By Jane Nakano & Michelle Melton
Energy analysts are keen to identify the next “big thing” that will significantly drive demand or supply in the global energy system. In the early 2000s, the energy world was taken by surprise at the strong and persistent upsurge in Chinese energy demand, which affected the price outlook for many energy commodities in ways that analysts had not anticipated. As China’s energy demand growth begins to moderate, companies, analysts, investors, and others have often wondered whether India is the next China — and therefore, whether there will be a dramatic uptick in Indian energy demand along the lines of what happened in China earlier in the century.
So is India the next China? There are some key similarities between the two countries when it comes to energy that makes the analogy appealing. Both countries, for example, are significant energy consumers that have large and increasingly urban populations. Both are trying to increase meaningful energy access and reduce poverty through export-led manufacturing growth (although China has recently attempted to move away from this growth model). Moreover, both have influential energy-oriented state-owned enterprises. However, there are also notable differences that belie an easy comparison. Appreciating these differences is important if we are to properly gauge the scope and nature of the impact India’s rise may have on the global energy market dynamics. These include the countries’ different growth trajectories, the way their respective energy sectors are structured, and the significant differences in the regulatory and policymaking environment in the two countries.
Beyond these differences, China is fundamentally a much richer country that has shown stronger and more consistent growth rooted in energy-intensive manufacturing. The prospects for India to catch up — and therefore an Indian energy consumption boom along the lines of what was seen in China a decade ago rally — are unlikely in the next few decades, but how close India comes will depend on the pace and scope of Indian economic growth. Given these differences, it is perhaps less exciting, but more accurate, to conclude that India is unlikely to chart the same path as China.
The International Energy Agency’s (IEA) recent special report on India, a part of the annual World Energy Outlook, offers some new insights and data to help facilitate the comparison. Below we highlight some key similarities between the two energy juggernauts as well as the features that distinguish the two countries. Most of the data below comes from this new report, along with other resources.
Large, growing energy consumers
Similarity: Both India and China are significant emerging economies that represent a large share of global economic growth, both now and in the future. Because of the strong relationship between economic growth and energy consumption, moreover, both countries are among the world’s largest energy consumers. China and India have equal projected shares of global energy consumption growth through 2040.
Difference: While China’s demand is still growing, India’s energy consumption is growing at a faster clip. India is set to contribute about one quarter of world energy demand by 2040, according to the IEA, more than doubling its energy demand. Indian demand growth is significant, but comes from a much lower base than in China. In addition, whereas the Chinese are expanding renewables, nuclear, and natural gas, the growth trajectory in India is much more fossil-intensive (although the IEA projects that India will be the world’s second largest solar market in 2040, behind China).
While both are large energy consumers, in absolute terms China will continue to be a larger energy consumer than India by nearly every metric. Even if India achieves sustained economic growth of over 6 percent annually through 2040, China will still dwarf India in terms of its economic size. Because of the link between economic growth, size of gross domestic product (GDP), and energy consumption, even the most optimistic scenarios with regard to Indian economic growth still show lower overall energy consumption in India.
Additionally, the underlying structural dynamics of the Indian and Chinese economies is different, which results in differences in the structure of future energy demand growth. A good example of this is the share of electricity driven by industrial demand; in China, nearly 75 percent of electricity is consumed by the industrial sector, compared with about 45 percent in India. China is trying to move away from a model of development based on heavy industry (and therefore high energy use per unit of GDP) towards a consumption- and services-led growth model. India, by contrast, is hoping to increase its manufacturing capacity, which would increase the energy intensity of its economy.
Change in Energy Demand in Selected Regions
Role of coal
Similarity: Coal is the linchpin of both countries’ energy systems. In addition to being large consumers of coal—China and India are the world’s first and third largest coal consumers, respectively—both countries are also significant coal producers.
In India, coal accounts for about 44 percent of total primary energy demand compared with 66 percent in China (in the electricity sector, coal accounts for about 70 percent of generation in India and 80 percent in China). Moreover, in both countries, the state is heavily involved in coal production. The Indian government produces about 80 percent of the country’s coal. In China, the world’s largest producer and consumer of coal, government owned mines account for about 70 percent of coal production.
Difference: The trajectory of coal use is very different in India and China. India will be the largest source of growth in global coal use, from both domestic production and imports; today, the vast majority of generation capacity under construction in that country is for coal. Coal production in India is projected by the IEA to increase 3.8 percent, one of the highest rates for coal production in the world. Also, India is projected to become the world’s largest coal importer by 2020, overtaking China, Japan, and the European Union. Chinese coal consumption, as noted, is decelerating, and the government plans to cap coal consumption at 4.6 billion short tons by 2020. It is estimated that Chinese coal consumption actually decreased in 2014. China is planning to close about 2,000 coal mines between 2013 and 2016, according to the U.S. Energy Information Administration.
Nonetheless, even aggressive projections of Indian coal consumption will not match absolute levels of Chinese coal consumption. Despite Indian coal use growth and Chinese coal use declines, Indian coal demand is only projected to be half of the projected levels of China.
Change in coal demand by selected countries and regions in the New Policies Scenario, 2013-2040
Total Electricity Generation in India by Fuel
Similarity: India and China have abundant natural resources and both export natural resources, but both countries are still net importers of crude oil and prioritize energy supply security.
Although China and India both have significant oil production and crude oil reserves, both countries import at least half of the oil they consume (China imports about 60 percent of its oil, while India imports about 80 percent of its oil). Both countries have established strategic oil stock programs to help bolster supply security. While holding 90 days of import cover is a requirement for members of the IEA, neither India nor China is currently an IEA member state, although the IEA has increasingly recognized the importance of engaging the two energy juggernauts.
Difference: India’s stocks currently provide import cover for 13 days. The Indian plan is to eventually expand this reserve, first to 30 days and eventually to 90 days. By contrast, China’s oil imports account for 60 percent of consumption. China’s strategic stock program, begun in 2006, is larger and more mature, and aims to provide 90 days of cover by 2020. In addition, Chinese efforts to diversify their energy supply have been more successful than India’s. These efforts include diversifying their trade partners, promoting additional pipelines, and expanding their investments in upstream projects.
Ms. Jane Nakano is a Senior Fellow with the Energy and National Security Program at CSIS. Ms. Michelle Melton is an Associate Fellow with the Energy and National Security Program. Read the IEA’s new special report on India here.