Gainers and losers from decarbonisation

by Akshay Jaitly and Ajay Shah, Business Standard, 15 November 2021.

Decarbonising the Indian economy will impose large gains and losses upon various elements of the Indian economy, in coming decades. It is not exceptional when compared with other elements of technological transformation of the past or the future. These coming changes are important for strategic thinking of financial investors and the leadership teams of non-financial firms. The public sector is faced with a moment similar to telecom of the early 1990s. In the world of public policy, we should worry about coal miners and restoring degraded land.

The precise date is not known, but there will be a day when coal mining in India will stop, and most crude oil production/processing will stop. Alongside this there will be a vast expansion of renewable energy and associated storage. These are large industries and the impact of these events will reverberate through the economy. For every reader of this article, there are numerous individuals and organisations in your world which are going to be affected in this transition.

Such technological change is hardly new. It has gone on since the start of time. Every decade has seen great shifts in the structure of production, and induced gainers and losers. When the Suez Canal was built, and the port traffic shifted from Calcutta to Bombay, it was a catastrophe for Calcutta. Mechanisation, automation, and shifts in consumer preferences have repeatedly created and destroyed industries that occupied millions of people. War production has leaped up 100-fold and then been extinguished. The essence of a successful country is the ability to anticipate and respond to megatrends, instead of complaining and trying to impede the change.

Professional lenders and investors are the ones placing speculative bets on a carbon-intensive vs. a post-carbon future. The optimists are betting on renewables, the cynics are buying shares of Coal India. Depending on whether India decarbonises faster or slower, this will induce profits and losses for these players. Such forming of positions takes place around all technological change. As an example, when the IT got better, the optimists were betting on modern banks and the cynics were betting on the banks that protected the employee count.

Depending on how the events play out, there will be winners and losers among these speculative bets. Protecting professional financial players is not a consideration for public policy: it is the job of each professional to watch the global decarbonisation process and place bets on how they think the Indian story will play out. Thanks to India's financial market integration into the global economy, a large fraction of the professional capital playing here is from outside the country. In this, we in India are beneficiaries of "international risk sharing". It is always better for the landlord in Bombay to be Japanese, and for the landlord in Tokyo to be Indian.

A critical milestone in this journey is going to be the day when a distribution company sends in the legal papers to prematurely terminate the PPA against a coal thermal plant. Here, the thermal plant will be protected by contract law, and the distribution company will have to pay for the privilege of reneging on a contract. Thermal plants will need to make plans for how they will liquidate their assets, and distribute their golden handshake. Distribution companies need to think through the financial magnitudes involved and the financing strategies for these.

Many people, who are adversely affected by the phasing out of fossil fuels, will queue up to ask for public money. In most cases, the correct answer for public policy is to say no. Technological change is a part of normal business risk, and this is what the world of business and finance does for a living. Everyone who is long carbon has had ample warning.

The commanding heights of the Indian electricity system are state owned and centrally planned. There is an analogy between the present position of the Indian electricity system and the position of the Indian state-controlled telecom system of 1995.

In 1995, the Indian state had meaningful assets in the form of telecom service provision. With the benefit of hindsight, we know that the best strategy at that point was to sell off these assets at a decent valuation, and then let the private buyer deal with the coming technological transformation. The private buyers would have had to sell equipment at scrap value, and shrink the labour force. Privatisation was done in one small part (the sale of VSNL). In the main, the incumbent telecom establishment was able to block privatisation, so the value of the telecom assets of the Indian state depreciated greatly.

A similar story can now be envisioned for the electricity sector. Today, the Indian state has assets in fossil fuel industries, distribution, transmission and generation that can be sold. A wrenching transformation is impending, involving closing down thermal and gas assets, shifting to renewables, with technological transformation of the grid to reflect decentralised renewables generation and new demands on transmission. Given the difficulties of state capacity, Indian state structures will perform in this transformation in ways reminiscent of MTNL and BSNL. Private investors are self-interested and capable, and will play their cards well, but the Indian state as an investor is not able to match this. Delaying sale will be value destroying. Along the way, weaknesses of Indian state response will also impose costs upon the citizenry, partly through poor quality electricity, and partly through difficulties in international relations.

There is one area where state-led money and management will be required in the decarbonisation process, and that is about coal mines. Miners require R&R services in an analogy with other displaced persons. And, once the mines are closed, significant resources will need to be put in, with associated management structures, to restore degraded land into forests and ecotourism. This is a worthy claim on public resources, unlike most other claimants that will arise.

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