India's Integrated Energy Policy

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Integrated Energy Policy Report of the Expert Committee

Government of India

Planning Commission

New Delhi

August 2006


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Integrated Energy Policy


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We, the Members of the Expert Committee on Integrated Energy Policy, hereby submit our Final Report.

Kirit S. ParikhChairman, Expert Committee

Member, Planning Commission, Government of India

T.L. Sankar Amit MitraEx-Principal, Administrative Staff College of India Secretary General, FICCI

Leena Srivastava D.S. Rawat

Executive Director, TERI Secretary General, ASSOCHAM

J.L. Bajaj V. RaghuramanEx-Chairman, SERC Representative of Confederation of Indian Industry

Rangan Banerjee Urjit R. PatelProfessor, IIT, Mumbai Executive Director, IDFC

Ajit Kapadia Pradeep Chaturvedi

Vice Chairman, Centre for Fuel Studies & Research The Institution of Engineers (India)

Subimal Sen R.R. ShahMember, West Bengal Planning Board Member Secretary, Planning Commission

R.V. Shahi M.S. SrinivasanSecretary, Ministry of Power Secretary, Ministry of Petroleum & Natural Gas

Anil Kakodkar Prodipto GhoshSecretary, Deptt. of Atomic Energy Secretary, Ministry of Environment & Forests

V. Subramanian H.C. GuptaSecretary, Ministry of Non-conventional Energy Secretary, Ministry of Coal

Sources

Convenor

Surya P. Sethi Adviser (Power & Energy), Planning Commission


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,e- ,l- vkgyqokfy;kMONTEK SINGH AHLUWALIA

mik/;{k;kstuk vk;ksxHkkjrDEPUTY CHAIRMAN

PLANNING COMMISSIONINDIA

;kstuk Hkou] laln ekxZ] ubZ fnYyh&110001 nwjHkk"k % 23096677] 23096688 QSDl % 23096699Yojana Bhawan, Parliament Street, New Delhi-110001 Phones : 23096677, 23096688 Fax : 23096699E-MAIL : [email protected]

Foreword

Energy is a vital input into production and this means that if India is tomove to the higher growth rate that is now feasible, we must ensure reliableavailability of energy, particularly electric power and petroleum products, atinternationally competitive prices. We cannot hope to compete effectively in

world markets unless these critical energy inputs are available in adequate quantitiesand at appropriate prices.

The present energy scenario is not satisfactory. The power supply positionprevailing in the country is characterised by persistent shortages and unreliabilityand also high prices for industrial consumer. There is also concern about theposition regarding petroleum products. We depend to the extent of 70 percent onimported oil, and this naturally raises issues about energy security. These concernshave been exacerbated by recent movements in international oil prices. Electricityis domestically produced but its supply depends upon availability of coal,exploitation of hydro power sources and the scope for expanding nuclear power,

and there are constraints affecting each source.

Achieving an efficient configuration of the various forms of energyrequires consistency in the policies governing each sector and consistency in thepricing of different types of energy. There is also a need for clarity in the directionin which we wish to move in aspects like energy security, research and development,addressing environmental concerns, energy conservation, etc. To address theseissues in an integrated manner, the Prime Minister had directed that the PlanningCommission should constitute an Expert Committee to undertake a comprehensivereview and to make recommendation for policy on this basis. The Expert

Committee was constituted under the chairmanship of Dr. Kirit S. Parikh,Member, Planning Commission and has finalised its report after an extensiveprocess of deliberation and consultation with various stakeholders. The draftreport was also placed on the web site of the Planning Commission and commentswere invited which have been taken into consideration in preparing the finalreport.


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,e- ,l- vkgyqokfy;kMONTEK SINGH AHLUWALIA

mik/;{k;kstuk vk;ksxHkkjrDEPUTY CHAIRMAN

PLANNING COMMISSIONINDIA

;kstuk Hkou] laln ekxZ] ubZ fnYyh&110001 nwjHkk"k % 23096677] 23096688 QSDl % 23096699Yojana Bhawan, Parliament Street, New Delhi-110001 Phones : 23096677, 23096688 Fax : 23096699E-MAIL : [email protected]

The report of the Expert Committee provides a broad overarchingframework for guiding the policies governing the production and use of differentforms of energy from various sources. It makes specific recommendations on avery large range of issues. The report is a valuable input into policy making andwill help shape our energy policy in the 11th Plan. Early implementation of therecommendations in the report would contribute substantially to putting the

economy on a sustainable higher growth path.

(Montek S. Ahluwalia)


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Preface

The energy policies that we have adopted since independence to serve the socio-economicpriority of development have encouraged and sustained many inefficiencies in the use andproduction of energy. We pay one of the highest prices for energy in purchasing power parityterms. This has eroded the competitiveness of many sectors of the economy. The challenge is toensure adequate supply of energy at the least possible cost. Another important challenge is toprovide clean and convenient lifeline energy to the poor even when they cannot fully pay forit, as it is critical to their well-being. Therein lies the importance of an effective and comprehensiveenergy policy.

In this context, the Prime Minister had directed the Planning Commission, to setup anExpert Committee to prepare an integrated energy policy linked with sustainable developmentthat covers all sources of energy and addresses all aspects of energy use and supply includingenergy security, access and availability, affordability and pricing, as well as efficiency andenvironmental concerns. The committee was constituted on August 12, 2004 and was to submitits report within six months i.e., by February 11, 2005. Given the complexity involved and widerconsultation needed, the term of the committee was extended upto 11th October 2005. The draftreport of the Committee was put on the website of Planning Commission inviting comments. Wereceived a large number of them from individuals, groups and institutions some of whom hadorganised special discussion meetings on the draft report. I thank them all. We have finalised thereport after taking these comments into account. While the finalisation of the report has takensome time, it is worth noting that some of the policy suggestions made in the draft report havebeen in the meanwhile taken up by the Government for implementation.

It is my pleasure and also my privilege to thank all the Members of the Committee fortheir many important suggestions and for sparing their valuable time towards the finalisation ofthis report.

I am also thankful to the officers and staff of the Power & Energy Division of thePlanning Commission for their contributions in the preparation of this report, particularly ShriSurya Sethi, Convenor of the Committee, for his many ideas, contributions, help in drafting thereport and for ensuring consistency and clarity. S/Shri R.C. Mahajan, M. Satyamurty, R.K. Kaul,I.A. Khan, B. Srinivasan, Dr. A. Mohan, D.N. Prasad, Rajnath Ram and Dr. M. Govinda Rajprovided many inputs and support.

I also thank Dr. Vivek Karandikar and Dr. Prasanna Dani of the Observer ResearchFoundation for their help in developing energy supply scenarios.

Finally, I want to thank Shri Sanjay Vasnik for diligently, carefully and cheerfully typingmany drafts of the report.

(Dr. Kirit S. Parikh)Member (Energy),

Planning Commission &

Chairman, Expert Committee on Integrated Energy PolicyDated: 09.08.2006


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Contents

ContentsPage No.

Members of the Committee iii

Foreword v

Preface vii

Overview xiii

Abbreviations Used xxxi

Chapter I. The Challenges 1

1.1 The Energy Scene 11.2 The Issues 13

1.3 The Vision 14

1.4 Need for an Integrated Energy Policy 15

1.5 Approach 16

Chapter II. Energy Requirements 18

2.1 Commercial Energy Needs 18

2.2 Required Electricity Generation 19

2.3 Indias Oil Demand 22

2.4 Indias Coal Demand for Non-Power Use 23

2.5 Indias Non-Power Natural Gas Demand 23

2.6 Total Primary Commercial Energy Requirement 26

2.7 Non-Commercial Energy Requirement 28

2.8 Total Primary Energy Requirement 31

2.9 Summing Up 31

Chapter III. Supply Options 33

3.1 Indias Energy Reserves 33

3.2 Supply Scenarios 40

3.3 Implications of the Results of the Scenarios 41

3.3.1 Aggregate Energy Needs and Imports Dependence 45

3.3.2 Energy Supply Options 45

3.3.3 Energy Efficiency and Demand Side Management 48

3.3.4 Carbon Emissions 50

3.3.5 Implications for Investment Needs 50

3.3.6 The Main Actions Recommended 51

3.4 Energy Independence in an Energy Scarce World 51

Chapter IV. Energy Security 544.1 What is Energy Security? 54

4.2 The Nature of the Problem 55


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4.3 Policy Options for Energy Security 57

4.3.1 Reduce Energy Requirements 57

4.3.2 Substitute Imported Energy by Domestic Alternatives 58

4.3.3 Diversify Supply Sources 60

4.3.4 Expand Resource Base and Develop Alternative Energy Sources 61

4.3.5 Increase Ability to Withstand Supply Shocks 64

4.3.6 Increase Ability to Import Energy and Face Market Risks 65

4.3.7 Increase Redundancy to Deal with Technical Risk 65

4.4 Energy Security for the Poor 66

4.5 Policies and Initiatives for Energy Security 66

Chapter V. Energy Policy Options/Initiatives 68

5.1 The Emerging Backdrop 68

5.2 Policies Covering Energy Markets, Pricing, Regulation, Taxation, Subsidies, 71Externalities and Institutions

Chapter VI. Policy for Energy Efficiency and Demand Side Management 81

6.1 Large Potential for Saving Energy 81

Chapter VII. Policy for Renewable and Non-Conventional Energy Sources 89

Chapter VIII. Household Energy Security: Electricity and Clean Fuels for All 99

8.1 Electricity 100

8.2 Cooking Energy 101

8.3 Subsidy through Debit Cards/Smart Cards 102

Chapter IX. Energy R&D 103

Chapter X. Power Sector Policy 109

Chapter XI. Coal Sector Policy 115

Chapter XII. Oil and Gas Sector Policy 123

Chapter XIII. Energy-Environment Linkages 129

13.1 Energy Supply Side: Environment Concerns 129

13.1.1 Exploration, Production and Transformation of Fossil Fuels 129

13.1.2 Environmental Impacts of Nuclear Power 130

13.1.3 Environmental Impacts of Large-Scale Hydropower 130

13.1.4 Environmental Impacts of Renewable Energy 131

13.2 Environmental Dimensions of Demand Side Impacts 131

13.3 Understanding the Determinants of Air Quality 131

13.3.1 Levels and Trend Analysis of Urban air quality in five major Indian cities 132

13.4 Long-term Sustainability of Indias Energy Use 13213.4.1 Local and Regional Impacts 132

13.4.2 Indias Approach to Climate Change 135


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Contents

Concluding Comment 137

Annexures 138

Annexure-IOrder Constituting the Committee

138Annexure-II Gist of Earlier Energy Policy Committees/Groups 141

Annexure-III Calorific Values, Units and Conversion Factors 147

List of Tables

Table 1.1 Selected Energy Indicators for 2003 1

Table 1.2 Household Energy Consumption in India (July 1999 June 2000) 8

Table 1.3 Growth of Motorised Transport Vehicles 10

Table 2.1 Energy Use Elasticity w.r.t. GDP 18

Table 2.2 Elasticities Used for Projections 19

Table 2.3 Energy Use Elasticity w.r.t. GDP from Cross-Country Data of 2003 19Table 2.4 Projections for Total Primary Commercial Energy Requirements 20

Table 2.5 Projections for Electricity Requirement 20

Table 2.6 Projections for Electricity Requirement by MOP 21

Table 2.7 Sources of Electricity Generation One Possible Scenario 22

Table 2.8 Demand Scenario for Petroleum Products - India 24

Table 2.9 Demand Projection of Coal by Various Agencies in Mt 25

Table 2.10 Demand Scenario for Natural Gas - India 27

Table 2.11 Commercial Fuel Requirements for Non-Power Use in Physical Units 28

Table 2.12 Projected Primary Commercial Energy Requirements (One Possible Scenario) 28Table 2.13 The Demand Scenario of Various Energy Items for Household 29

Consumption in India

Table 2.14 The Impact of Electrification on the Demand Scenario of Various Energy 30Items for Household Consumption

Table 2.15 Total Primary Energy Requirement (Mtoe) 31

Table 2.16 Per Capita Energy Requirements in Selected Countries (2003) 32

Table 3.1 Indias Hydrocarbon Reserves 33

Table 3.2 Reserves/Production of Crude Oil & Natural Gas 35

Table 3.3 The Approximate Potential Available From Nuclear Energy 36

Table 3.4 Possible Development of Nuclear Power Installed Capacity in MW 37Table 3.5 Renewable Energy Resources 37

Table 3.6 Some Energy Supply Scenarios for 8% GDP Growth 41

Table 3.7 Scenario Summaries for 8% GDP Growth Fuel Mix in Year 2031-32 44

Table 3.8 Ranges of Commercial Energy Requirement, Domestic Production and 45Imports for 8 percent Growth for year 2031-32

Table 3.9 Generation Capacities and Load Factors in Scenario 11 46

Table 3.10 Primary Energy Supply Sources (2003-04) 52

Table 4.1 Sources of Indias Oil Imports 2004-05 59

Table 7.1 Capital Costs and the Typical Cost of Generated Electricity from 90

the Renewable OptionsTable 7.2 International Feed-in Tariffs 91


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Table 13.1 Environmental Impacts Associated with Energy Transformation 129Based on Fossil Fuels

Table 13.2 Supply Side, Local and Regional Environmental Impacts 130

Table 13.3 India Approved CDM Projects 135

List of Figures

Figure 1.1 Total Primary Energy Supply (TOE) Per Capita (2003) vs. GDP Per Capita 2(PPP US$2000)

Figure 1.2 Kilo Watt hours of Electricity Consumption Per Capita (2003) vs. 3GDP Per Capita (PPP US$2000)

Figure 1.3 Human Development Index (HDI) vs. Electricity Consumption 3Per Capita in 2002

Figure 1.4 Peak Power and Energy Shortages in States/UTs. 2004-05 4

Figure 1.5 Distribution of Households by Primary Source of Energy Used 6for Cooking- India

Figure 1.6 Pattern of Household Energy Consumption

Figure 1.6(a) Monthly Per Capita Household Consumption 8Pattern Urban India, 2000

Figure 1.6(b) Monthly Per Capita Household Consumption 8Pattern Rural India, 2000

Figure 1.7 Domestic Consumption and Production of Crude Oil 9

Figure 1.8 Growth of Transport Vehicles and Two Wheelers 10

Figure 2.1 Projected Electricity Generation Growth (BkWh) 21

Figure 2.2 Plan-wise Projected Installed Capacity Addition (MW) 21

Figure 2.3 Percentage Share of Commercial Primary Energy Resources2003-04 29and 2031-32

Figure 2.4 Percentage of Households Using LPG 30

Figure 3.1 Fuel Mix Comparison in Year 2031-32 42

Figure 3.2 Coal Dominant Scenario 1 - Fuel Mix Year-Wise 42

Figure 3.3 Forced Hydro, Nuclear and Gas Scenario 5 - Fuel Mix Year-Wise 43

Figure 3.4 Forced Renewables Scenario 11 - Fuel Mix Year Wise 43

Figure 3.5 CO2

From Energy Use in Alternative Scenarios in Year 2031-32 50

Figure 4.1 Indias Growing Share in Global Energy Consumption (Higher Projections) 56

Figure 4.2 World Oil Prices 56Figure 6.1 Reduction in the Energy Consumption of Refrigerators Sold in the 87

United States of America

Figure 7.1 Renewable Energy Options 89

Figure 13.1 Air Pollution in Residential Areas 133

Figure 13.2 Air Pollution in Industrial Areas 134

List of Boxes

Box 1.1 The Burden of Traditional Fuels in Rural India 7

Box 6.1 Bureau of Energy Efficiency (BEE) 82

Box 6.2 Initial Cost and Life Cycle Cost 86

Box 11.1 Delivered Cost of Domestic and Imported Thermal Coal 119


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Overview

India faces formidable challenges inmeeting its energy needs and in providingadequate energy of desired quality in variousforms in a sustainable manner and at

competitive prices. India needs to sustain an8% to 10% economic growth rate, over thenext 25 years, if it is to eradicate poverty andmeet its human development goals. To delivera sustained growth rate of 8% through 2031-32and to meet the lifeline energy needs of allcitizens, India needs, at the very least, to increaseits primary energy supply by 3 to 4 times and,its electricity generation capacity/supply by 5to 6 times of their 2003-04 levels. With 2003-04 as the base, Indias commercial energy supplywould need to grow from 5.2% to 6.1% perannum while its total primary energy supplywould need to grow at 4.3% to 5.1% annually.By 2031-32 power generation capacity mustincrease to nearly 8,00,000 MW from thecurrent capacity of around 1,60,000 MWinclusive of all captive plants. Similarlyrequirement of coal, the dominant fuel inIndias energy mix will need to expand to over2 billion tonnes/annum based on domesticquality of coal. Meeting the energy challenge isof fundamental importance to Indias economic

growth imperatives and its efforts to raise itslevel of human development.

The broad vision behind the energypolicy is to reliably meet the demand forenergy services of all sectors at competitiveprices. Further, lifeline energy needs of allhouseholds must be met even if that entailsdirected subsidies to vulnerable households.The demand must be met through safe, cleanand convenient forms of energy at the least-

cost in a technically efficient, economicallyviable and environmentally sustainable manner.

Overview

Considering the shocks and disruptions thatcan be reasonably expected, assured supply ofsuch energy and technologies at all times isessential to providing energy security for all.

Meeting this vision requires that India pursuesall available fuel options and forms of energy,both conventional and non-conventional.Further, India must seek to expand its energyresource base and seek new and emergingenergy sources. Finally, and most importantly,India must pursue technologies that maximiseenergy efficiency, demand side managementand conservation. Coal shall remain Indiasmost important energy source till 2031-32 andpossibly beyond. Thus, India must seek cleancoal combustion technologies and, given thegrowing demand for coal, also pursue new coalextraction technologies such as in-situgasification to tap its vast coal reserves that aredifficult to extract economically usingconventional technologies.

The approach of the Committee isdirected to realising a cost-effective energysystem. For this the following are needed:

(i) Wherever possible, energy markets

should be competitive. However,competition alone has been shown tohave its limitations in a number ofareas of the energy sector andindependent regulation becomes evenmore critical in such instances.

(ii) Pricing and resource allocations thatare determined by market forces underan effective and credible regulatoryoversight.

(iii) Transparent and targeted subsidies.

(iv) Improved efficiencies across the energychain.


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(v) Policies that reflect externalities ofenergy consumption.

(vi) Policies that rely on incentives/disincentives to regulate market and

consumer behaviour.

(vii) Policies that are implementable.

(viii) Management reforms that createaccountability and incentives forefficiency.

A competitive market without anyentry barriers is theoretically the most efficientway to realise optimal fuel and technologychoices for extraction, conversion,

transportation, distribution and end use ofenergy. The tax structure and regulation acrossenergy sub-sectors should be consistent andinstitutional arrangements should provide alevel playing field to all players. Social objectivesshould ideally be met through direct transfers.Environmental externalities should be treateduniformly and internalised. A consistentapplication of polluter pays principle may bemade to attain environmental objectives atleast-cost where prescribed environmental

norms are either not applied consistently ornot being adhered to. An energy market withthe above features would minimise marketdistortions and maximise efficiency gains. Anintegrated energy policy is needed to ensurethat energy costs and availability do notconstrain Indias economic growth andcompetitiveness.

While the medium to long-termchallenges of ensuring competitive energymarkets are formidable, the immediateproblems of acute power shortages, adequatesupply of good coal, gas shortages, and concernsof States rich in coal and hydro resourcesrequire immediate policy action. Ourrecommendations address immediate as well asthe medium to long-term issues.

Key, high priority recommendationsare summarised below:

(i) Ensuring Adequate Supply of Coal

with Consistent Quality: Coalaccounts for over 50% of Indias

commercial energy consumption andabout 78% of domestic coal productionis dedicated to power generation. Thisdominance of coal in Indias energy

mix is not likely to change till 2031-32.Since prices were de-controlled, thesector has become profitable primarilyas a result of price increases and therising share of open cast production.India would need to augment domesticproduction and encourage thermal coalimports to meet its energy needs. TheCommittee has concluded that alongthe western and southern coasts ofIndia imported coal is more cost

competitive compared to domestic coaland further, imported coal is far morecost competitive compared to importedgas at these coastal locations. Such acost advantage of imported coal overimported gas is likely to continue forsome time in the future. Thus:

Domestic coal production shouldbe stepped up by allotting coalblocks to central and state publicsector units and captive mines of

notified end users. Coal blocks heldby Coal India Limited (CIL) thatcannot be brought into productionby 2016-17, either directly orthrough joint ventures, should bemade available to other eligiblecandidates for development and forbringing into production by 2011-12.

At the same time the neededinfrastructure must be created to

facilitate thermal coal imports. Thiswill facilitate coastal powergeneration capacity based onimported thermal coal. Imports ofthermal coal will also putcompetitive pressure on thedomestic coal industry to be moreefficient.

A system of pricing coal on itsgross calorific value must replacethe current system of pricing coal

on the basis of broad bands of itsuseful heat value.


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Overview

Coal companies must be asked toconform to international practiceof preparing coal prior to its sale.Washed coal must become the

norm and use of unwashed coalshould become the exception.

The current system of coal linkagesshould be replaced by long-termcoal supply agreements with strictpenalties for not meeting contractedsupplies, quality and offtakecommitments.

Coal must be brought underindependent regulation to improveexploitation and allocation of

available resources, and to regulatee-auctions and coal prices and toenable a competitive coal marketto take shape.

By the end of 2007-08 the quantityof coal sold through e-auction mustreach 20% of domestic production.

Ideally, the Coal Mines(Nationalisation) Act, 1973, shouldbe amended to facilitate: (a) private

participation in coal mining forpurposes other than those specifiedin the Act and (b) offering of futurecoal blocks to potentialentrepreneurs. A consensus shouldbe built on the need to reform thisAct.

(ii) Addressing Concern of Resource RichStates: Both coal and hydro resourcesare concentrated in a few states.Increasingly states are becoming more

assertive in demanding higher share ofbenefits that their local energy resourcesprovide to the country as a whole.Even though these are nationalresources and should not be rendereduncompetitive because of suchdemands, it is conceivable thatmechanisms can be put in place thatresult in resource rich states reapingmore equitable benefits. Allowingresource rich States a share in the profitsof the enterprise tapping such localresources through what is called acarried equity interest and further

allowing the state or its residents anopportunity to invest in such projectson equal terms and appropriatelyrevising the royalty rate etc. are possible

solutions to removing hurdles inexploiting these domestic sources ofprimary energy. The NDC must takeup this issue immediately in respect ofcoal and hydro resources. Over thelonger term, a National Policy onDomestic Natural Resources should beformulated and enacted through theParliament.

(iii) Ensuring Availability of Gas forPower Generation: There is a total

generation capacity of 12,604 MW basedon gas and liquid fuels. Bulk of it isbase loaded under combined cycleoperation. However, gas supplies havebeen restricted and the overallutilisation remains at only 54.5%. Asignificant part of this capacity wasrealised under the earlier liquid fuelpolicy while the rest has been builtbased on unenforceable fuel supplyagreements that would have been

unbankable in any other environment.While requiring that no new gascapacity be built without firm andbankable gas supply agreements, effortshould be made to allocate availabledomestic gas supplies to the fertiliser,petrochemicals, transport and powersectors at prices that are regulated toyield a fair return to domestic gasproducers. Such a practice should beenforced till a better demand-supplybalance emerges and domestic gasproduction achieves some of thepotential that is often cited. A morecompetitive market can then function.

(iv) Power Sector Reforms: These mustfocus on controlling the aggregatetechnical and commercial losses of thestate transmission and distributionutilities. This is essential to creating afinancially robust power sector in eachstate. Only financially healthy state

power distribution utilities can sustainthe growing generation andtransmission of Central Power Sector


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PSUs and State Power Sector Utilities(SPSUs) and provide the neededcomfort on payment security to attractprivate investment in the power sector

at internationally competitive tariffs.Our recommendations:

To control AT&C losses, theCommittee recommends that theexisting Accelerated PowerDevelopment and ReformProgramme (APDRP) berestructured to ensure energy flowauditing at the distributiontransformer level throughautomated meter reading, a

Geographical Information System(GIS) mapping of the network andconsumers and the separation offeeders for agricultural pumps.Investment in developing aManagement Information System(MIS) that can support a full energyaudit for each distributiontransformer is essential forreduction in AT&C losses. Thiswill also fix accountability and

provide a baseline which is anessential prerequisite tomanagement reform and/orprivatisation. The revised APDRPwill provide incentives to StateElectricity Boards (SEBs) that arelinked to performance outcomesand will also include incentives tostaff for reduction in AT&C losses.

The Committee also recommendsthat the liberal captive and group

captive regime foreseen under theElectricity Act 2003 be realised onthe ground. Indias liberal captiveregime will not only deriveeconomic benefits from theavailability of distributed generationbut will also set competitivewheeling charges to supply powerto group captive consumers. Thiswill pave the way for open accessto distribution networks. It will

also facilitate private generation thatlimits its interface with the hostutility to the use of the distribution

network for a fee and thus can berealised even before AT&C lossesare reduced.

To achieve these objectives, the

Committee feels that it is essentialto separate the cost of the purewires business (carriage) from theenergy business (content) in bothtransmission and distribution atdifferent voltages. The ElectricityAct 2003 recognises such separationfor the transmission sub-segment.Separation of content from carriagein the distribution sub-segment,however, is considered only as a

means to the provision of openaccess. The wires business withinthe distribution sub-segment is alsoa natural monopoly and must beregulated. Further, introduction ofAvailability Based Tariffs (ABT) forthe intra-state sales and theupgrading of State Load DespatchCentres to the technological levelof Regional Load Despatch Centresshould be realised.

Open access is resisted byincumbents as they fear that all thehigh value paying customers wouldgo away and they would be leftwith small and subsidisedagricultural and domesticcustomers. Since these customershave strong political constituencies,it may be difficult to raise theirtariffs when needed and theincumbent utilities would not

remain viable for long. Theseconcerns can be taken care of if thecross-subsidy surcharge, wheelingcharge and back-up charge are setproperly. However, if these are settoo high, open access could beeffectively thwarted. These chargesneed to be periodically revised andindependently regulated.

A robust and efficient inter-stateand intra-state transmission system

with adequate surplus capacity thatis capable of transferring powerfrom surplus regions to deficit


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Overview

regions is a must for ensuringoptimal operation of the system.

Rehabilitation of existing thermalstations could raise capacity at least-

cost in the short-run. Similarlyrehabilitation of hydro stationscould yield much needed peakcapacity at negligible cost. Boththese steps must be taken upurgently.

(v) Reduction in Cost of Power: In termsof purchasing power parity, powertariffs in India for industry, commerceand large households are among thehighest in the world. It is important to

reduce the cost of power to increaseboth the competitiveness of the Indianeconomy and also to increase consumerwelfare. A number of measures aresuggested for this.

The Government Policy shouldensure that all generation andtransmission projects should becompetitively built on the basis oftariff-based bidding. Public SectorUndertakings shall also be

encouraged to participate in suchbids even though the tariff policyallows them a 5 year windowwherein projects undertaken by thepublic sector need not be bidcompetitively.

In cases where tariff continues tobe determined on the basis of costsand norms, regulators may eitheradopt a return on equity approachor return on capital approach,whichever is considered better inthe interest of consumers. Indeciding the level of returnprovided, the regulator should inter-alia take into account the returnavailable on long-term governmentbonds and reasonable riskpremiums associated with equityinvestments.

The current practice of stateregulators not allowing state publicsector power utilities the samereturns as the central public sector

utilities should be strongly opposedin the interest of strengthening faircompetition which alone will bringdown prices in the long-run.

Similarly differential paymentsecurity structures for CentralPower Sector PSUs and the privatesector should be abolished.

Consumer prices for electricity arecurrently set by State ElectricityRegulatory Commissions on costplus basis. Regulators should setmulti-year tariffs and differentiatethem by time of day.

Government should seed the capital

markets to develop market-basedinstruments that effectively extendthe tenure of debt available topower projects to, perhaps, 20years. This will reduce the capacitycharge in the earlier years andspread it more evenly over the lifeof the project.

Unit sizes should be standardisedand global tenders invited for anumber of units to get substantial

bulk discount.

Distribution should be bid out onthe basis of a distribution marginor paid for by a regulateddistribution charge determined ona cost plus basis including a profitmark up similar to that paid forgeneration as suggested above.

(vi) Rationalisation of Fuel Prices:Relative prices play the most important

role in choice of technology, fuel andenergy form. They are thus the mostvital aspect of an Integrated EnergyPolicy that promotes efficient fuelchoices and facilitates appropriatesubstitution. In a competitive set up,the marginal use value of different fuels,which are substitutes, should be equalat a given place and time so that theprices of different fuels at differentplaces do not differ by more than thecost of transporting the fuels. Theresulting inter-fuel choices will then beeconomically efficient. Further:


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Prices of different fuels should notbe set independently of each other.As a general rule, all commercialprimary energy sources must be

priced at trade parity prices at thepoint of sale, namely the Free-on-Board (FOB) price for products forwhich the country is a net exporterand Cost, Insurance and Freight(CIF) price for which it is a netimporter. The price of a productfor which the country is self-sufficient in a competitive marketwith many suppliers and buyerswould fluctuate between the two

depending upon the ease of import/export and reliability of supplies.In a situation with a monopolysupplier with exportable surplus atimport parity price, the price wouldbe in between the two dependingon the price elasticity of domesticdemand. This principle is extremelyrelevant for the petroleum sectorwherein bulk of the crude oil isimported and India has become anet exporter of petroleum products.

To cushion domestic prices againstshort-term volatility of prices onthe international market (FOB orCIF) domestic prices can be set onthe basis of median prices over theprevious month or a three monthperiod.

The petroleum and natural gassector is, once again, devoid of anycompetition and independent

oversight of either upstream ordownstream activities. On theupstream side, Directorate GeneralHydrocarbons (DGH), an arm ofthe Ministry, oversees allocationand exploitation of oil & gasreserves and enforces profit sharingwith exploration & productioncompanies. The currentarrangement needs to bestrengthened and made

independent. On the downstreamside, despite the dismantling of theAdministered Price Mechanism, the

GOI continues to control thepricing of automotive fuels, LPG,large part of domestic natural gasand PDS kerosene. There is no real

competition in the sector otherthan in some peripheral productssuch as lubricants, despite thepresence of a large domestic privateplayer in refining and the likelyemergence of other private playersin this field. In fact, the prevailingpricing and taxation policies andthe market structure providesignificant protection to the privaterefineries. The result is that Indias

refining capacity exceeds thedemand by 18% already. There isan urgent need to have anindependent regulator for bothupstream and downstream sectors.The notification of the Petroleum& Natural Gas Regulatory BoardAct, 2006, is thus welcome.

In the petroleum sector, full pricecompetition at the refinery gateand the retail level would lead to

trade parity prices as describedabove. Thus instead ofadministering prices, full pricecompetition should be introduced.

Coal prices should ideally be leftto the market and trading of coal,nationally and internationally,should be free. Only a competitivefree market can do an efficient jobof price determination. Acompetitive market requires that

there are multiple producers andthat there are no entry barriers tonew producers or to importers.Pending the creation of such acompetitive market, independentregulation of coal prices becomesessential.

Apart from CILs virtual monopolyin coal supply, coal prices cannotbe determined in a competitivemarket open to all users as long as

the largest coal consuming sector,i.e. power, has coal cost as a passthrough. However, since other


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Overview

users of coal are numerous andconsume substantial quantities ofcoal, a strategy for competitive pricediscovery is possible. We

recommend as follows: High quality coking and non-

coking coal which areexportable may be sold atexport parity prices asdetermined by import priceat the nearest port minus15%. This practise iscurrently being adopted forsupply of good quality cokingcoal to the steel industry.

20% of the production maybe sold through e-auction.Quantities to be sold throughe-auction from differentmines must be determinedannually with a monthlymine-wise schedule to beindependently monitored andenforced by a coal regulator.

Remaining coal should besold under long-term Fuel

Supply and TransportAgreements (FSTAs).Regulated utilities should beallowed upto 100% of theircertified requirementsthrough FSTAs. Other bulkconsumers could be allowedpartial FSTAs based on coalavailability. Any shortfallsshould be met through e-auction supplies or imports.

Pithead price of coal underFSTAs should be revisedannually by a coal regulatoron a basis that inter-alia takesinto account prices obtainedthrough e-auction, FOB priceof imported coal (bothadjusted for quality) andproduction cost, inclusive ofreturn based on efficiencystandards.

Coal prices may be madefully variable based on Gross

Calorific Value (GCV) andother quality parameters.

Natural Gas is not an easily tradablecommodity. Making gas tradable

requires significant investments inpipelines or, alternatively, inliquefaction, cryogenic shipping &regasification. Comparing local gasprices to spot LNG prices in theinternational market is grosslymisleading. Again, linking gas pricesto crude price movements is alsomisleading. Long-term supplycontracts such as those in Europeare more representative of natural

gas prices. Natural gas price can bedetermined through competitionamong different producers wheremultiple sources and a competitivesupply-demand balance exist. Aslong as there is shortage of gas inthe country and the two majorusers of gas, namely fertiliser andpower, work in a regulated costplus environment, a competitivemarket determined price would be

highly distorted. Such distortionswould get further amplified by theprevailing regime of fertilisersubsidies & power sector subsidiesand cross subsidies. In such asituation price of domestic gas andits allocation should beindependently regulated on a costplus basis including reasonablereturns.

Another option could be to price

gas on a net-back basis. If gasbecomes a key component inIndias energy mix, it is pointedout that beyond the level of gasconsumption in the fertiliser,petrochemical, automotive anddomestic sectors, gas must competewith coal as the key alternative forpower generation. This implies thatthe cost of generating peak or baseelectricity using gas cannot exceed

the cost of peak or base electricityfrom coal, the cheapest alternative.A competitive coal market is thus


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important for setting a proper priceof natural gas on a net-back basis.An alternative for a gas producersis to export gas, in which case the

domestic gas price could be the netrealisation of the domestic naturalgas producer after investing andgetting a return on the investmentneeded to make the natural gastradable across borders in either atrans-border pipeline or throughliquefaction and shipping facilities.For the foreseeable future, domesticgas supplies to both the fertiliserand the power sector, that together

account for about 80% of thecurrent gas usage, would need tobe allocated based on availabilityand charged at regulated price thatreflects cost of production and areasonable profit.

Central and State taxes oncommercial energy supplies needto be rationalised to yield optimalfuel choices and investmentdecisions. Relative prices of fuels

can be distorted if taxes andsubsidies are not equivalent acrossfuels. This equivalence should bein effective calorie terms. In otherwords they should be such thatproducer and consumer choices asto which fuel and which technologyto use are not affected by the taxesand subsidies. Socio-economicbenefits such as employmentgeneration and positive impact onenergy security may supportdifferential taxes on alternate fuels.

Environmental taxes and subsidies,however, are levied precisely toaffect choices. Differential taxes canbe justified here if theyappropriately reflect environmentalexternalities. A consistentapplication of the polluter paysprinciple or consumer-paysprinciple should be made to attain

environmental objectives at least-cost where prescribedenvironmental norms are either not

applied consistently or not beingadhered to.

(vii) Energy Efficiency and Demand SideManagement: Lowering the energy

intensity of GDP growth throughhigher energy efficiency is importantfor meeting Indias energy challengeand ensuring its energy security. Theenergy intensity of Indias growth hasbeen falling and is about half of whatit used to be in the early seventies.Currently, we consume 0.16 kg of oilequivalent (kgoe) per dollar of GDPexpressed in purchasing power parityterms. Indias energy intensity is lower

than the 0.23 kgoe of China, 0.22 kgoeof the US and a World average of 0.21kgoe. Indias energy intensity is evenmarginally lower than that of Germany& OECD at 0.17 kgoe. However,Denmark at 0.13 kgoe, UK at 0.14kgoe and Brazil & Japan at 0.15 kgoeare ahead of India. These figures andmany sectoral studies confirm that thereis room to improve and energyintensity can be brought down

significantly in India with currentcommercially available technologies.

Lowering energy intensity throughhigher efficiency is equivalent tocreating a virtual source of untappeddomestic energy. It may be noted thata unit of energy saved by a user isgreater than a unit produced, as it saveson production losses as well astransport, transmission and distributionlosses. Thus a Negawatt, produced

by a reduction of energy need hasmore value than a Megawatt generated.The Committee feels that with anaggressive pursuit of energy efficiencyand conservation, it is possible to reduceIndias energy intensity by up to 25%from current levels.

Efficiency can be increased in energyextraction, conversion, transportation,as well as in consumption. Further, thesame level of output or service can be

obtained by alternate means requiringless energy. The major areas where


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Overview

efficiency in energy use can make asubstantial impact are mining,electricity generation, electricitytransmission, electricity distribution,

water pumping, industrial productionprocesses, haulage, mass transport,building design, construction, heating,ventilation, air conditioning, lightingand household appliances. As the Indianeconomy opens up to internationalcompetition, it will have to becomemore energy efficient. This is welldemonstrated by Indias steel andcement industry. However, theCommittee recommends the following

policies for raising energy efficiency.Some of these policies can beimplemented through voluntary targetsundertaken by industry associations asopposed to external dictates andenforcement.

Merge Petroleum ConservationResearch Association (PCRA) withBureau of Energy Efficiency (BEE).The merged entity should be anautonomous statutory body under

the Energy Conservation Act, beindependent of all the energyministries and be funded by theCentral Government. It must:

Force the pace of improvement in energyefficiency of energy usingappliances, equipment andvehicles, and create goldencarrot incentives in the formof substantial rewards to the

firm which firstcommercialises equipmentthat exceeds a prescribedenergy efficiency target.

Enforce truthful labelling onequipment, and impose majorfinancial penalties if theequipment fails to deliverstated efficiencies. In extremecases, resort to black listingof errant suppliers on

consumer information websites and in governmentprocurement.

Establish benchmarks of energy consumption for allenergy intensive sectors.

Disseminate information,

support training and rewardbest practices with nationallevel honours in energyefficiency and energyconservation.

Increase the gross efficiency inpower generation from the currentaverage of 30.5% to 34%. All newplants should adopt technologiesthat improve their gross efficiencyfrom the prevailing 36% to at least

38-40%.

Require a least-cost planningapproach to provide a level playingfield, to Negawatts and Megawattsso that regulators permit the samereturn on the investment neededto save a watt as to supply anadditional watt.

Promote minimum life cycle costpurchase instead of minimum initial

cost procurement by thegovernment and the public sector.

Promote urban mass transport,energy efficient vehicles and freightmovement by railways throughscheduled freight trains withguaranteed, safe and timelydeliveries. Enforce minimum fuelefficiency standards for all vehicles.

Institute specialisations in energyefficiency/conservation in technical

colleges and commence certificationof such experts.

(viii) Augmenting of Resources forIncreased Energy Security: Indiasenergy resources can be augmented byexploration to find more coal, oil andgas, or by recovering a higherpercentage of the in-place reserves.Developing the thorium cycle fornuclear power and exploiting non-conventional energy, especially solar

power, offer possibilities for Indiasenergy independence beyond 2050.


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At a growth rate of 5% in domesticproduction, currently extractable coalresources will be exhausted in about 45years. However, only about 45% of

the potential coal bearing area hascurrently been covered by regionalsurveys. It is also felt that both regionalas well as detailed drilling can be mademore comprehensive. Several possibleoptions are recommended:

Covering all coal bearing areas withcomprehensive regional and detaileddrilling could make a significantdifference to the estimated life ofIndias coal reserves.

Indias extractable coal resourcescould be augmented through in-situ coal gasification which makesuse of those coal deposits whichare at greater depth and cannot beextracted economically byconventional methods.

Extracting coal bed methane beforeand during mining could augmentthe countrys energy resources.

Enhanced oil recovery andincremental oil recoverytechnologies could improve theproportion of in-place reserves thatcould be economically recoveredfrom abandoned/depleted fields.

Isolated deposits of all hydrocarbons including coal may betapped economically through subleases to the private sector.

(ix) Using Energy Abroad: In case India

can access cheap natural gas overseasunder long-term (25-30 years)arrangements, it should consider settingup captive fertiliser and/or gasliquefaction facilities in such countries.This would essentially augment energyavailability for India.

(x) Role of Nuclear and Hydro Power:Even if India succeeds in exploiting itsfull hydro potential of 1,50,000 MW,the contribution of hydro energy to

the energy mix will only be around1.9-2.2%. It is clarified that hydro share

in the primary energy mix comes outlower because of the way oilequivalence of hydro electricity iscalculated. A hydroelectric plant

converts a unit of primary energy inthe form of potential energy to almostone unit of electricity. The fossil fuelroute or the nuclear route needs almost3 units of a primary energy source toproduce the same unit of electricity.Thus while hydros share in primaryenergy mix is lower than that ofnuclear, the kWh produced from hydrois higher. Similarly, even if a 20-foldincrease takes place in Indias nuclear

power capacity by 2031-32, thecontribution of nuclear energy toIndias energy mix is also, at best,expected to be 4.0-6.4%. If the recentagreement with the US translates intoa removal of sanctions by the nuclearsuppliers group, possibilities of importsof nuclear fuels as well as power plantsshould be actively considered so thatnuclear development takes place at afaster pace.

Nuclear energy theoretically offersIndia the most potent means to long-term energy security. India has tosucceed in realising the three-stagedevelopment process described in themain report and thereby tap its vastthorium resource to become trulyenergy independent beyond 2050.Continuing support to the three-stagedevelopment of Indias nuclear potentialis essential.

Though its contribution to energyrequirement is limited, hydroelectricitys flexibility and suitabilityto meet peak demand makes it valuable.Moreover, the development ofhydropower, especially storage schemes,are critical for India as our per capitawater storage is the lowest among othercomparable countries. Creating suchstorages is critical to Indias watersecurity, flood control and drought

control. The environmental concernsand the problem of resettlement andrehabilitation of project affected people


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Overview

(PAPs) can and must be satisfactorilyhandled. The PAPs should benefit fromthe project as much as otherbeneficiaries. This can be accomplished,

for example, as follows: Require compulsory land

consolidation and impose abetterment levy in kind of (say) 5percent of land on the commandarea farmers. Use this land toresettle and compensate all PAPs.

(xi) Role of Renewables: From a longer-term perspective and keeping in mindthe need to maximally develop domesticsupply options as well as the need to

diversify energy sources, renewablesremain important to Indias energysector. It would not be out of place tomention that solar power could be animportant player in India attainingenergy independence in the long run.With a concerted push and a 40-foldincrease in their contribution toprimary energy, renewables mayaccount for only 5 to 6% of Indiasenergy mix by 2031-32. While this

figure appears small, the distributednature of renewables can provide manysocio-economic benefits.

Subsidies for renewables may be justified on several grounds. Arenewable energy source may beenvironmentally friendly. It may belocally available thereby making itpossible to supply energy earlier thanin a centralised system. Grid connectedrenewables could improve the quality

of supply and provide system benefitsby generating energy at the ends of thegrid where otherwise supply wouldhave been lax. Further, renewables mayprovide employment and livelihood tothe poor. However, the subsidies shouldbe given for a well-defined period orupto a well-defined limit.

The Committee recommends thatfor promoting renewables,incentives should be linked to

outcomes (energy generated) andnot just outlays (capacity installed).

Even when a capital subsidy isneeded, it should be linked tooutcomes. For example, capitalsubsidy could also be given in the

form of a Tradable Tax RebateCertificate (TTRC) that could bebased on actual energy generated.The rebate claim would becomepayable depending upon theamount of electricity/energycertified as having been actuallysupplied.

Power Regulators must createalternative incentive structures suchas mandated feed-in-laws or

differential tariffs to encourageutilities to integrate wind, smallhydro, cogeneration etc. into theirsystems.

An annual renewable energy reportshould be published providingdetails of actual performance ofdifferent renewable technologies atthe state and national levels. Thisshould include actual energysupplied from different renewable

options, availability, actual costs,operating and maintenanceproblems etc. It should also reporton social benefits, employmentcreated, and womens participationand empowerment.

Policies for promoting specificalternatives are suggested in themain text. These include fuel woodplantations, bio-gas plants, woodgasifier based power plants, solar

thermal, solar water heaters, solarphotovoltaics, bio-diesel andethanol.

It is also recommended that theIndian Renewable EnergyDevelopment Agency Ltd (IREDA)be converted into a nationalrefinancing institution on the linesof NABARD/National HousingBank (NHB) for the renewableenergy sector. IREDAs own equity

base can be expanded by thefinancial institutions of the country


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instead of continuing the currentsystem of GOI support.

(xii) Ensuring Energy Security: Indiasenergy security, at its broadest level, is

primarily about ensuring thecontinuous availability of commercialenergy at competitive prices to supportits economic growth and meet thelifeline energy needs of its householdswith safe, clean and convenient formsof energy even if that entails directedsubsidies. Reducing energyrequirements and increasing efficiencyare two very important measures toincrease energy security. However, it

is also necessary to recognise that Indiasgrowing dependence on energy importsexposes its energy needs to externalprice shocks. Hence, domestic energyresources must be expanded. For Indiait is not a question of choosing amongalternate domestic energy resources butexploiting all available domestic energyresources to the maximum as long asthey are competitive.

The Committee, however, felt that

obtaining equity oil, coal and gas abroaddo not represent adequate strategies forenhancing energy security beyonddiversifying supply sources. In contrast,pipelines for importing gas do enhancesecurity of supply if the supplyingcountry makes a major investment inthe pipeline. The most critical elementsof our energy security, however, remainthe measures suggested herein toincrease efficiency, reduce requirements

and augment the domestic energyresource base.

Ensuring energy security requiresdealing with various risks. The threatto energy security arises not just fromsupply risks and the uncertainty ofavailability of imported energy, butalso from possible disruptions orshortfalls in domestic production.Supply risks from domestic sources,such as from a strike in CIL or the

Railways, also need to be addressed.Even if there is no disruption of supply,there can be the market risk of a sudden

increase in energy price. Even whenthe country has adequate energyresources, technical failures may disruptthe supply of energy to some people.

Generators could fail, transmission linesmay trip or oil pipelines may spring aleak. One needs to provide securityagainst such technical risks. Risks canbe reduced by lowering the requirementof energy by increasing efficiency inproduction and use; by substitutingimported fuels with domestic fuels; bydiversifying fuel choices (gas, ethanol,orimulsion tar sands etc.) and supplysources; and by expanding the domestic

energy resource base. Risks can also bedealt with by increasing the ability towithstand supply shocks throughcreation of strategic reserves, the abilityto import energy and face market riskby building hard currency reserves andby providing redundancy to addresstechnical risks. We recommend asfollows:

Maintain a reserve, equivalent to90 days of oil imports for strategic-

cum-buffer stock purposes and/orbuy options for emergency suppliesfrom neighbouring large storagessuch as those available in Singapore.The buffer stocks could be used toaddress short-term price volatility.Operating the strategic/bufferreserves in cooperation with othercountries who maintain suchreserves could also increase theireffectiveness.

Since 80 percent of globalhydrocarbon reserves are controlledby national oil companiescontrolled by respectivegovernments, oil diplomacyestablishing bilateral economic,social and cultural ties can reducesupply risk.

(xiii) Boosting Energy Related R&D: Indiawill find it increasingly harder toimport its required quantities of

commercial energy as her share of theincremental world supply of fossil fuelscould rise from a low of 13% in the


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Overview

most energy efficient scenario to a highof 21% in the coal dominant scenarioby 2031-32. This assumes that theworlds supply of fossil fuels grows by

only 2% per annum till 2031-32.Research and Development (R&D) inthe energy sector is critical to augmentour energy resources, to meet our long-term energy needs and to promoteenergy efficiency. Such R&D wouldgo a long way in raising our energysecurity and delivering energyindependence over the long-term. R&Drequires sustained and continuedsupport over a long period of time.

Energy related R&D has not beenallotted the resources that it needs.India needs to substantially augmentthe resources made available for energyrelated R&D and to allocate thesestrategically. To take an innovative ideato its commercial application involvesmany steps. Basic research leading to afundamental breakthrough may openup possibilities of applications. R&D isneeded to develop conceptualbreakthroughs and prove theirfeasibility. This needs to be followedup by a working, laboratory scalemodel. Projects that shows economicpotential could then be scaled up aspilot projects, while keeping in mindcost reductions that could be achievedthrough better engineering and massproduction. Demonstrations of suchprojects, economic assessments andfurther R&D to make the newtechnology acceptable and attractive to

customers could follow, before finallyleading to commercialisation anddiffusion. Some key policy initiativesrelevant to energy related R&D aredetailed below:

A National Energy Fund (NEF)should be set-up to finance energyR&D. Our expenditure on R&Dexcepting for atomic energy, which

as of today provides less than 3percent of our total electrical energysupply, is miniscule compared towhat industry and governments

spend in developed countries. Inthe latter, firms generally spendmore than 2 percent of theirturnover for R&D. The totalexpenditure on R&D in 2004-05was Rs.610 crores* for AtomicEnergy and Rs.70 crores forMinistry of Power, Coal and Non-Conventional Energy Sources. Evenat one-tenth of the rate at whichfirms in developed countries spend

on R&D, i.e. 0.2% of the turnoverof all energy firms whose turnoverexceeds Rs.100 crores a year, weend up with Rs.1000 to Rs.1200crores per year which will increaseovertime. We should be spendingmuch more than this on R&D.Much of R&D can be considered apublic good. It is thus betterfinanced by the Government.Initially an allocation of Rs.1000crores should be made for energyR&D excluding atomic energy. Tobegin with, individuals, academicresearch institutions, consultingfirms, private and public sectorenterprise, should all compete forthis fund. Firms may also beencouraged to enhance theirexpenditure on R&D through taxincentives.

The resources devoted toresearch in different areasdepend on the economicimportance of that particulararea, the availability oftechnology and the likelihoodof success. The latter changeswith time as newdevelopments in science andtechnology take place anduncertainties reduce. R&D

* Only about 15% of this amount or about Rs.90 crores, was for R&D on nuclear power. The rest of theexpenditure is for R&D on non-electricity applications of Radiation Technology and FundamentalResearch.


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priorities have to be basedon a dynamic strategic visionwhich is frequently updated.Of critical importance is

research and analysis for theenergy policy to outlinetechnology road maps. TheNEF should encourage andfund such studies on a regularbasis in a number ofinstitutions and should alsocommission them fromexperienced and qualifiedindividuals.

The NEF should support

energy policy modellingactivities in a number ofinstitutions on a long-termbasis. The different modellersshould be brought togetherperiodically in a forum toaddress specific policy issues.

A number of technologymissions should be mountedfor developing near-commercial technologies and

rolling out new technologiesin a time bound manner.These include coaltechnologies (where Indiashould focus) for efficiencyimprovement; in-situgasification; IGCC andcarbon sequestration; solartechnologies covering solar-thermal and photovoltaics;bio-fuels such as bio-diesel

and ethanol; bio-massplantation and woodgasification, and communitybased bio-gas plants.

Coordinated research anddevelopment in all stages ofthe innovation chain to reacha targeted goal (such as thatin place in the departmentsof atomic energy and spaceresearch) should be used to

develop more efficientindustrial plant, machinery &processes, efficient appliances,

hybrid cars, super batteries,nuclear technologies relatedto thorium and fusion, gashydrates, and hydrogen

production, storage, transportand distribution.

The NEF could provideR&D funding in support ofapplications, innovative newideas, fundamental researchetc. to researchers in differentinstitutions, universities,organisations and evenindividuals workingindependently.

A number of academicinstitutions should bedeveloped as centres ofexcellence in energy research.

(xiv) Household Energy Security -Electricity and Clean Fuels for All:One of the toughest challenges is toprovide electricity and clean fuels toall, particularly rural populations giventheir poor paying capacity, the limitedavailability of local resources for clean

cooking energy, and the size of thecountry and its population. Theconsiderable effort spent on gatheringbiomass and cow-dung and thenpreparing them for use is not pricedinto the cost of such energy. Thesefuels create smoke and indoor airpollution, are inconvenient to use, andadversely affect the health of people,particularly women and children. Yet,given the fact that women and girls

carry most of the burden of thedrudgery and also bear the brunt ofindoor air pollution, the urgency tomeet the challenge should be high.Such steps are needed for our broaderneed to achieve universal primaryeducation for girls, promote genderequality and empower women. Easyavailability of a certain amount of cleanenergy that is required to maintain lifeshould be considered as a basic

necessity. Energy security at theindividual level implies ensuring supplyof such a lifeline energy need. India


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Overview

cannot be energy secure if her peopleremain without secure supply of energyfor lifeline needs. Ensuring this wouldrequire targeted subsidies as many

households would be unable to pay forsafe, clean and convenient commercialenergy to meet lifeline needs. Thisrequires:

Electrification of All Households: Thegovernment has announced itscommitment to ensure this by 2009-10.

Provision of Cooking Energy: Wemay set a goal to provide cleancooking energy such as LPG, NG,

biogas or kerosene to all within 10years. It may be noted that therequirement of cooking energy doesnot increase indefinitely withincome. Thus the total amount ofLPG required to provide cookingenergy to 1.5 billion persons isaround 55 Mtoe.

Other Sources: We may provide fuelwood plantations within onekilometre of all habitations. Those

who do not have access or cannotafford even subsidised clean fuels,rely on gathering wood.Neighbourhood plantations canease their burden and the timetaken to gather and transport wood.

The Rajiv Gandhi GrameenVidyutikaran Yojana (RGGVY) waslaunched to achieve electrification ofall households. By 2009-2010 theRGGVY aims to electrify the 1,25,000villages, still without electricity; toconnect all the estimated 2.34 crore un-electrified households below thepoverty line with a 90% subsidy onconnecting costs; and finally, toaugment the backbone network in allthe electrified 4.62 lakh villages. The5.46 crore households above thepoverty line which are currentlyunelectrified, are expected to getelectricity connection on their own

without any subsidy. Going by currentexperience, all these households above

the poverty line may not seek suchconnectivity on their own.

To make RGGVY sustainable, abusiness plan with a viable revenue

model needs to be elaborated. A clearpricing and subsidy policy and themeans of targeting the subsidy need tobe announced soon. Local bodies,panchayati raj institutions, NGOs oreven local entrepreneurs can take thefranchise to run the local network.Womens self-help groups can also beempowered to do so.

The consumer pays about 40% of theimport parity price for kerosene sold

through the Public Distribution System(PDS). The balance 60% of the price isbeing funded largely by oil sector PSUsand to a small extent by theGovernment through the budget.However, subsidies do not reach theintended beneficiaries due to poortargeting. The real issue is to improvetargeting within the subsidy programmewell and ensure that those fallingoutside the subsidy net pay the full

cost of supply. Additionally, a well-targeted subsidy regime may onlymarginally raise the current subsidyburden.

The best way for providing subsidyfor electricity and cleaner fuels,kerosene or LPG, is to entitletargeted households to 30 units ofelectricity per month and LPG,kerosene or bio-gas purchased froma local community size plant

equivalent to 6 kg of LPG permonth. A system of debit cardsmay be introduced to deliver sucha subsidy. The entitlements canonly be used for purchase of theseproducts. With modern ICT, debitcard readers operated on batteryand feeding data using mobiletechnology, can work in rural areasof the country as well.

In addition to the above subsidy, other

actions are also needed that createenergy secure villages. We suggest:


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Finance a large scale socio-economicexperiment to operate communitysized bio-gas plants as a commercialenterprise either by a community

cooperative or by a commercialentrepreneur. Bio-gas plants on thisscale could meet the need for cleancooking energy of a sizable segmentof the rural population.

Even with subsidies for clean fuel,it may not be easy to reach cleanfuels to the poor and they maycontinue to use fuelwood. As partof the above programme, improvethe efficiency of domestic chullahs

and lanterns from the prevailing10-12% to 20-25%, which is easilyattainable and couple this toimproving ventilation in thecooking area of the dwellings. Thesurplus biomass released as a resultof better efficiency could be usedin gasifiers for generating electricity.

Generate electricity through woodgasifiers or by burning surplus bio-gas from the community bio-gas

plants. Such distributed generatorsmay be able to take electricity tovillages sooner than the grid. Thiswill encourage local generation andcould conceivably feed the gridwith surplus power at an agreedfeed in tariff at a future date.Formulate a tariff policy for suchdistributed generation for bothhousehold and productive useincluding agriculture.

To reduce drudgery of those whostill need to gather fuel, developwoodlots within one kilometre ofthe village. Provide finance throughself-help groups to transformwomen, who, today are onlyenergy gatherers, into micro-entrepreneurs engaged in ruralenergy markets and energymanagement. Womens groups canform co-operatives for developing

and managing fuel wood or oilseed plantations with the sameeffort that they put towards

searching and gathering fuel woodtoday.

For setting up of off-grid generationfacilities in rural areas, encourage

the organised sector to adopt ruralcommunity/communities in theirareas of operation.

(xv) An Enabling Environment forCompetitive Efficiency: Apart frompricing policies, an environment thatallows multiple players in each elementof the energy value chain to competeon transparent and equal terms isessential to realising efficiency gainswithin the energy sector. Currently

the sector is dominated by large PublicSector Companies and some sub-sectorshave natural monopoly characteristicspotentially offering economies of scale.Given this ground reality, independent& informed regulation becomesessential to realising competitiveefficiency. Such regulation can play animportant role to see that competitivemarkets develop and mature. Suchregulation must in the very least ensure

that: The regulatory responsibility/

functions of the State are separatedfrom the Ministries that controlthe Public Sector Units dominatingthe energy sector; and

Till effective competitive marketsemerge, independent regulatorsshould fix prices or price caps tomimic competitive markets basedon principles summarised in para(v) above. Even when competitivemarkets emerge, the regulators rolewill continue to remain important.

(xvi) Climate Change Concerns: Concernvis-a-vis the threat of climate changehas been an important issue informulating the energy policy. Eventhough India is not required to containits GHG emissions, as a signatory tothe UN Framework Convention onClimate Change and a country whichhas acceded to the Kyoto Protocol,India has been very active in proposing


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Clean Development Mechanism (CDM)projects. By May 2006, a total of 297projects had been approved by Indiawith approximately 240 million tonnes

of CO2 reduction. Also, since theimpact on the countrys poor, due toclimate change, could be serious, thisreport has suggested a number ofinitiatives that will reduce the greenhouse gas intensity of the economy byas much as one third. These are:

- Energy efficiency in all sectors

- Emphasis on mass transport

- Active policy on renewable energy

including bio-fuels and fuelplantations

- Accelerated development of nuclearand hydro-electricity

- Technology Missions for clean coaltechnologies

- Focussed R&D on many climatefriendly technologies

The broad policy framework and thethrust of development suggested here need tobe made more specific. To this end once thepolicy framework is accepted, detailed roadmapsof development should be chalked out andspecific policy measures for implementationdrafted.

With the recommendations of the

Committee, India can meet her energyrequirements in an efficient, cost effective wayand be on a path of sustainable energy security.


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Abbreviations Used

A ABT-Availability Based Tariff

APDRP-Accelerated PowerDevelopment and Reform Programme

AT&C-Aggregate Technical andCommercial

APM-Administered Price Mechanism

ADB-Asian Development BankATF-Aviation Turbine Fuel

APEC-Asia Pacific EconomicCooperation

ALCC-Annualised Life Cycle Cost

AMR-Automatic Meter Reading

B BEE-Bureau of Energy Efficiency

BPL-Below Poverty Line

BCS-Best Case ScenarioBAU-Business as Usual

BCM-Billion Cubic Meters

BARC-Bhaba Atomic Research Centre

BESCOM-Bangalore Electricity SupplyCompany Ltd.

BP-British petroleum

BCCL-Bharat Cocking Coal Limited

C CAGR-Compounded Annual GrowthRate

CASE-Commission for AdditionalSources of Energy

CIL-Coal India Limited

CIF-Cost Insurance and Freight

CDM-Clean Development Mechanism

CO2-Carbon dioxide

CEA-Central Electricity Authority

CMIE-Centre for Monitoring IndianEconomy

Abbreviations UsedCNG-Compressed Natural Gas

CBM-Coal Bed Methane

CONCOR-Container Corporation ofIndia Ltd.

CHP-Combined Heat & Power

CIS-Common wealth of Independent

StatesCMPDIL-Central Mine Planning &Design Institute Ltd.

CLASP-Collaborative Labelling andAppliance Standards Programme

CSIR-Council for Scientific andIndustrial Research

CERC-Central Electricity RegulatoryCommission

CEA-Central Electricity Authority

CO-Carbon Monoxide

CH4-Methane Gas

CER-Certified Emission Reduction

D DAE-Department of Atomic Energy

DGH-Directorate General ofHydrocarbons

DSM-Demand Side Management

DSCL-DCM Sriram Consolidated Ltd

DTI-Department of Trade & Industry,U.K.

DG-Distributed Generation

DST-Department of Science &Technology

DME-Dimethyl Ether

DBT-Department of Bio Technology

E EMPs-Environment Management Plans

ECL-Eastern Coal Fields LimitedEIA-Energy Information


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Overview Integrated Energy Policy

Administration

EOR-Enhanced Oil Recovery

EIL-Engineers India Limited

EE-Energy EfficiencyEC Act-Energy Conservation Act.

ESCOs-Energy Service Companies

F FFA- Free Fatty Acids

FSA-Fuel Supply Agreements

FOB-Free on Board

FSTA-Fuel Supply and TransportAgreement

FDI-Foreign Direct InvestmentFBRs-Fast Breeder Reactors

FBTR-Fast Breeder Test Reactor

FO-Fuel Oil

FSI-Floor Space Index

G GAIL-GAIL (India) Limited

GIS-Geographical Information System

GOI-Government of India

GCV-Gross Calorific ValueGDP-Gross Domestic Product

GHG-Green House Gases

GSPC-Gujarat State PetroleumCorporation

GEF-Global Environment Facility

GTL-Gas to Liquids

GSI-Geological Survey of India

H HDI-Human Development IndexHHs-Households

HOG-High Output Growth

HSDO-High Speed Diesel Oil

HVDC-High Voltage Direct Current

I ICRISAT-International Crops ResearchInstitute for the Semi-Arid Tropics

IREDA-Indian Renewable Energy

Development Agency Ltd.IGCC-Integrated GasificationCombined Cycle.

ICT-Information and CommunicationTechnologies

IEA-International Energy Agency

IRADe-Integrated Research and Actionfor Development.

IHV-India Hydrocarbon Vision 2025

IOC-Indian Oil Corporation

IC-Internal Combustion

IOR-Improved Oil Recovery

IPP-Independent Power Producers

ICCEPT-Imperial College Centre forEnergy Policy and Technology

K KG-Krishna Godavari

L LPG-Liquefied Petroleum Gas

LNG-Liquefied Natural Gas

LWRs-Light Water Reactors

LDO-Light Diesel Oil

LSHS-Low Sulphur Heavy Stock

M MSW-Municipal Solid Waste

MECL-Mineral ExplorationCorporation Limited

MIS-Management Information System

MS-Motor Spirit

MOPNG-Ministry of Petroleum andNatural Gas

MOP-Ministry of Power

MNES-Ministry of Non-ConventionalEnergy Sources

MSP-Minimum Support Price

N NHB-National Housing Bank

NABARD-National Bank forAgriculture and Rural Development

NDC-National Development Council

NEF-National Energy Fund

NG-Natural Gas

NGOs-Non-Governmental

OrganisationsNSS-National Sample Survey


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India faces formidable challenges inmeeting its energy needs and providing adequateand varied energy of desired quality to users ina sustainable manner and at reasonable costs.India needs economic growth for humandevelopment, which in turn requires access toclean, convenient and reliable energy for all.As we near the 8-10% growth rate that we

aspire for, the quantity & quality of energy weneed, will increase substantially. Thus theenergy challenge is of fundamental importance.The nature and dimension of this challenge

becomes clear when we look at the energyscene in the country today. This chapter laysout the contemporary energy scene,highlighting issues of concern, and then makesthe case for an Integrated Energy Policies toaddress these.

1.1 THE ENERGY SCENE2. Per capita consumption of energy inIndia is one of the lowest in the world. Indiaconsumed 439 kg of oil equivalent (kgoe) per

Chapter I

Table 1.1Selected Energy Indicators for 2003

Region/Country GDP Per TPES TPES/GDP Electricity kWh/Capita-PPP Per Capita (kgoe/ Consumption $-2000 PPP(US $ 2000) (kgoe) $-2000 PPP) Per Capita

(kWh)

China 4838 1090 0.23 1379 0.29

Australia 28295 5630 0.20 10640 0.38

Brazil 7359 1094 0.15 1934 0.26

Denmark 29082 3852 0.13 6599 0.23

Germany 25271 4210 0.17 6898 0.27

India* 2732 439 0.16 553 0.20

Indonesia 3175 753 0.24 440 0.14

Netherlands 27124 4983 0.18 6748 0.25

Saudi Arabia 12494 5805 0.46 6481 0.52

Sweden 27869 5751 0.21 15397 0.55

United Kingdom 26944 3906 0.14 6231 0.23

United States 35487 7835 0.22 13066 0.37

Japan 26636 4052 0.15 7816 0.29

World 7868 1688 0.21 2429 0.31

TPES: Total Primary Energy Supply

*Data for India are corrected for actual consumption and the difference in actual and IEA

assumed calorie content of Indian coalSource: IEA (2005), Key World Energy Statistics 2005, International Energy Agency, Paris,http://www.iea.org

The Challenges


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person of primary energy in 2003 compared to1090 in China, 7835 in the U.S. and the worldaverage of 1688. Indias energy use efficiencyfor generating Gross Domestic Product (GDP)

in Purchasing Power Parity (PPP) terms isbetter than the world average, China, US andGermany ( see Table 1.1 ). However, it is 7% to23% higher than Denmark, UK, Japan andBrazil. Clearly, significant reduction in theenergy intensity of growth can be achievedbased on existing technologies.

3. The level of per capita energy supply isa good indicator of the level of economicdevelopment as seen in Figure 1.1 where per

capita energy supply is plotted against percapita GDP. Figure 1.2 shows the relationshipof per capita electricity supply with the levelof economic development. Figures 1.1 and 1.2are plotted on logarithmic scale and thus theirslopes indicate elasticity of per capita energysupply w.r.t. per capita GDP i.e. percent changein per capita energy supply for every percentchange in per capita GDP.

4. If we look at the consumption of electricity - one of the most convenient formsof energy - we see that per capita consumption

in India is far below that in other countries.Moreover, access to electricity is very uneven.Even though 85 percent of villages areconsidered electrified, around 57 percent of the

rural households and 12 percent of the urbanhouseholds i.e. 84 million households (over44.2% of total) in the country did not haveelectricity in 2000. Improvement in humandevelopment is also strongly associated withaccess to electricity. In Figure 1.3, the HumanDevelopment Index (HDI), which is calculatedfrom literacy rate, infant mortality rate andper capita GDP (UNDP, 2004) is plotted againstper capita electricity consumption.

5. Even those who have access toelectricity suffer from shortages and poorquality of supply. Unscheduled outages, loadshedding, fluctuating voltage and erraticfrequency are common. Consumers and theeconomy bear a large burden of theconsequences of this poor quality of supply.This is evident through many examples. Motorsare over designed and consume more electricitythan required for the task. Voltage stabilisersare needed for expensive equipment. Dieselgenerators provide backup power to industrialand commercial consumers, while inverters1 to

Figure 1.1Total Primary Energy Supply (TOE) Per Capita (2003) vs. GDP Per Capita (PPP US$2000)

Source: IEA (2005)

1 Inverters charge batteries when power is available and when power go out convert the DC power ofbatteries to supply AC power.


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Figure 1.2Kilo Watt hours of Electricity Consumption Per Capita (2003) vs. GDP Per Capita (PPP US$2000)

Source: IEA (2005)

Figure 1.3Human Development Index (HDI) vs. Electricity Consumption Per Capita in 2002

Note: HDI for India 0.595 and Electricity consumption per capita 553 kWh.Source: United Nations Development Programme (UNDP-2004) and IEA (2004)

tide over power outages are ubiquitous in cityhomes. Equipment often gets damaged. Motors,compressors and pumps get burnt out often.Added to these is the cost of idle manpowerand loss in production when power supply is

interrupted. The extent of power shortage variesfrom state to state. In 2004-05, the peak shortagevaried from 0 to 25.4% with an all-India averageof 11.7%. Similarly, energy shortage also variedfrom 0 to 20.1% with an all-India average of

Hu

manDevelopmentIndicator(HDI

)

Electricity consumption per capita (kWh)


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Figure 1.4Peak Power and Energy Shortages in States/UTs. 2004-05

Source: Central Electricity Authority (CEA), 2005

7.3% ( Figure 1.4 ). These shortages includescheduled cuts, reported load shedding andfrequency corrections. However, unscheduledoutages are not included.

6. Availability based tariffs (ABT) andunscheduled interchange charges for powerintroduced in 2003 for inter-state sale of powerhave reduced voltage and frequencyfluctuations. The latter are still, however, notas stable as one would like. In all regions,except the Northern one, frequency was withinthe normal band (49.0-50.50 Hz) for morethan 98% of the time in 2004-05, up from 55%

in 2000. Frequency falls when demand exceedsavailable supply on the grid.

7. Power capacity has risen at the rate of5.87% per annum over the last 25 years. Thetotal supply of electrical energy has risen at therate of 7.2% per annum over the same period.This reflects a gradual improvement in theaverage Plant Load Factor (PLF) of thermalplants (which stood at 74.8% in 2004-05) aswell as a decline in the share of hydro in the

power generation mix. However, consumptionis still constrained as supply and powershortages continue to plague the country.

Shortages and the poor quality of power arethe outcome of inadequate investments indistribution and transmission. Increasinggeneration capacity has attracted the bulk ofinvestment both at the centre and the statelevels. Aggregate Technical and Commercial(AT&C) losses which include theft, non-billing,incorrect billing, inefficiency in collection, andtransmission and distribution losses, exceed40% for the country as a whole. Consequentlythe State Electricity Boards (SEBs), remainfinancially sick and hence unable either toadequately meet their investment needs ontheir own or attract private capital to do so.

8. The Ministry of Power has set a targetof adding 1,00,000 MW of generation capacitybetween 2002-2012. This programme includesthe 41,110 MW capacity additions proposed inthe 10th Plan to ensure the availability ofreliable and quality power as well as the creationof an adequate reserve margin. Historically,plan targets have never been met, and even inthe 10th Plan, the likely capacity addition willactually be under 28,000 MW. Further, the

generation capacity created does not have thedesired mix of peaking, intermediate and baseload stations. Finally, the history of emphasis


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on investment in power generation results inloading more and more power on an inadequatetransmission and distribution (T&D) network.Since T&D investments have not kept pace

with investments in generation, power cannotbe easily moved from surplus to deficit areas.Industrial and commercial establishments havebeen forced to seek captive and standbygeneration to meet demand or provide qualitysupply on a 24X7 basis to support criticalprocesses and provide peaking support. Thereis good reason to believe that some 50,000MW of such captive and standby capacity is inplace. Those in the household sector who canafford it manage with the help of inverters.

9. The sector is dominated by large statemonopolies at both central and state levels.Over 88% of utility-based generation is in thepublic sector, which also, almost entirely,controls transmission. Private distribution islimited to Orissa, Delhi and some parts ofWest Bengal, Maharashtra, Gujarat and U.P.An uneven playing field permeates the marketplace wherein the Central Power Sector PSUsget guaranteed post-tax returns of 14-16% withfull payment backed by the GOI. State PowerSector Utilities (SPSUs) are given zero or lowreturns by Regulators who are under constantpressure not to raise tariffs, which are alreadyamong the highest in the world in PPP termsfor industrial, commercial and householdconsumers. For example, in 2002, industries inIndia paid 47 US cents per unit as opposed to20 cents in China, 17 cents in Brazil, 12 centsin Japan, 5.5 cents in US and 5 cents inGermany in terms of PPP. Financially sickstate sector utilities are unable to invest on

their own and remain a poor credit risk forprivate suppliers of energy. This reality has ledto a growth driven by Central Power SectorPSUs, which is clearly unsustainable in thelong run since their only customer is bankrupt.Even the massive investments required indistribution are unlikely to yield adequatereturns in the current set-up. Ne

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India's Integrated Energy Policy