India’s energy shift to show up in key transportation fuels

The United Nations’ Climate Change Conference, better known as COP26, has emphasised yet again the pivotal role India will play in the global energy transition matrix.

Over this decade, the focus is expected to shift from sources of energy to major areas of energy use such as transportation, and the energy mix it runs on. Indeed, CRISIL Research’s assessment across usage categories suggests transportation will play a prominent role in India’s energy transition plan.

To be sure, investments in renewables will continue to shrink the share of coal. But crude, which contributes ~28% to the overall energy mix and is a large source of carbon emissions, will see changing dynamics as we migrate to meet the emission target for 2030. Notably, ~50% of crude consumption in India is for transportation.

Within crude, petrol and diesel have a share of 14% and 39%, respectively. Also, petrol and diesel together account for ~93% of the overall transportation fuel basket.

An analysis shows government initiatives to control emissions will impact the transportation sector on three major counts this decade. Through fiscal 2025, aggressive adoption of compressed natural gas (CNG) and ethanol blending will help slow down growth in demand for petrol. Beyond that year, there will be further flattening as electric vehicles (EV) hit the road rapidly.

These initiatives will, in turn, have three broad effects.

One, they will displace a significant portion of diesel and petrol sales in coming years. Diesel consumption will log a compound annual growth rate (CAGR) of ~4% between fiscals 2022 and 2025, but slow to ~2.5% between fiscals 2025 and 2030, given continuous penetration of CNG vehicles. The brakes will slam harder on petrol sales, slowing it from an already low CAGR of ~2% between fiscals 2022 and 2025 to a mere 1% CAGR between fiscals 2025 and 2030.

Two, 40-60 million tonne per annum (MTPA) of capacity addition lined up by refiners — over and above ~110 MT that will come on-stream by fiscal 2030 — may need to be trimmed as these may not be needed. Even excluding these 40-60 MTPA capacities, we see utilisation of refiners remaining below 100% through most of this decade for the first time in years.

Three, refiners are trying to re-invent themselves through diversification and revenue-stream expansion by producing more value-added products such as petrochemicals. With such large-scale, planned petrochemical and crude-to-chemical capacities bringing in more efficiencies, India will be better-placed to export surpluses over the longer term. From being a net importer of many petrochemicals so far, it will shift to becoming an exporter amid plant shutdowns in Europe and continued demand from China.

The viability of such integrated capacities in the global landscape remains a monitorable. However, it is expected to evolve further, firming up India’s value proposition in the global landscape.