Ep89 India's Net Zero: Commercial Reality or Clever PR? with Arun Kumar, Asia Research and Engagement

Is India's net zero push real, or just clever PR? Arun Kumar of Asia Research and Engagement joins the podcast to explain why the greenwashing era is ending and why decarbonisation now wins on cost, not sentiment. We dig into the hard-to-abate sectors, green steel and cement, alongside power, coal, renewables, carbon markets, corporate PPAs and how Indian banks are pricing climate transition risk. Essential listening for anyone in climate finance, energy transition and sustainable investment across India and the wider Asia Pacific.

Ref.: Asia Research and Engagement Group, ARE's Asia Transition Platform

ABOUT ARUN: Arun Kumar is a Strategic Advisor at Asia Research and Engagement (ARE), a Singapore-headquartered organisation whose collaborative platform connects institutional investors with large listed companies to accelerate the energy transition. His focus spans the highest market-cap companies in hard-to-abate sectors, Power, Cement, Steel and Automobiles, plus Banks and financial institutions. A recognised expert in India's power sector with over 30 years of experience, Arun brings deep expertise across power trading, management consulting and equity research. He has held senior positions at PTC India, HSBC, KPMG and CRISIL, advising investors, policymakers, regulators and corporates on critical aspects of the energy sector. His work spans Asia, the US, Europe and India. Arun holds a Master's in Economics from the Delhi School of Economics and an MBA from IMI Delhi, plus an advanced certification in Cloud Computing, Data Analytics and Blockchain from IIT Madras.

Recommendations:

• Climate Capitalism by Akshat Rathi: A Bloomberg journalist's ground-level account of how clean technologies, from China's electric cars and batteries to solar, wind and green steel, are becoming commercially viable and profitable.  https://www.hachette.co.uk/titles/akshat-rathi/climate-capitalism/9781529329957/ 
• Value(s): Building a Better World for All by Mark Carney: The former Bank of England governor and current Canadian Prime Minister argues that finance and markets must be steered by human values rather than price alone.
   https://books.google.com/books/about/Value_s.html?id=Jz6XzQEACAAJ

HOST, PRODUCTION, ARTWORK: Joseph Jacobelli  |  MUSIC: Ep76 onward excerpts from Vivaldi’s La Follia, played by Luca Jacobelli.

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Ep89 India's Net Zero: Commercial Reality or Clever PR? with Arun Kumar, Asia Research and Engagement

[00:00:01] Arun Kumar: And I would be worried if I'm a coal miner or a manufacturer of BTG equipment or any of these, because I see that cost economics seriously going against them. It's not about the world wanting to be clean. It's more about cost economics. And I think the cost economics is clearly moving against them.

[00:00:24] Narrator: Welcome to Asia Climate Finance, your front-row seat to the policies, investments, and actors shaping climate, business and finance across Asia Pacific. Subscribe now so others find this essential guide to Asia's climate economy and note the disclaimers at the end. Now over to the host, analyst, investor, and author Joseph Jacobelli.

[00:00:47] Joseph Jacobelli: Good morning, good afternoon, or good evening, wherever you may be listening from. Welcome to Asia Climate Finance. Indian companies are making net zero pledges at a breathtaking pace, but how many are real and how many are just clever PR? Today, we cut through the noise and whether the greenwashing era is finally over and why coal is quietly losing the one battle it can't win: the one over cost. My guest is Arun Kumar of Asia Research and Engagement. Three decades in the field, he sits where the pressure gets applied between the boardrooms making the calls and the investors holding them to account. If you've got an idea, write to us at acfpod@outlook.com. Also at the top of the show notes. Enjoy the show.

Hey, Arun, it's really brilliant to have you on. How are you today?

[00:01:48] Arun Kumar: Very good, thank you so much.

[00:01:50] Joseph Jacobelli: So before we get started into the big questions around Indian industry and Net Zero, I'd really love for you to tell us a little bit about your own journey to this space. And also tell us a little bit about Asia Research and Engagement and where it sits, because I think it sits actually at quite an interesting intersection of financial markets and sustainability. So what was it that drew you personally to the energy transition as a focus and how did that shape the work you now do with investors across the region, Arun?

[00:02:26] Arun Kumar: Thanks, Joseph. First of all, let me congratulate you on this journey of 89 episodes. I remember we first talked in the early years, many years back, I guess, and this has been doing great. I've heard some of the very good interviews you have conducted. So, first of all, congratulations to you.

[00:02:43] Joseph Jacobelli: Thank you, thank you.

[00:02:43] Arun Kumar: Regarding my journey, yeah, I have got almost three decades of experience working in the space of energy, initially as a management consultant, then as a grid analyst where we both worked briefly together, and then actually getting to the industry and being a power trader for almost a decade. And so Asia Research and Engagement, when this assignment came in, it's like an amalgamation of all the experiences which I've gathered today.

The work which ARE or Asia Research and Engagement does—our mandate is to work across Asia. So we work across most of the major economies of Asia, including India and China, the two leading ones, and the theory of change. So we have two platforms: energy transition and food transition. I work as a part of the energy transition platform. The theory of change which we have is that we think that the larger corporates can drive the biggest change because a major part of the capital is being allocated by these large companies, which are primarily the listed ones. And the top listed companies will make a huge difference and impact if energy transition goals are to be achieved.

And one of the ways to make that happen or accelerate the process is using the leverage of investors' pressure. So many of the large funds are part of our platform, which either proactively are part of our platform or sometimes they may not be officially part of the platform but are engaging with us. So we bring the engagement between the companies and the investors to facilitate the change. Sometimes the change is more about dialogue, more about asking some more questions, and improving the disclosures. The whole objective is about improving the quality of transition decisions. So investors allocating more capital towards companies which are taking transition decisions, companies deploying more capital towards projects which are getting more and more transition-driven, and policymakers shaping the incentives better.

So all these three put together is the theory which we think will bring the major change in the energy transition, which is anyway happening. It's not that it's something which we will make it happen, but we only want to smoothen the process or accelerate the process in the right sense. So that's the role which ARE plays. I am part of the energy transition. So I am working with, at this point in time, mostly focusing on the Indian companies, but potentially we can work across Asia as a part of the ARE team.

[00:05:22] Joseph Jacobelli: And I wanted to also highlight that you've got a fantastic background, not just from a perspective that you work for banks, so you've got that financial side of things, but you also worked for corporations, so you've got that side of things as well. And in addition, I don't want to praise you too much, Arun—we're good friends—I don't want to praise you too much in public, but you also have a very unique view because you're not just an India specialist and you really have a very broad view of how what's happening in India fits in with the rest of Asia and the rest of the world. So I think it's a really, really great asset and it's really great to have you on the podcast.

If I can move on to some kind of high-level questions, Arun, about the Indian industry and net zero. So the first one is that Indian companies have been making net zero pledges at a pretty striking pace over the last few years, right? When you step back and look at the overall picture, personally, how genuine do you think this movement actually is and what's actually driving it beyond the obvious public relations optics?

[00:06:35] Arun Kumar: Good question and good scepticism about what the companies are saying. But since you're working deeply with the companies, I think this stage of net zero commitment which was happening five, six years back, and which could be called greenwashing, is no more the case. Today I just came off the AGM of Tata Power and all I can tell you is the conversation inside the boardroom is much more commercial. They're asking questions: will that affect our access to the export market? Will the investors value us differently? Will our cost of capital change if we don't factor that into our capital deployment? Can we secure affordable renewable power to replace the fossil? Can we make RE round-the-clock? So this is a commercial question which boardrooms are today discussing, and the company management is telling the shareholders that we want to be net zero by 2045. This is what the management said to the shareholders today in the AGM.

So this is no more a question which was just as PR optics, because the company is making a commitment and also backing it up with a credible plan. So at ARE we are not just looking at what is the net zero commitment date. What we are looking at is: what is the investment decision which a particular company is making following the net zero commitment which they have taken? I'll give you an example; I attended another AGM, Tata Steel. Now Tata Steel is the first company which has started deploying the electric arc furnace in India. India, as traditionally has been coal-based blast furnaces used in steel manufacturing, but they have recently started the first pilot in Ludhiana. During the AGM, they said that while they have an EAF operation which is going to be a fully electric arc furnace, they're also going to add 2 million tonnes of additional capacity in India.

So the point they're making to the investors is that it makes good business sense, but at the same time, they're also careful. They're not saying that entire investment is going towards green steel. They're also saying that if the demand picks up, we'll definitely put more money. But at this point in time, we are looking at it in a very favourable way, and we are putting money there. So if you're putting money where the mouth lies, I guess that's the credibility of that announcement of energy transition. And then we look at it when we evaluate and compare companies; this is what we will look at primarily. What is the investment decision? How is the management telling the shareholders what they actually are—are they answering the question if your shareholders are asking that, or are they disclosing in their annual reports about what kind of investment decisions they'll take in future? So I think we have moved away from that greenwashing phase to a more credible commercial phase of energy transition.

[00:09:22] Joseph Jacobelli: No, it's really good that you put a little bit of colour on that, mentioning Tata Power and Tata Steel. Now a lot of the corporations—Indian corporations' commitments—come with target years like 2050 or 2070 that are far enough away that the people actually making the announcements won't actually be accountable for them, right? So how should investors and civil society be pressure testing these pledges today rather than waiting decades to find out if they were serious? And I guess you already partly answered the question by mentioning those two examples, but do you have any further thoughts on that?

[00:10:06] Arun Kumar: Yeah, sure. I mean, that's where probably they'll need to seek people like ARE as partners, because that's where we do the detailing, which is where the challenge is. Step zero is, of course, the announcement of a net zero target. Many companies haven't announced that, so we consider that as an important announcement. So we will take that at step zero, and that is something from where we'll start, but at the same time, two companies may have announced a net zero target, but we'll look beyond. We'll look at what is the capital which they're allocating each year. Each year a company announces the capital investment for that particular year. Where is the capital going? Where is the money being put to the test? Because what has been built has been built. What we are looking at is where is the future money going to flow? Are they going to flow to the greener investments? What is their incremental milestone? So 2070 or 2050 could be a target, but do they have a 2030 target which looks credible at this point in time? Who is the management accountable to? Is the chairman accountable for it? Or if there is an insignificant person accountable for it, what are they telling the shareholders? Which technologies are they looking to invest in? What are the assumptions behind the whole policy and carbon prices? So what is the management commentary on the carbon pricing and on the technology evolution?

And all this put together, when we do our research at a company level, we get a fair picture about the company's commitment. And that's how we compare companies also. Sometimes, both companies may have the same net zero target date, but when we write the report of this analysis—and that's why our kind of analysis is very important, especially from an investors' perspective—is that they should look at these companies more favourably when they're allocating capital towards buying the shares of these companies. And I think this space is very important because you are right—the far-off target is very hard to really comprehend for a common investor.

[00:12:12] Joseph Jacobelli: Right, right. A recurring tension in these conversations is between what Indian industry needs to stay competitive globally and what the science actually says needs to happen on timelines. When those two things conflict, which one tends to win inside the boardroom in India? Is it the money side of things or is it looking at more the longer-term side of things?

[00:12:38] Arun Kumar: I mean, of course, the shareholders will be asking for a good EBITDA and good PAT, as we all know as equity analysts. We understand that. But the good news is that now decarbonisation is no more seen as a cost. It is seen as something which you need to do to be competitive. Today, for example, round-the-clock renewable energy is going to be cheaper than a new coal power plant. And also the investors are going to ask which are the companies which have a credible transition plan.

And global capital will definitely—because yesterday only, there was an article by Bloomberg and the whole investment in energy, which includes power and oil and gas, in the last decade, there is a clear shift from fossil to non-fossil. A huge shift from what was 60%. And this is across... in fact, the interesting analysis which Bloomberg did was that private capital is primarily moving towards greener investment. Most of the fossil investment is still done by governments using the tax base money because, obviously, the returns are not that primary; maybe energy security or geopolitics is driving that decision. But the key point about the companies is that if the companies do not take that decarbonisation investment decision, they're likely to be non-competitive going forward.

[00:14:21] Joseph Jacobelli: Well, I've got a follow-up question. So, kind of on the landscape side of things, in your experience, do you feel that the average—let's talk about large-sized Indian corporations—is fully factoring in both climate physical risk as well as climate transition risk? Apart from pressure from investors and shareholders, do they feel that that's also a pressure, or are we not quite there yet? I guess physical risk—I mean, heatwaves and floods and those things—are pretty much recognised by large, medium, and even small corporations. But what about the transition risk? We're talking about potential legal liabilities, technological change, market change, and so on and so forth. Do you feel that as part of the transition plans, they are on top of this, or not?

[00:15:21] Arun Kumar: I would say that it's a mix. The answer is a mix. So the larger corporations—let's say the Tata Group or JSW, the larger groups—do they have a team already in place to actually take that into consideration? But I would be very honest, in India, that's still early days. It's not that it is fully factored into the investment decision. It's not that the management time or chairman's time is going to be spent on that. At this point in time, it has not reached the board level in the sense that it is discussed as a one-day discussion on particular climate risk. But we are moving in that direction. Given the geopolitics, given what has happened over the last say, two months, three months of this crisis in the Middle East, people are realising that it is not only the climate risk, also the energy risk; fossil energy sources are at risk and energy security is something which is of prime importance.

And energy can come through cleaner ways and through not-so-clean ways. They were more worried about the least-cost energy, and probably the governments are still a little bit more focused on security, but companies are more focused on the cost of energy. We gradually see that factoring of climate risk, and the physical as well as the other transition risk, getting into the decision making. It varies from company to company, but the bigger the companies, many companies have that factored into their plan; gradually that is getting incorporated in the whole capital. So basically, the first point when we look at it as ARE is: where is the capital being allocated?

So this year's capital and next year's capital, we'll compare it—has that been impacted? And our goal is that... for example, one of the factors which we are looking at is: can the company say "no new coal" policy? Can the power companies announce that? Tata Power has done that. Tata Power is the only company which has done that in India. No other company has done it. But that's our wish list. We are expecting that by 2032 or 2033, because at some point in the future, we will definitely expect the companies to come with that kind of announcement. And we are seeing that gradually in process.

[00:17:45] Joseph Jacobelli: Right. Because I think that's really important for investors, right? I mean, the worst thing that can possibly happen is that a company gets caught—to use an analogy—with its pants down, right? So all of a sudden something happens and they didn't know about it. But I think there's enough... you seem to be saying that there's enough understanding on the part of at least large companies that they need to kind of think about it.

[00:18:05] Arun Kumar: Yeah. And in fact, more than the companies, it is the banks, because a lot of the infrastructure is largely funded by debt, right? So banks also need to factor that in, and they're getting there. It has not been fully factored into debt, but it's getting there.

[00:18:21] Joseph Jacobelli: Right, right, right. So you've got kind of company realisation plus bank realisation, and bank realisation also giving some pressure on the companies.

[00:18:35] Joseph Jacobelli: Moving on to something a little bit more specific, and just to pick—I mean, we can't talk about every single sector in India, it's a big country with lots of people like China—so maybe we just focus on three sectors: cement, steel, and power. So on the cement front, cement is one of those sectors where decarbonisation is generally brutal because so much of the carbon comes from the chemistry of making clinker, not just from burning fuel. How are Indian cement majors like, I don't know, UltraTech or Sri Cement actually approaching that problem? And is there a credible technology path here?

[00:19:18] Arun Kumar: Interesting question because we have engaged with a few cement companies and we know the predicament which they're currently facing. So cement is, you're right, probably one of the hardest transition stories because, unlike power, you can't simply replace one fuel with another. 60% of emissions come from the clinker chemical process. Even if they have a hundred per cent renewable energy, they would still be emitting a lot of carbon. And when we are looking at what the companies are saying in their annual reports and what the companies are telling us, they basically have taken a more portfolio approach. They haven't taken a single-bullet solution to the problem.

So they're talking about improving the thermal efficiency, they are talking about replacing all electricity with renewable energy, use of alternative fuels, expanding the waste heat recovery system, reducing the clinker content of cement through blended products, and increasing some capital application towards technology like carbon capture. They talk about all those blended approaches as a portfolio. They understand the entire process can't be replaced. And at this point in time, there is no visible solution they have for that. So what I would say to an investor is that when you're looking at the company, look at where the company capital is being allocated. Are they looking for solutions? Are they putting their money towards reducing the carbon production every year, or are they simply waiting for that magic solution which will come one day? We find at least the major cement companies are working in that direction. And we feel that while it may not be a single short answer to the transition, our expectation is that in a gradual way, cement will find its own bearing and they would be able to, because that's the intent which they've already stated.

And they're demonstrating through incremental capital allocation; at least the low-hanging fruits they're addressing as early as they can. So I think cement is the hardest one, but at the same time, I am more positive about it, and we will see some changes in years to come.

[00:21:28] Joseph Jacobelli: Understood. Steel is in a similar position, right? Now green hydrogen-based steelmaking sounds like an exciting concept, but the economics look very different in India compared to, say, Sweden or Germany. What realistic transition is available to companies like, I don't know, just to pick some names, Tata Steel or JSW, in the near to medium term?

[00:21:53] Arun Kumar: I mean, in the case of India, very often the conversation about decarbonising steel doesn't jump straight to green hydrogen. Green hydrogen is something which they have put some capital on, but that is not a solution they're looking at in the next few years. So they're looking at issues like how can they replace their blast furnace with the electric arc furnace? But they're facing a challenge—there is no scrap availability in India. So they're trying to address those issues or low-hanging fruit, again: replacing all electricity from fossil to renewable energy sources and improving energy efficiency. Again, they're taking a more portfolio approach, but at the same time, wherever they think that there's a possibility of putting the capital, they're also deploying the capital.

Indian companies are going to face the challenge because Indian steel production is going to more than double in the next five years. So it's very important to understand that production doubling at a very high cost may not be the possibility. In the Indian market, of course, there is a CBAM impact, and they will be feeling the pressure from it. But they're literally doing everything they can do within their powers to the extent they're commercially viable to make the steel which they're producing more and more green.

There's also a policy side; the Government of India has come out with a green steel taxonomy. They have rated the steel with carbon emissions from one star to five stars. Five stars is very ambitious, but the Indian average CO2 emission of steel production is very high. There's also a disclosure issue, which currently is not there. Gradually those are the issues which they're trying to address, and the larger companies are working on it much more than probably the smaller ones. But this is a story which is currently evolving and we are seeing change. It'll not be that straightforward and quick, but we see that happening over a period of maybe a next decade or so.

[00:23:52] Joseph Jacobelli: So the Indian steel capacity doubling over the next five years—that's pretty much fixed because I presume the companies have already stated the plans, et cetera? Yeah. So it's not a wish. Well, that's really massive.

[00:24:05] Arun Kumar: Yeah, that is huge. Huge annual capex for each of the major steel companies which we're covering. So obviously these larger companies are going to put in a huge amount of additional capacity. A few companies have already announced it. We are not seeing all of that going towards greener steel because they think that the demand is still not there. But as the demand picks up, probably... so I would say: when is the last coal-based blast furnace they will be installing? That is something which is our wish list from our perspective. But at the same time, we have to go with the flow. The low-hanging fruits are being captured, but the more difficult things still remain to be done.

[00:24:47] Joseph Jacobelli: Right, right. And obviously competitiveness is a key factor. The power sector sits at the centre of everyone else's decarbonisation story because you can't have green cement or steel without greener electricity. How are India's large power producers thinking about stranded asset risk on their coal fleets? And is anyone actually building that into financial planning?

[00:25:18] Arun Kumar: So yeah, you are right. Power transition story is central to everything because the supply... one of the lowest-hanging fruits both steel and cement are talking about is changing from fossil-based electricity to green electricity. And the good news there is, of course, the cost of green electricity has come down. Solar has been dominant, but we are talking about now round-the-clock renewable energy, which includes a lot of storage: battery, pumped hydro, and possibly small nuclear reactors (SMRs). We don't know. But the solution being talked about is round-the-clock renewable energy.

That is something which is cost-effective. So when we look at the cost economics of round-the-clock renewable energy versus a new coal-based plant, our assessment at ARE is that the future new coal-based plant probably will be more expensive than round-the-clock RE. But the challenge is base-loading because there has been a shortage post the solar hour. There have been challenges from pure renewable energy; as the solar hour goes away, there is a huge demand spike. And that can only be met through either coal or gas, and currently, coal will continue to be the story in India for some more time. But we have a huge existing coal fleet which will continue to provide that. The Government of India has announced 80,000 megawatts of additional coal to be put in the next five or six years.

My assessment, or ARE's assessment, is that that probably will not happen because cost economics is changing very fast. Only a few companies are now putting in coal capex—say NTPC, Adani, JSW—and most of them are also... when we look at individual company level capex, NTPC is putting two-thirds of capex into renewable energy. So coal capex has significantly come down. And we don't see that kind of coal-based capacity addition which will happen in India, but at the same time, because of the base-loading issue, coal will continue to be the story which the government will continue to support. So somewhere we are at the point where China was in 2015 when, say, 76% of the supply used to come from coal. China today is less than 50%. I think the same story will, or maybe in a fast-track way, repeat itself. In India, we'll see a much higher share of renewable energy. Capacity-wise, India today is 55% renewable capacity (total installed capacity), but in energy terms, it is still 25% or 30%. We expect that to go above 50% over the next decade.

[00:27:54] Joseph Jacobelli: Right, right. Moving on to some kind of finance-related questions: Carbon finance keeps getting talked up as a way of making transition projects actually bankable for hard-to-abate sectors like steel and cement. But given how volatile and, frankly, unreliable carbon credit revenues have been globally, do you think that Indian industry can generally build a credible financing case around carbon markets? Or is it just too shaky a foundation to anchor real investment decisions on?

[00:28:37] Arun Kumar: I think India is going to start the carbon market very soon. Carbon markets do have a role to play, but only on the margins. I think in some cases where technologies are very expensive, they can add some marginal revenue, maybe that can be used. But to be very realistic, using the carbon market as a way that billions of dollars of investment will happen—unfortunately, that's not going to happen because, as you said yourself, the market has been very volatile. Investors are not going to take a long-term call on carbon prices. Carbon prices at best will be considered as a short-term, one or two-year revenue stream, maybe a little longer, but at much lower prices.

So I think major decisions of investment and capital allocation will depend entirely on the commercial consideration of the particular technology, the maturity of the technology, and the overall returns which the technology or the project will provide. So I think that's where the current situation is. But if the carbon markets were to become stable and globally connected and more credible... because one of the issues of the carbon market is also the carbon accounting credibility.

[00:29:46] Joseph Jacobelli: Yes.

[00:29:47] Arun Kumar: So all those things put together... I don't see that happening very soon, but if that were to happen, then possibly that can be seen as an additional source of revenue. But at this point in time, most of the investment decisions are taken more from a commercial consideration perspective rather than from a carbon market revenue perspective. It's an add-on revenue for any company.

[00:30:09] Joseph Jacobelli: Right. The reason I started our finance conversation with carbon is because I think it is a very useful extra tool for financing. I don't think... I think some people are overly optimistic, maybe saying that's going to be the ultimate tool. But I think the more tools we have, the better it is. So that's really where I was coming from, Arun. Now financing is often cited as the big constraint, but India has attracted an enormous amount of renewable energy investment. Is the real bottleneck capital, or is it something else like policy certainty, technology availability, or just organisational will inside these companies?

[00:30:57] Arun Kumar: Capital used to be a constraint, but I think now it's no more a constraint. It's more about investible projects. India has attracted almost all large major RE companies, and they have put in projects; there has been interest from all kinds of funds: pension funds, sovereign wealth funds. They've all put in money here in this renewable energy. We have seen pre-IPO funding; there have been many deals based on renewable companies. Recently we saw a large company set up by some funds bought by JSW Energy called O2 Power at a huge valuation. So capital has not been a constraint, but what is the constraint is the right investment projects which are seen as commercially profitable—I wouldn't say just viable, but profitable.

If the project is commercially profitable, if a project can give returns, there is absolutely no constraint of funding from multiple sources, both domestic and international. One of the factors which has helped the renewable cost come down is the large inflow of funding, and that has led to the scale which has given the renewable sector that kind of cost economics to bring the cost down. And the future projection for the cost is only downwards at this point in time. So while the renewable energy cost curve is a falling cost curve, I think the coal cost curve is a rising cost curve at this point in time from whatever we are looking at. If you're looking for future investment in a renewable project versus a coal project, I can tell you that in five years' time, the cost curve for a renewable project is going to be declining while the cost of energy from a coal project is going to be increasing.

So one, we are looking at a falling cost curve; second, you are looking at a rising cost curve. But this is the situation in power. In steel and in cement, the challenge is slightly different, as we talked earlier. It's about technologies. It's about proven technologies like clinker. Is there any option to clinker? Is there any option to blast furnace-based steelmaking in India? There are other technologies which are being used—DRI and other technologies which have less carbon intensity—but it is not truly green as green is defined. So there is the R&D issue, then the proven technology issues are there in the hard-to-abate sectors like steel, cement, and a few more.

But some sectors have taken off, like autos have taken off. We didn't talk about autos, but autos have taken off in a way. But at the same time, autos have other problems like logistics problems, charging and battery issues, and battery costs. So I think the capital will flow. Capital is not the constraint. The constraint is: are there enough investible projects which an investor can invest in with a fair degree of return expectation on that project? That's something which is now becoming the main story, rather than people saying, "Oh, where is the money going to come from?"

[00:34:00] Joseph Jacobelli: In some markets around Southeast Asia, as you know, Arun, you've seen Corporate Power Purchasing Agreements (CPPAs). What's the state today of PPAs in India?

[00:34:19] Arun Kumar: No, that's been there in India. In fact, what we call is C&I customers in India—commercial and industrial customers. So basically, as per the regulation in India, any consumer with more than one megawatt of load can buy power directly from a generator; they don't have to go through the distribution company. And for RE power, that threshold is reduced to a hundred kilowatts, which is very small. Most of the companies which have larger facilities have their own either captive power plant or are buying from a third source in what's called group captive mode.

So one power plant, say a hundred-megawatt solar, can be supplying to three or four commercial and industrial customers. That's been pretty mature in India, very much being used. And some of the data centres, for example, have signed direct PPAs. We also have other instruments like Virtual Power Plants (VPPs) or Virtual Power Purchasing Agreements (VPPAs). So basically, the modus operandi of that is that Google or a Microsoft or an Apple has signed a PPA with a renewable energy generator, and they are selling that power into the grid without any direct consumption. They're not direct consumers. They're basically selling that power through the power exchange. If I have a PPA of say, three rupees, and I'm able to sell that on the power exchange at two rupees, the differential is borne by a Google or a Microsoft; so they have actually... they're virtual consumers of green energy. That's also happening. That's been extensively used, and that is basically to own the green attributes.

These are some of the instruments which have led to this kind of capacity addition. India last year added 54,000 megawatts, of which 90% was green. That capacity addition is happening mainly, and part of that is driven by the corporate PPAs.

[00:36:16] Joseph Jacobelli: Very interesting. We talked a little bit about banks before, and when you look at Indian commercial banks’ lending to sectors like cement, steel, and power, how confident are you that they're actually pricing transition risk into those lending decisions in any meaningful way? Or does it still feel like climate risk is something that sits in a kind of sustainability report rather than a credit committee conversation?

[00:36:46] Arun Kumar: I think we are there... it's early days. We are moving in the right direction. We had a recent interaction with a few banks, one-on-one meetings with the ESG team. We also attended a few AGMs; from there you get a feel of what the banks are thinking. What is the management saying? There was no discussion of ESG in the AGM for some of the largest banks in India. We realised, especially for the public sector banks—the government banks—one of the mandates which the banks have been given is to develop India, "Viksit Bharat," by 2047. So India becoming a developed country by 2047 is a mandate which the banks have been given, and they cannot really not fund projects which could be higher earners but at the same time not so ESG or environment friendly.

But having said that, it has changed. While it was earlier treated more like an ESG reporting thing—so you are doing some sustainability reporting for the BRSR or CSR initiatives—now we are seeing gradually more interest among the banks. For example, some banks are saying: "Can you help us prepare a decarbonisation roadmap for us? Can you help us create a sectoral roadmap for decarbonisation?" Those things are new; they are not something which has been there for many years, but in the last one or two years, we are seeing that being factored in.

We are also in touch with the central bank, the Reserve Bank of India. They're also in the process of introducing climate risk as a part of credit risk. And many of the private banks already have a team in place for factoring that climate risk as a part of the credit risk valuation process. But banking is mostly regulated, so the central bank has to define the roadmap which a bank will move on. And the central bank is in the process. The Government of India has issued a draft green taxonomy because that's also important: what is green and what is not green has to be defined. And they're in the process of issuing the final green taxonomy.

From the government side, the green taxonomy is going to be issued. The Reserve Bank of India is going to introduce a platform through which the banks can access data directly incorporating climate risk as a part of that risk evaluation process. Banks have the ESG teams and gradually, I think, that will get incorporated. Private banks will do faster than the state-owned banks, but I think the process is moving in the right direction. It may take a little longer than say, steel, cement or power has taken.

[00:39:23] Joseph Jacobelli: Right. So it's kind of like a work in progress but progressing relatively rapidly.

[00:39:31] Arun Kumar: Rapidly, yeah. In the last year... since I've been working with ARE for about 14 months, and when I met first with the RBI say one year back, these discussions were still in very early stages. Now, every time I go and meet them, we see some progress. So we are seeing progress; we are seeing that the direction is moving in the right way. And the recent energy crisis actually helped that matter also; it has helped the process move a little faster. And I think the good news is that now the technology risk of green is no more seen as a risk. It is more seen as inevitable. Whether you... it's only a question of when. It's not a question of "Should we do it or not do it?"; it could be a timing issue. It could be that "No, I may wait for another year," but it is not about not doing it.

[00:40:23] Joseph Jacobelli: Moving more onto the outlook kind of thing: Looking ahead five or 10 years, which sector do you think will surprise people the most in terms of how far it has moved on decarbonisation, and conversely, where are you most worried that the gap between ambition and reality will be impossible or very difficult to close?

[00:40:48] Arun Kumar: I think one of the things which is going to happen in the very recent future would be cross-border power market development. I was recently at the Asia Clean Energy Forum at ADB Manila, and ADB is funding some of these power markets in the regional context. One of the factors which is a challenge with RE is that RE is intermittent and solar comes at a certain hour, wind comes at a certain hour, and you have to have storage. But at the same time, there could be complimentary power exchange between regions. For example, Nepal, a country north of India, has a huge hydro potential, but during those winter months, they have a power shortage. India can supply that. In the summer months, India has actually been buying power from Nepal and Bhutan. Just to give you an example, similar things in the ASEAN region—they're also talking about similar things in Malaysia.

So I think more cross-country power market development is likely to happen. The discussion and the infrastructure creation as an ASEAN grid is already on the table. How soon that'll happen, we don't know. We think that the cross-border power market is something which will... and that is more required from a renewable energy deepening perspective in these countries. Smaller countries on their own may not be able to absorb everything which they generate because of the nature of renewable energy. So we see that, and I would expect in the next 10 years even that would be a significant positive development in this cross-country power market. Three particular regions where I think this will happen are South Asia (which is already there), ASEAN, and Central Asia. You can also see some of that in Africa—I'm not very familiar with that, but we have been hearing about some of these regions in Africa talking about that. Europe already has a truly European power market, so we'll see that happen.

Also, another area which I've been seeing and hearing from experts is hydrogen and carbon capture and possibly nuclear SMRs (small modular reactors). Because I heard from the Director General of the International Atomic Energy Agency, saying that we have reduced the R&D to commercialisation of SMRs. We have reduced all the risks, and we are factoring that in. So there is a lot of investment and work being done on those SMRs also. These three technologies—hydrogen, carbon capture, and SMRs—are something which I would think could be very important even for hard-to-abate sectors like cement and steel, because SMRs apparently can also provide both heat as well as electricity. So this will basically solve a lot of blast furnace-related issues for some of these sectors. I think these three technologies are on the way, because there is money being put on the table and we will see that maturing into commercially usable technology. I don't know about how commercially profitable, but definitely commercially usable technology.

And I would be worried if I'm a coal miner or a manufacturer of BTG equipment or any of these, because I see that cost economics seriously going against them. It's not about the world wanting to be clean; it's more about cost economics. And I think the cost economics is clearly moving against them. We would not see that... I mean, there's already a BTG shortage because when one of the Indian utilities wanted to put up a coal-based plant, they were told by the BTG manufacturer that the waiting period for supply is three years because they have stopped manufacturing BTG—there is no capacity addition. And that is something which is probably going to face the biggest challenge in the next decade; it will be very, very hard to really see that continuing at the same pace.

[00:44:49] Joseph Jacobelli: Very, very, very interesting. Before we let you go, Arun, on the lighter side of the conversation, do you have any personal recommendations to our listeners? It could be books, reports, films, documentaries, or anything which has caught your eye.

[00:45:06] Arun Kumar: I love books. One of the books I recently picked up which I'm reading currently is called Climate Capitalism, written by Akshat Rathi, an Indian. It's a 2023 book. Basically, it captures some of the ground-level evidence of how transition is unfolding. It's captured the story of China's EVs and batteries, solar and wind becoming cheaper, and some of these insider stories on performance in cement and oil. He is actually capturing some of these good projects which have become suddenly viable, which nobody initially thought would be. It's a very good book to read; I'll recommend it to anyone who loves seeing actual ground-level investment turning out to be commercially viable. So that's the book I'm reading.

I have another book—I don't know, it's slightly political, but I have it on my desk. It is the book written by Mark Carney (Note: Transcript says Canadian Prime Minister, but he was Governor of the Bank of Canada/England). It's basically about geopolitics; the premise is that finance in future will flow towards what society really, truly values. It'll not be purely based on commercial consideration. So geopolitics and capital allocation will shape the future.

AI, of course, is something which we're seeing data centre demand coming up, and hopefully, that will drive more and more green energy demand. These are two books which I would recommend to you; geopolitics is important to understand before you think about what will happen next.

[00:46:35] Joseph Jacobelli: Those are really great recommendations, Arun, and I will put them on my reading list. I want to really, really thank you for your time; I really appreciate it. I always enjoy very much speaking to you and thank you so much for all of your insights, Arun.

[00:46:51] Arun Kumar: Thank you, Joseph. And it's a pleasure always speaking to you and connecting back with you. Thank you so much for inviting me to your podcast.

[00:47:01] Narrator: Please note that the Asia Climate Finance Podcast is provided for educational purposes only and does not constitute investment advice. Any information discussed should not be relied upon for making investment decisions. Listeners should always seek advice from a suitably qualified and authorised investment professional. The views and opinions expressed by guests are their own, and do not necessarily reflect the views of their current or former employers or of the podcast host or producers.

Recommendations:

• Climate Capitalism by Akshat Rathi: A Bloomberg journalist's ground-level account of how clean technologies, from China's electric cars and batteries to solar, wind and green steel, are becoming commercially viable and profitable. https://www.hachette.co.uk/titles/akshat-rathi/climate-capitalism/9781529329957/
• Value(s): Building a Better World for All by Mark Carney: The former Bank of England governor and current Canadian Prime Minister argues that finance and markets must be steered by human values rather than price alone. https://books.google.com/books/about/Value_s.html?id=Jz6XzQEACAAJ