only when the sun is shining about two years ago. But about 10 days ago, when a new tender was opened and this was for 1200 megawatts of electricity to be delivered round the clock from renewables and storage, we found average prices which were less than the average price of coal. And to be delivered --
Jason Bordoff: For solar --
Dr. Ajay Mathur: Solar plus storage.
Jason Bordoff: So, base load basically --
Dr. Ajay Mathur: Well, base load as well as peak load during hours --
Jason Bordoff: I mean they can play the role of base load you --
Dr. Ajay Mathur: Exactly. It can play, the loads will be slowed, but it can also play the role of -- at peak times. For example, when all of us go to bed at night we switch on our air conditioners and therefore you have a peak at 9 o’clock at night which is a two-hour peak.
Jason Bordoff: Okay.
Dr. Ajay Mathur: The sun is not shining at that time, but you need electricity.
Jason Bordoff: So, we often hear India referenced as one of the major challenges making progress on climate change in the years to come. It’s one of the -- the fastest growing major economy in -- in terms of its emissions growth rate -- the growth rate. There’s obviously a lot of other sources besides electricity, but on electricity does this mean problem solved, now we’re never going to have as zero carbon growth trajectory?
Dr. Ajay Mathur: Well very clearly this is the end of the beginning. The issue of availability of electricity from renewables around the clock at affordable prices is over. Now, the issue is that of scale up. Will we get enough solar panels, will we get enough batteries, when will we get it? Is there enough land to put it up, are there transmission lines to take it from where these will be placed to the places where they’ll be used? Those are the kinds of issues that we will now have to focus on.
Jason Bordoff: Those are the main challenges for system integration in your view --
Dr. Ajay Mathur: Absolutely. So, flexibility is very important, but part of the problem is solved because of the -- you know, there are two companies which --
Jason Bordoff: I mean for several years the conversation I’ve had with policy makers in India with leaders like yourself is, how do we start to overcome the barriers as we increasingly scale renewables at higher and higher penetration rates into the grid. What you just said about storage, it changes the game in some important ways.
Dr. Ajay Mathur: It changes the conversation completely. And of the people who will -- who have won the bid, one of them is putting up solar plus pumped storage. The other is putting up solar and wind and battery storage. And the point is that for both of these options the net electricity price is less than the net electricity price from coal electricity. This is huge, what it implies is a few years from now three years, five years, seven years, but certainly by 2027 there -- the new electricity capacity that will be built would be exclusively solar plus storage. What we are therefore going to see is that while coal use will increase for the next three, four, five, six years, after that it will stabilize, and as the coal power plants retire, it will decline.
Jason Bordoff: Which just to be clear when you say as the coal power plants retire, in the U.S. the average coal power plant is something like 45 years old, it’s quite a bit younger in India, so that --
Dr. Ajay Mathur: That’s true.
Jason Bordoff: If we’re thinking about climate goals like one and a half or two degrees given the time frame, we have to get on track with that, can we let these plants run to the end of their natural life, even if the new investment comes in clean energy?
Dr. Ajay Mathur: Well, first of all if you look from a purely economic perspective, the vast number of coal power plants would have retired by 2050. There would be a remaining lump which would retire largely by 2060, the number remaining after 2060 would be very, very small. But by 2050 the climate issues will be so urgent that there would be addition -- additional regulatory interventions that would come into play apart from the economic interventions that I talked about which would probably accelerate the process. So, at -- so the baseline that we are now looking at is very different from the baseline earlier. We are looking at a -- definitely at coal for electricity peaking by somewhere around 2030 to 2035.
Jason Bordoff: And talk a little bit about what policy actions you think are needed to create the regulatory framework, allow for system integrations, send the right price signals to move in that direction?
Dr. Ajay Mathur: Well, I believe that there are a couple of key issues that are needed. The first is, people will put in the storage whether it is batteries or pumped storage, but they would need to make sure that they get a higher price for it. So, real time prices are essential. Right now, bulk electricity is priced on a 24-hour basis. So, that’s the first step. The Central Electricity Regulatory Commission in India has put out draft regulations which look at real time pricing so I think that’s the --. The second is we need to bring in things like demand reduction measures, so that when the electricity company wants, it can tell you and I, please reduce your demand by 10% in 10 minutes and if you do that, we will give you a premium on your electricity tariff. Those are the kinds of interventions. And the third of course is that coal power stations in the short-term need to ramp up and ramp down much faster than they’ve been doing in the past, which allows therefore solar to come in and go out more easily.
Jason Bordoff: And you’re talking about the drivers so there’s policy drivers, there’s economic drivers which are changing with what you just said about solar and storage. There’s political economy challenges, I mean in the U.S. a major issue with the cheap natural gas and the cheap renewables is the decline of coal communities around the United States and we have something like 50 or 60 thousand people who work in the coal sector, tell me if I have my numbers right, but in India it’s something like 300 thousand, 500 thousand --
Dr. Ajay Mathur: Absolutely, yeah.
Jason Bordoff: And then you have a million or million and a half in rail who work in railways and the number one thing the railways move is coal. So, there are a lot of jobs at stake for what you just said, how big a challenge will that be?
Dr. Ajay Mathur: Jason, this is a very important issue. The thing is we’re looking at a 20- to 30-year timeframe to solve this issue. That’s the lifetime of a worker. So, if we are able to retire the last coal plant on the day when the last coal mine and the last coal miner retires, it is possible to look at this in a way that meets climate justice goals as well. It is also important that the communities that -- where coal mines existed and where coal mines are closed, those communities get a fair shake. I read about a year ago in The New Times of you know, that beekeeping in the Appalachian Areas brings families more money than working in the coal mines. I don’t know what are kinds of livelihoods in the areas in the coal bearing areas of India that can provide people with livelihoods that are at least as economically beneficial as coal mining, but we need to look at that. The only good thing is I think we have a 20-year window.
Jason Bordoff: It’s very hard. I mean I think in the U.S. there’s been a lot of talk of you know, retraining and other careers and I think policymakers on both sides of the aisle have struggled to make it on those sorts of promises.
Dr. Ajay Mathur: This is not easy.
Jason Bordoff: But how big a political barrier is it, how much pushback do you see on this transition?
Dr. Ajay Mathur: Well -- there it will be a pushback, there is no doubt about it and it’s going to push back from the local communities, there’ll also be a push back from state governments because the state governments where coal occurs are largely in the eastern part of the country. Whereas, the places where solar and wind will occur is largely in the western and southern parts of the country. So, there would be interstate justice issues as well. So, this is not going to be easy from a political economy point of view it’s going to be difficult, but what we have learned is that things will move the way the least cost of measures take them. What we need to do is to make sure that people suffer the least, in fact they shouldn’t suffer at all.
Jason Bordoff: Now, one of the ways people are suffering as well, is just air quality and I think the perception broadly is that in a country like India, concerns about local air pollutions are many times greater than -- the drivers of change come more from that than from concerns about climate change, so you know, tell me if that’s right and then what does that mean for the pace at which the public at large is pushing for the kind of policy changes that you said would accelerate the pace of coal decline?
Dr. Ajay Mathur: So, over the past three years we have seen that air pollution levels just peaked, they dramatically rise during the winter months for a variety of reasons.
Jason Bordoff: Not just energy, that includes crop burning and other --
Dr. Ajay Mathur: That’s right. So, energy itself is a relatively small part. So, in summers for example when the emission levels are at about the national ambient requirements, energy contributes something on the order of one-third to 40% of the emissions.
Jason Bordoff: The rest is agriculture --
Dr. Ajay Mathur: The rest is -- the rest is dust which is blown in from the deserts in the west, it is construction and demolition waste, it is the secondary particles formed from the ammonia that rises from the fertilizers outside the city, it is because of the industrial pollutions. So, a huge range of pollutants. The transport sector is something that I count within the energy sector.
Jason Bordoff: Right. And as I want to ask you about the role of natural gas in India’s energy future. We just had President of the United States over there looking for the possibility of a trade deal and there’s a lot of discussion about whether LNG would be a part of that. This whole discussion about the carbon intensity of LNG and methane emissions, but from a local air pollution standpoint, many, many times better than say using coal. The Indian Government has pretty ambitious plans to increase the role of gas in the economy. Do you see that playing out, how is that going, what role do you think natural gas has in addressing India’s energy needs at the same time that we want to make progress on both air pollution and climate change?
Dr. Ajay Mathur: So, as I said on the electricity side, there is a huge capacity which is in excess of what is needed. So, what is happening is that coal power stations which are closer to the cities are being closed down. So, for example there is this large power station which was right next to Delhi which has been closed down for air pollution reasons. But nevertheless, there are coal power plants further away from urban areas which are still operating, that’s number one. Number two, the issue of air pollution is also addressed through moves towards cleaning up the coal power stations which is still seen to be cheaper than setting up gas power plants. So, gas is -- gas electricity is really a cost issue, it’s not so much whether we have it or not, but --
Jason Bordoff: But with what you just said about solar and storage, do you see a lot of growth in gas demand in the power sector or is it going to come from other sectors?
Dr. Ajay Mathur: No, no. We don’t see a large growth in the gas in power sector in the near future, yet six years, seven years from now, we will see a role for gas in the power sector and that is because of seasonal variations. So, in the summers when the demand is very high versus winters when the demand is very low there is a difference of about 30%, part of this 30% would be met by gas. Gas would largely be used for cooking and therefore the imported LNG is being used to provide cooking fuel in urban areas through piped networks.
Jason Bordoff: And that -- moving away from dirty cooking fuels --
Dr. Ajay Mathur: Exactly.
Jason Bordoff: Along with electricity access, those have been two major priorities for the --
Dr. Ajay Mathur: Correct, of the government.
Jason Bordoff: Indian government and actually quite a bit of progress?
Dr. Ajay Mathur: Absolutely, absolutely.
Jason Bordoff: Do you see -- India’s gas consumption started to grow in the last couple of years in response to rather cheap global LNG spot prices, we have pretty low gas prices around the world now. So, how does India think about the role of gas, is it looking to exploit the current low-price environment to sign contracts, is it going to depend on the spot market, sign long-term contracts which is something that projects looking to develop including in the U.S. are wondering about it?
Dr. Ajay Mathur: So, there is no doubt that contracts long-term contracts for gas are and will be signed. The issue will always be what is it it’s used for. We see that it would be obviously be used for peaking electricity, but the far larger amounts would be used for cooking gas and to some extent for transport. For example, in the city of Delhi, commercial vehicles, buses and taxis must use gas, they cannot use petrol or diesel, so those things will grow.
Jason Bordoff: And do you think, will -- is India looking at this moment of low prices to sign --
Dr. Ajay Mathur: Oh, absolutely.
Jason Bordoff: Think about long-term?
Dr. Ajay Mathur: Yes. So, India is looking at reducing liquid fuels, oil, and it’s looking for a 10% reduction over the next two years and replacing it with gas.
Jason Bordoff: And you think U.S. LNG or be attractive in the Indian market?
Dr. Ajay Mathur: Listen, this is really a matter of the comparative economics. So, depending on who offers what prices at what time is the key to whether these will be signed or not. But that gas contracts will be signed is inevitable, it’s happened -- it’s happening and will continue to happen.
Jason Bordoff: What do you think the government has to do to expand the use of gas, meet some of the targets, are they got as a target of going from six percent to fifteen percent of the energy mix and as you said cooking fuels will be a big driver of that for creation of the well-functioning gas market, competition, the infrastructure that you need, what are the policy drivers that are needed thee?
Dr. Ajay Mathur: So, the two key drivers for gas, one is obviously the network so that it’s available everywhere and that network is increasing day on day as we speak.
Jason Bordoff: You’re talking about pipelines?
Dr. Ajay Mathur: Oh, pipelines --
Jason Bordoff: Yeah.
Dr. Ajay Mathur: Yeah. The second is the relative economics of gas compared to other fuels and other fuels here is coal which is amazingly expensive and becoming expensive day by day whereas the price of gas is declining. And at the same time, we are also looking at key markets, we spoke about the cooking -- piped cooking market, we also -- there is also -- we’ve seen increasing use of gas in industry. Those are the kinds of markets where gas is entering now. So, the policy driver really is availability.
Jason Bordoff: And just say a little bit more about, I mentioned a minute ago, there’s been progress moving households away from inefficient use and dirty use of fuel toward cleaner LPG, just talk a little bit about what the government is doing there and how it’s going?
Dr. Ajay Mathur: So, the government’s program, it’s called UJALA or alighting lives, is about providing LPG connections to rural households. The government has been very successful in connecting gas to almost all urban individuals, but in rural areas it has been poor and in rural areas biomass is used typically in a dirty and inefficient fashion. So, the people who are using it are typically women are extremely prone to a range of diseases associated with burning dirty biomass in dirty stoves. It also leads to a huge amount of external pollution. If you take pictures you see pictures of India you will see a swath of dirty air across all of Northern to Eastern India. What that tells us is that whether it is for personal reasons or for national reasons, moving away from this biomass fuel is important. The government therefore created the program of providing these LPG stoves, the coverage today I am told has crossed 50% of rural households. There is still the issue or reliability of supply and therefore refills, but those are issues that are being addressed as we speak. So, there is an increasing uptake of LPG in rural areas as opposed to using biomass fuels.
Jason Bordoff: And the government also major priority to expand access to electricity and has made great progress, near universal access to electricity now.
Dr. Ajay Mathur: So, I think it was in March 2019 that the government was able to electrify or ensure that almost every household in the country is connected to the grid. That completely changes the picture when just 10 years ago, there were still about a third of Indian households who were not connected to the grid. This enables households to start thinking of obviously lighting and mobile phone chargers and so on, but also things like refrigerators, you know, enhancing quality of life, using livelihood such as you know, textiles and so on which therefore increase the productivity and therefore the income of houses.
Jason Bordoff: And how did they achieve that and how much was distributed versus central utility scale?
Dr. Ajay Mathur: Well, this is almost 100% centrally located, there has been some amount of distributed renewables, but that’s relatively small you know it’s probably less than 10%. The goal is that everybody’s connected to the grid, but what it allows is that tomorrow we may have for reliability reasons, micro grids, which are based on local renewables which enhance and supplement the grid-based connectivity. And that allows people an option of how much grid electricity they want and how much micro grid renewable based electricity that they want.
Jason Bordoff: So, significant expansion in electrification of all towns and cities and villages, expanded use of LPG, all of which improves quality of life for people around the country, how much in tension is that with the NDCs the climate goals that India has in the Paris Agreement?
Dr. Ajay Mathur: So, India has two major energy related goals, the first is that the climate intensity of the economy declines by 33 to 35% in 2030 compared to what it was in --
Jason Bordoff: That was its NDC, it’s National Determined Contribution.
Dr. Ajay Mathur: National Determined Contribution. The second was that at least 40% of the electricity generating capacity would be non-fossil fuel based. On the first, we expect that currently India would have already achieved something of the order of 25% of carbon intensity reduction. In other words, in another two or three years it should be able to meet its 33% goal. On the non-fossil fuel side, we are already at about 36% non-fossil fuel generation capacity. So, again in about a couple of years we should be able to meet the 40% goal. The more important issue is we also now need to move to sectors other than electricity. In transportation for example or industries steel and cement where CO2 is produced because of the way that we make cement and electricity. We need to look at alternative methodologies, electric transport or hydrogen-based steelmaking to move towards zero carbon transport and industry.
Jason Bordoff: And do you see -- how much progress do you see there, how much -- how strong are the policy drivers there? Even with near universal access to electricity, does that still remain concern about electricity reliability is that -- is that a concern at all in terms of expanding electrification or transport?
Dr. Ajay Mathur: Sure. So, there is no doubt that while 100% of the households have been connected to electricity, it does not mean that they get electricity 24/7. Consequently, there is a priority on ensuring that are electrons flowing on it 100% of the time, so that people can get electricity as and when they want. So, that’s a continuing priority, it also helps build the market for local micro grids based on renewables. On the issue of the other sectors, there is an issue of, in the transport sector, we have now seen buses being competitive on a lifecycle cost electricity buses being competitive with diesel buses on a lifecycle cost basis. We are -- probably at the instance where two-wheelers, motorcycles and motor scooters, which are electric being on a lifecycle cost being less costly than petrol or gasoline-based vehicles. Again, in those areas I think the transition is happening. The speed of the transition will depend on the availability of electricity charging stations. In India, two-wheelers are approximately six times as many as cars and therefore this transition has huge implications, much larger implications than moving to electric cars in terms of the carbon dioxide emissions.
Jason Bordoff: And when you think about the drivers of policy action, we’ve talked about several of them, affordability and access, we’ve talked about pollution and climate, another major one for India’s energy security, oil imports, we talked about whether gas would play a role and a lot of that is going to be imports, how important is that as a policy priority and how does it manifest itself. What is the government doing to build strategic stocks, reduce oil imports, is that a driver of the need to find alternatives?
Dr. Ajay Mathur: It clearly is. So, for example in the oil sector, there is a stated objective of reducing 10% imports over the next two years. A part of it would be met by gas and part of it would be met by electrification and part of it would be met by energy efficiency. So, there is a move towards reducing the outflow of foreign exchange because the greatest impact on the Indian economy is the volatility on the macro economy. So, if the finance minister has to get up in the Parliament and say, excuse me I have to spend more money on buying oil that’s something that Parliament doesn’t like.
Jason Bordoff: Yeah, the U.S. used to have that conversation too before --
Dr. Ajay Mathur: Exactly.
Jason Bordoff: And the cusp of net exporter of oil with the Shale Revolution. You mentioned about foreign outflows, what about the inflows, what -- you need a lot of capital for the kind of investments you are talking about, are there in your view significant barriers to foreign direct investments are there things policy can do there to overcome that?
Dr. Ajay Mathur: It’s very interesting that what we’ve seen in the past couple of years is that in the investment sector, private equity has not been an issue, what has been an issue is debt. You can get a loan in this country, in the U.S., for two to three percent a year, in India it’s about 11%. When Indian companies build a loan portfolio which includes loans raised in India -- in the U.S. and Europe, the challenge is that in order to repay from their rupee earnings the need to buy a hedge, and the currency hedges that are currently available are three-year hedges where the premium is about seven percent. So, more -- it’s more or less ends up costing the same as if you borrowed from Indian markets. I think it would do the world good if we’re able to develop a 10-year hedging instrument. That would bring the cost down, it would enable money to be moved into these projects and it would also bring higher returns to the capital in the U.S. and Europe.
Jason Bordoff: In your view, what is the single biggest challenge for India’s energy sector development moving forward, is it the fiscal solvency of distribution companies, the overall investment environment some other policy related what’s -- where would you be focusing now?
Dr. Ajay Mathur: So, I think the largest issue is in the policy in the local policy environment and it is policy certainty that is most important. We have had examples in the recent past where governments have wondered you know, the price of solar energy has been falling and therefore governments had wondered we signed a contract five years ago which was substantially more expensive than the one we signed this year. So, why don’t we ask the fellow with whom we signed it five years ago to also provide it at the same price, but that fellow has already invested, he’s bought the solar panels at that price, he can’t provide electricity at a lower price. And it is this kind of policy certainty that developers and banks shudder about, that’s one.
The second, as you mentioned, is the issue of ensuring that financial flows keep occurring and therefore the availability of cheaper capital because with renewables there is much more money on the capital side than there is on the operational side. Obviously, there is almost no money which means that cost of capital matters a lot. And therefore, if we can reduce the amount -- the cost of capital, renewables become much cheaper. So, as -- if we can address those two big issues the other issues get resolved along the way.
Jason Bordoff: Well, as a former policy maker I will say that I’m probably skeptical on the first -- it comes up all the time in the U.S. too and where people lament policy uncertainty and if anything the pendulum is swinging more, in more extreme directions in the U.S. and that’s likely that continue. So, I think --
Dr. Ajay Mathur: Let’s keep our fingers crossed, Jason.
Jason Bordoff: I think investors in the U.S. and India and probably elsewhere will continue needing to learn to live with policy uncertainty as they think about how to make investments moving forward. Ajay, unfortunately we’re out of time I wish we had much more time, but it’s really it was a pleasure to spend time with you to welcome you here to New York to the Center on Global Energy Policy, thanks for making time to be with us on your visit today.
Dr. Ajay Mathur: Thank you ever so much. This has been delightful, thanks.
Jason Bordoff: And thanks to all of you for listening for joining us on Columbia Energy Exchange. For more information about the podcast or the Center on Global Energy Policy, visit us online at energypolicy.columbia.edu or follow us on social media @ColumbiaUEnergy. I’m Jason Bordoff, thanks for listening, we’ll see you next week.