The One Thing Holding Back Clean Energy Daily Brief 242

TITLE: The One thing holding back Clean Energy | The Daily Brief #242 CHANNEL: Markets by Zerodha DATE: 2025-06-09 ---TRANSCRIPT--- In today’s episode of the daily brief, I’ll talk about two interesting stories. I first talk about the energy sector and finally I talk about the RBI’s bold move. Welcome to the daily brief show by Zeroda where our aim is to simplify the biggest news in the financial markets in a way that’s one level deeper as compared to news channels. I’m your host Axara and today is Monday 9th June. Coming to the first story, some of the world’s biggest investments today are in energy. A new report from the International Energy Agency or IEA shows that by 2025 we’ll spend $3.3 trillion on energy and $2.2 trillion of that is going towards clean technologies like solar panels, wind turbines, and electric cars. That’s twice as much as we’re spending on oil, gas, and coal combined. to the IEA. We are stepping into something called the age of electricity. We have previously spoken about how the energy sector is primarily split into two sectors, oil and natural gas and electricity. Last week we went deeper into the first segment. Today we’re looking at the other side. The electricity segment is everything from making electricity to bringing it to your home. So power plants, solar farms, trading platforms, power lines, and other things that make up the grid. Just 10 years ago, we were spending far more money on fossil fuels than on electricity. Today, those numbers have flipped. We’re now investing $1.5 trillion in the electricity sector alone, which is 50% more than what we spend on all fossil fuels put together. This isn’t just a climate change story. Although, it is that as well. Countries do want cleaner energy, but more than that, they’re also driven by energy security concerns. For instance, China, just like us, depends on imports for most of its oil. That’s a critical vulnerability. If its oil imports are blocked, the country could come to a standstill. It plans to reduce this dependence, which is why it’s leading global clean energy investment, funneling $630 billion into the sector in 2025. Similarly, Europe wants to be less reliant on Russian gas, especially after Russia started using it as a point of leverage over the continent and everyone wants to get ahead in the booming artificial intelligence economy, creating a huge demand for electricity to run all the data centers. The numbers show just how dramatic this shift is. Solar power alone is expected to attract $450 billion in investment in 2025, making it the largest single item in our inventory of the world’s investment spending, according to the IEA. That’s more money than any other single energy technology in history. All this while, upstream oil investment is set to fall by 6% in 2025, the first year-on-year decline since the co9 slump in 2020. But is that enough to bring about an age of electricity? Not quite. Because parts of this transition are still severely underfunded. That’s what we’re looking at today. While we’re building solar farms and wind turbines at breakneck speeds, we’ve perhaps neglected all the less fancy but crucial infrastructure that actually takes their electricity to where it’s needed, the power grid. Think of the grid like a highway system, but for electricity. It’s a massive network of power lines, substations, and transformers that carry electricity from power plants to your home. When you flip a light switch, the electricity that flows to your lights might have traveled hundreds of kilometers through this highway system to reach you. We need to do more to build out these electrical highways. And the IA isn’t talking about this for the first time. Back in 2023, the IAA estimated we needed to add or rebuild 80 million km of power lines by 2040. essentially doubling the entire global grid. It was blunt about the consequences. Without massive grid investment, we would be in a grid delay case where we can’t carry the clean electricity we’re making to the people who actually need it. That will set us back in the green transmission, adding 58 billion additional tons of carbon dioxide emissions by 2050, equivalent to 4 years worth of current global power sector emissions, even though we have the means to avoid it. So, if we want to get around this, we need a lot, and we mean a lot, of investment in this sector. Some estimates say that we’ll require 3.1 trillion in investments by 2030 in the grid alone to limit global warming to 1.8°C. Meanwhile, global grid investment has barely budged. We’ve been putting in around $300 billion per year since 2015, even while renewable investment has nearly doubled. Only now is this starting to climb. Grid investment reached a new high of $390 billion globally in 2024 and is set to surpass that to $400 billion for the first time this year. That’s encouraging, but it’s nowhere near what’s actually needed. Here’s one way of thinking about the lag in our grid investments. Back in 2016, for every dollar spent on building new power plants, we invested 60 cents in the grid. Today, that’s dropped to less than 40 cents. We’re building tons of new electricity generation, but not nearly enough infrastructure to actually deliver it. So, what happens when you don’t spend enough on a highway system? Terrible traffic jams all around. That’s what happens when you don’t build this electricity highway system as well. Right now, there are 1,650 gawatt of solar and wind projects, six times the entire electricity capacity of an industrial powerhouse like Germany, just sitting around and waiting to be connected to the grid. These projects are built and are ready to go. They could bring us electricity today, but they can’t because the grid infrastructure just isn’t there. So, you might wonder why there’s such a grid shortage. After all, it’s not like we haven’t transmitted electricity before. We’ve built out infrastructure for thermal power already. But here’s the thing about renewable energy. It needs the grid way more than traditional power plants do. A coal or gas plant can be built pretty much anywhere and runs 24/7. All you need is a stockpile of fuel. On the other hand, green power plants have to be built where energy is the most abundant. Solar farms need to be built where it’s sunny and wind farms need to be built where it’s windy. And that might well be in some remote area far away from cities. And so you need lots of new transmission lines to carry that power to where people actually live and work. And then there’s the intermittency problem. The sun doesn’t always shine and the wind doesn’t always blow. If you want some stability, you need to diversify. You need a grid that runs across vast distances, balancing supply and demand issues across regions. When it’s calm and cloudy in one place, the grid needs to quickly pull power from somewhere else where conditions are better. That’s one of our best ways of managing fluctuations in renewable energy production. This seems like a rather obvious problem, right? If our underinvestment in grids is actually hurting the clean energy investments that we are making, why isn’t this getting more attention? One simple answer is that it’s just hard to build a grid. So, let’s take the time comparison. A new solar farm is a relatively simple localized project. You can build one in around 1 to 5 years. On the other hand, if you’re building hundreds of kilometers worth of transmission infrastructure, cutting across huge swades of land, it’ll take much longer. You need extensive planning to pull it off. You need to get a range of approvals and permits in place. And you need to acquire large amounts of land. You also need to figure out how to work through all sorts of difficult terrain. And so on top of that, you could encounter all sorts of unexpected hurdles. For example, in Rajasthan, many transmission projects were held up because they were cutting through the habitat of the great Indian bustard. Not something you can plan for, right? Adding on to the difficulty in India the different parts of the government are responsible for setting up power plants and setting up transmission lines. Coordination between the two is actually sometimes poor leading to severe mismatches between a region’s ability to generate power and to make it available for people elsewhere. All these problems mean that on average creating new grid infrastructure could take anywhere between 5 and 15 years. That’s a fundamental timing mismatch that leads to years of delay. The only real way out of the timing mismatch is to plan your grid out ahead of time before all the renewables projects come up. But in India at least, our system is set up to penalize such planning. After a recent amendment, if a transmission company builds a power line but no electricity flows through it initially, they only get a fraction of their normal payment for the first 6 months. that actively disincentivizes them from planning ahead. Since transmission companies never know exactly when approved energy projects will actually start operating, they sometimes avoid building the necessary infrastructure early. Because why risk completing a project on time if you might get penalized with reduced payments while waiting for other projects to catch up? On top of all that, it’s hard to find all the equipment we need for our grids. For instance, we’re currently going through a worldwide shortage of transformers, and that’s holding up power projects all over the world. If you place an order for transformers right now, it can take up to 4 years to deliver. Things like this reveal just how unprepared the world was for the speed of the energy transition. Transformers allow us to safely and efficiently move power over long distances and deliver it to homes and businesses. They’re fundamental to building a grid. And yet, the world’s supply simply can’t keep up with the explosive demand. This problem won’t be solved overnight. The global transformer market, worth 13.5 billion in 2023, is dominated by a handful of countries. China, South Korea, Turkey, and Italy, account for half of all transformer exports, making the entire world dependent on just a few key suppliers. And ramping up supply is hard. Even the raw materials needed for transformers, copper, aluminium, rare earths, and specialized electrical steel are all getting more expensive and harder to source for reasons ranging from a lack of supply of materials to geopolitical tensions to tariffs to rare earth export bans and much more. The effects of this supply chain stress ripple everywhere. Transformer prices have gone through the roof, costing 75% more than they did as recently as 2018. But that’s just one problem. We’re running into many other such shortages. Cable orders that used to take a few months now require 2 to 3 years of waiting and have nearly doubled in price since 2018. Some specialized equipment has weight times exceeding 5 years. To add insult to injury, the industry also faces a skilled worker shortage. Currently about 8 million people work in grid construction and maintenance worldwide. But the IEA says we’ll need to add another 1.5 million workers by 2030 just to meet basic policy goals. So the results are clear. A short while ago, Business Standard reported that here in India, approximately 40 transmission projects worth 60 gawatt of renewable energy didn’t yet have connectivity approval from the central transmission utility, which means they too are not connected to the grid yet. And we’re trying to spend our way around bottlenecks. The green energy corridor scheme, for instance, aims to invest $2.6 billion in India’s transmission network, but who knows if it’ll be taken to fruition. But this isn’t just a problem for our country. It’s a global crisis. In Europe, some renewable energy projects are waiting up to 9 years just to get permission to connect to the grid. In the United States, the backlog of projects waiting for grid connections has grown eight times larger than it was a decade ago. One technology that’s supposed to help solve the renewable energy puzzle, as we discussed a few days ago, is battery storage. Investment into this space is booming. The IIA reports that global battery storage investment is set to reach $66 billion in 2025. Think of batteries as the grid’s way of dealing with the fact that electricity demand and renewable energy supply rarely match up perfectly. If electricity demand and supply is only matched in real time, you’re obviously going to run into some problems. These massive battery systems act like giant shock absorbers for the grid, soaking up excess solar power when the sun is blazing and releasing it back when the clouds roll in. In California, for example, so much solar power gets generated during sunny afternoons that electricity prices sometimes go negative. We recently saw prices almost touch zero in India, too. Batteries can store that excess power and release it when it’s needed. But here’s the catch. Those batteries face exactly the same grid connection problems as everything else. You can build a billion dollar battery storage facility in a year, but if you can’t get the transformers and transmission lines to connect it to the grid, it’s basically useless. The batteries themselves might be getting cheaper and more efficient, but they still need all that basic grid infrastructure to actually function. So, here’s the bottom line. We have recently made massive progress with our green energy buildout. While climate change isn’t a problem we can escape, we’re finally trying to step up to the challenge. But if we don’t fix our grid problem, all those solar panels and wind turbines we’re building won’t matter. The clean energy transition could stall, not because we lack the technology, but because we couldn’t build a system to deliver it. The energy transition is often thought of as a power generation challenge. How do we kick off from fossil fuels and build enough renewable capacity? But the real constraint has become the mundane but critical infrastructure that actually delivers electricity. In the age of electricity, this infrastructure is the very foundation that everything else depends on. Now coming to the next story, the Reserve Bank of India just delivered a double whammy that caught everyone offg guard. A hefty 50 basis point rate cut when markets were expecting just 25 and a massive 100 basis point reduction in the cash reserve ratio. This is the most doubbish we’ve seen the RBI in years. But at the same time, they also shifted their stance to neutral, essentially slamming the brakes on easing for now. Are you confused? Don’t worry, we’ll help you make sense of it all. Let’s start with what happened yesterday at the RBI’s 55th monetary policy committee meeting. Governor Sanjay Malhotra and his team delivered what can only be described as a shock and awe strategy. First, the repo rate, which is the rate at which banks borrow from the RBI, was slashed by 50 basis points to 5.5%. A basis point is 100th of a percentage point. So, we’re talking about half a percentage shaved off interest rates. Most analysts, on the other hand, were betting on just 25 basis points. But that wasn’t all. The RBI also announced a 100 basis point cut to the cash reserve ratio or CRR. That’s essentially the share of their deposits that banks must park with the RBI as a safety buffer. It’s money that banks technically possess but can’t lend out. This will now come down from 4% to 3% over four phases starting in September. This could inject a massive 2.5 lakh cr rupees into the banking system by December. So when banks have more money to lend, it’s easier for them to offer loans at cheaper rates. It’s like having more inventory in a shop. you can afford to be more competitive with your pricing. But just as markets were getting excited about this doubbish stance, the RBI pulled a classic central bank move. They changed their policy stance from accommodative to neutral. Now, these are more than just fancy words. They tell you how the RBI might move in the future. So, when a central bank adopts an accommodative stance, it’s essentially signaling that it’s in a mood to help the economy and will cut rates further if needed. Think of it as a green light for more easing. A neutral stance, on the other hand, means the central bank is taking a wait and watch approach. It wants to watch the economy for now and react to whatever happens. It could go either way for now. Cut rates if things get worse or raise them if inflation picks up. Governor Malhotra was pretty clear about what this shift means. Monetary policy now has very limited space to support growth. In other words, don’t expect many more rate cuts. So why did the RBI make all these moves? It all comes down to the classic central bank dilemma, balancing growth and inflation. On the inflation front, things are looking remarkably good for India right now. Consumer price inflation has dropped to a nearly 6-year low of 3.2% in April, well below the RBI’s target of 4%. Food inflation, which was a massive and persistent headache, recorded its sixth consecutive monthly decline. The RBI is so confident about our current inflation trajectory that they’ve revised their forecast downward from 4% to 3.7% for the entire financial year. They’re even projecting that inflation might undersshoot their target. Something that would have been unthinkable just a year ago when it seemed impossible to keep inflation under its upper tolerance band. Unless we see a severe shock to our economy, it looks like prices will remain stable for some time. But there’s another side to the coin. Growth. That’s where things are somewhat more worrying. India’s GDP grew at 6.5% last year. Now that sounds impressive and compared to most of the world, it is. But it’s well below our country’s potential as well as what we need. The government and RBI want to see growth closer to 7 to 8% annually to create enough jobs for India’s young and often unemployed population. Global headwinds are making things even worse. We’re seeing trade tensions, geopolitical uncertainties and a general slowdown in global growth which are all weighing on India’s export prospects. The world isn’t a great market and so domestic demand has become crucial. That’s exactly what the RBI is trying to stimulate with these rate cuts. Now what are the experts saying? To get a deeper perspective on these moves, let’s look at some expert commentary. Suyash Chowri who is the head of fixed income at Bandan EMC has some fascinating insights. He points out something crucial that many missed in the initial excitement. While the RBI gave a lot with the aggressive rate cut and CR reduction, they also took something away by shifting to a neutral stance so quickly. His key observation is about what he calls the expectation channel. Here’s what that means. Monetary policy doesn’t just work through current interest rates, but also through what people expect rates to be in the future. Markets always take bets on the future. If a business is considering whether to take a loan with floating interest rates, it doesn’t just look at today’s interest rates, but also how they might go tomorrow. If businesses and consumers think rates will fall further, they might be more willing to borrow and invest today. But by declaring that monetary policy has limited space and shifting to neutral, the RBI essentially capped those expectations. As Chowri puts it, this forces the bar higher in market’s mind and works somewhat counter to the overall objective of transmission. To the market, it practically sounds like this is as good as things are going to get. And that isn’t quite as compelling. This shift in expectations played out perfectly in the market’s immediate reaction. We saw aggressive curve steepening. That’s market jargon for short-term rates falling more than long-term rates. People don’t expect money to get any cheaper in the future, so they demand more to lend their money out for longer. Essentially, traders started pricing out any future rate cuts. Chowri also questions the timing of the stance change. He argues that with global economic uncertainty still unfolding, an accommodative stance might have been the smarter thing to do. After all, we haven’t yet seen the full impact of global tensions on actual economic data. And if things take a turn for the worse, you don’t want the market to panic that no more support is coming. So, how do the rate cuts even work? Many of our listeners wonder how these RBI rate cuts actually reach you and me. How can the RBI, just by tweaking some numbers around, change the very direction of our economy? The process is called monetary policy transmission, and it’s more complex than you might think. The RBI’s recent annual report gives us some fascinating insights into this process. Let’s walk you through how it works. When the RBI cuts the repo rate, it doesn’t automatically mean your home loan EMI drops the next day. The rate cut has to travel all the way through the banking system. Now, this journey isn’t always smooth or quick. Here’s how it goes. First, the repo rate cut affects money market rates where banks lend to each other to make up for temporary shortfalls. It tells the bank a price that the RBI is willing to lend at. When banks lend to each other, they take that as a base rate because the markets rates are the rates at which banks themselves get money. It’s sort of the minimum price of money in the country. When there’s a lot of liquidity in the system, this rate is far below the RBI’s repo rate. And that’s what we have seen. The weighted average call rate, which gauges the borrowing cost for banks, has been trading below the repo rate for a while. Next, banks need to adjust their own lending rates. But not all loans are priced the same way, right? For different sorts of loans, the speed at which they show up for borrowers is different. RBI’s data shows that about 60% of bank loans are now directly linked to external benchmarks like the repo rate. For these loans, called the EPLR loans, the move is instant. Loans repric almost immediately when the RBI cuts rates. But the remaining 40% of these bank loans are still linked to the older benchmarks like the marginal cost of funds based lending rate or MCLR. These adjust more slowly. They’re based on the bank’s cost of funds which changes gradually as all their deposits get repriced. Now the annual report reveals some fascinating differences between bank types. Private banks have about 86% of their loans linked to external benchmarks. Public sector banks on the other hand lag at just 45%. This means private bank customers see faster transmission of rate cuts. This also changes by sector. Housing loans which are mostly linked to external benchmarks see quick transmission but corporate loans and some other segments still depend on MCLR and take longer to adjust. The transmission works differently for your deposits. Term deposit rates have already started falling with some banks cutting rates by 40 to 50 basis points. But this makes its way through the system gradually as old deposits mature and get renewed at new rates. Now let’s talk about the CR cut which is a big deal especially for bank profits and what’s called their net interest margins or NIMs. To begin with, here’s what NIMs are. They’re essentially the difference between what banks earn on loans and what they pay on deposits. It’s the core measure of bank profitability. It is to a bank what a markup is to your local Kirana store. The bigger the difference between buying and selling price, the better the profit. So banks have to park money with the RBI according to what the CRR is and they don’t earn any interest on this money. To them it’s essentially dead capital. So when the RBI cuts CR to banks, it’s like an asset that was doing nothing and can suddenly become productive. And the size of that cut means that suddenly 1% of the banking systems deposits have come alive. According to City Research Analysis, this 100 basis point CR cut could add 6 to eight basis points to bank net interest margins. Banks that have low margins today, mainly public sector and foreign banks, will suddenly find a lot more room to breathe. And look at the timing. City’s analysis suggests that bank NIMs, especially for private banks, were expected to hit the bottom in the second quarter of this fiscal year. Between the rate cuts and the CR reduction, banks margins could stabilize far sooner than one hoped. According to City, private banks were slated to face a tougher compression of their NIMs, potentially 30 to 40 basis points in the second quarter compared to public sector banks at 20 to 25 basis points. This cut gives them a cushion to fall on. So these cuts will happen in phases from September through November. That coincides with the festival season when credit demand typically picks up. This will ensure that banks have adequate liquidity exactly when they need it most. So there’s another angle here. Remember banks have been struggling to grow their deposits lately. This cut also gives them breathing room. It boosts how much of their deposits they can lend so that they don’t have to chase expensive deposits. So where does this leave us? The RBI has essentially frontloaded its monetary easing. It’s given the economy a significant boost up front rather than spreading it over multiple policy meetings. The challenge now is transmission. Despite all these measures, lending rates haven’t fallen as much as the size of the rate cuts would suggest. The RBI acknowledges this and this is where the expectation channel that Suyas Chowri mentioned becomes crucial. By shifting to neutral, the RBI may have inadvertently slowed the very transmission they’re trying to accelerate. Now, the market will be watching inflation data closely. And if inflation remains benign and global headwinds intensify, there might still be room for one more rate cut despite the neutral stance. But for now, the RBI seems content to wait and watch how these measures play out. Now coming to the tidbits, Tata Advanced Systems Limited or TASL has signed a manufacturing agreement with DASO Aviation to produce major airframe assemblies for Rafael fighter jets in Hyderabad. The facility will manufacture components including the front section, central fuselage, rear section, and lateral rear fuselage shells. This marks the first time complete Rafael fuselages will be built outside France. Production is expected to begin by FY 2028 with a targeted output of two complete fuselages per month. This move expands TASL’s aerospace footprint and integrates it further into DASO’s global supply chain. It also aligns with India’s broader defense manufacturing agenda. Though specific financial details of the deal have not been disclosed. Silver prices in Delhi reached an all-time high of rupees 1 lakh 4,100 per kilogram on June 5th, continuing their upward run for the fourth consecutive session. The multicommodity exchange or MCX also saw silver futures for July delivery hitting a record rups 1 lak 5,218 per kg marking a strong intraday rally of rupes 3,833 or 3.78%. Year to date silver has surged by 21.7% rising from rups 86,17 per kg on December 31st 2024 to rupes 1 lak 4,675 per kg. The previous all-time high was rupes 1 lak 3,500 per kg on March 19th. In global markets, silver crossed the $35 per ounce mark for the first time since 2012, while spot gold stood at $3,395 per ounce. Domestically, gold of $99.9% purity rose rups 430 to rupes 99,690 per 10 g. Analysts attribute silver strength to robust industrial demand, supply constraints, and inflation hedging interest. That’s all the news I have for you today. Thank you so much for watching and see you in the next one. Disclaimer, this content is forformational purposes only. None of the stocks, brands, or products mentioned are recommendations or endorsements.