Investments in biofuels and green hydrogen on the rise: S&P Global
Gauri Jauhar, Executive Director of Global Energy Transitions at S&P Global Commodity Insights, highlighted the growing investments in biofuels, green hydrogen, and carbon capture technologies. However, she noted these areas are still in early stages and require stronger government support. While fossil fuel companies continue to outperform green energy firms in returns on capital employed, the shift to renewable energy remains vital for energy security and sustainability.
Gauri Jauhar, Executive Director of Global Energy Transitions and Clean Tech Consulting at S&P Global Commodity Insights, stated that investments are growing in areas like biofuels and green hydrogen, with advancements also seen in carbon capture technologies.
However, she notes that these technologies are still in the early stages and will require stronger government policies, incentives, and mandates to create new markets and stimulate demand.
Jauhar also observes that, despite these advancements, fossil fuel companies continue to deliver higher returns on capital employed, outperforming green energy firms by an average of 8.3 percentage points.
This is the verbatim transcript of the interview.
Q: The report suggests that we need big investments in the new energy space as well. But as far as India is concerned, do you think there’s enough done, what kind of investments are we seeing in the traditional refining or upstream sectors versus, say, new energy like biofuels or other avenues as well?
A: There is definitely a green rush, and we are seeing new commitments by even bellwether energy companies in India. So if you take a combination of companies such as ONGC, Indian Oil, HPCL, NTPC, Reliance, Adani Group, while they are continuing to invest in their core businesses, to the extent to maintain capital expenditure and grow for energy security, what we do see is that if you look at the time frame up to 2030, which is an important time frame for meeting and milestone for meeting interim targets towards net zero, we do see these companies spending about $57 billion in aggregate.
What’s interesting about that number is that it compares to about $65 billion being spent in low-carbon technologies by a group of companies, oil and gas companies, called the OGCI group of companies in the last five years. So I think there’s definitely a shift that is happening, but it is not happening at the cost of energy security.
Q: Going forward, where do you see more investments coming? We are seeing it, number one, like you mentioned, across the energy space. We are also seeing it across some of the older thermal power companies as well, who are getting quite aggressive as far as renewable energy capacity is concerned. Going forward, where do you see incremental spends happening?
A: So the incremental spends are happening towards sort of what we call, the foundations for a new energy system, which is also something we have highlighted in our report that we launched yesterday, India Forward, me and my co-authors have looked into this space. What we find is that there is a lot of new investment that is beginning to go into areas like biofuels, and green hydrogen. We are coming at the margins of even technologies like carbon capture.
But all these are frontier technologies in the energy transition space. And they will need a lot more of government policy push, a lot more incentives, mandates to create new markets, to create the demand for these new markets. So a lot of things have to happen synchronisically. But at the same time, we are seeing mature renewable technologies like solar and wind on an accelerated course in India.
Q: When we talk about investments, one thing that maybe the investor, shareholders, or the industry wants to know is what is the return on that capital employed? Say if somebody is investing in new energy versus a traditional energy, where do they tend to benefit?
A: I think this is where the whole just energy transition considerations come in. While, if you look at the stock markets right now, and you see a lot of investments going into greener energy companies, more integrated and utility companies, and they are delivering far higher stock market returns. In fact, the difference between the sort of—the greener end of the spectrum and the more traditional energy companies or other more fossil-fuel-based energy companies, it’s almost like about a 258% difference on the stock appreciation that has happened in the last five years.
But if you see the returns on capital employed, which is returns based on the balance sheets and the net income performance, we see that difference actually tilts in favour of the fossil fuel energy companies, fossil fuel-based companies, wherein they deliver on average about 8.3 percentage points higher than the green energy companies.
This is where I think this underscores the need for that balance that we talk about in our report between energy security and energy transition, that while this new energy system is coming into place with newer just energy transition technologies, we are still not quite there in delivering the types of rates of return on capital employed that the fossil fuel-based energy companies have delivered.
Mind you, this is not just about rates of return on capital employed, it comes with huge political economy considerations as well. It has implications on employment, and on huge stocks of capital which have already been committed. So how do you unwind that and replace it with a new energy system is a work in progress? A lot more thought has to be given to how this transition will happen in a just manner as well.
Q: As you mentioned, while it’s a work in progress, India actually has gone ahead and given a very strong commitment as far as becoming net zero. Along with that, what we are actually seeing is that on round there is quite a lot of competitive intensity as far as the renewable space is concerned. Some of the tariffs that we’re seeing getting discovered at the recent bidding have been very low. So going forward, do you see a path to profitability or sustained profitability for some of these players and can some of the players actually survive? Because in the past we have seen some of the players, especially in the power space, actually struggle to even survive.
A: It’s a very relevant question, because as you rightly said, that there is pressure on returns. As we have seen, there’s a difference wherein stock market returns are not being reflected in actual returns on capital employed. What we also have indicated in our report, which some of my colleagues on the power side have shared, is that there will be potentially a cost pressure that comes as supply chains are also rewired, as some domestic manufacturing as well picks up.
So we do see and anticipate a certain cost pressure coming in the near term. So the ability to deliver actual high rates of return is something which remains to be seen and there will be as you said rightly, competitive intensity in this sector.
Q: When we talk about new energy, a lot of new avenues have come up. Earlier, we were also talking about gas as a clean fuel. 50% is still imported in the country, but we do have Krishna Godavari Basin production coming up. There’s a lot of chatter around more production being focused on in the country as well. Will this be also a big part of the clean energy puzzle?
A: When we look at gas globally, what we see is gas has about seven advantages which need to be fully exploited to play its full role as a transition and a bridge fuel. There is an overall economic advantage in terms of system-wide stabilising, a system which is going into more renewables and needs cleaner baseload power when you don’t have the nuclear option still ready. So it has, number one, an economic advantage. It has a clear emissions advantage on CO2 emissions, Nitrogen oxides (NOx), sulphur oxides (SOx) and particulate matter. It does have an operational advantage as well, to be supportive of power for peak demand and minimum loads.
It has a coupling advantage. It has an optionality advantage of support of quicker building and shorter lifespan adaptability to future technology and also policy changes. It has an energy security advantage and it also offers a decentralised advantage wherein off-grid renewables and gas can offer flexible and in some cases even cost-effective power solutions when you compare it to things like displacement of diesel-based gensets, for instance, in both developing and developed markets.
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