India's Energy Demand and the Investment Potential Ahead


The world has undergone a significant transition over the past half-century, moving from the pursuit of 'energy' to satisfy the basic needs, to seeking 'energy' for supporting a modern lifestyle. In today’s day and age, frustrations run high if someone has a low phone battery without a way to recharge in sight, or if an air-conditioner shuts down in peak summer, or if Wi-Fi stops working while one is watching a new OTT series. This transformation is evident in the memes circling the social media too, humorously portraying Wi-Fi as the latest essential in Maslow's hierarchy of needs.

This change in lifestyle, marked by an uptick in usage of mobile phones, air-conditioners, cars etc, has led to a sharp rise in primary energy consumption in India, reaching a record 39.02 exajoules in 2023. Over the last decade, India's primary energy consumption has grown by 4.2%, compared to the global average of 1.4%, resulting in India's share of global primary energy consumption reaching 6.3%. The sweltering heat in recent years has exacerbated this trend, with India's peak power demand reaching an all-time high of 250 GW in May 2024 due to excessive usage of cooling appliances.

Power/Energy Consumption: An Upward Trajectory

The trajectory of primary energy consumption is expected to continue upward, driven by increasing per capita income, leading to greater penetration of mobile phones, cars, international travel, and household appliances that enhance daily life. Additionally, India's efforts to increase manufacturing's share in GDP will further boost energy consumption as companies expand their production capacities. For example, major Indian automakers have announced plans to invest around two lakh crores in the next 5-6 years to meet projected demand, aiming for annual passenger vehicle sales growth of 7-8%; reaching 6-6.5 million units by 2030, up from 4.2 million currently.

In addition to conventional demand drivers, energy consumption in India will be bolstered by emerging technologies such as artificial intelligence, data centres, electric vehicles, and green hydrogen. The power consumption of these emerging technologies is substantial; for instance, the daily power usage of a popular chatbot and virtual assistant is equivalent to that of 1,80,000 US households. While electric vehicle penetration in India is currently at 2%, it is expected to reach 15-20% by 2030, with an average battery size of 60-80 kWh. This shift from internal combustion engine (ICE) cars to electric vehicles could increase electricity consumption for vehicle owners by 8-12%.

The cumulative effect of improving lifestyles, rising per capita incomes, aspirations for better living standards and increased industrial demand will likely drive peak power demand to 354 GW by 2030 during solar hours, potentially resulting in a peak power deficit of around 9%, up from the current near-equilibrium situation. India's per capita power consumption stands at 1181 kWh—just one third of the global average.

Investment Opportunities

Considering the rising energy consumption in India, there are investment opportunities in the oil and gas sector, spanning upstream, midstream and downstream companies. The government has introduced several policy changes aimed at improving earnings visibility, including transparent realization mechanisms, gas pricing reforms, and enhanced capital allocation compared to the past decade. Similarly, investment opportunities exist in power generation, transmission and distribution companies, as well as ancillary firms providing electricity cables and maintaining power infrastructure.

There is renewed interest in India's renewable energy sector, encompassing solar and wind power and their entire ecosystem, from cell manufacturing to Engineering, Procurement and Construction (EPC) to project development. The government aims to achieve 500 GW of renewable installed capacity by 2030, compared to 146 GW as of May 2024, providing ample room for growth in renewable energy companies. Additionally, the government recognizes hydropower's role in meeting peak demand periods, with only 21% of India's potential 250 GW hydropower tapped so far.

Despite the energy sector contributing 18% to the total earnings of the Nifty 50 index, the weightage of energy stocks is around 8%, indicating potential valuation opportunities.

If an investor is interested in investing in the energy theme, he/she can do it directly by investing in energy and related stocks or through mutual funds. Currently, ICICI Prudential Mutual Fund has a New Fund Offer (NFO) focused on the energy sector, closing on July 16, 2024.

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