REFORMING ENERGY
The Problems
1. India has become increasingly dependent on imported energy to fuel its growth. This means the health of the economy is very sensitive to global conditions – for example, the price of crude oil.
This creates uncertainty and is a drag on growth.2. India needs to pay for expensive energy imports either through exports or through capital flows into the economy. But capital flows and energy prices often move in different directions, making it hard to ensure these payments are made.
3. As India develops, its energy mix moves from less dense fuel such as firewood to denser fuel like crude oil. Again, this increases external dependency.
4. Power generation has its own problems, with several power plants in danger of being closed down for financial reasons and many state electricity boards chronically unable to avoid losses, because of the political difficulty of raising electricity prices.
Energy Reforms
Neelkanth Mishra
India’s energy needs are heavily dependent on imports. This puts downward pressure on growth – it creates undesired volatility in external balances and on medium-term growth expectations.
Productivity is intricately tied to energy usage: not only does more output per capita require greater automation in transportation, industrial output and household chores, it also requires a shift to more energy-intensive materials like metals, plastics, bricks and cement. Growing GDP without growing energy consumption is possible – but it is difficult and has limits. Productivity improvement also needs greater usage of denser fuels (like crude oil and coal) and a decline in the use of less dense biomass (firewood, crop residue). Viewed from another perspective, urbanization, whether in situ or via migration, increases energy demand and needs denser fuels, pushing residential demand towards electricity and gas.
If India sustains the 7 per cent a year growth rate that it has managed on average over the last twenty-five years, and also manages to reduce energy intensity of GDP growth at 2.5 per cent a year as it has since 1995, energy demand would grow at 4.4 per cent a year. However, energy production grew at only 3.1 per cent a year between 2000 and 2015, and so imports had to rise at 8.4 per cent to meet demand.
Import dependency of energy rose from 21 per cent in 2000 to 36 per cent in 2015 and could rise to nearly 50 per cent by 2040 even if energy production rises at a slightly faster pace than it has in the past. Worryingly, with India lacking reserves of the fuel types that are likely to see demand growth, i.e., oil, gas and metallurgical coal, increasing domestic production alone would not suffice.
While energy prices are notoriously volatile, their compounded annual growth rate over a twenty-five-year horizon has rarely been less than 2 per cent: by this yardstick, India’s energy import bill could rise to $660 billion by 2040. As a share of GDP this would be lower than it is currently, but it would still pose a challenge: energy imports need to be paid for, either through exports or by getting foreign capital. The rhythm of capital flows being mostly different from that of energy prices, this causes undesirable swings in India’s medium-term growth expectations.
Options: The solutions can only lie in a rapid increase of domestic energy production, improving energy efficiency and encouraging substitution to locally produced energy sources. A high energy import bill means that there is pressure on the rupee to lose value; as it depreciates, domestic energy sources become cheaper. So there should be a natural preference for domestic energy. However, government policy needs to accelerate this transition.
Energy Reforms
| No. | Suggestion | Type* | Description/Explanation |
| 1. | A mass campaign to generate awareness of the need for energy reforms to sustain high growth | Substitution | Will help build political consensus around SEB reforms (a state subject), energy substitution related projects and improvement of energy efficiency. |
| Immediate action | |||
| 2. | Auction licences for merchant-mining of coal | Production | Enabling legislation already exists for private sector participation in mining. This would help make supply responsive to the price of energy in rupees. |
| 3. | Reintroduce the clean energy cess and deploy it to incentivize SEBs away from coal | Production | The earlier cess of Rs 400/t was subsumed under GST. The new cess can be an add-on, but to be utilized only for energy-related uses (so net neutral for users). |
| 4. | Free up gas pricing | Production | Again, this will help make supply responsive to the energy price in rupees. It will also encourage prospecting for domestic gas resources. |
| 5. | Accelerate retirement of old thermal power plants | Efficiency | While significant energy is wasted in converting coal to electricity, this is particularly bad in older plants. |
| 6. | Reduce non-transport use of diesel | Substitution | Nearly a sixth of diesel is used for purposes other than for transport – e.g., for backup power via gensets. Transitioning to solar pump sets and giving incentives to states to reduce planned power outages would help reduce the need for gensets. |
| 7. | Start time-of-day pricing programmes | Production | Start charging bigger customers a different tariff depending on the time of day that they consume power, and extend this over time to everyone. This will enable quicker renewable integration. |
| 8. | Start a procurement programme for renewable power with storage | Production | To have a greater share of renewable generation on the grid one needs grid-scale storage. A government procurement programme can create a supply chain and drive down costs for it. |
| 9. | Electric vehicles (EVs) for taxis, buses, two-wheelers | Substitution | The economics of battery EVs mean these automotive segments are likely to transition first to EVs. Waiting for serendipity to accelerate this transition is risky. Instead, it is better to impose fleet-level carbon emission targets for car makers; continue experimentation with city-specific EV taxis; create incentives for state transport corporations to transition to EV buses. |
| 10. | Revive stranded power plants | Production | For a variety of reasons a significant part of constructed capacity is currently inactive, and is under threat of getting liquidated. Policy must prevent that. |
| Medium- or long-term changes | |||
| 11. | Further indigenize renewable energy capacity | Production | Creating a significant amount of solar capacity while there is minimal domestic manufacturing of solar cells would cause the import bill to shoot up and stress external balances. Thus domestic capacity for solar cell production must be created. |
| 12. | Changes to the national power grid | Production | A higher share of renewables in electricity generation would require structural changes to be made to the grid: more storage, different pricing algorithms for power purchase agreements, more micro-grids. |
| 13. | Restructure the SEBs | Efficiency | Currently, one-fifth of power is lost/not billed/paid for. SEBs are thus very fragile and each should be unbundled into an infrastructure and a services company. The infra company could get a fixed return on its equity, and the services company could compete for customers. |
| 14. | Steelmaking through locally available thermal coal | Substitution | Development of these technologies should be made possible by India’s reserves of high-quality iron ore. Nine per cent of India’s energy needs is to make steel. |
| 15. | Global benchmarking for major uses of energy | Efficiency | Like water in Israel, Indian households and industry need to use energy most efficiently. Setting industry-level targets will be an important step forward. |
| 16. | Accelerate transition away from direct biomass usage | Substitution | Ujwala is a great start. With electrification and power availability improving, subsidizing households to move to induction cooktops could be tried. |
| 17. | Trading of carbon credits: allow biomass to be included | Substitution | As rural fuels transition to denser sources, the biomass generated every year in farming needs to be used. This may need subsidies initially. |
| 18. | Reducing plastics usage | Substitution | The non-energy usage of gas and oil, such as in the creation of plastics, should be minimized. |
| 19. | Raise targets for renewable energy generation significantly | Production | Even 650 GW of solar + wind capacity would provide only 4 per cent of India’s projected energy needs in 2040. |
* P = raising production; E = improving efficiency; S = driving/encouraging substitution to domestic energy sources
The Solutions
1. Renewable energy production is vital – but that would require not just scaling up targets for the number of solar or wind farms, but creating a domestic ecosystem for solar cell and battery production. Taxis, two- and three-wheelers and buses should be incentivized to shift to electric power.
2. Power distribution needs to be reformed. The monopoly of the SEB needs to be broken up, and the power grid upgraded to deal with more renewable energy production. Micro-grids are a powerful local solution, and variable tariffs depending upon the time of day that power is used should be tried.
3. Both distribution companies and consumers should be encouraged to move away from coal or diesel. Cook-stoves should become electric, diesel gensets should be rendered unnecessary and the clean energy cess on coal should be reintroduced.
4. Recent history has shown the utility of mass campaigns for such things as hygiene, sanitation and giving up the LPG subsidy. A similar campaign should be started to change attitudes towards electricity tariffs, renewable power and energy wastage.
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