Wed08162017

Last updateSat, 22 Jul 2017 6am

You are here: Home | Agenda | Climate change | Low on fuel: Crisis ahead

Low on fuel: Crisis ahead

By D Narasimha Rao

With costs of oil and coal rising, and crude imports growing, India is facing a huge energy crisis. Where does India's energy come from, and where does it go? If we are to reduce demand, boost efficiency and design small-scale, decentralised energy options, we must incorporate the consumer in decision-making

India's economic engine is burning hot; its GDP growth has been bullish, the stock market crossed 10,000 for the first time, services and exports are growing. After emphasising de-control in the 1990s, the government has floored the gas pedal of government-facilitated development schemes such as the Golden Quadrilateral and the recent National Urban Renewal Mission. Unfortunately, we are running low on fuel -- literally.

The Planning Commission's recent Integrated Energy Policy (IEP) (see box) provides a good overview of our energy concerns, but does not portend the looming crisis. We are already seeing signs of the crisis -- sustained energy price increases in oil/gas and coal, runaway growth in crude imports, irreversible environmental damage. The government appears to bank its hopes in the short-term on offshore fuel supplies -- nuclear fuel from the USA and Russia, imported natural gas (LNG) from the Middle East, and, to a lesser extent, imported coal from Indonesia and Australia. But these options pose grave security concerns, may materialise later rather than sooner, and carry a high and volatile price tag. Some lone voices of sustainable development have been shouting themselves hoarse: reduce inefficient consumption, encourage replenishable sources of energy, integrate environmental protection into energy planning, and decentralise decision-making.

The IEP acknowledges only the first two, but too far down the list from coal and gas, which will dominate the fuel mix under any circumstances. Unfortunately, it also suffers from 'targetitis' -- the Commission adopts a fire-all-cylinders policy approach, setting targets and broad policy outlines for a smorgasbord of supply-side and demand-side options, without revealing the cavernous gap between targets and the status quo.

The grim reality is that institutional reform -- the single largest impediment to correcting price distortions and releasing supply constraints -- has not been sufficiently addressed (see box). The IEP emphasises markets, market pricing and strong regulatory frameworks for monopoly sectors. These are easier said than done (particularly with coal and railways). The continuing governance failures of our service delivery agencies (electricity and water utilities, municipalities) thwart any realistic effort to incorporate the customer into solution-building. Without this, we will not achieve the set targets for energy efficiency and demand reduction, nor will we generate incentives to design small-scale energy supply options. Ultimately, this could be the difference between an imminent and a potential energy crisis.

Taking stock of energy consumption: The demand side

India's commercial and total primary per capita energy consumption was 350 kgoe (kilograms of oil equivalent) (TERI 2004) and 479 kgoe (IEA 2004) in 2003-04, both of which are about a fifth of the world average, and less than half of China's. The rate of growth of energy consumption has been 2.5% from 1993-2003 (EIA 2003), as compared to an average GDP growth of 6.8% since 1994. India's per capita installed electric capacity in 2001 reached barely 0.1 kW, compared to 0.25 kW in China, and 3 kW in the US. Most states provide intermittent power for eight hours or less a day to rural areas. Clearly, energy consumption needs to grow at a higher rate than at present.

What has been the composition of consumption and growth? Non-commercial energy, which constitutes primarily biomass and waste products, constitutes less than 30% of total energy consumed, while it used to be close to 70% 50 years ago. This has led to an increased reliance on emission-intensive fossil fuels, such as coal and oil. Industry and transportation dominate commercial energy consumption, comprising over 70% of the total. Energy consumption by industry is mainly in the form of electricity, which has grown at 5% from 1993-94 to 2001-02 (TERI 2004).

The transportation sector has grown rapidly, particularly passenger vehicles. Through the 1990s, passenger cars grew at an average rate of 11.4% per year (INSIGHT 2001). Two-wheelers grew at a staggering 13.6% from 1999-2000 to 2004-05 (CRIS-INFAC 2005), and over 11% from 1992-2000 (India Infoline). From an energy perspective, two-wheelers, which account for over 70% of vehicles on the road, have much more efficient fuel consumption than cars. On the downside, their emissions are poorer, particularly of carcinogenic pollutants such as lead and carbon monoxide

A third of the vehicles registered in India ply in 23 million-plus cities, where congestion and pollution have increased, and autorickshaws are the predominant mode of public transport. Road transport has gradually replaced railways as the preferred choice for freight and passenger traffic (the share of the railways has dropped by half since 1989, to 30% and 15% in 2003-04 for freight and passenger traffic respectively). This does not bode well for quality of life. Given that the transportation sector accounts for more than half of India's petroleum consumption, the burden of increasing oil imports (see below) on energy security, and rising fuel costs, is largely on account of the transportation sector.

The IEP cites mass transportation systems as the sole policy remedy for city transportation. But the role of municipal governance is underestimated. Municipal service providers control land development, city planning, enforcement of emission limits, and traffic management, all of which influence the growth and environmental impact of passenger vehicles. These are equally important.

Energy intensity

How efficiently do we consume energy? The energy intensity (energy use per unit of GDP) of India's industrial output (25,460 Btu/$) is more than three times that of the US (9,521 Btu/$), and four times that of the UK (6,247 Btu/$), but appreciably less than that of China (33,175 Btu/$) (Source: EIA 2003).

Commercial energy intensity has marginally decreased through the 1990s (TERI 2004), and in some key energy-intensive industries such as cement and steel. However, these are still well above international standards (Sathaye et al 2005), as is that of India's paper and pulp industries. Unfortunately for Indo-China 'comparophiles', energy intensity in China has been reducing at the rate of 5% per year from 1993-2003, compared to 1.8% in India (EIA 2003). This means that China's energy efficiency of production will soon surpass that of India.

The efficiency of electricity consumption and production is dismal. On the consumption side, low per capita electricity consumption belies inefficiencies in consumption since it averages the consumption of those who receive virtually no power with high-intensity users. Prime movers (motors) and lights constitute the bulk of consumption. Virtually all lights, barring those in new commercial buildings and government offices, are incandescent, which have one-fourth the efficiency and life of fluorescent lights. A compact fluorescent light (CFL) programme for residential users can reduce system demand by 5% (author's estimate, based on realistic demand composition: 25% residential demand, 40% of which is lighting, of which half adopt CFLs). Old and constantly refurbished motors (pumpsets) in the agricultural sector consume up to double the energy they ought to. Further, agricultural consumers pay flat rates and pump water wastefully. Numerous studies have shown that consumption may actually reduce if farmers are provided metered, reliable power. Similarly, municipal water utilities contribute to the bulk of energy wastage in cities, from excessive pumping. Addressing these demand-side concerns also requires facing governance (accountability) failures at the municipal and state level, where market forces may never reach.

The energy impact of inefficient production includes fuel consumption and the indirect energy consumption needed to build power plants and delivery systems. The most obvious energy burden is that of high technical distribution losses, particularly in rural areas. Furthermore, poorly-maintained capacity and imprudent capacity-planning lead to under-utilisation of existing and future capacity. The plant load factor of India's stock of power plants has steadily increased to just over 70%. This is mostly due to fuel shortages, but also low availability from degradation, and disrepair. Dozens of coal power plants in Orissa, Bihar and other eastern and northern states have not reached even 60-70% of their rated capacity for years (interviews with various power sector personnel, regional system operators, regulators). If management of these plants were improved, and greater accountability forced on power planning, our capacity needs, and therefore energy intensity, would decrease.

Market forces may not, and in some cases will not, reach electric utilities, because they will always be monopolies. We need to reform and improve the regulatory agencies that discipline these utilities as well. They need to treat efficiency improvements on a par with supply additions, because these are equivalent from a supply adequacy perspective.

Further, improving energy intensity frees up resources. But freed up resources need to be channelled appropriately to where they are needed most. This means, among other things, focusing on rural energy needs, a policy for which is still pending under the Electricity Act 2003. This will require a paradigm shift in planning and policy, away from centralised planning and provision, through the strengthening of local institutions.

The supply side: Where do we stand?

India's fuel mix has stayed reasonably fixed for the last few decades, with one noticeable change: increased use of natural gas. Coal supplies 55-57% of our commercial energy needs, oil about 30%, gas 8%, hydro 5% and nuclear 1%. The main shift has been in the growth of natural gas, which now contributes over 10% of electricity production from almost nothing in the 1980s. Towards electricity production, coal contributes about 58% (but over 80% in energy terms), hydro 26-27%, nuclear 2.5%, diesel 1%, and wind 1.6% (TERI 2004, IEP 2005).

Where are the supply constraints?

Coal has the highest and most dependable reserves, but reliable supply is stymied by institutional failures in the state-owned coal and railway industries. The supply constraints manifest, in part, in price trends. Coal pithead prices have increased steadily at 9% from 1990 to 2000, while inflation was 8% on average in this period. These prices do not account for the supply shortages that have been causing persistent reductions in power plant output.

Hydro supplies 27% of electricity needs today. This share will only decrease with time. Hydro power is monsoon-dependent and thus reliably unreliable; the northeastern states contain abundant untapped resources, but may entail high -- possibly prohibitive -- social and economic costs (of transport to load centres). Until and unless power planning and governance becomes more democratic and equitable, and projects get smaller in scale, hydro power potential will remain just that -- potential.

The future of the nuclear industry depends on international fuel supplies. Apart from the obvious security risk this raises, scaling up commercial nuclear power raises many other concerns. Nuclear power has hidden costs, both economic (overruns) and environmental (waste disposal), and would make hardly a dent in energy needs at our rate of project development (over 15 years for Kaiga I and II).

Natural gas appears to have the greatest potential to become a stable supply source, if the domestic gas discoveries in the Krishna-Godavari basin are an indication. However, when and at what cost these will reach the burner tip is unknown. Natural gas reserves indicate nothing of the commercial viability of supply, while imported gas may be expensive (the global LNG transport market is highly constrained).

Oil, like nuclear energy, depends entirely on crude imports for future growth. Crude production has stagnated, while imports have grown to 75% of crude consumption (Indian Oil 2004). Wind has limited, but as yet untapped, resource potential, but first needs to surmount the chicken and egg hurdle with respect to scale and affordability.

Thus, each domestic fuel source is saddled with its own share of daunting supply constraints -- be they institutional, economic, environmental or technical. The IEP is not wrong in recommending a multi-pronged effort to improve energy supply and consumption efficiency. However, our ability to achieve these outcomes hinges critically on institutional and governance improvements, both in regulatory agencies and service delivery agencies, which manage consumption and plan future resource requirements.

Energy and climate change

India is one of the largest emitters of carbon dioxide (CO2) behind the US, China and Japan, and contributes about 4% of world CO2 emissions (EIA 2003). It also has the highest CO2 emissions growth rate (4.2%, 1993-2003) among the top seven emitters, including China (3.2%). India has not committed to a reduction in greenhouse gas (GHG) emissions, though it is a signatory to the Kyoto Protocol.

Coal and oil emit two to three times the CO2 compared to natural gas, depending on the type of combustion. Given electricity’s dependence on coal, and relentless passenger vehicle growth, the emissions trajectory seems unchangeable. Just to stem growth, let alone reduce it, would require a drastic shift away from coal and oil.

But we need to shift away from coal and oil anyway. Even the IEP, which does not embrace climate change as a policy imperative, acknowledges that energy security concerns, local environmental pollution, and supply risks necessitate reliance on a diverse fuel mix and reduction in oil imports -- both of which imply a reduction in coal and oil. But what will we realistically adopt instead?

Clean coal and coal gasification would have the highest absolute impact on emissions from any single technology. Significant R&D efforts need to be put into this. Fortunately, this can be done within the current institutional structure.

In our centralised planning environment, large-scale nuclear and hydro also become natural 'carbon-free' solutions. However, would emissions reduction justify the waste disposal risks and costs from scaling up nuclear capacity? Large-scale hydro is also carbon-free, but has an appalling track record of ecological and social damage. Our environmental regulatory framework has been largely dysfunctional. If we embrace climate change policy, we need to simultaneously address this or risk unpalatable environmental trade-offs.

As the IEP shows, the fuel mix has limited sensitivity to non-fossil supply alternatives within a centralised planning paradigm. As discussed earlier, the technical potential for grid-connected wind and biomass deployment is limited to less than 5% of the fuel mix. But with decentralised, stand-alone systems for rural energy, individual loads would require lower energy output and hence lower resource requirements, thereby increasing potential sites for widespread biomass/wind deployment. Beyond these, solar is the ultimate 'backstop' technology. The future of solar's commercial viability depends on the global market, but indigenous R&D should be encouraged to improve resource assessment and exploit domestic cost advantages.

Our energy security, supply inadequacy and environmental concerns -- including climate change -- dovetail into the need for decentralised, consumer-influenced decision-making. The efficacy of regulatory frameworks to induce cost-effective clean coal and gas supply also depends on transparency and consumer participation. Neglect of the consumer is perhaps the greatest oversight of our policymakers.

Draft Integrated Energy Policy: Failure to integrate energy and environment

The Integrated Energy Policy presented in December 2005 by an expert committee at the Planning Commission provides a comprehensive assessment of India’s future energy needs, constraints, and supply options. On the positive side, the document acknowledges the diversity of concerns we face, including fuel shortages, environmental impact and institutional and supply constraints.

Substantively, it projects fuel mixes for different growth and policy scenarios. No matter how aggressively we develop non-conventional sources of energy, or hydro and nuclear energy, coal and natural gas will under all circumstances carry the burden of 50-70% of our energy needs. The report thus develops preliminary policies for the coal and oil/gas sectors. These focus on creating strong regulatory frameworks to foster private investment, technology development (such as coal-bed methane, coal gasification), market-based pricing, and competition. In addition, the report contains elements of policies for power sector reforms, energy efficiency, and renewables.

The expert committee leaves no stone unturned in addressing our energy shortages, as it recommends a smorgasbord of supply-side and demand-side options that would please everyone from George Bush to environmentalists: augment all possible energy sources -- domestic and imported; unleash market forces to correct price distortions and discipline state-owned institutions; pursue energy efficiency initiatives, demand-side management, targeted subsidies to the poor, subsidies for renewables. Towards environmental protection, the expert committee makes a glib recommendation to internalise externalities into markets through taxes or other mechanisms. Climate change gets referenced for completion, wherein they document India’s participation in the Kyoto Protocol. Unsurprisingly, the committee does not recommend any specific policy measures on climate change, since that would contradict India’s stance.

Despite the urge to question the policy’s practicality, one cannot expect a roadmap for implementation from a high-level policy document. However, one can expect the committee to recognise today’s ground realities, and assign priority to those recommendations that need greater government attention and support. Here, the policy document falls short. While the emphasis on coal and gas policy is understandable, the neglect of other equally important options is not. Specifically, the linkage between energy and the environment, and the failures of the current regulatory framework to mitigate environmental damage, have not been sufficiently dealt with. The committee ought to have recognised the need for an integrated energy and environment policy in this effort.

Second, the policy relies on market forces to address institutional failures. However, markets cannot fix institutional failures in monopoly industries such as state-owned utilities, and governance failures within government. These failures will directly influence the achievement of the committee’s policies and performance targets.


Impact of market reforms on energy consumption

Conventional wisdom suggests that market liberalisation has led to indiscriminate consumption and increased reliance on fossil fuels. However, this is not the case. The main casualty of reforms, from an energy consumption perspective, has been transportation. Liberalisation of the automobile industry, aggressive urbanisation and support of road infrastructure have contributed to the increase in passenger vehicles, and therefore reliance on oil imports. Other than this, some sectors such as cement and steel have reduced energy intensity due to the forces of competition. Overall, the commercial energy intensity of the economy has marginally declined through the 1990s. The fuel mix of commercial energy use has remained fairly constant through the 1990s, but for an increase in the use of natural gas, which is environmentally benign relative to coal and oil.

Rather than worsen fossil fuel reliance, market and private sector-oriented structural reforms have had an indirect, and perhaps deeper, impact on energy consumption. The single-minded focus of structural reforms on private sector participation has been at the expense of governance and institutional reforms, particularly of state-owned utilities, regulatory agencies and municipal service providers. These have perpetuated inefficient management practices, and consequently inefficient energy consumption, production and delivery. For example, electricity sector inefficiencies depend more on regulatory efficacy than on open access markets; expensive captive power units proliferate in industry because of utilities’ governance failures; gross wastage in potable water supply and agricultural pumpsets arise from institutional failures in water and electricity boards; indiscriminate land development and absence of mass transportation systems contribute to the proliferation of vehicles.

The future planning of electricity supply, the development of mass transit and planned cities, as well as development of rural energy options, all depend on the efficacy of government institutions. The introduction and functioning of markets themselves require effective governance.

References

The Energy and Resources Institute (2004): TERI Energy Data Directory and Yearbook 2003/2004
Energy Information Administration (Dept of Energy, US) (2003): International Energy Data and Analysis
Asian CERC Information Technology (2001): Automobile -- Passenger Car Research Report
CRIS INFAC (2005): Cars and Utilities Annual Review, May 2005
Planning Commission of India ((2005): Integrated Energy Policy (Draft)
Rao, Narasimha D (2005):CFL -- A Utility Perspective, Presentation at CFL conference, Bureau of Energy Efficiency, Ministry of Power

(D Narasimha Rao is a Visiting Faculty at IIM-Bangalore. He focuses on infrastructure reforms and regulation, with specific expertise in public utilities, power generation technologies and planning)

InfoChange News & Features, June 2006