As large parts of India deal with scorching heat waves and below-normal monsoons, demand for coal-based power has hit all-time highs, rising by 7.3 per cent this fiscal year as per government sources. Headlines about extreme weather events like heat waves, droughts and floods are a common occurrence in media today. We read about red alerts, death tolls, power cuts, destroyed crops and school holidays more often than ever before. Going forward these outcomes of climate change are only expected to increase in frequency and severity.
The World Meteorological Organization forecast’s a 47 per cent likelihood of a 1.5-degree Celsius increase in global temperature over the next 5 years compared to the pre-industrial era of 1850 to 1900. As such, global warming is set to add upward pressure on energy demand, especially in hot tropical countries like India.
India is also one of the fastest growing economies in the world and energy sector being a key enabler of economic growth - playing a role in everything from industry to transportation to communication in addition to household uses, is expected to play a critical role in the future.
While India’s energy consumption has more than doubled in the last two decades, its per capita energy consumption is only one third of global average. With the International Monetary Fund expecting India’s GDP to touch $5 trillion by 2027, India’s per capita energy consumption is set for a significant rise in line with rising per capita income which will enable more Indians to buy air-conditioners, refrigerators, cars & two wheelers from the current paltry numbers of 8 per cent, 18 per cent and 4 per cent respectively. With 58 per cent of Indians having access to the internet, the digital economy is expanding fast and in turn fueling growth of the Indian data centre industry, which thanks to artificial intelligence applications is set to become more energy intensive.
Rising demand will warrant capacity addition and government reforms in the energy sector to fuel India’s growth story. Businesses involved in extraction, generation, processing, transportation, storage, marketing and distribution of oil & gas, coal or thermal energy will be beneficiaries. Energy ancillary businesses such as EPC service providers, Equipment providers, Battery makers, Casting & Forging etc. too are likely to gain. Government reforms such as allowing Oil Marketing Companies to recoup losses, privatisation of discoms, focus on domestic coal production, revising natural gas pricing guidelines among others are already underway, highlighting the government’s priority to grow and support the energy sector.
As India pursues economic growth, greenhouse gas emissions and its carbon footprint are expected to rise. With a view to make India’s growth sustainable, government of India has laid out a plan to achieve net zero emissions by 2070. This target would require a massive thrust to renewable energy sources such as hydro, solar and wind, with a 500-gigawatt capacity target set for 2030. With the rollout of the National Green Hydrogen mission, India has taken a big step towards its hydrogen production and export aim. Ethanol blending in petrol is targeted to rise from 12 per cent in 2023 to 20 per cent in 2025. India is aiming for 30 per cent of all vehicle sales to be electric by 2030. The government has also announced a rooftop solar scheme which will provide subsidies to 10 million households for installing rooftop solar panels. These measures among others are creating opportunities for new and existing players in the energy value chain.
All in all, the Indian energy sector, which is set to play a crucial role in India’s development, as well as its commitment to climate action is full of lucrative opportunities for investors. The market share of energy companies in broader stock market indices is close to 8 per cent, much lower than their profit contribution which is close to 19 per cent as of May 2024. This suggests a potential increase in market share of these energy companies in line with their profit share going forward. While the Nifty Energy index has significantly outperformed the more diversified Nifty 50 index over the last one year, valuations are at reasonable levels, making now an opportune time to invest in this sector.
