Rep intengy

Integrated Energy Policy

Report of the Expert Committee

Government of IndiaPlanning Commission

New Delhi

August 2006

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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. RawatExecutive 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 ChaturvediVice 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. SethiAdviser (Power & Energy), Planning Commission

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,e- ,l- vkgyqokfy;kMONTEK SINGH AHLUWALIA

mik/;{k;kstuk vk;ksxHkkjrDEPUTY CHAIRMANPLANNING 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 inworld 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 ExpertCommittee 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 CHAIRMANPLANNING 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 theeconomy 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 Policy

Dated: 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 1

1.2 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 India’s Oil Demand 22

2.4 India’s Coal Demand for Non-Power Use 23

2.5 India’s 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 India’s 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 54

4.1 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 India’s Energy Use 132

13.4.1 Local and Regional Impacts 132

13.4.2 India’s Approach to Climate Change 135

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Contents

Concluding Comment 137

Annexures 138

Annexure-I Order Constituting the Committee 138

Annexure-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 19

Table 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) 28

Table 2.13 The Demand Scenario of Various Energy Items for Household 29Consumption 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 India’s 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 37

Table 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 India’s Oil Imports – 2004-05 59

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

Table 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 Resources—2003-04 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 India’s Growing Share in Global Energy Consumption (Higher Projections) 56

Figure 4.2 World Oil Prices 56

Figure 6.1 Reduction in the Energy Consumption of Refrigerators Sold in the 87United 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 atcompetitive 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, India’s 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 inIndia’s energy mix will need to expand to over2 billion tonnes/annum based on domesticquality of coal. Meeting the energy challenge isof fundamental importance to India’s economicgrowth 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 India’smost 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 marketsshould 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 andconsumer 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 environmentalnorms 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 India’s 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 Coalwith Consistent Quality: Coalaccounts for over 50% of India’s

commercial energy consumption andabout 78% of domestic coal productionis dedicated to power generation. Thisdominance of coal in India’s energymix 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 costcompetitive 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 ofnotified 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 tofacilitate 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 coalon 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 thenorm 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 ofavailable 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) privateparticipation 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 moreassertive 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 a“carried 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 possiblesolutions 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 totalgeneration 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 beenunbankable 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 statepower 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 sectorat 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, aGeographical 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 andprovide 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 groupcaptive regime foreseen under theElectricity Act 2003 be realised onthe ground. India’s 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 willalso 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, theCommittee 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 ameans 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 notremain 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 systemwith 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 toreduce 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 beencouraged 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 capitalmarkets 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 substantialbulk 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 importantrole 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 bepriced 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 twodepending 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 independentoversight 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 madeindependent. 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 realcompetition 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 India’srefining 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 totrade 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 thatthere 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 CIL’s virtual monopolyin coal supply, coal prices cannotbe determined in a competitivemarket open to all users as long asthe 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. Werecommend 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 FuelSupply 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 tradablerequires 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 naturalgas 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 behighly 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 pricegas on a net-back basis. If gasbecomes a key component inIndia’s 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 exceedthe 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 thedomestic 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 togetheraccount 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 fuelscan 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 pays”principle or “consumer-pays”principle should be made to attainenvironmental objectives at least-cost where prescribedenvironmental norms are either not

applied consistently or not beingadhered to.

(vii) Energy Efficiency and Demand SideManagement: Lowering the energyintensity of GDP growth throughhigher energy efficiency is importantfor meeting India’s energy challengeand ensuring its energy security. Theenergy intensity of India’s 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. India’s energy intensity is lowerthan the 0.23 kgoe of China, 0.22 kgoeof the US and a World average of 0.21kgoe. India’s 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 downsignificantly 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”, producedby 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 reduceIndia’s 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 beobtained 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 India’s steel andcement industry. However, theCommittee recommends the followingpolicies 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 underthe Energy Conservation Act, beindependent of all the energyministries and be funded by theCentral Government. It must:

• Force the pace ofimprovement in energyefficiency of energy usingappliances, equipment andvehicles, and create “goldencarrot” incentives in the formof substantial rewards to thefirm 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 onconsumer information websites and in governmentprocurement.

• Establish benchmarks ofenergy 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 least38-40%.

� 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 initialcost 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 technicalcolleges and commence certificationof such experts.

(viii) Augmenting of Resources forIncreased Energy Security: India’senergy 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 solarpower, offer possibilities for India’senergy 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% ofthe 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 ofIndia’s coal reserves.

� India’s 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 country’s 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 Indiacan 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 tothe 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 plantconverts 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 hydro’s share in primaryenergy mix is lower than that ofnuclear, the kWh produced from hydrois higher. Similarly, even if a 20-foldincrease takes place in India’s nuclearpower capacity by 2031-32, thecontribution of nuclear energy toIndia’s 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 India’s nuclear potentialis essential.

Though its contribution to energyrequirement is limited, hydroelectricity’s 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 India’s watersecurity, flood control and droughtcontrol. 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 landconsolidation 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 todiversify energy sources, renewablesremain important to India’s 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 India’senergy mix by 2031-32. While thisfigure appears small, the distributednature of renewables can provide manysocio-economic benefits.

Subsidies for renewables may bejustified 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 qualityof 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 tooutcomes (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 theform 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 ordifferential 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 renewableoptions, availability, actual costs,operating and maintenanceproblems etc. It should also reporton social benefits, employmentcreated, and women’s participationand empowerment.

� Policies for promoting specificalternatives are suggested in themain text. These include fuel woodplantations, bio-gas plants, woodgasifier based power plants, solarthermal, 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. IREDA’s own equitybase 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: India’senergy security, at its broadest level, isprimarily 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, itis also necessary to recognise that India’sgrowing 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 thatobtaining 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 requirementsand 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 theRailways, 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 domesticenergy 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 ofcommercial 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 theworld’s supply of fossil fuels grows byonly 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 tocustomers 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 governmentsspend 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 spendon 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 isresearch 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 supportenergy 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 androlling 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-dieseland 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 todevelop more efficientindustrial plant, machinery &processes, efficient appliances,

hybrid cars, super batteries,nuclear technologies relatedto thorium and fusion, gashydrates, and hydrogenproduction, 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 cleancooking 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 girlscarry 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 basicnecessity. 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 manyhouseholds 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. Thosewho 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 ownwithout 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 revenuemodel 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.Women’s self-help groups can also beempowered to do so.

The consumer pays about 40% of theimport parity price for kerosene soldthrough 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 fullcost 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 plantequivalent 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, otheractions 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 communitycooperative 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 chullahsand 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-gasplants. 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. Women’s groups canform co-operatives for developingand 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, encouragethe 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. Currentlythe 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 ensurethat:

� 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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Overview

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

2 reduction. Also, since the

impact on the country’s 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 energyincluding 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 theCommittee, 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 Bank

ATF-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 Scenario

BAU-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 Used

CNG-Compressed Natural Gas

CBM-Coal Bed Methane

CONCOR-Container Corporation ofIndia Ltd.

CHP-Combined Heat & Power

CIS-Common wealth of IndependentStates

CMPDIL-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 Limited

EIA-Energy Information

xxxii

Overview Integrated Energy Policy

Administration

EOR-Enhanced Oil Recovery

EIL-Engineers India Limited

EE-Energy Efficiency

EC 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 Investment

FBRs-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 Value

GDP-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 Index

HHs-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 EnergyDevelopment 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-GovernmentalOrganisations

NSS-National Sample Survey

xxxiii

Abbreviations Used

NSSO-National Sample SurveyOrganisation

NCDMA-National Clean DevelopmentMechanism Authority

NLC-Neyveli Lignite Corporation

NCDC-National Coal DevelopmentCorporation

NEEPCO-North Eastern ElectricPower Corporation Limited

NHPC-National Hydro Electric PowerCorporation

NSG-Nuclear Suppliers Group

NELP-New Exploration LicensingPolicy

O OECD-Organisation for Economic Co-operation and Development

ONGC-Oil and Natural GasCorporation

ORF-Observer Research Foundation

OIL-Oil India Limited

OMCs-Oil Marketing Companies

P PSUs-Public Sector Undertakings

PDS-Public Distribution System

PCRA-Petroleum ConservationResearch Association

PAP-Project Affected People.

PPP-Purchasing Power Parity

PLF-Plant Load Factor

PWC-Price Waterhouse Coopers

POWERGRID-Power GridCorporation of India Limited

PHWRs-Pressurised Heavy WaterReactors

PFBR-Prototype Fast Breeder Reactor

R RSPM-Respiratory SuspendedParticulate Matter

R & D-Research and Development

RGGVY-Rajiv Gandhi GrameenVidyutikaran Yojana

ROR-Run of the River

RCs-Regulatory Commissions

REGA-Rural Employment GuaranteeAct.

S SEBs-State Electricity Boards

SPM-Suspended Particulate Matter

S & T-Science and Technology

SPR-Strategic Petroleum Reserve

SPSUs-State Power Sector Utilities

Sox-Sulphur Oxides

SHGs-Self-Help Groups

SWH-Solar Water Heater

SERC-State Electricity RegulatoryCommission

SO2

– Sulphur Oxide

T TIFAC-Technology Information,Forecasting & Assessment Council

TTRC-Tradable Tax Rebate Certificates

TPES-Total Primary Energy Supply

TPCES-Total Primary CommercialEnergy Supply

TERI-The Energy and ResourcesInstitute

TPNCES-Total Primary Non-Commercial Energy Supply.

T & D-Transmission and Distribution

TOD-Time of Day

TPA-Tripartite Agreement

U UNFCC-United Nations FrameworkConvention on Climate Change

UK-United Kingdom

UNDP-United Nations DevelopmentProgramme

UAE-United Arab Emirates

UP-Uttar Pradesh

USA-United States of America

UHV-Useful Heat Value

V VOCs-Volatile Organic Compounds

1

The Challenges

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 weaspire 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 SCENE

2. 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 IEAassumed calorie content of Indian coal

Source: IEA (2005), Key World Energy Statistics 2005, International Energy Agency, Paris,http://www.iea.org

The Challenges

2


person of primary energy in 2003 compared to1090 in China, 7835 in the U.S. and the worldaverage of 1688. India’s 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 percapita 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 ofelectricity - 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 therural 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.

3

The Challenges

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

man

Dev

elo

pm

ent

Indi

cato

r (H

DI)

Electricity consumption per capita (kWh)

4


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

5

The Challenges

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 pacewith 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 ontheir 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. Nevertheless,such investments to strengthen distributionsystem, irrespective of public or privateownership must be made. The GOI and theRegulators have to struggle to put an enablingenvironment and a regulatory framework inplace that will nurture competition in each

element of the electricity value chain, bring inthe needed investments and yield the necessaryefficiency gains through such competition.

10. The Accelerated Power Developmentand Reforms Programme (APDRP) is aimed atsupporting distribution reforms throughinvestments and incentives by strengtheningsub-transmission and distribution networks inthe states so as to reduce the aggregate AT&Closs levels and encourage efficiencyimprovements in metering, billing andcollection. The performance of the APDRP,thus far, has fallen short of the promise withan investment of only Rs.9,200 crore realisedin the first three years against a target ofRs.20,000 crores for the 5 years of the 10thPlan. The programme has to be restructured toan outcome-driven programme based onmonitorable targets against established baselines.Privatisation of distribution has also been triedin Orissa and Delhi as an alternative but theresults are, at best, mixed.

11. Power tariffs are structured on the basisof industrial and commercial users cross-subsidising agricultural and domestic powerconsumption. The agricultural sector is suppliedun-metered power in almost all states and thefarmers pay a highly subsidised lump sumbased on the declared horse power of theirpumps. This leads to a zero marginal cost ofpower which promotes, inefficient use andover exploitation of ground water. Thedomestic sector also has a range of subsidiesbased on the level of consumption includingheavily subsidised power for the poorestsegment wherein households pay a low lumpsum monthly charge. With the rising cost ofsupply, the burden of these cross-subsidies hasincreased and is disproportionately loaded onthe paying industrial, commercial and largehousehold consumers. Additionally, the tariffstructure has created incentives for high payingconsumers to pilfer power under the coverprovided by unmetered power. The habit ofstealing power is now widespread. A vestedinterest lobby has been created and what areeuphemistically called AT&C losses remainstubbornly high. While some state governmentspartially compensate the SEBs for subsidiesgiven to farmers and other specified consumers,

6


Figure 1.5Distribution of Households by Primary Source of EnergyUsed for Cooking- India

Source: NSSO (2001): Energy used by Indian Households 1999-2000. NSS 55th Round, Report No. 464(55/1.0/6), National Sample Survey Organisation (NSSO), Govt. of India, August, 2001.

AT&C losses have to be borne by SEBs. Evenif such practices could have been justified inthe formative years of these companies,necessary corrective measures should have beentaken on the basis of the experience gatheredover subsequent years of operation. Thedevelopment of an effective way to subsidisefarmers and certain other consumptioncategories that gives them incentives to bothuse power efficiently and arrest pilferage, isvery critical for a healthy power sector. Theprocess of power sector reforms was started in1992 and continues to date. Despite someprogress, the sector has a long way to gobefore becoming competitive and efficient atmeeting demand with quality power and beingable to attract the needed investment to keepup with growing demand on commerciallyviable terms.

12. A majority of India’s people usetraditional fuels such as dung, agriculturalwastes and firewood for cooking food. Thesefuels cause indoor pollution. The 1999-200055th round of the National Sample Survey(NSS) revealed that for 86% of rural householdsthe primary source of cooking energy wasfirewood and woodchips or dung cakes. Inurban areas as well, more than 20% of allhouseholds relied mainly on firewood andchips. Only 5% of the households in ruralareas and 44% in urban areas used LPG.Kerosene was used by 22% of urban households

and only 2.7% of rural households. Otherprimary sources of cooking energy used byurban and rural households include coke,charcoal, gobar gas (cow dung gas), electricityand other fuels.

13. Figure 1.5 shows that not much changehas taken place in rural areas since the 50thround of NSS (1994-95) though in urbanhouseholds use of LPG has nearly doubled.

14. The use of traditional fuels for cookingwith the attendant pollution and the cost ofgathering them imposes a heavy burden onpeople, particularly women and girls. The needto gather fuels may deprive a young girl of herschooling. Over time, the use of such fuelsincreases the risks of eye infections andrespiratory diseases. Lack of access to clean andconvenient sources of energy impact the healthof women and girls disproportionately as theyspend more time indoors and are primarilyresponsible for cooking. Women’s micro-enterprises (an important factor in householdincome, as well as in women’s welfare andempowerment), are heat-intensive (foodprocessing), labour-intensive, and/or light-intensive (home industries with work inevenings). The lack of adequate energy supply—and other coordinated support—affects women’sabilities to use these micro-enterprises profitablyand safely. Furthermore, women often faceadditional barriers in making the best use of

7

The Challenges

available opportunities and obtaining improvedenergy services. There are social and practicalconstraints related to ownership and controlover productive resources, and women aretypically excluded/marginalised from decision-making vis-à-vis the use of these resources.This is worsened by barriers related to illiteracy,lack of exposure to information and training.Thus, the economic burden of traditional fuelsis around Rs.300 billion (see BOX 1.1). Anenergy policy that seeks to be responsive tosocial welfare must address this fact. It isestimated that in rural North India, 30 billion

hours are spent in gathering fuel wood andother traditional fuels annually.

15. The total quantities of traditional fuelsused are substantial. Table 1.2 presents the dataon household energy use. Biomass based fuelsdominate particularly in rural areas, wherethey are used by households in all consumerexpenditure categories (see Figure 1.6). Thisimplies that their use would not reduce evenwith economic growth and rising incomes inrural areas.

BOX 1.1

The Burden of Traditional Fuels in Rural India

A study based on an integrated survey covering 15,293 rural households from 148 villages inthree states of rural North India and one state in South India shows the importance of cleanfuels. Symptoms of diseases related to air and water pollution, expenditure on health andperson days lost, demographic and socio-economic information, measurements of air qualityin the kitchen, outside the kitchen and the home were collected. Indicators for respiratoryfunctions (Peak Expiratory Flow) were measured for most of the adults present at the time ofthe survey. The doctors examined a sub-sample of individuals for confirmation of diseases.

The study estimated that

• 96% of households use biomass energy, 11% use kerosene and 5% use LPG for cooking.Most of them use multiple fuels.

• Forests contribute 39% of the fuel wood need.

• 314 Mt of bio-fuels are gathered annually.

• 85 million households spend 30 billion hours annually in fuel wood gathering.

• Respiratory symptoms are prevalent among 24 million adults of which 17 million haveserious symptoms.

• 5% of adults suffer from Bronchial asthma, 16% from Bronchitis, 8.2% from PulmonaryTB and 7% from Chest infection.

• Risk of contracting respiratory diseases and eye diseases increases with longer duration ofuse of bio-fuels.

Total economic burden of dirty biomass fuel was estimated to be Rs.299 billion using a wagerate of Rs.60 per day, comprising of opportunity cost of gathering fuel, working days lost dueto eye infections and respiratory diseases, and the cost of medicine.

As women are the primary sufferers of the adverse impact of use of biomass fuels, there is aclose linkage between gender and energy. Gender and energy issues have remained on theperiphery of energy policy, and require greater attention and backing.

Source: Parikh Jyoti et al (2005)2

2 Parikh Jyoti K. et al “Lack of Energy, Water and Sanitation and its Impact on Rural India” in Parikh KiritS. and R. Radhakrishna (eds.), India Development Report 2004-2005, Oxford University Press, New Delhi.

8


Figure 1.6Pattern of Household Energy Consumption

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

Figure 1.6(b): Monthly Per Cpita Household Consumption Pattern Rural India, 2000

Source: NSS 55th Round, (July 1999-June 2000), National Sample Survey Organisation, Ministry ofStatistics and Programme Implementation, Government of India

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

Fuel Type Physical Units Mtoe

Rural Urban Total Rural Urban Total

Fire Wood & Chips (Mt) 158.87 18.08 176.95 71.49 8.13 79.62

Electricity (BkWh) 40.76 57.26 98.02 3.51 4.92 8.43

Dung Cake (Mt) 132.95 8.03 140.98 27.92 1.69 29.61

Kerosene (ML) 7.38 4.51 11.89 6.25 3.82 10.07

Coal (Mt) 1.20 1.54 2.74 0.49 0.63 1.12

L.P.G. (Mt) 1.25 4.43 5.68 1.41 5.00 6.41

Source: Derived from NSS 55th Round, (July 1999-June 2000) data, National Sample SurveyOrganisation, Ministry of Statistics and Programme Implementation, Government of India

9

The Challenges

Figure 1.7Domestic Consumption and Production of Crude Oil

Source: Ministry of Petroleum & Natural Gas

16. In 2004-05, net of exports, Indiaconsumed 120.17 Mt of crude oil productsincluding refinery fuel. Domestic productionof crude oil has been between 30.3 Mt to 33.98Mt during 1990-2005 (see Figure 1.7). Not onlyhas domestic production stagnated, oil reserveshovered between 700 Mt and 750 Mt duringthis period. The total oil reserves were 739 Mtin 1990-91 and were estimated to be 786 Mt in2004-05. The proved reserves to production(R/P) ratio was 23 in 2004-05. We now import72% of our consumption and our importdependence is growing rapidly. This raisesserious concerns about India’s energy security,our ability to obtain the oil we need and theimpact of constrained supply and theconsequent increase in oil prices on oureconomy.

17. Till 1997, oil and gas exploration wasmainly done by public sector firms. Progressiveliberalisation of exploration and the licensingpolicy has attracted some private and foreignfirms. The success of these explorations has

been marginal in enhancing oil reserves.However, some sizeable gas reserves amountingto 680 Mtoe [320 Mtoe claimed by Relianceand 360 Mtoe claimed by Gujarat StatePetroleum Corporation (GSPC)] have beenreported recently which is yet to be confirmedby DGH. More work is needed to estimate thetotal extractable potential. Despite one of themost liberal exploration licensing regimes, Indiahas failed to attract any oil majors to explorein India. This might be an indication of the oilmajor’s assessment of the exploration potentialin the Indian Sedimentary basins since typicallysuch firms prefer to work in large fields. In thelatest round of bidding for exploration underthe new exploration licensing policy (NELP),oil majors have shown interest. Given therising preference for gas as a fuel and feedstock,India is also seeking to significantly raise gasimports through LNG and Trans-National gaspipelines. Oil diplomacy is currently seen as amajor tool for ensuring India’s energy securityalong with the acquisition of equity oil and gasfrom overseas.

10


Figure 1.8Growth of Transport Vehicles and Two Wheelers

Source: Centre for Monitoring Indian Economy Pvt. Ltd. (CMIE)

18. The total consumption of petroleumproducts grew at the rate of 5.7% per annumbetween 1980-81 and 2003-04. However, growthin consumption has moderated to 2.95% perannum over the last four years (2000-01 to2004-05). Consumption for petrol and dieselgrew at 7.3% and 5.8% per annum respectivelybetween 1980-81 and 2004-05. This was theoutcome of the growth of personal motorisedtransport and the rise in share of road haulage.The numbers of two-wheelers rose from5,75,893 to 4,14,78,136, three-wheelers from36,765 to 18,81,085, cars from 5,39,475 to57,17,456, buses from 93,907 to 5,52,899 andtrucks from 3,43,000 to 20,88,918 between1970-71 and 2001-02 (Figure 1.8). The vehicle

population continues to grow at higher thanhistorical rates. However, in the last 5 yearsgrowth in consumption of petrol and dieselhas been far more moderate at 6.9% and lessthan 1% respectively. This reflects the improvedefficiency of vehicles and better road conditions.Table 1.3 gives the decadal growth rates ofmotor vehicles from 1970-71 to 2001-02. In2004-05, liquid fuel consumption in thetransport sector accounted for 28% of ourtotal petroleum products consumption.

19. Currently, the refining capacity of thecountry is greater than the domesticrequirements, making India a net exporter ofpetroleum products. The projected addition to

Table 1.3Growth of Motorised Transport Vehicles

1970-71 1980-81 1990-91 2001-2002 Growth Rate

Two-wheelers 575893 2530441 14199858 41478136 15.3%

Three-wheelers 36765 142073 617365 1881085 14.0%

Cars 539475 900221 2266506 5717456 8.2%

Taxis 60446 100845 243748 684490 8.4%

Jeeps 82584 120475 443734 1168868 9.2%

Buses 93907 153909 331096 552899 6.1%

Trucks 343000 554000 1355953 2088918 6.2%

Source: Center for Monitoring Indian Economy Pvt. Ltd. (CMIE)

11

The Challenges

refining capacity in both the public and privatesectors will far exceed addition in demand andpetroleum products could, therefore, becomeIndia’s largest export. India’s marginal advantagein becoming a refining hub for exportingproducts is not immediately clear.

20. The oil sector remains largely in thehands of the central Public Sector Undertakings(PSUs). The exception is refining wherein some26% of capacity is now in private hands. Before2002, oil product prices were set by thegovernment under an Administered PriceMechanism (APM), which is no longer in use.The prices of inputs and the products are nowdetermined on the basis of the import parityprinciple even for products wherein India is anet exporter. However, since prices are fixedcollectively by the public sector oil companies,there is no price competition at the refinerygate or retail outlets. The Government of India,through the Ministry of Petroleum and NaturalGas, has frequently deviated from the importparity principle in fixing the effective price ofdomestic crude as well as the price of petroleumproducts at the retail level. Currently, there isno independent regulation of the upstream ordownstream petroleum sector.

21. The above pricing methodology leadsto multiple distortions when coupled with thefact that there are differential custom duties oncrude oil and petroleum products, differentialexcise duties and central levies on products, aswell as differential state taxes and a normativepooling of the transport costs. These distortionsand their impact on the profitability of centralPSUs and private refiners are furthercompounded by subsidies on LPG andkerosene, which are exclusively marketed bycentral PSUs that share part of the subsidyburden. Efficient cost based private refinerswith no marketing obligations have thus hadextraordinary advantages in this distortedmarket. Even public sector refineries orupstream operations such as Oil & NaturalGas Corporation (ONGC) make large profitswhile oil marketing companies lose money.This has restrained the growth of private sectorretailers who find it simpler to sell to thepublic sector marketing companies at import

parity prices. Other barriers to private sector’sentry into retailing include a minimuminvestment hurdle of Rs.2000 crore and theabsence of a common carrier principle in thedistribution and marketing sectors. Anotherfeature of the distorted market is the large-scale adulteration of petrol and diesel withsubsidised kerosene.

22. The challenges facing the petroleumand natural gas sectors include: (a) ensuringcrude oil and gas supplies in a constrainedworld market amidst rising prices; (b) demandmanagement of petroleum products; (c) rationalpricing of petroleum products and natural gas;(d) removal of entry barriers for private playersin distribution and retail business in order tocreate real market competition; (e) regulationof upstream and downstream sectors; (f)improving the administration of LPG andkerosene subsidies and, finally (g) environmentalmanagement through product upgradation.

23. Coal has been the mainstay of India’senergy supply for many years. Coalconsumption increased from 140 Mt in 1984 toover 400 Mt in 2004 with a growth rate of5.4%. Thermal power plants using coal todayaccount for 57% of our total generationcapacity. Indian coal has a high ash contentand low calorific value – an average of 4000kcal/kg compared to 6000 kcal/kg in importedcoal. The average calorific value of coal burntin India’s power plants is only about 3500kcal/kg. The high ash content also results inhigher emission of suspended particulate matter(SPM). However, the sulphur content of Indiancoal is very low, and emission of SO

2 during

combustion is also low. Since SPM iscomparatively easy to trap, Indian coal isrelatively clean. Despite large reserves of coaldomestic supply is tailored to barely meetdomestic demand for thermal coal with smallquantities being imported. India is not self-sufficient in metallurgical coal and over 65% ofthe demand is met through imports.

24. The coal sector is dominated by PublicSector Undertakings (PSUs) under the centraland state governments. PSUs engaged in theproduction of coal and lignite contribute nearly

12


90% and 73% of the total production of coaland lignite respectively. The Coal sector wasprogressively nationalised between 1971 and1973 after recognising the need for scientificand planned development of resources andimproving the working conditions in existingmines. The objectives of ‘nationalisation’ havenot been realised completely. The country isfacing an acute shortage of coking coal supplies,the demand and supply balance of non-coking(thermal) coal is extremely tight with marginalquantities of imports required to fill the gap.More importantly, the quality of thermal coalhas been deteriorating over the years. Theincreasing share of opencast mines is one ofthe contributing factors for the deteriorationin quality. There has been only a marginalimprovement in productivity. The level ofmechanisation of underground workings andthe success thereof has also not metexpectations.

25. A lack of competition, the absence ofsuitable benchmarks for different operationalparameters and the absence of an independentRegulator for the sector have constrained thegrowth of coal industry. Problems of landacquisition and rehabilitation, stiff legislationcovering forest conservation and environmentmanagement have also, to some extent, affectedthe pace of development of the coal sector.Indian Coal is internationally competitive atthe pithead. However, its pricing has remainednon-transparent and its distribution is restrictedthrough a complex regime of linkages based ona constrained rail infrastructure that offers littleflexibility. Moreover, freight rates are exorbitantand cross subsidise passenger traffic. This makesIndian coal progressively uncompetitive as itmoves away from the pitheads. In spite of low(5%) import duty on thermal coal, importshave been sluggish. This is primarily due toconstraints of port capacity and the costassociated with multiple handling and inlandtransportation of imported coal. Unfortunatelycoal consumption at coastal sites is currentlyminimal.

26. The entry of the private sector in coalproduction is essential for realising efficiencygains and augmenting the domestic coal supply.Consequently, the Coal Mines Nationalisation

(Amendment) Bill, 2000, was introduced inParliament to bring about suitable legislativeamendments to permit private sector entryinto the coal sector. However, its passage isstill awaited. Pending such amendment, thecaptive mining policy was formulated withinthe bounds of existing legislation and severalcoal blocks have been offered to potentialentrepreneurs to exploit coal for their ownconsumption. Foreign Direct Investment (FDI)in coal mining has been allowed and miningby joint venture companies is permitted albeitfor captive mines. Coal blocks have also beenallocated to other PSUs under Central andState Governments for coal mining.

27. Large estimates of total coal resourcesgive a false sense of security because currentand foreseeable technologies convert only asmall fraction of the total resource into themineable category. The capacity of PSUsengaged in exploration has restricted the paceof proving indicated and inferred resources.This limited capacity, coupled with theeconomics of opencast mines versusunderground mines, gives only limited incentiveto explore for coal beyond 300m depth.

28. Clean coal technologies for improvingthe efficiency of energy conversion and limitingemissions; research and development initiativesfor establishing additional sources of energysuch as coal bed methane; in-situ gasification ofun-mineable and deep seated coal reserves; andthe liquefaction of coal are promising areas foraction but are still in their infancy.

29. While we have developed indigenoustechnological capability in all aspects of nuclearpower, our ability to develop nuclear power isrestricted by the very limited availability ofUranium. In fact, the present Uranium shortagehas forced us to operate even the small nucleargeneration capacity that we have at a loadfactor below what is technically possible. Thepace at which we can expand nuclear powergeneration using indigenous fuel sources isthus severely limited even though the eventualpotential for nuclear power generation is vast.

30. There is large unexploited hydelpotential in the country. Development of this

13

The Challenges

involves relatively long gestation lags.Moreover, storage schemes often involvedisplacement of people and submergence ofland. Project affected people need to be resettledand rehabilitated. Also, storage schemes mayhave other environmental consequences suchas adverse impact on aquatic life anddownstream ecosystems. While these problemsare not unsurmountable they have not beenadequately attended to in the past. There is,therefore, some opposition to the developmentof large storage schemes. However, storageschemes help utilise water that would haveotherwise gone to the seas. Run of the riverschemes avoid these problems though at thecost of a much lower utilisation of the availablehydro resource both in terms of water usageand its energy potential. Most importantly,run of the river schemes, typically, have muchlower capacity for delivering peak powercompared to storage schemes. Thus, if a riverbasin can support storage projects, a carefuleconomic analysis must be done before allowingthat potential to be converted to the easy-to-dorun of the river schemes.

31. Given the shortage of conventionalfuels, non-conventional energy sources hold aspecial attraction for the country. Despite manyyears of efforts and despite the significantgrowth of small-hydro and wind power, thecontribution of non-conventional energysources such as wind, solar, biogas, etc., to ourtotal energy use has remained below 1%.

32. Environmental problems associatedwith energy use have become severe in manyurban areas. Most of our cities have a highconcentration of one or more pollutants abovethe safe limit. In fact, many Indian cities areamong the most polluted cities in the world.The Supreme Court mandated the use ofCompressed Natural Gas (CNG) for buses,taxis and three-wheelers in Delhi beginningSeptember 2001. Other cities are followingthis lead. In our energy strategy environmentalconcerns have to be factored in to reduceemission of local pollutants as well as globalpollutants to ensure that the energy strategy isecologically sustainable.

33. The continued dependence on biomass-based fuels, which are mostly obtained fromforests, raises the threat of deforestation,thinning of forests and a loss of habitat andbio-diversity.

34. Thus in summarising the energy scenewe note that the immediate problems areshortages of fuels, a growing dependence onimported oil that is becoming dearer by theday, and a power sector with ill financialhealth that discourages growth in a countrythat needs energy for growth and forimproving human welfare. These problemsshould be addressed in the context of ourlong-term energy requirements and theavailable strategic options to fulfil them sothat we may not get locked into paths thatwe may regret later.

1.2 THE ISSUES

35. The energy scene described above raisesa number of issues. We divide these into twocategories: those that need to be addressedfrom a long-term perspective and those thatare pressing problems in the short-term.

36. From a long-term perspective a numberof issues need to be addressed:

(a) How much energy do we need overthe long run? Given our resources,what should be our strategy to meetthe growing demand?

(b) How do we promote the efficientallocation of various fuels and energyforms to different uses? What shouldbe their relative prices?

(c) How do we address the legitimateconcerns of States rich in energyresources such as coal and hydro?

(d) What institutional reforms are neededto generate competitive efficiency? Howdo we leverage the strength of publicsector units that dominate energysectors? How do we obtain credible,independent, transparent and consistentregulatory oversight in the energysector?

(e) What is the role of renewables in our

14


energy supply? How do we promotetheir development?

(f) How should we increase India’s knownenergy resources? What newtechnologies are relevant for India’sfuture? How do we promote theirdevelopment? What should be ourR&D strategy?

(g) What is the scope for increasing theenergy efficiency of the system? Whatpolicies can lead to higher efficiency?How do we encourage energyconservation and energy efficiency? Inparticular, how do we reduce the useof petroleum fuels for transport? Whatpolicies are needed to promote fuelefficiency and alternatives in transport?

(h) How do we ensure energy security?What is the role of obtaining equityenergy abroad? How do we reducedependence on imported energy?

(i) How do we encourage an energysystem that keeps air pollution withinacceptable limits? The growing globalconcern over the threat of climatechange requires that India continues toincrease its energy supply in aresponsible manner withoutcompromising its economic growthimperative. India’s long-term energystrategy must take this into account.

37. In the short-term, our pressingproblems are:

(a) How do we deal with persistent powershortages? How do we expandcapacities for generation, transmissionand distribution? How to generateinvestible surpluses with SEBs? Howdo we improve the financial health ofSEBs? How do we reduce AT&Closses?

(b) How do we reduce the cost of powerand improve its quality? How shouldwe do away with cost plus regime?How do we introduce competition?How can we encourage private sectorparticipation in the power sector? Howcan we provide open access in a levelplaying field?

(c) How do we ensure fuel supply forpower generation? How should weexpand coal supply in a cost effectiveway? How can we promote investmentin coal production? How do weexpand production by captive mines?How do we facilitate import of coalto meet shortfalls in domestic supplyand wherever imports are costeffective?

(d) How should we allocate and pricedomestic gas?

(e) How do we deal with the rising cost ofoil in the world market? How tominimise its adverse impact on theeconomy?

(f) How do we provide clean cookingenergy to all? How can we develop anenergy system that is poverty andgender sensitive?

(g) How do we provide access to electricityfor all households? Considering someconsumption of electricity as a meritgood that we want all to consume,how should it be financed?

(h) How do we provide subsidy forelectricity and clean cooking fuels tocertain consumers e.g. poor householdsor agricultural pumps, in ways that donot encourage wasteful use ofelectricity?

1.3 THE VISION

38. The broad vision behind the energypolicy is to reliably meet the demand forenergy services of all sectors including thelifeline energy needs of vulnerable householdsin all parts of the country with safe, clean andconvenient energy at the least-cost. This mustbe done in a technically efficient, economicallyviable and environmentally sustainable mannerusing different fuels and forms of energy, bothconventional and non-conventional, as well asnew and emerging energy sources to ensuresupply at all times with a prescribed confidencelevel considering that shocks and disruptioncan be reasonably expected. In other words,the goal of the energy policy is to provideenergy security to all.

15

The Challenges

1.4 NEED FOR AN INTEGRATEDPOLICY

39. The need to have an integrated policyarises because different fuels can substitute foreach other in both production andconsumption. Alternative technologies areavailable and there is substantial scope forexploiting possible synergies to increase energysystem efficiency and to meet requirement forenergy services. If the energy system is to beefficient, our policies must be integrated.Currently with five separate ministries (Coal,Petroleum & Natural Gas, Atomic Energy,Power and Non-Conventional Energy sources),each concerned with its own turf, policies arenot always consistent, opportunities for inter-linkages and synergy are missing and sub-optimal solutions are the result. We brieflylook at issues that call for an integrated policyand describe some of the attributes of such apolicy.

(a) Relative Prices

Different fuels have different calorificvalues. Their efficiency in use andconvenience also differ. Moreover, theygenerate different kinds and amountsof pollution. And yet often they aresubstitutes for each other in specificuses. Their relative prices, therefore,have to be set in a way that the resultinginter-fuel choices are socially andeconomically desirable. For this, theirmarginal use values per rupee of fuelneed to be equivalent. Thus prices ofdifferent fuels should not be setindependently of each other.

(b) Consistent Tax Structure

Relative prices can be affected by taxesand subsidies. Excise and import dutieshave to be consistent across differentfuels. For an optimal allocation ofresources, taxes on capital goods thatuse different fuels to produce the sameoutput should be consistent. The taxstructure on alternate fuels may beused to promote desired policyobjectives relating to environment,utilising domestic energy resources,generating employment etc.

(c) Level Playing Field

All players and energy projects, publicor private, large or small, domestic orforeign should be treated equally if thesector is to be efficient.

(d) Uniform Treatment of Externalities

Different fuels may have differentexternalities in their production andfor use. Thus for example, coal involvesmining with potential to damage landwhile nuclear power involves a muchsmaller amount of mining but posesproblems of hazardous waste disposal.Biomass based fuels are renewables andmay not result in carbon emissions,but the air pollution caused by theiruse may have a severe and adverseimpact on health. Our policies need totake an integrated view so thatenvironmental objectives are attainedat least-cost.

(e) Public Infrastructure

Many elements of the energy systemconstitute public infrastructure withmany positive externalities andeconomies of scale. Some of them arenatural monopolies. Ports, roads, railroads, urban mass transport, etc., playan important role in the energy system.Transmission networks or gas pipelinenetworks have large economies of scale.These are often developed throughpublic efforts or through public-privatepartnerships. Their development needsto be coordinated and their functioningregulated.

(f) Long Gestation Lags, R&D andTransition Strategy

Many energy projects involve largeinvestments and have long gestationlags. An integrated policy needs toprovide a framework of development,and a strategy of transition to thedesired energy future. In particular,R&D for new technologies and newsources may be most successful withlong-term commitment and support.Setting priorities among alternativeR&D missions and defining an optimal

16


R&D strategy require an integratedperspective on the future of the energysystem.

(g) Consistent Regulation

The energy sector requires regulatoryoversight to balance consumer andproducer interests, to ensure efficiencyand to create a level playing field.Natural monopolies need regulation toensure open access to all so thatcompetitive efficiency is realised.However, regulation should beconsistent across different energysources and across regions, whichrequires an integrated policy.

(h) National Priorities

While competitive efficiency is adesirable goal, policies have to factorin national priorities. Thus if thecountry decides that food security isparamount and that a certain level offertiliser self-sufficiency is required, thenthe energy policy needs to provide forit. If this calls for a certain quantitativeallocation of natural gas, one mustconsider such an allocation, thoughone should ideally find animplementation solution that is at theleast-cost.

(i) Regionally Balanced Development

Energy infrastructure is critical fordevelopment. For regionally balanceddevelopment, energy should beavailable in all regions. Freight andtransmission equalisation, as practisedin the past, has often caused regionallydistorted development. Thus Bihar, inspite of its natural resources, hasremained industrially underdeveloped.One needs to use more directinstruments where incentives are linkedto outcomes. Distortion of energyprices do not often serve this purpose.As different fuels and resources aredifferentially distributed geographically,an integrated approach can helpminimise the cost of distortions andincentives.

(j) Energy for the Poor

Some amount of clean cooking fuels(LPG and Kerosene) and electricity aremerit goods, which justifies subsidiesfor these goods for the poor. Thesesubsidies have to be consistent,progressive and implementable. Ideally,they should also be self-targeting andself-limiting. Implemented properly,they could, especially for women,relieve drudgery, reduce health impact,increase productivity and enhancelivelihood options.

1.5 APPROACH

40. Traditional approach to the energypolicy - of determining optimal supply strategywith quantitative targets - is no longerappropriate. We must provide policies thatcreate an enabling environment and provideincentives to decision makers, consumers,private firms, autonomous public corporations,and government departments, to behave inways that result in socially and economicallydesirable outcomes. The Committee’s approachhas been to identify such policies.

41. It is not necessary to compare preciselythe economics of alternatives as the policydoes not mandate which alternative should beused and when. Relative economics ofalternatives depend on particular circumstances,relative prices of different fuels as well astechnological developments. These comparisonsand the resulting choices among them are bestleft to economic decision takers. Thus, policyrecommendations have been presented as broadprinciples, leaving the details to be evolved, ifnecessary, by implementing agencies in theframework of plans and programmes at anypoint of time.

42. The institutional structure in the publicsector that we have so assiduously built upduring the last 55 years or so to promote self-sufficiency and self-reliance in energy, has ledto a monopolistic market structure and led tothe systemic infirmities that are inherent incases of majority public ownership of anenterprise. However, the Committee recognises

17

The Challenges

that in a liberalised economy, the private sectoris expected to play an important role in theenergy sector.

43. Keeping this in mind our approach todesigning an integrated energy policy is basedon the following premises:

(a) Effective implementability of policiesis important. Any policy that dependson the good behaviour of many peopleis unlikely to be effectivelyimplementable.

(b) Informed debate based on widelydisseminated and reliable data is criticalfor effective policy formulation.

(c) Incentive compatible policies that factorin stakeholder concerns are more likelyto be acceptable and implementable.

(d) Competitive set-ups that giveappropriate signals to various economicagents, such as prices, are to bepreferred.

(e) Independent Regulators have criticalroles to play. However, regulation isnot always a substitute for competitionand by itself cannot give efficientoutcomes. Regulation should becomplemented by an appropriate

industry structure. For example,experience in electricity sector hasshown that good regulation under aproper industry structure can mimiccompetition. It must also be noted thatthe mere presence of competition doesnot negate the need for independentregulation – it only changes the scopeof regulation.

(f) Social objectives should not be sacrificedto the objective of competition butshould be made consistent with itthrough the use of direct transferswhere possible.

(g) Policy has to recognise the existinginstitutional structure of the energysector and define a transition strategyof reforms.

(h) Policies should reflect externalities ofenergy consumption.

(i) Efficiencies across the energy chainshould be improved.

44. With these principles in mind, we willnow look at energy by each fuel source as wellas at the power sector to address issues identifiedearlier. Keeping in mind the need forintegration, we will underline aspects of policiesthat need to be integrated with other policies.

18

Integrated Energy Policy Chapter II

Long-term projections for energyrequirements are based on assumptions vis-à-vis the growth of the economy, populationgrowth, the pace at which “non-commercialenergy” is replaced by “commercial energy”,the progress of energy conservation, increasein energy efficiency as well as societal andlifestyle changes. It is not surprising, therefore,that available projections differ widely. Yet itis useful to have a set of consistent projectionswith clearly stated assumptions to outline thebroad discussion of the challenges facing us inmeeting energy needs as well as to provide aframework for policy formulation. Having saidthis, it is emphasised that a rigorous demandanalysis has not been conducted by theCommittee and the numbers here and inChapter III merely establish an indicative rangeof likely energy demand, supply and mix.However, the policy recommendations thatemerge are not affected by the lack of precisionin the demand projections.

2.1 COMMERCIAL ENERGY NEEDS

2. We projected total primary commercialenergy requirement on the basis of elasticityw.r.t. GDP, which gives a percentage changein commercial energy requirement for onepercent change in GDP. The elasticities are

obtained from time series data of India’scommercial energy use. These elasticities aresummarised below:

3. The elasticity for per capita primarycommercial energy supply with respect to percapita GDP estimated from the time series dataof India comes to 0.82 since 1990-91 which issignificantly lower than 1.08 estimated for theperiod since 1980-81. Similarly the elasticityfor per capita electricity generation is only1.06 since 1990-91 compared to 1.30 for theperiod since 1980-81. We have used electricitygeneration rather than consumption becausewhile losses have been rising over time, precisedata is not available on technical losses andcommercial losses (which includes pilferage,non-billing, and non-collection). Except fortechnical losses all electricity made availablecontributes to GDP. However, since eventechnical losses have been rising (currentestimates are upwards of 15%) using electricitygeneration instead of actual consumption giveshigher elasticities. Importantly though, theelasticities in India are falling over time (orwith increasing GDP).

4. The energy elasticities of GDP can bereshaped by policy interventions, the relativeprices of fuels, changes in technology, changes

Energy Requirements

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

(Percent change in Commercial energy use for one percent change in GDP)

Regression Using India’s Time Series

Per Capita

1. TPCES w.r.t. GDP (Rs. Crores 1993-94) 1980-81—2003-04 1.08

1990-91—2003-04 0.82

2. Electricity Generated w.r.t. GDP (Utilities + Captive) 1980-81—2003-04 1.30

1990-91—2003-04 1.06

TPCES = Total Primary Commercial Energy Supply

19

Energy Requirements

in end-use efficiency of equipment, the level ofthe energy infrastructure and developmentpriorities that affect the structure of theeconomy. Normally, overall elasticity falls overtime as is corroborated by the time series datafor India’s commercial energy consumption.However, there is also a feeling that, for India,the energy elasticity of GDP growth will notfall any further as rising income levels willfoster life style changes that are more energyintense. Based on these alternative views twosets of elasticities were used for projectingIndia’s commercial energy demand. The twosets of elasticities used are shown in Table 2.2.

5. To get a feel for how India’s energyelasticities compare with other countries, wehave estimated these elasticities using cross-country regression based on data of 2003. Theseare shown in Table 2.3. The elasticity for totalprimary energy supply, TPES, comes to 0.83for all countries and to 0.79 for countries witha PPP GDP between $2000 and $8000 (India’sGDP in PPP terms based on 2000 dollars was$2732 in 2003 and by 2031-32 might reach theupper end of the range). India’s energy elasticityfor commercial energy is comparable to theelasticity estimates for TPES using cross country

data. The elasticity for electricity consumptioncomes to 1.24 for all countries and to 1.25 forPPP GDP range of $2000 to $8000. India’selasticity for electricity generation is comparableto that of countries with per capita GDPexceeding $8000 in PPP terms. Importantly,the trend of falling elasticities with risingincome levels is demonstrated even by crosscountry data.

6. Using the above estimates, commercialenergy needs have been projected for differentgrowth scenarios using falling and constantelasticities from Table 2.2. These projectionsare given in Table 2.4, which also showspopulation projections by the Registrar ofCensus. It is noted, though, that the numberbased on constant elasticities is not used in thisreport for any comparison.

2.2 REQUIRED ELECTRICITYGENERATION

7. Requirement for electricity generation,(projected using the elasticities of Table 2.2) areshown in Table 2.5. Plan-wise projectedelectricity generation and capacity additionsare shown in Figures 2.1 and 2.2 respectively.

Table 2.2Elasticities Used for Projections

(TPCES w.r.t. total GDP)

TPCES 1 TPCES 2 Electricity Electricity(Falling (Constant (Falling (Constant

elasticities) elasticities) elasticities) elasticities)

2004-05 to 2011-12 0.75 0.8 0.95 0.95

2011-12 to 2021-22 0.70 0.8 0.85 0.95

2021-22 to 2031-32 0.67 0.8 0.78 0.95

Table 2.3Energy Use Elasticity w.r.t. GDP from Cross-Country Data of 2003

1. TPES (kgoe/capita) w.r.t. per capita GDP ($ PPP 2000) All Countries 0.83

2000 <GDP <8000 0.79

GDP >8000 0.76

2. Electricity Consumption (kWh/capita) w.r.t. per capita All Countries 1.24

GDP ($ PPP 2000) 2000< GDP <8000 1.25

GDP >8000 1.09

20


Table 2.5Projections for Electricity Requirement

(Based on Falling Elasticities of Table 2.2)

Year Billion kWh Projected Peak Installed CapacityDemand (GW) Required (GW)

Total Energy Energy Required @ GDP Growth @ GDP GrowthRequirement at Bus Bar Rate Rate

@ GDP Growth @ GDP GrowthRate Rate

8% 9% 8% 9% 8% 9% 8% 9%

2003-04 633 633 592 592 89 89 131 131

2006-07 761 774 712 724 107 109 153 155

2011-12 1097 1167 1026 1091 158 168 220 233

2016-17 1524 1687 1425 1577 226 250 306 337

2021-22 2118 2438 1980 2280 323 372 425 488

2026-27 2866 3423 2680 3201 437 522 575 685

2031-32 3880 4806 3628 4493 592 733 778 960

Note: Electricity generation and peak demand in 2003-04 is the total of utilities and non-utilities above 1MW size. Energy demand at bus bar is estimated assuming 6.5% auxiliary consumption. Peakdemand is estimated assuming system load factor of 76% up to 2010, 74% for 2011-12 to 2015-16,72% for 2016-17 to 2020-21 and 70% for 2021-22 and beyond. The installed capacity has beenestimated keeping the ratio between total installed capacity and total energy required constant at the2003-04 level. This assumes optimal utilisation of resources bringing down the ratio between installedcapacity required to peak demand from 1.47 in 2003-04 to 1.31 in 2031-32.

Table 2.4Projections for Total Primary Commercial Energy Requirements

(Mt of Oil Equivalent)

Year Population GDP TPCES TPCESin millions (Rs. in Billion (Mtoe) 1 (Mtoe) 2

@1993-94 prices) GDP Growth Rate GDP Growth Rate

8% 9% 8% 9% 8% 9%

2006-07 1114 17839 18171 389 397 394 403

2011-12 1197 26211 27958 521 551 537 570

2016-17 1275 38513 43017 684 748 732 807

2021-22 1347 56588 66187 898 1015 998 1142

2026-27 1411 83145 101837 1166 1360 1361 1617

2031-32 1468 122170 156689 1514 1823 1856 2289

Note: 1. Projections based on falling elasticities with respect to GDP

2. Projections assuming no change in elasticities with respect to GDP

3. It is pointed out that the level of commercial energy consumption shown for 2006-07 is notexpected to be achieved as the growth in demand for petroleum products in the first 4 years ofthe 10th Plan has only been 2.8% per annum. However, over the long-term, the projections maystill be valid as incomes and access improves.

21

Energy Requirements

Figure 2.1Projected Electricity Generation Growth (BkWh)

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

8. For comparison purposes, Table 2.6provides projections of electricity demand madeby the Ministry of Power. For the purposes of

this report, however, the projections of Table2.5 have been used.

Table 2.6Projections for Electricity Requirement by MOP

Year Billion kWh Installed Capacity (GW)

8% 9% 8% 9%

2006-07 700 700 140 140

2011-12 1029 1077 206 215

2016-17 1511 1657 303 331

2021-22 2221 2550 445 510

2026-27 3263 3923 655 785

2031-32 4793 6036 962 1207

22


Table 2.7Sources of Electricity Generation – One Possible Scenario

Year Electricity Hydro Nuclear Rene- ThermalGeneration (BkWh) (BkWh) wables Energy Fuel Needsat Bus Bar (BkWh) (BkWh)

(BkWh) Coal (Mt) NG (BCM) Oil* (Mt)

8% 9% 8% 9% 8% 9% 8% 9% 8% 9%

2003-04 592 592 74 17 3 498 498 318 318 11 11 6 6

2006-07 711 724 87 39 8 577 590 337 379 12 14 6 6

2011-12 1026 1091 139 64 11 812 877 463 521 19 21 8 8

2016-17 1425 1577 204 118 14 1089 1241 603 678 33 37 9 10

2021-22 1981 2280 270 172 18 1521 1820 832 936 52 59 12 12

2026-27 2680 3201 335 274 21 2050 2571 1109 1248 77 87 14 15

2031-32 3628 4493 401 375 24 2828 3693 1475 1659 119 134 17 20

*includes secondary oil consumption for coal-based generation

9. Electricity requirements can be met byvarious alternative fuels. These include coal,nuclear power, hydropower, gas, oil andrenewables such as biomass, wind energy, solarenergy, etc. In order to understand the broaddimensions of the fuel requirements for powergeneration, a possible fuel mix scenario hasbeen developed. The projections of thisscenario are summarised in Table 2.7. It isimportant to note that Table 2.7 representsone possible scenario and it should not, inany way, be considered as the preferredscenario. Also to the extent that gas, hydroor nuclear capacity cannot be realised asprojected in the scenario, coal-basedgeneration will need to fill the gap. Inreality, the choice between coal and gas willbe guided by economic and commercialconsiderations including any policyprescriptions for pricing-in certainenvironmental externalities. The level of gasuse projected in the scenario under Table2.7 is based on somewhat optimisticassumptions of gas availability and of itsability to compete with coal on price. Shouldthese assumptions not hold true, coaldependence will increase.

10. The projections in Table 2.7 assumeexploitation of full hydro potential of 1,50,000MW in the country, a capacity addition of

63,000 MW from nuclear power sources and a14,000 MW capacity from wind farms by 2031-32. These scenario assumptions in respect ofhydro and nuclear may not be fully realisedand are made here in order to characterise theboundaries of alternative choices. Generationfrom coal-based stations also includes electricitygeneration from lignite. The scenario also forcesgas usage for power generation with gas-basedelectricity share rising from about 10% to 16%between 2003-04 and 2031-32. As a result ofthese assumptions, the share of coal-basedelectricity drops from 72% to 61%. The demandfor oil in power sector covers consumption ofpetroleum products in diesel based plants aswell as secondary oil consumption in coal-based plants.

2.3 INDIA’S OIL DEMAND

11. Long-term growth in demand ofpetroleum products depends upon a number offactors such as economic growth (GDP),elasticity of demand for petroleum productswith respect to GDP growth, relative pricelevels of substitute products particularly LNG/CNG, saturation of LPG demand, and theimpact of energy conservation measures. Thedemand for petrol and diesel is dependent onthe growth of road infrastructure, the price ofoil, the future efficiency of vehicles, the growth

23

Energy Requirements

of alternate modes of transport and theemergence of substitutes like bio-fuels and/ortechnologies such as hybrids. Naphtha demandis dependent on the growth plans for fertiliserand petro-chemicals and its price relative to theprice and availability of natural gas. Differentagencies have made various projectionsestimating changes in demand of petroleumproducts. The committee has reviewed thedemand projections made by EnergyInformation Administration(EIA), USA,International Energy Agency(IEA), IndiaHydrocarbon Vision 2025, India Vision 2020,Working Group Report for the 10th Plan,Power & Energy Division and IntegratedResearch and Action for Development - PriceWaterhouse Coopers (IRADe-PWC).

12. A summary of the projections byvarious agencies is given in Table 2.8. As theavailable projections by these agencies are fordifferent years, the same have been interpolatedor extrapolated to bring them to a commonyear to ease comparison. The projections byIEA and EIA are based on unrealistically lowgrowth rates of GDP for India. It may be seenthat the demand for the year 2025 varies from235 Mt for the Best Case Scenario (BCS) ofIndia Vision 2020 to 368 Mt of IndiaHydrocarbon Vision (IHV) 2025. The IRADe-PWC projections exclude Naphtha and theirprojection of 347 Mt under high growth case(HOG) is comparable to 368 Mt of IndiaHydrocarbon Vision.

13. It should be emphasised that most ofthese projections do not factor in the impact ofchange in prices. The world market inpetroleum products has seen large swings inprices and future prices are difficult to predict.Since these projections vary a lot, we haveprojected oil demand by detailed sectoral end-use analysis.

2.4 INDIA’S COAL DEMAND FORNON-POWER USE

14. Long-term projections of the demandfor coal are quite complex owing to rapidchanges in the relative availability and pricesof different fuels as well as the technologicaladvancements and new policies in the end-use

sectors. Total demand, defined as the aggregatedemand across various non-power coalconsuming sectors such as steel, cement etc., isassessed by determining the outputs of eachsector, which in turn are functions of GDPgrowth. In the last decade or so, a gradualdecline in the elasticity of demand of coalagainst GDP has been observed. Possiblereasons for this decline can be: (a) rising shareof the non-energy consuming sector in theaggregate GDP; (b) substitution of coal byalternative fuels; and (c) technologicalinnovations in coal consuming sectors leadingto energy efficiency and a reduction in specificconsumption.

15. The committee has reviewed thedemand projections made by EnergyInformation Administration (EIA),International Energy Agency (IEA), India vision2020, India Hydrocarbon Vision 2025, CoalVision 2025, Working Group Report for the10th Plan and the Power & Energy Divisionof Planning Commission. A summary ofprojections by various agencies is given inTable 2.9. Projections have been brought to acommon year by interpolation/extrapolationfor ease of comparison. The projections byIEA and EIA are based on low growth of GDPfor India. It may be seen that the projecteddemand for coal in the year 2024-25 variesfrom 971 Mt for the “Business as Usual”scenario of India Vision 2020 to 1402 Mt in theIndia Hydrocarbon Vision 2025 report. TheCommittee decided to use the projectionscarried out for Coal Vision 2025 by TERI fornon-power coal requirements and extrapolatedthem for estimating the coal requirement fornon-power use in 2031-32.

2.5 INDIA’S NON-POWERNATURAL GAS DEMAND

16. Currently, the Indian gas market issupply constrained, especially since the futuredemand for gas appears to be strong. Table 2.10summarises the various long-term projectionsavailable for gas in India. As the availableprojections by these agencies are for differentyears, the same have been interpolated orextrapolated to bring them to common yearsand have been converted into MMscmd for the

24


Tab

le 2

.8D

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for

Pet

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Pro

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EIA

(20

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IEA

IHV

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(200

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ase

(200

1-02

)C

om

mis

sion

)B

AU

BC

SP

roje

ctio

ns

BA

UH

OG

(200

3-04

)

Bas

e Y

ear

2001

2001

2001

2000

1998

-99

1997

2001

-02

2001

-02

2003

-04

(105

Mt)

(105

Mt)

(105

Mt)

(102

Mt)

(91

Mt)

(83

Mt)

(108

Mt)

(108

Mt)

(109

.7 M

t)

2004

-05

119

122

115

122

132

121

112

119

124

125

127

2009

-10

139

149

129

145

175

153

135

139

147

162

176

2014

-15

157

194

154

171

226

193

162

164

174

191

212

2019

-20

219

254

189

201

288

245

195

195

207

212

259

2024

-25

264

324

204

230

368

309

235

232

240

260

347

2029

-30

271

276

281

320

465

EIA

- E

ner

gy I

nfo

rmat

ion

Adm

inis

trat

ion

, U

SAIR

AD

e -

Inte

grat

ed R

esea

rch

an

d A

ctio

n f

or

Dev

elo

pm

ent

IEA

- I

nte

rnat

ion

al E

ner

gy A

gen

cyB

AU

- B

usi

nes

s as

Usu

alP

WC

- P

rice

Wat

erh

ou

se C

oo

per

sIH

V -

In

dia

Hy

dro

carb

on

Vis

ion

202

5B

CS

- B

est

Cas

e Sc

enar

ioH

OG

- H

igh

Ou

tpu

t G

row

th

Note

:A

s th

e av

aila

ble

pro

ject

ion

s b

y t

he

vari

ou

s ag

enci

es a

re f

or

diff

eren

t y

ears

, th

e sa

me

hav

e b

een

in

terp

ola

ted

or

extr

apo

late

d to

bri

ng

them

to

com

mo

n y

ears

fo

r co

mp

aris

on

pu

rpo

ses.

25

Energy Requirements

Tab

le 2

.9D

eman

d P

roje

ctio

n o

f C

oal

by

Var

iou

s A

gen

cies

in

Mt

Sou

rce

Sec

tors

/Per

iod

Bas

e yea

r06

-07

2010

2011

-12

2015

2016

-17

2020

-21

2021

-22

2024

-25

2025

2030

Po

wer

322

469

617

Cap

tive

Po

wer

2832

37X

Pla

n w

ork

ing

Stee

l43

4040

gro

up

Cem

ent

2524

25F

erti

lise

r4

55

Oth

ers

5150

56T

ota

l20

01-0

247

362

078

098

111

26P

ow

er32

241

351

763

571

9C

apti

ve P

ow

er28

4360

8410

2C

oal

Vis

ion

Fer

tili

ser

420

25*

7% G

DP

Stee

l43

5367

8497

Cem

ent

2538

5888

113

Oth

ers

5164

8010

111

7T

ota

l20

06-0

747

361

178

299

211

47P

ow

er32

242

755

369

980

4C

apti

ve P

ow

er28

4463

9011

2C

oal

Vis

ion

Fer

tili

ser

420

25*

8% G

DP

Stee

l43

5469

9010

5C

emen

t25

3961

9512

3O

ther

s51

6582

106

123

Tota

l20

06-0

747

363

082

810

7912

67H

yd

roca

rbo

n19

98-9

911

1814

0214

83V

isio

n 2

025

Bes

t C

ase

1997

-98

538

659

Indi

a V

isio

nSc

enar

io20

20B

usi

nes

s A

s(3

11)

688

971

Usu

alH

igh

2001

408

473

548

611

629

EIA

Lo

w37

441

144

748

149

0R

efer

ence

390

439

493

IEA

2000

484

623

713

817

P&

E D

ivis

ion

,20

0148

161

276

492

095

714

17P

lan

nin

g C

om

m.

(203

1-32

)

* P

roje

ctio

ns

mad

e b

y T

ER

I fo

r C

oal

Vis

ion

202

5

26


purpose of comparison. It may be seen that thedemand for gas varies from 155 MMscmd inlow case of EIA to 738 MMscmd in HOG caseof IRADe-PWC for the year 2024-25. Most ofthese projections have not taken into accountthe price sensitivity of gas. The IHV 2025states that the share of oil and gas in India’senergy mix would be 25% and 20% respectively.Based on the numbers given in IHV 2025 forprojected oil demand (364 Mtoe) the gas demandworks out to be 291 Mtoe if the respectiveshares are as stated. However, IHV 2025 alsostates that the projected demand for gas in2025 will be 391 Million Standard Cubic MetrePer Day (MMscmd) which translates into only128 Mtoe. This error makes the estimates inIHV 2025 inconclusive. India Vision 2020 hasestimated the demand for gas to be between 65and 71 Billion Cubic Metres (BCM) for theyear 2020. IRADe-PWC has projected demandof natural gas and natural gas equivalent ofNaphtha at 243 BCM under the business-as-usual (BAU) scenario and 405.7 BCM underHigh Output Growth (HOG) scenario for theyear 2030.

17. Natural gas can replace existing fuelsin various sectors both for feedstock as well asfor energy purposes. However, this substitutionwill depend upon the relative price of gas withrespect to other fuels. Therefore, it may bestated that the demand for gas will dependupon the price of natural gas relative to that ofalternatives, mainly Naphtha for fertiliser andpetrochemicals and coal for power.

18. The above wide range of estimates forgas demand was considered by the Committee.It was agreed to base the demand estimate fornon-power gas on the assumption that theprojected fertiliser (urea) capacity by 2031-32would be all gas-based; and non-power end-uses of gas will continue to grow at 8% or 9%per annum depending upon GDP growth. Thecommittee considered this to be a realisticbasis for estimating the use of gas for non-power use. The use of gas for power generationwill depend on the availability of gas and theprice relative to coal. As detailed in Paragraph10, the forced gas scenario results in a 16%share for gas-based electricity generation by

2031-32. Table 2.7 gives the gas demand forpower based on this share of gas in electricityproduction.

2.6 TOTAL PRIMARYCOMMERCIAL ENERGYREQUIREMENT

19. Putting together the various projectionsdiscussed above for coal, oil and natural gas fornon-power use, the commercial fuelrequirement for non-power use are summarisedbelow in Table 2.11.

20. Total commercial primary energyrequirements based on the scenario drawn forpower in Table 2.7 and the projections madefor non-power oil, coal and gas aresummarised in Table 2.12 using the commonunit of million tonnes of oil equivalent(Mtoe). It is emphasised that Table 2.12 ismerely one scenario that forces Hydro(1,50,000 MW), forces Nuclear (63,000 MW)and forces share of gas-based power generation(16%). Other scenarios based on DSM,efficiency improvements, renewables etc. willbring down the commercial energyrequirements further and change the fuel mixshown in Table 2.12. In Chapter IIIcommercial energy supply and the commercialenergy mix is projected under a number ofscenarios reflecting specific policy initiatives.The commercial energy supply under thesescenarios varies from a low of 1351 Mtoe toa high of 1702 Mtoe. It is noted that thecommercial energy requirement of 1514 Mtoeestimated on the basis of falling elasticities(Table 2.4) is not significantly different fromthe mid-point of this range (1526 Mtoe).Again, the requirement assessed in Table 2.12is based on assumptions that correspond toscenario 5 under Chapter III. The commercialenergy requirement estimated in Table 2.12 isabove the mid-point of the range ofcommercial energy supply established by thevarious scenarios under Chapter III.

21. Figure 2.3 shows the actual percentageshares of various commercial energy sources in2003-04 and as projected for 2031-32 in thescenario under Table 2.12.

27

Energy Requirements

Tab

le 2

.10

Dem

and S

cen

ario

for

Nat

ura

l G

as -

In

dia

(By

Var

iou

s A

gen

cies

/Org

anis

atio

ns)

(MM

scm

d)

Pro

ject

ion

s by

the

Var

iou

s A

gen

cies

EIA

(20

04)

Pow

er &

Yea

rIE

AIH

V-2

025

Ind

ia V

isio

n-2

020

En

ergy

IRA

De

& P

WC

*R

efer

ence

Hig

hL

ow

(200

4)(2

000)

(200

2)D

ivis

ion

’sP

roje

ctio

ns

Cas

eC

ase

Cas

eB

AU

BC

S(2

003-

04)

BA

UH

OG

Bas

e Y

ear

2001

2001

2001

2000

1999

- 2

000

1997

2001

-02

2003

-04

(62

MM

scm

d)

(62

MM

scm

d)

(62

MM

scm

d)(

67 M

Msc

md)

(110

MM

scm

d)

(59

MM

scm

d)

(81

MM

scm

d)

(85

MM

scm

d)

2004

-05

7477

7491

195

8987

9893

95

2009

-10

9310

193

140

277

115

111

134

145

164

2014

-15

124

132

109

189

329

149

142

183

226

285

2019

-20

155

171

132

228

358

194

177

249

356

493

2024

-25

195

225

155

259

391

258

226

326

488

738

2029

-30

295

430

667

1111

EIA

- E

ner

gy I

nfo

rmat

ion

Adm

inis

trat

ion

, U

SAIR

AD

e -

Inte

grat

ed R

esea

rch

an

d A

ctio

n f

or

Dev

elo

pm

ent

IEA

- I

nte

rnat

ion

al E

ner

gy A

gen

cyB

AU

- B

usi

nes

s as

Usu

al

IHV

- I

ndi

a H

ydr

oca

rbo

n V

isio

n 2

025

BC

S -

Bes

t C

ase

Scen

ario

PW

C -

Pri

ce W

ater

ho

use

Co

op

ers

HO

G -

Hig

h O

utp

ut

Gro

wth

* in

clu

des

Nat

ura

l G

as &

N G

equ

ival

ent

of

Nap

hth

a

Note

:As

the

avai

lab

le p

roje

ctio

ns

by

th

e va

rio

us

agen

cies

are

fo

r di

ffer

ent

yea

rs,

the

sam

e h

ave

bee

n i

nte

rpo

late

d o

r ex

trap

ola

ted

to b

rin

g th

em t

o c

om

mo

ny

ears

an

d h

ave

bee

n c

on

vert

ed i

nto

MM

scm

d fo

r th

e p

urp

ose

of

com

par

iso

n.

28


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

Non-Power- Coal1

Non-Power - Oil2

Non-Power- Natural Gas3

Mt Mt B.Cu.M

8% 9% 8% 9% 8% 9%

2003-04 91 91 113 113 20 20

2006-07 123 123 126 142 20 22

2011-12 164 170 158 178 30 32

2016-17 221 237 205 231 38 45

2021-22 299 334 266 299 56 65

2026-27 408 475 351 395 73 93

2031-32 562 684 469 528 100 133

Note: Estimated fuel requirements of coal, oil and natural gas are for non-power purposes.1

As explained in Para 152



Table 2.12Projected Primary Commercial Energy Requirements (One Possible Scenario)

(Mtoe)

Year Hydro Nuclear Coal Oil Natural Gas TPCES8% 9% 8% 9% 8% 9% 8% 9%

2011-12 12 17 257 283 166 186 44 48 496 546

2016-17 18 31 338 375 214 241 64 74 665 739

2021-22 23 45 464 521 278 311 97 111 907 1011

2026-27 29 71 622 706 365 410 135 162 1222 1378

2031-32 35 98 835 937 486 548 197 240 1651 1858

CAGR -% 5.9 11.2 5.9 6.3 5.1 5.6 7.2 8 6 6.4(CompoundedAnnual GrowthRates)

Per capita 24 67 569 638 331 373 134 163 1124 1266consumptionIn 2032 (Kgoe)

In 2004 (Kgoe) 6.5 4.6 157 157 111 111 27 27 306 306

Ratio 2032/2004 3.7 14.6 3.6 4.1 2.9 3.4 5.2 6.3 3.7 4.1

2.7 NON-COMMERCIAL ENERGYREQUIREMENT

22. The so-called “Non-commercial”sources of energy, including fuel wood,agricultural waste and dung, are primarily used

by households for cooking energy. These arecalled non-commercial because a majorproportion of these are simply gathered byactual users directly as opposed to being tradedcommercially.

29

Energy Requirements

23. Based on the latest data available onhousehold energy consumption from the NSS55th round covering the year 1999-2000,household demands are projected assuming thatincome distribution in rural and urban areasremain log-normal with consumption. Witheconomic growth, the mean per capitaconsumption in different expenditure classeschange. It is also assumed that the pattern offuel use for a particular monthly per capitaconsumption expenditure class remains thesame as observed in the 55th round. Theprojections are summarised in Table 2.13.

24. It should be noted that the requirementof electricity, kerosene and gas for household

consumption are included in the projectiongiven in Table 2.12. The impact of the RajivGandhi Grameen Vidyutikaran Yojana(RGGVY), which targets provision of electricityto all by the year 2009-10, will alter the demandfor electricity. To account for this impact,household demands are projected from 2009-10onwards using the energy use pattern of onlythose households in the NSS 55th round sample,which had electricity. These are given in Table2.14.

25. The differences are substantial only in2011 and 2016, as even without the accelerationin rural electrification planned under RGGVY,most of the households will have been

Figure 2.3

Table 2.13The Demand Scenario of Various Energy Items for Household Consumption in India

(Mtoe)

Year Fire Wood Electricity Dung Cake Kerosene L.P.G.& Chips

8% 9% 8% 9% 8% 9% 8% 9% 8% 9%

2000 79.62 79.62 8.43 8.43 29.61 29.61 10.07 10.07 6.42 6.42

2006 88.64 88.78 18.17 19.26 36.97 37.33 12.68 12.77 15.85 16.87

2011 94.11 94.05 27.17 29.68 40.42 40.48 14.01 14.02 23.94 26.07

2016 98.44 98.50 38.38 42.28 41.93 41.35 14.84 14.70 33.11 35.93

2021 102.06 102.46 50.39 54.78 41.79 40.87 15.16 14.93 41.63 44.16

2026 104.64 105.07 61.37 64.95 40.95 40.28 15.17 14.93 48.11 49.63

2031 106.39 106.59 69.72 71.80 40.47 40.21 15.12 14.96 52.27 52.89

30


Table 2.14The Impact of Electrification on the Demand Scenario of

Various Energy Items for Household Consumption(Mtoe)

Fire Wood Electricity Dung Cake Kerosene L.P.G.Year & Chips

8% 9% 8% 9% 8% 9% 8% 9% 8% 9%

2011 87.90 88.00 31.13 33.63 31.03 31.16 13.18 13.16 25.27 27.36

2016 92.59 93.02 42.58 46.51 32.21 31.53 13.82 13.64 34.30 36.95

2021 96.85 97.67 54.89 59.35 31.45 30.28 13.98 13.71 42.45 44.72

2026 100.01 100.72 66.19 69.86 30.00 29.12 13.88 13.61 48.55 49.88

2031 102.08 102.41 74.82 76.95 29.14 28.78 13.76 13.59 52.49 53.05

electrified by 2019-20. It is worth noting froma comparison of Tables 2.13 and 2.14 that forthe year 2011 electrification does not reducekerosene consumption significantly. This isrational. As long as kerosene is available,especially subsidised kerosene, what is savedfrom lighting is used as fuel and theconsumption of dung goes down. Thissubstitution is more convenient and the dungsaved has greater value as fertiliser. The use ofLPG for cooking will increase over time. Figure2.4 shows this.

26. The impact of other components ofBharat Nirman is difficult to assess. If weassume that the programme will increase ruralincomes by 1% every year, then the differencesfor the 8% and 9% growth rate column inTable 2.14 give some idea of resulting changesin demand. In 2031, the total householdrequirement changes by some 3 percent (5Mtoe) with a 1% higher growth rate.

27. It may be noted that the householddemand for non-commercial energy (firewood,

Figure 2.4Percentage of Households Using LPG

31

Energy Requirements

chips and dung cake) increases from around109 Mtoe in 2000 to around 131 Mtoe in 2031.The additional requirement is expected to bemet from agricultural residue and increasedlivestock activity that can be expected with 8-9% growth rates. In any case our goal shouldbe to progressively substitute these traditionalfuels with cleaner and more convenient fuels.

28. It is pointed out that apart from beingused as household fuel, non-commercial energyis also used in the unorganised small and cottagesector for end-uses such as brick kilns, pottery,jaggery, etc. It is estimated that suchconsumption of non-commercial fuels wasaround 23.5 Mtoe in 2003-04. With easieravailability of coal, gas and fuel oil growth inthis segment is projected to be a sluggish 3.0%per annum. Use of non-commercial energy bythe unorganised sector is thus expected toreach 54 Mtoe by 2031-32.

2.8 TOTAL PRIMARY ENERGYREQUIREMENT

29. Based on the commercial energyrequirement projected in Table 2.12 and thenon-commercial energy requirement projectedin Table 2.14 together with the non-commercialenergy use by small industries as detailed inParagraph 28, the total primary energy is shownin Table 2.15. Once again, it is emphasised thatthis is one scenario that is above the mid-pointof the range of total primary energy supplyestimated in Chapter III. It is further noted thatthe 2006-07 requirement in Table 2.15 is taken

from Table 2.4 with falling elasticities. As statedunder Table 2.4 we may not achieve this levelof total primary energy consumption in 2006-07 as petroleum demand has been sluggish inthe first 4 years of the 10th Plan.

2.9 SUMMING UP

30. The challenge facing the country is toensure that the energy needed to sustain an 8to 9% growth rate becomes available. To putthe requirement in perspective, per capitaenergy use in other countries in 2003 iscompared with India’s projected needs for 2032in Table 2.16. It is pointed out again that thescenario considered here is based on Table 2.12and 2.15 and is hence above the mid-point ofthe range of energy supply scenarios establishedin Chapter III.

31. India’s per capita consumption ofenergy in its various forms in 2003-04 is wellbelow that of developed countries and theworld average in 2003. Even in 2032, the percapita consumption in India from varioussources of energy will be well below the 2003level of per capita consumption in respect ofdeveloped countries. In fact, as seen from Table2.16 India’s projected level of per capita energyconsumption in 2032, will be less than 74% ofthe world average in 2003.

32. One should note that these projectedneeds are based on past trends from the demandside based largely on the projection of income.They assume that energy prices will remain on

Table 2.15Total Primary Energy Requirement (Mtoe)

Year TPCES TPNCES* TPES

8% 9% 8% 9% 8% 9%

2006-07 389 397 153 153 542 550

2011-12 496 546 169 169 665 715

2016-17 665 739 177 177 842 916

2021-22 907 1011 182 181 1089 1192

2026-27 1222 1378 184 183 1406 1561

2031-32 1651 1858 185 185 1836 2043

*This includes household requirement as per Table 2.14 and consumption by small industries as per Para 28.

32


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

TPES Electricity Oil Gas Coal Nuclear Hydro(kgoe) Consumption (kgoe) (Cu.m.) (Kg) (kWh) (kWh)

(kWh)

India 2003-04 439 553 111 30 257* (375) 16 69

India 2031-32 (projected 1250 2471 331 149 925* (1388) 256 273@ 8% GDP growth)**

World Average (2003) 1688 2429 635 538 740 403 423

OECD (2003) 4668 8044 2099 1144 1651 1924 1076

U.S.A. (2003) 7840 13066 3426 2176 3410 2624 948

China (2003) 1090 1379 213 32 1073 32 215

South Korea (2003) 4272 7007 2264 627 1541 2570 101

Japan (2003) 4056 7816 2146 845 1247 1859 816

*Per capita coal consumption of India has been estimated based on the calorific value of hard coal usedinternationally (6000 kcal/kg) to maintain uniformity. The figures in brackets are the actual per capitaconsumption based on Indian coal with a calorific value of 4000 kcal/kg.

** Based on numbers estimated in Tables 2.7, 2.12 and 2.15.

Source: IEA (2005), Key World Energy Statistics 2005

the trend lines. They also assume that progressin energy efficiency and energy conservation,replacement of non-commercial energy andsocietal and lifestyle changes will continue asper historical trends. There are, of course,opportunities to accelerate or alter the pace ofthe trends. The projected energy requirementscan be reduced substantially with acceleratedimprovement in energy efficiency andconservation, which should be considered asthe most important supply options since theyhave the potential to reduce consumption by20-25%. This is considered when the supplyoptions are explored later in the report.

33. These projections and the scenarios inthe next chapter provide broad guidelines topotential investors, and may supplement theirown assessments of the demand levels in variousenergy sub-sectors.

34. What are the alternative supplyoptions? To what extent can demand be metbased on domestic resources? To what extentimports would be needed? These questions areaddressed in the next chapter.

33

Supply Options

Strategies to meet our energyrequirement are constrained by country’senergy resources and import possibilities.Unfortunately, India is not well endowed withnatural energy resources. Reserves of oil, gasand Uranium are meagre though we have largereserves of thorium. While coal is abundant, itis regionally concentrated and is of low calorieand high ash content, though it has theadvantage of a low sulphur content. Theextractable reserves, based on current extractiontechnology, remain limited. Hydro potential is

significant, but small compared to our needsand its contribution in terms of energy islikely to remain small. Further, the need tomitigate environmental and social impact ofstorage schemes often delays hydrodevelopment thereby causing huge costoverruns.

3.1 INDIA’S ENERGY RESERVES

2. India’s Hydro-Carbon Energy Reservesare summarised in Table 3.1.

Supply Options

Chapter III

Table 3.1India’s Hydrocarbon Reserves

Production Net Reserve/Proved Inferred Indicated in Imports in Production Ratio

Resources Unit 2004-05 2004-05 P/Q (P+I)/Q

(P) (I) (Q) (M)

Coal (as on 1.1.2005) Mtoe 38114 48007 15497

Extractable Coal** Mtoe 13489 9600-15650 157 16 86 147-186

Lignite (as on 1.1.2005) Mtoe 1220 3652 5772

Extractable Lignite Mtoe 1220 9 - 136 136

Oil (2005) Mt 786* - - 34 87 23 23

Gas (2005) Mtoe 1101* - - 29 3 (LNG) 38 38

Coal Bed Methane Mtoe 765 - 1260-2340

In-situ Coal Gasification*** ? ?

* Balance Recoverable Reserves** Extractable coal from proved reserves has been calculated by considering 90% of geological reserve as mineable

and dividing mineable reserve by Reserve to Production ratio (2.543 has been used in ‘Coal Vision 2025’ forCIL blocks); and range for extractable coal from prognosticated reserves has been arrived at by taking 70% ofindicated and 40% of Inferred reserve as mineable and dividing mineable reserve by R:P ratios (2.543 for CILblocks and 4.7 for non-CIL blocks as per ‘Coal Vision 2025’).

*** From deep seated coal (not included in extractable coal reserves)

Note: Indicated Gas resource includes 320 Mtoe claimed by Reliance Energy but excludes the 360 Mtoe ofreserves indicated by GSPCL as the same have not yet been certified by DGH.

Source: Respective Line Ministries

34


COAL SUPPLY SCENARIO

3. Proved reserves of coal, the mostabundant energy resource, at the current levelof consumption can last for about 80 years. Ifall the inferred reserves also materialise thencoal and lignite can last for over 140 years atthe current rate of extraction. Of course, coaland lignite consumption will increase in thefuture and the reserves would last for far feweryears. If domestic coal production continues togrow at 5% per year, the total (includingproven, indicated and inferred) extractable coalreserves will run out in around 45 years.However, only about 45% of the potentialcoal bearing area has currently been coveredby regional surveys. Further, it is felt thatboth regional as well as detailed drilling can bemade more comprehensive. Covering all coalbearing areas with comprehensive regional anddetailed drilling could make a significantdifference to the estimated life of India’s coalreserves. The problem with coal remains findinga way to raise the proportion of extractablereserves, ensure adequate production and takecare of the environmental impact of productionand use.

4. In-situ coal gasification can significantlyincrease the extractable energy from India’svast in-place coal reserves. This is so becausein-situ coal gasification can tap energy fromcoal reserves that cannot be extractedeconomically based on available open cast/underground extraction technologies. However,in-situ gasification has not yet been deployedcommercially anywhere in the world. ONGCis engaged in trials to establish the feasibilityand economics of this technology for Indiancoal and lignite in collaboration with Russia.Neyveli Lignite Corporation has tied up withan Australian group to pursue in-situgasification of lignite. In-situ gasification hasmany environmental advantages. The problemsof overburden removal and ash disposal facedby conventional coal mining and use areeliminated. Gasification is the first step towardsa clean coal technology since carbon can becaptured from the syn-gas produced andsequestered in the mine or pumped back in oilor gas fields to enhance oil or gas recovery. In-situ coal gasification, with or without carbon

sequestration could be eligible for carboncredits. Finally, using this process at abandonedcoalmines might provide an economicallyattractive option for full extraction of energyfrom in-place reserves. Clearly, the potentialfor domestic energy supply based on in-situcoal gasification can be large but it has not yetbeen assessed.

OIL AND GAS SUPPLY SCENARIO

5. The reserves of crude oil are merely786Mt. These can sustain the current level ofproduction for 23 years and are less than only7 years worth of our level of consumption in2004-05. There has been no significant step upin crude oil reserves during the last decade inspite of large investments in explorationactivities (see Table 3.2). The country has nothad any significant oil find since the BombayHigh fields, more than 28 years ago. As aresult, crude oil production has stagnated andthe gap between the demand and domesticavailability of crude oil is widening. Importdependence will keep rising, unless dramaticnew discoveries are made. Only one third ofthe potential oil bearing area has been exploredso far. The reluctance of international majorsto explore in India seen in the past, seems tohave changed following the high success rate ingas discovery achieved by relatively smallinternational players. They have shown muchgreater interest in the latest round of biddingfor exploration blocks under the newexploration licensing policy (NELP). Also,some geologists predict vast amount ofundiscovered oil in India. What it may requireis development of technology to overcomegeological barriers for deep drilling both aboveground and under sea. In any case India’ssupply strategy while stepping up explorationshould not rely on the possibility of finding oildomestically.

6. The situation was similar in the case ofnatural gas reserves till 2001-02 before thediscovery of gas in Krishna-Godavari basin byReliance. Coupled with the recent largediscovery of natural gas claimed by GujaratState Petroleum Corporation (GSPC), thesefinds have added to the gas reservessubstantially. However, the size of the reserve

35

Supply Options

of the GSPC find is yet to be certified by theDirectorate General of Hydrocarbons (DGH).

7. The Directorate General ofHydrocarbons has estimated the country’sresource base for Coal Bed Methane (CBM) tobe between 1400 BCM (1260 Mtoe) and 2600BCM (2340 Mtoe). To give impetus toexploration and production, the governmenthas formulated the CBM policy. Based on tworounds of bidding under this policy, contractshave been signed with PSUs/private companiesfor the exploration and production of CBM in13 blocks. An additional three blocks havebeen taken up for development on the basis ofnomination. The estimated investment in theseblocks is about Rs.560 crore and the likelyCBM resources generated is estimated as 850BCM (765 Mtoe). ONGC maintains thatcommercial production of CBM from some ofthese blocks will start in 2007. Thus, at thevery low current rate of production, the provengas and CBM reserves, together, can last forsome 50 years.

NUCLEAR

8. India is poorly endowed with Uranium.Available Uranium supply can fuel only 10,000

MW of the Pressurised Heavy Water Reactors(PHWR). Further, India is extracting Uraniumfrom extremely low grade ores (as low as 0.1%Uranium) compared to ores with up to 12-14%Uranium in certain resources abroad. Thismakes Indian nuclear fuel 2-3 times costlierthan international supplies. The substantialThorium reserves can be used but that requiresthat the fertile Thorium be converted to fissilematerial. In this context, a three-stage nuclearpower programme is envisaged. Thisprogramme consists of setting up of PressurisedHeavy Water Reactors (PHWRs) in the firststage, Fast Breeder Reactors (FBRs) in thesecond stage and reactors based on the Uranium233-Thorium 232 cycle in the third stage. It isalso envisaged that in the first stage of theprogramme, capacity addition will besupplemented by electricity generation throughLight Water Reactors (LWRs), initially throughimports of technology but with the long-termobjective of indigenisation. PHWR technologywas selected for the first stage as these reactorsare efficient users of natural Uranium foryielding the plutonium fuel required for thesecond stage FBR programme. The FBRs willbe fuelled by plutonium and will also recyclespent Uranium from the PHWR to breedmore plutonium fuel for electricity generation.

Table 3.2Reserves/Production of Crude Oil & Natural Gas

Year Crude Oil (Mt) Natural Gas (BCM)

Reserves* Production Reserves* Production

1970-71 128 6.9 62 1.4

1980-81 366 10.5 351 2.4

1990-91 739 32.2 686 18.0

2000-01 703 32.4 760 29.5

2001-02 732 32.0 763 29.7

2002-03 741 33.0 751 31.4

2003-04 761 33.4 853 32.0

2004-05 739 33.9 923 31.8

2005-06(p) 786 33.2 1101 32.2

(p) Provisional

* Reserves position as on 1st April of commencing year

Source: Ministry of Petroleum & Natural Gas

36


Thorium as blanket material in FBRs willproduce Uranium 233 to fire the third stage.

9. The first stage programme of PHWRtechnology has reached maturity, though muchlater than was initially expected. A beginninghas been made in the introduction of LWRswith the inter-governmental agreement betweenIndia and the Russian Federation forcooperation in setting up of 2x1,000 MegawattElectrical (MWe) LWRs at Kudankulam, TamilNadu. A 40 MWt Fast Breeder Test Reactor(FBTR) was set-up in 1985 at Kalpakkam togain experience in the technology under thesecond phase. This has been followed byprogress in the development of technology forthe first Prototype Fast Breeder Reactor (PFBR)of 500 MWe capacity. Such a plant is currentlyunder construction. Research and developmenton the utilisation of Thorium is also in progress.

10. FBR technology is critical to developingstage two of India’s nuclear power programme.Without developing the wide-scale use of FBRtechnology, India will find it difficult to gobeyond 10,000 MWe nuclear capacity based onknown indigenous Uranium resources. Use ofFBR technology would enable indigenousUranium resources to support a 20,000 MWenuclear power programme by the year 2020.Such a FBR programme is critical to developingthe Thorium-based third stage of India’s nuclearpower programme. The Bhabha AtomicResearch Centre (BARC) is also engaged inR&D activities to develop an Advanced HeavyWater Reactor of 300 MWe capacity that wouldprovide industrial scale experience necessary

for the Thorium-based Stage Three of India’snuclear power programme. Table 3.3 showsthe potential of nuclear energy with domesticresources in the country.

11. The pace of development of nuclearpower is constrained by the rate at whichplutonium can be bred and Thorium convertedto fissile material. If India is able to importnuclear fuel, the process can be accelerated.Two possible growth paths of nuclear powerare summarised in Table 3.4.

RENEWABLE ENERGY RESOURCES

12. Given the limited amount of domesticconventional energy sources, renewable energyresources gain significance in the Indian context.India’s renewable energy resources aresummarised in Table 3.5. It may be noted thatmany renewables require land. The potentialenergy generated is assessed independently foreach option. If all such options are developedtogether the combined potential may be lessthan the sum due to a paucity of available landfor energy generation as other competing landuses may dominate.

HYDROELECTRICITY

13. India’s hydel resources are estimated tobe 84,000 MW at 60% load factor. The currentutility based installed capacity is 32,326 MWand the average annual generation over the lastthree years (2002-05) was 74 Billion Kilowatthours (BkWh) giving a load factor of 29%. Atsuch a load factor an installed capacity of1,50,000 MW including some 15,000 MW of

Table 3.3The Approximate Potential Available From Nuclear Energy

Particulars Amount Thermal Energy Electricity

TWh GW-yr. GWe-Yr. MWe

Uranium-Metal 61,000-t

In PHWR 7,992 913 330 10,000

In FBR 1,027,616 117,308 42,200 5,00,000

Thorium-Metal 2,25,000-t

In Breeders 3,783,886 431,950 1,50,000 Very large

Source: Department of Atomic Energy

37

Supply Options

Table 3.4Possible Development of Nuclear Power Installed Capacity in MW

Year Unit Scenario Remarks

Optimistic* Pessimistic

2010 GWe 11 9

2020 GWe 29 21

2030 GWe 63 48

2040 GWe 131 104

2050 GWe 275 208

* It is assumed that India will be able to import 8,000 MW of Light Water Reactors with fuel overthe next ten years.

Source: Department of Atomic Energy

These estimates assume that the FBR technology issuccessfully demonstrated by the 500 MW PFBRcurrently under construction, new Uranium mines areopened for providing fuel for setting up additionalPHWRs, India succeeds in assimilating the LWRtechnology through import and develops the AdvancedHeavy Water Reactor for utilising Thorium by 2020.

Table 3.5Renewable Energy Resources

Resources Unit Present Potential Basis of Accessing Potential

Hydro-power MW 32,326 1,50,000 Total potential assessed is 84,000 MW** at60% load factor or 1,50,000 MW at lowerload factors

Biomass

Wood Mtoe/year 140 620* Using 60 million Ha wasteland yielding (20)MT/Ha/year

0.6** 4 In 12 million family sized plants

Biogas Mtoe/year 0.1 15 In community based plants if most of thedung is put through them.

Bio-Fuels

Bio-diesel Mtoe/year - 20* Through plantation of 20* million hectares ofwasteland or 7* million hectares of intensivecultivation

Ethanol Mtoe/year <1 10 From 1.2 million hectares of intensivecultivation with required inputs.

Solar

Photovoltaic Mtoe/year - 1,200 Expected by utilising 5 million hectareswasteland at an efficiency level of 15 percentfor Solar Photovoltaic Cells

Thermal Mtoe/year 1,200 MWe scale power plants using 5 millionhectares

Wind Energy Mtoe/year <1 10 Onshore potential of 65,000 MWe at 20percent load factor

Small Hydro-power Mtoe/year <1 5

* The availability of land and inputs for getting projected yields is a critical constraint

** based on 50 percent plants under use

Source: Respective Line Ministries

38


3 Parikh Jyoti K. and Parikh K.S. (1977) “Mobilisation and Impacts of Biogas Technologies“, Energy, Vol.2 pp. 441-445, 1977

small hydel plants (size <25 MW) may bejustified given the available potentialhydroelectric energy. All new projects shouldbe designed with this objective in mind. Sucha strategy would ensure that hydro is maximallyused for meeting peak loads. Undevelopedhydro potential is mainly concentrated in theNorth East, Himachal and Uttaranchal. Inaddition there are possibilities of importinghydropower from Nepal and Bhutan whosecombined economically feasible potentials isestimated to be in excess of 55,000 MW.

14. The accelerated hydro development planaims to build 50,000 MW of new capacity by2025-26. Out of this, 25690 MW are to beinstalled in Arunachal Pradesh. Problems ofenvironment and ecology, and the socialproblems of resettlement of project-affectedpeople have delayed development of hydroprojects, particularly those that involve largestorage dams. Of the 50,000 MW planned, 31,000MW shall come from run of the river (ROR)schemes where these problems are moremanageable. However, the available energyvaries from month to month and peakingcapacity is minimal. It is estimated that 19,660MW of ROR schemes generate 2 BkWh of energyin a lean month and 13 BkWh in a high inflowmonth, giving load factors of 14% to 90%.

WIND

15. Onshore wind energy potential isestimated to be around 45,000 MW. Currently,it is claimed that Indian wind farms deliver acapacity factor of about 17% on average. As afirst level of approximation, this permits agrid-connected wind capacity estimate of asmuch as 20,000 MW at the current size ofIndia’s grid. The actual grid connected windcapacity, however, is only about 3,600 MW.This reflects both a poor exploitation of claimedpotential and, perhaps, the exaggerated claimsof capacity factors. Even if one goes by a windpotential of 65,000 MW (as estimated by theWind Power Society) inclusive of off-shorepotential and further assumes that technologicalinnovations will raise capacity factors to 20%,the total contribution of wind energy to India’senergy mix will remain below 10 Mtoe. Despite

this, wind power, especially at the lagging endsof the grid, provides several benefits and shouldbe pursued wherever it is viable.

BIOMASS, BIOGAS AND BIO-FUELS

16. Biomass is the major domestic fuel usedfor cooking, and consists mainly of agriculturalby-products and gathered wood. Domesticbiomass use in 2000 was 80 Mtoe. Along withdung cakes which provided 30 Mtoe, biomassbased fuels provide 81% of domestic energy.Biomass is also used as industrial fuel by smallindustries in the unorganised sector and bycottage industries. Inclusive of such use biomassalong with dung cakes accounts for almost a thirdof India’s total primary energy consumption.This non-commercial energy for the domesticuse is essentially managed by women withouttechnology, or investment, and involvesunsustainable practises, backbreaking drudgery,health problems especially for women and thegirl child and likely environmental damage. Whatneeds to be done to make this energy resourcemore sustainable is to improve the efficiency andconvenience of using biomass through, forexample, wood gasification or biogas plants.Rural people aspire to have clean and convenientfuel just like their urban counterparts. Thoughfalling in its share of the total energy mix, biomassdependence shall continue to rise in absoluteterms, and biomass will remain a part of India’senergy supply scene till 2031-32 and beyond. Assuch, a technology mission for enhanced andefficient use of biomass/bio-fuels is highlydesirable.

17. India has a 40 year old biogasprogramme. The total number of family sizebiogas plants installed is 3.7 million, thoughevaluation studies show that only half of theseare in use. Community based plants can processdung from households with less than the 3-5animals that are required for a family sizedplant and can also use any excess gas availablefrom family sized plants. Managing acommunity sized plant in an incentivecompatible way that ensures voluntarycooperation of all stakeholders is admittedlychallenging but is very much possible andworth pursuing (Parikh and Parikh, 1977)3.

39

Supply Options

18. Biomass could become a major energysource if fuel wood plantations are developed.This requires land, which may have othercompeting uses. In fact, biomass, bio-fuels(vegetable, edible and non-edible oils andethanol) and solar energy on sizeable scale allrequire large amounts of land. The potentialenergy generated is shown in Table 3.5. Atappropriate relative prices, farmers maythemselves decide to use their land forproducing energy. Clearly, Table 3.5 showsthat wood plantations offer the best option forbiomass based supply sources along withpossessing a huge employment generationpotential. Wood gasification or directcombustion are possible options for powergeneration based on such biomass. Theeconomics would depend on actual yields fromthe wood plantations.

19. Bio-diesel is a natural diesel substitute.While bio-diesel from non-edible oils such asJatropha, Karanj, Mahua etc., has attracted lotof attention recently, its economic feasibilitydepends largely on the yields one can get fromwasteland and/or the returns one can get fromgood quality land with irrigation and fertiliseruse compared to returns from growing othercrops. A number of projects being undertakennow will provide an assessment of thesecomparative returns in a few years. Bio-dieselalso provides decentralised local fuel, whichcan be used directly without esterification instationery engines. The process of bio-dieselgeneration and use can also create significantemployment. These benefits should be factoredin while assessing the desirability of bio-dieselwhen the data on land productivity areavailable.

20. Ethanol is used extensively in Brazil asa fuel for cars. In the Indian situation ofscarcity of land and water, the availablequantities of ethanol, when used as feedstockfor production of chemicals and potablealcohol, offer higher economic and opportunitycosts to the country rather than its use as anadmixture with gasoline. If technology can bedeveloped to economically collect and convertcrop residues such as rice straws (which arecurrently burnt) or if intensive cultivation of

land for crops to produce cellulosic ethanolconstitutes an attractive option to farmers,adequate quantity of ethanol could then beavailable to blend petrol with 10% or higherconcentration of ethanol. At present ethanolas a transport fuel can make some contributionbut is not likely to constitute a major option.

SOLAR-ENERGY

21. Solar energy has a large potential inthe country. The average solar insolation inthe country is 6 kWh/meter2/day. This can beexploited by many direct thermal applicationssuch as for cooking, heating or in photovoltaiccells that directly convert sunlight to electricity.The present conversion efficiency ofcommercially available photovoltaic cells is lessthan 15 percent. With this efficiency thepotential of covering just 5 million hectares ofland with photovoltaic cells is 1200 Mtoe/year. Photovoltaic technology is proven butexpensive and the cost of electricity exceedsRs.20/kWh at present. Potential to reduce costsand increase efficiency exists and a technologymission for this purpose is highly desirable.

22. Solar thermal generation is economicalfor water heating for both households andindustrial use. Much of its potential has yet tobe exploited. Appropriate policies need to bedesigned to accelerate the exploitation of thisenergy source. Solar thermal generation hasnot found acceptance globally, though thepotential to use it in hybrid systems may bethere.

HYDROGEN

23. Hydrogen is seen as the new energycarrier. Development of Hydrogen technologyis being pursued in many countries. India hasalso set up a Hydrogen Development Board topromote development of technologies forproducing, transporting, storing anddistributing hydrogen as well as to explore thefield of fuel cells for efficient end-use ofhydrogen. Hydrogen can also be burnt directlyin internal combustion engines. It can beproduced from hydrocarbons and biomass, bysplitting water with the use of solar, hydro,wind or nuclear energy, and through certain

40


microbial processes. The overall efficiency ofthe hydrogen cycle, however, remains in doubt.Hydrogen production, liquefaction orcompression, transportation, storage and finaldispensation, all entail huge amount of energyconsumption and loss. Significant barriersrelating to financial and technological viabilityremain in the widespread use of hydrogen inautomotive or stationary applications. Metalhydrides that store hydrogen and release it fordirect combustion have been developed forpowering two/three-wheelers in the countrybut the technology has not yet beencommercialised. Stationary applications orautomotive applications using fuel cells are stillrelatively uncompetitive.

EMERGING TECHNOLOGIES

24. Another emerging technology ofinterest is the liquefaction of coal. South Africaleads the world in this technology based on theSasol process. Some 6 tonnes of relatively highquality (5500+ kcal/kg) coal is required toproduce one tonne of liquid fuel. Thetechnology was commercially proven in SouthAfrica and has been in use there for a numberof decades. At current prices of oil, thistechnology may be viable even for Indian coalsand should be pursued.

25. Among new energy resources that haveyet to be proved are gas hydrates and nuclearfusion. India has large deposits of gas hydrates(methane gas trapped inside ice) off her coasts.The technology to exploit it is yet to bedeveloped. Fusion power which requires fuelsthat can be obtained from sea water offersvirtually unlimited power. The technology ofcontrolled fusion with positive energy gain inan economic way is also yet to be developed.These two energy sources are not likely to beavailable commercially in the next 25 years.

3.2 SUPPLY SCENARIOS

26. Table 2.12 in Chapter II outlines onepossible energy mix scenario. This scenarioassumes that electricity generation will be based

on the full development of hydro and nuclearpotential of the country and the use of gas tothe extent of 16%. Possible fuel-wisesubstitution should be taken into account inconsidering supply options. With respect to oilfor transport use, it cannot easily be replacedin significant quantities unless there aretechnological breakthroughs or large-scale shiftsto public transport in place of personal vehiclesor to freight movement by railroads in place oftrucks. Other than for power generationdemand for natural gas is in the production offertilisers and chemicals where it cannot beeconomically substituted. With coal and naturalgas there is a clear substitution possibility.Such a substitution will depend on the relativeavailability and price of coal/gas.

27. To explore the consequences ofdifferent alternatives and their quantitativesignificance a number of scenarios have beendeveloped using a multi-sectoral, multi periodoptimising linear programming model4. Thesescenarios are described in Table 3.6. They aredesigned to assess the importance of criticalpolicy options for meeting energy requirements.These scenarios are designed to map outextreme points of feasible options and noneof them should be looked upon as a preferredscenario.

28. The linear programming model usedabove obtains the least-cost solution subject toconstraints over ten 5-year periods from 2000till 2050. It also has sub-periods characterisingpeak, intermediate and base load duringsummer and winter seasons. Power demand ischaracterised for three regions: (a) near coalmines, (b) distant coastal regions and (c) therest. Options at distant coastal regions includetransmission from pithead plants and loadcentre based generation using domestic coalor imported coal. The amount of pitheadgeneration is restricted due to environmentalreasons. In the case of hydro, India’s fullpotential of 1,50,000 MW is taken as exploitedby 2031-32. Nuclear capacity of 63,000 MW isassumed to be realised by 2031-32. As regards

4 The model developed by Observer Research Foundation (ORF) was upgraded and the scenarios developedunder the guidance of Dr. Kirit Parikh by a team from ORF.

41

Supply Options

Table 3.6Some Energy Supply Scenarios for 8% GDP Growth

Scenario Description

1. Coal-Based Development Most electricity generation by the most economical option –which turns out to be primarily coal.

2. Maximise Nuclear Assumes nuclear development as per the optimistic scenario ofTable 3.4.

3. Forced Hydro Development of the entire (1,50,000 MW) domestic hydropotential by 2031-32.

4. Maximise Hydro & Nuclear Both nuclear and hydro as in 2 and 3.

5. ‘4’ plus forced Natural Gas 16% of electricity generation from gas. This is comparable tothe scenario of Table 2.7 & 2.12.

6. ‘5’ plus Demand Side Demand side management reduces electricity demand byManagement 15 percent.

7. ‘5’ plus Higher Coal Power *Thermal Efficiency of future coal power plants increased toPlant Efficiency 38-40 percent for super critical boilers. from 36 percent for

the present 500 MW

8. ‘6’ plus Coal Power Plant Both DSM and coal efficiency together.Efficiency

9. ‘8’ plus higher freight share Railways freight share increased from 32 percent toof Railways 50 percent.

10. ‘9’ plus vehicle efficiency Fuel efficiency of all motorised vehicles increased byincreased 50 percent.

11. ‘10’ plus renewables 30,000 MW wind power, 10,000 MW of solar power, 50,000MW of biomass power, 10 Mt of bio-diesel, and 5 Mt ofethanol by 2031-32.

* Thermal efficiency of coal-based plants refers to gross thermal efficiency based on gross generationand is equal to the ratio of gross heat output to gross heat input.

gas, the model is forced to have a 16% sharefor gas-based power generation by 2031-32. Amodel scenario critically depends on the set ofassumptions, parameters and constraints, andin particular on the relative costs and pricesof the alternatives available, the discount rateand the projected requirements. Requirementshave been specified in terms of billion unitsof electricity, billion tonne-kilometre of freighttraffic, and billion passenger-kilometre ofpassenger traffic. The freight and passengertraffic projections have been made usingelasticities with respect to GDP of 1.0 and0.8, estimated using time series data from 1930to 2000. The “optimality” of the solution iscontingent on the various inputs/assumptionsdetailed herein. The importance of the modelis that each solution provides a consistentscenario. It should be noted that the modeldoes not suggest preferred scenarios. They arein fact extreme options to define the feasiblespace for alternate policy choices. Thus when

1,50,000 MW of hydel by 2031-32 is estimated,it does not mean that given the various social,political and environmental constraints we willin fact fully develop our hydel resources toreach this estimate. The scenario does,however, show what the implications are forenergy supply if we were able to develop thefull hydro potential. Table 3.7 summarises theresults of the scenarios. Figure 3.1 shows thisgraphically. Period-wise details for threeselected scenarios are given in Figures 3.2 to3.4.

3.3 IMPLICATIONS OF THERESULTS OF THE SCENARIOS

29. The results provide us insights onaggregate energy needs and required imports,energy supply options, the importance ofenergy efficiency and demand side management,the range of carbon emissions, and investmentneeds. We look at these in turn.

42


Figure 3.1Fuel Mix Comparison in Year 2031-32

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

43

Supply Options

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

Figure 3.4Forced Renewables Scenario 11 - Fuel Mix Year Wise

44


Tab

le 3

.7Sce

nar

io S

um

mar

ies

for

8% G

DP

Gro

wth

— F

uel

Mix

in

Yea

r 20

31-3

2M

t of

Oil

Equ

ival

ent

(Mto

e)

Sce

nar

io N

o.

12

34

56

78

910

11

Scen

ario

Coa

lFo

rced

Forc

edFo

rced

Forc

edFo

rced

Forc

edFo

rced

Forc

ed N

uc+

Forc

edSc

enar

ioD

escr

ipti

onD

omin

ant

Hyd

roN

ucle

arN

ucle

ar+

Nuc

+H

ydN

uc+

Hyd

+N

uc+

Hyd

+N

uc+

Hyd

+H

yd+

GA

S+N

uc+

Hyd

+10

+Fo

rced

Cas

eH

ydro

+ G

AS

GA

S+ D

SMG

AS+

GA

S+ D

SM+

DSM

+G

AS+

DSM

Ren

ewab

les

Coa

l ef

f.C

oal

eff.

Coa

l ef

f.++

Coa

l ef

f.R

ail

shar

e up

+R

ail

shar

eup

+T

rans

port

eff.

Cru

de O

il48

648

548

648

548

648

648

548

544

736

135

0

Nat

ura

l G

as10

410

510

410

519

717

419

117

117

117

115

0

Co

al1,

022

953

998

929

835

715

818

698

701

707

632

Hy

dro

1335

1335

3535

3535

3535

35

Nu

clea

r76

7698

9898

9898

9898

9898

Ren

ewab

les

22

22

22

22

22

87

No

n-c

om

mer

cial

185

185

185

185

185

185

185

185

185

185

185

Tota

l1,

887

1,84

01,

885

1,83

91,

837

1,69

51,

813

1,67

31,

639

1,55

81,

536

Tota

l w

ith

ou

t1,

702

1,65

51,

700

1,65

41,

652

1,51

01,

628

1,48

81,

454

1,37

31,

351

Non

-Com

mer

cial

Cru

de O

il25

.7%

26.4

%25

.8%

26.4

%26

.4%

28.7

%26

.8%

29.0

%27

.3%

23.2

%22

.8%

Nat

ura

l G

as5.

5%5.

7%5.

5%5.

7%10

.7%

10.3

%10

.5%

10.2

%10

.5%

11.0

%9.

8%

Co

al54

.1%

51.8

%52

.9%

50.5

%45

.5%

42.2

%45

.1%

41.7

%42

.8%

45.4

%41

.1%

Hy

dro

0.7%

1.9%

0.7%

1.9%

1.9%

2.0%

1.9%

2.1%

2.1%

2.2%

2.2%

Nu

clea

r4.

0%4.

1%5.

2%5.

3%5.

3%5.

8%5.

4%5.

9%6.

0%6.

3%6.

4%

Ren

ewab

les

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

5.6%

No

n-C

om

mer

cial

9.8%

10.1

%9.

8%10

.1%

10.1

%10

.9%

10.2

%11

.1%

11.3

%11

.9%

12.0

%

Tota

l10

010

010

010

010

010

010

010

010

010

010

0

45

Supply Options

3.3.1 AGGREGATE ENERGY NEEDS AND

IMPORTS DEPENDENCE

30. Based on the various scenariosdeveloped the total commercial energyrequirement for India in 2031-32 varies from alow of 1351 Mtoe to a high of 1702 Mtoe. Thislevel of commercial energy requirement entailsan annual growth of 5.2% to 6.1% over thecommercial energy supply level in 2003-04 tosustain an 8% growth rate of GDP. The totalprimary energy requirement in 2031-32 variesfrom a low of 1536 Mtoe to a high of 1887Mtoe. This yields an annual growth in totalprimary energy requirement of 4.3% to 5.1%over the 2003-04 level to sustain a GDP growthof 8% per annum.

31. The modelled scenarios help us inassessing the significance of various options.They also suggest our likely dependence onenergy imports. The level of imports dependon the level of domestic production. Givenour resources shown in Table 3.1, domesticproduction of oil and gas will depend criticallyon new finds. If we don’t make major newdiscoveries, our production can increase onlymarginally. We can only guess what theproduction will be and be ready for the worst.Thus we assume that we can produce by 2031-32 only 35 Mtoe of oil per year and around100 Mtoe of natural gas including coal bedmethane. Our production of coal is constrained

by our ability to successfully use our ampledomestic resources. The main hurdle could bean inability to expand production at the neededpace, environmental constraints due toattendant deforestation and the social problemof resettlement of project affected people. At amodest growth rate of production of 5.5 percentper year - a rate slightly higher than what hasbeen achieved over the previous 25 years - theproduction of coal and lignite by 2031-32 willbe around 1400 Mt. Based on these assumptions,our import needs for the various scenarios willbe as shown in Table 3.8. Thus, with an 8%GDP growth rate an import dependence forenergy in 2031-32 could be as low as 29 percentand as high as 59 percent. Increasing coalproduction and associated infrastructure oftransport, as well as improving energy useefficiency in generation and use are critical ifwe are to reduce our dependence on importedenergy.

3.3.2 ENERGY SUPPLY OPTIONS

32. The major choices are use of alternativefuels in the power sector and in modes oftransport. Table 3.9 shows the generationcapacities in scenario 11 (renewables scenario)from different sources and the load factor foreach type of plants for the year 2031-32. Thisis an extreme scenario where all options forpower generation other than coal, are pushedto their limits. We have also assumed high

Table 3.8Ranges of Commercial Energy Requirement, Domestic Production and Imports for

8 percent Growth for year 2031-32

Fuel Range of Assumed Range of ImportRequirement in Domestic Imports* (Percent)

Scenarios Production

(R) (P) (I) (I/R)

Oil (Mt) 350–486 35 315–451 90–93

Natural Gas (Mtoe) 100–197 100 0-97 0-49including CBM

Coal (Mtoe) 632-1022 560 72-462 11-45

TCPES 1351-1702 — 387-1010 29-59

*Range of imports is calculated across all scenarios as follows:

Lower bound =Minimum requirement – Maximum domestic production

Upper bound = Maximum requirement – Minimum domestic production

46


plant load factors for biomass gasification andcombustion, and somewhat lower factors forconventional plants. It gives the minimum coalrequirement.

33. It is seen that even under scenario 11,coal is the dominant fuel with a share of 51%in electricity generation and a share of over41% in the energy mix. Gas-based generationconstitutes only 11% of electricity generationcapacity in scenario 11. The capacity factor ofgas plants remains 31% showing that they aremainly used for peaking. Scenarios were alsogenerated with alternative prices of natural gasand it is found that natural gas is not selectedwhen the gas price is US$ 4.5 per MMBtu orhigher even for peaking power as long as thecoal price remains at or below US$ 2.27 perMMBtu (i.e. $45 per tonne of imported coalwith 6000 kcal/kg). The low load factor forhydro plants is an outcome of the limitedavailability of hydro energy.

34. The results of the scenarios in thecontext of the brief review of energy resourcesshow the following:

(a) Any supply strategy over the comingdecades will have to emphasise India’s

major resource, i.e. coal. Coal is themost abundant domestically availableprimary energy resource other thanthorium and solar insolation. In the“coal-based development” scenario, thetotal demand for coal increases from172 Mtoe in 2004-05 to 1022 Mtoe in2031-32. Measured in Mt of Indian coalwith 4000 kcal/kg, the requirement ofcoal will thus increase from 406 Mt in2004-05 to 2555 Mt in 2031-32. Thequality of Indian coal is deterioratingprogressively. A 5% deterioration overthe next 25 years would raise the coalrequirement to 2689 Mt by 2031-32 interms of Indian coal. This order ofincrease may call for a massive rise incoal imports unless domesticproduction increases correspondingly.This would increase our energydependency on imports. Additionally,since use of coal is associated with theenvironmental problems of mining andlocal air pollution, apart from CO

2

emission; coal use must be accompaniedby appropriate environmental measuresand use of clean coal technologies. Evenunder the least coal intensive option,

Table 3.9Generation Capacities and Load Factors in Scenario 11

Source Capacity (MW) Plant Load Factor (%)

Coal 269997 67

Natural Gas 69815 27

Coal Bed Methane 27778 36

In-situ Coal Gas 22222 36

Nuclear 63060 68

Hydro 150153 30

IGCC Pet coke 3137 68

Wind – Onshore 32141 20

Wind – Off-shore 1200 25

Biomass Gasification 1200 75

Biomass combustion 50000 70

Solar 10000 17.5

Total 700703 50

47

Supply Options

domestic coal production would needto rise to 1580 Million Tonnes.

(b) A massive effort is clearly needed toexpand domestic coal production.Given that, at present, coal mines take8 years to develop and Coal India suffersfrom several problems, it is doubtfulthat Coal India can meet this need.Opening up the coal sector to privatemining and use of the best technologyare unavoidable. Captive mining aspermitted at present alone will notsuffice. We must build a consensus toallow changes in the coal sector tohappen sooner rather than later. Inany event, massive investments wouldbe needed to enhance the railinfrastructure to move large quantitiesof domestic coal. Alternate coastal/river transportation of coal may alsohave to be pursued aggressively.

(c) As seen from Table 3.8 high qualitycoal (6000 kcal/kg) import needs couldrange from 120 million tonnes to 770million tonnes by 2031-32. To put thisin perspective, currently less than abillion tonnes of high quality coalequivalent is traded internationally outof a production of about 4.8 billiontonnes of equivalent high quality coal.This will require the development ofappropriate port infrastructure as wellas the development of end-use (power,steel and cement) at coastal locationsto avoid double handling and inlandtransportation of imported coal.

(d) Development of hydropower as a cleanpower source has to be given duepriority. Full development of hydropotential while technically feasible, willrequire timely resolution of issues ofwater rights, resettlement of projectaffected people and environmentalconcerns. These issues can be and mustbe resolved satisfactorily. The irrigationand flood control benefits of hydro-power and its operational flexibilitycan justify the higher costs of hydelplants. It is pointed out that Indianeeds to create water storage capacity.Its storage per capita at 207m3/capita is

one of the lowest in the world andcompares poorly with thecorresponding levels of 1964 m3/capitaand 1111 m3/capita in the US andChina respectively.

(e) States that are well endowed with coaland/or hydro resources have beenincreasingly demanding a greater shareof the benefits to the nation fromexploiting these resources. This is anurgent issue and must be taken up atthe National Development Council(NDC) level to avoid delays andadditional costs in fully exploiting thesedomestic energy resources.

(f) Though nuclear energy can make onlya modest contribution over the next 25years, longer term consideration of evena modest degree of energy self-sufficiency suggests the need to pursuethe development of nuclear power usingThorium. Despite the many delays anddisappointments in achieving set targetsof nuclear energy development in thepast, this is an option we cannot affordnot to pursue. Today the PHWR iseconomically competitive with coal-based plants at certain locations.

(g) If the import of 6,000 MWe of LWRreactors does not materialise, theinstalled nuclear capacity by 2031-32will be 48,000 MW instead of 63,000MW. The impact on the variousscenarios will, however, be marginaland none of the policy conclusionwould be affected. We have notdepended on large scale import ofLWRs due to the uncertaintiesinvolved. Imported LWRs could be animportant option if the FBR andThorium reactor routes not materialiseor are found to be uneconomical.Energy security concerns may leave usno option other than full pursuit ofthe FBR and Thorium routes.

(h) The optimistic nuclear developmentscenario as envisaged is contingent on6,000 MW of additional import ofLWRs whose plutonium could be usedin FBRs along with the plutoniumfrom the 10,000 MWe reactors using

48


our own Uranium. Import of theadditional 6,000 MW of LWRs (andassociated fuel) depends upon thehandful of countries constituting theNuclear Suppliers’ Group (NSG). Ifthe sanctions by the NSG are removedand India is able to import Uraniumand nuclear power plants, nuclearpower can play a much bigger role inthe power sector. The capacity growththen would not be constrained by Table3.4. However, if energy securityconcerns are our primary drivertowards nuclear, then import of LWRs,even though more economical, mayhave to be limited to restrict ourdependence on energy imports.

(i) Full development of hydro potentialand realisation of the optimistic nuclearscenario by 2031-32 reduce coalrequirement by some 93 Mtoe (232 Mtof Indian coal) from the level of 1022Mtoe projected in the coal dominantscenario. This scenario implies totalelectricity generation capacity of7,75,500 MW in 2031-32 of whichhydro capacity will be 1,50,000 MW,and nuclear capacity will need toexpand from the present 3,660 MW to63,000 MW.

(j) If we assume no dramatic new finds ofoil occur in the country, our oil importswill be around 315 to 451 Mt in 2031-32. This is about four to five times ofwhat we import today. Assuming thatworld trade over this period will growfrom 2.4 billion tonne (Bt) today to 4Bt by that time, India’s imports willconstitute 7.9 to 11.3 percent of globaltrade.

(k) Gas does not emerge as a major fuel inany of the scenarios. The share of gasin the energy mix remains below 11%.Even when gas is pushed for powergeneration, only 16% of the powergenerated comes from gas. This is sodespite the scenarios assuming thatdomestic natural gas supplies will besupplemented with coal-bed methaneand in-situ gasification of coal as wellas with imported LNG.

(l) A disturbing fact that emerges fromthe study of various scenario is thateven if India somehow succeeds inraising the contribution of renewableenergy by over 40 times by 2031-32inclusive of a renewable power capacityof 1,00,000 MW (compared to 6,161MW as on March 2005); thecontribution of renewables to ourenergy mix will not go beyond 5.6%of total energy required in 2031-32.This is consistent with variousprojections worldwide that shows thatthe fossil fuel dependence of the worldas a whole will continue to rise till2031-32.

3.3.3 ENERGY EFFICIENCY AND DEMAND

SIDE MANAGEMENT

35. India’s conventional energy reserves arelimited and we must develop all available andeconomic alternatives. Simultaneously, a majorstress must be laid on energy efficiency andconservation, with particular emphasis onefficiency of electricity generation, transmission,distribution and end-use. Clearly, over the next25 years energy efficiency and conservation arethe most important virtual energy supplysources that India possesses.

(a) India cannot deliver sustained 8%growth over the next 25 years withoutenergy and water, and these twotogether shall, in turn, pose the biggestconstraints to India’s growth. Theenergy intensity of our growth hasbeen falling and is about half what itused to be in the early seventies butthere is significant room to improve.In 2003 India consumed 0.16 kilogramof oil equivalent per dollar of GDPexpressed in purchasing parity terms.This compares to 0.23 in China, 0.22in US and a world average of 0.21.However there are several countries inEurope and Japan at or below 0.15.One should note that cross countrycomparisons are full of pitfalls. Forexample, if the share of hydel energy ishigher in the total energy mix, energyintensity would be lower. Even then,

49

Supply Options

these comparisons do show that energyintensity can be brought down by 20%in India with commercially viabletechnologies currently available and inuse in the developed countries.

(b) The most energy efficient scenario fromour model shows an aggregate energyrequirement of 1536 Mtoe in 2031.This scenario is 19% more efficientthan the most energy intensive scenario.With a projected population of 1.468billion, the per capita total primaryenergy supply (TPES) in the mostenergy efficient scenario comes to 1046kgoe/year. This is comparable toChina’s per capita TPES in 2003. Evenin the most energy intensive scenariothe per capita TPES in 2031-32 is only1285 kgoe. This compares with the2003 world average per capita energyconsumption of 1688 kgoe. Thus whilethe projected total energy requirementmay look large, it is perhaps not largeenough for the GDP growth assumed.

(c) Efficiency of coal power plantsthemselves can be improvedsubstantially. The average grossefficiency of generation from coalpower plants is 30.5%. The best plantsin the world operate with super criticalboilers and get gross efficiency of 42%.Germany is even claiming grossconversion efficiency of 46%. It shouldbe possible to get gross efficiency of38-40% at an economically attractivecost for all new coal-based plants. Thisalone can reduce coal requirement by111 Mtoe of coal (278 Mt of Indiancoal). Thus a very high priority shouldbe given to developing or obtainingthe technology for coal-based plants ofhigh efficiency.

(d) If Demand Side Management (DSM)options are pursued to reduce demandfor electricity through energy efficientprocesses, equipment, lighting andbuildings so that electricity demand isreduced by 15% by 2031-32, a reductionof 152 Mtoe (381 Mt of Indian coal) incoal requirement takes place. Studieshave shown that economically attractive

options of DSM exist to attain suchreductions. Energy efficiency and DSMshould have a very high priority.Policies to promote these are describedin Chapter VI.

(e) Since domestic oil supply has stagnatedat a low level and requirements aregrowing, oil use efficiency, conservationand substitution by other forms ofenergy are major options to reduce oilimports. The same is true of gas, thoughthe prospects of finding gas looksomewhat brighter. Since no economicsubstitutes are obvious for the transportsector at least till 2031-32, energyefficiency of vehicles and use of masstransport have to have high priority. Ifthe energy efficiency of all motorisedtransport vehicles is increased by 50%,(an efficiency level that is alreadyachieved in the world today) our oilrequirement will go down by some 86Mt by 2031-32. If on the other handrailways are able to win back the freighttraffic they have lost to trucks andmanage to carry 50 percent of freightbillion tonne kilometre (Bt-km), thenoil requirement can go down by 38Mt. These two initiatives in thetransport sector can, together, reduceour oil requirement by over 25% fromthe most oil intensive scenario in 2031-32.

(f) Urban mass transport is much morefuel efficient per passenger kilometrecompared to private vehicles. Masstransport also reduces road congestionand air pollution. Thus developmentof urban mass transport systems ofquality and convenience that can attractpassengers will contribute significantlyto energy conservation.

(g) If both energy efficiency of coalgeneration and DSM are pursuedtogether along with higher freight shareby Railways and a push for renewables,coal demand could come down by over38% from the coal dominant scenarioto 632 Mtoe (1580 Mt of Indian coal).

36. All of the above recommendations,

50


Figure 3.5CO2 Generation Comparison in year 2031-32

resulting from an analysis of the scenariosstudied, are technologically viable. Pursuingthem can lower our energy demand by over19%. Failure to deliver on theserecommendations could push India into theinternational market for coal with a potentialdemand equal to over 75% of the current levelof trade. The short to medium term impact ofsuch an eventuality on coal prices could bedisastrous. That being said, there are indicationsthat over the medium term world output ofcoal and coal trade is set to increase significantly.

3.3.4 CARBON EMISSIONS

37. Estimates of CO2 generated from

energy use in different scenarios are shown inFigure 3.5. Between Scenarios 1 (coal dominantscenario) and scenario 11 (with all efficiencyand DSM measures and renewables) thedifference is nearly 35%.

38. The carbon emission implications ofour scenarios are therefore significant. AnnualCO

2 emissions could rise from 1 billion tonne

at present to 5.5 billion tonnes per year by2031-32 in the high coal use scenario and 3.9

billion tonnes in the low coal and renewabledominant scenario. In the US, emissions todayare in excess of 5.5 billion tonnes of CO

2. In

per capita terms, however, India’s carbonemissions in 2031-32 will be 2.6 to 3.6 tonnesof CO

2 compared to the 2004 level of over 20

tonnes in US and a global average of 4.5tonnes in 2004.

3.3.5 IMPLICATIONS FOR INVESTMENT NEEDS

39. Apart from the challenges of physicallysupplying different forms of energy discussedabove, the investment requirement also show aneed for purposive action. The electricitygeneration, transmission and distribution sectoralone is estimated to require an investment ofat least Rs.60 trillion in 2005 rupees. The totalenergy sector investment could well amount toRs.100-110 trillion in 2005 rupees inclusive ofrelated infrastructure.

40. An economy growing at 8% shouldhave little difficulty in mobilising the neededresources particularly with public privatepartnerships. The main challenge, however, isto create efficient and financially viable energy

51

Supply Options

sub sectors so that investors have the incentivesto invest in a competitive set up whereconsumers interests are simultaneouslyprotected.

3.3.6 THE MAIN ACTIONS RECOMMENDED

41. Comparisons of energy requirementsand our resource base suggest that ourhydrocarbon resources would be grosslyinadequate to meet our needs. From a longerterm perspective we need to take a number ofactions:

� Relentlessly pursue energy efficiencyand energy conservation as the mostimportant virtual source of domesticenergy.

� Institute policies that maximisedomestic coal production.

� Create coastal infrastructure for importand use of coal.

� Develop coal transportationinfrastructure including alternativessuch as coastal and river movement.

� Develop fully the nuclear and hydrooption.

� Mount R&D efforts to developcommercially viable in-situ coalgasification technology.

� Redouble exploration efforts for oil,gas and coal.

� Raise the level of diplomacy to accesshydrocarbon reserves overseas and gaspipelines to India.

� Undertake a technology mission oncarbon sequestration.

� Undertake pilot projects to assess theeconomics and social benefits ofbiomass plantations and bio-fuels

� Undertake a solar technology missionto make solar power usingphotovoltaics or solar thermaleconomically attractive.

� Undertake R&D for exploiting gas-hydrates.

� Undertake R&D for fusion to keepopen that option for unlimited power.

� Assess off-shore wind power potential.

3.4 ENERGY INDEPENDENCE INAN ENERGY SCARCE WORLD

42. World energy supplies are becomingincreasingly constrained. India needs to growits energy share in a market with sluggishgrowth in supply and rising prices. It is assumedthat the world’s fossil fuel supplies grow by2% per annum. Then India’s share of worldsupplies of fossil fuels in 2031-32 would risefrom a level of 3.7% to a low of 7.6% in themost energy efficient scenario to 10.9% in themost energy intensive scenario.

43. President Kalam in his IndependenceDay address to the nation in 2005 has calledfor achieving energy independence. Whileenergy security is a major concern for the next25 years, from a longer term perspective energyindependence becomes important. What doesan energy independence scenario look like?The main challenges are to augment totaldomestic energy supply.

44. Table 3.10 shows the energy supply bysources for the year 2003-04. The followingoptions exist to substitute oil:

� Industrial use of Naphtha, Fuel Oil(FO) and High Speed Diesel Oil(HSDO) and domestic use of LPG andKerosene can all be replaced by naturalgas. Domestic availability of gas, today,looks more promising than oil. Gasshould be used for power generationonly after it meets the above demand.

� Produce bio-diesel in a decentralisedmanner and substitute all agriculturaluse of HSDO/LSHS/fuel oil with bio-diesel.

� Encourage blending of ethanol withpetrol.

� Provide adequate quality power toreduce the need for diesel used forstandby generators and diesel pumps.

� Expand electrification of railways toreduce diesel needs.

� Improve railways’ freight service sothat all long distance goods traffic preferrailways thereby substantially reducingHSDO used for transport.

52


� Promote urban mass transport toreduce demand for petrol for personalmotorised vehicles.

� Improve fuel efficiency of motorisedvehicles by a factor of two throughbetter vehicle design.

� Encourage hybrid vehicles which arenow available commercially on costcompetitive terms.

45. Under President Kalam’s vision forenergy independence, India could eliminate its

Table 3.10Primary Energy Supply Sources (2003-04)

(All figures in Mtoe)

Source Domestic Import# Total

Coal & Lignite Coal 145.00 14.00167.00

Lignite 8.00 -

Oil & Products LPG 12.44 0 12.44

Kerosene 10.69 0.84 11.53

HSD 40.31 -6.29 34.02

LDO 1.21 0.00 1.21

FO 8.36 -0.35 8.01

LSHS 4.60 0.00 4.60

MS 8.59 -3.19 5.40

ATF 2.66 -1.77 0.89

NAPHTHA 13.59 0.21 13.80

Bitumen 3.24 0.00 3.24

Pet Coke 2.80 0.00 2.80

Lubes etc 1.37 1.53 2.90

Others* 18.01 0.15 18.16

TOTAL 127.87 -8.87 119.00

Gas Gas 29.00 - 29.00

Electricity Hydel 7.00 - 7.00

Nuclear 5.00 - 5.00

TOTAL 12.00 - 12.00

TOTAL COMMERCIAL ENERGY 327.00

Non Commercial Fuel wood Agro 110.00 - 110.00Waste

Dung Cake 32.00 - 32.00

Biogas 1.00 - 1.00

TOTAL 143.00 - 143.00

TOTAL ENERGY 470.00

* Others include refinery fuel of about 9 Mt# Net of exports

53

Supply Options

oil dependence over the next 40-50 years by:

� Developing cheap batteries with highstorage density for hybrids/electricvehicles.

� Developing solar power. As suggestedby President Kalam, if efficiency ofsolar photovoltaics can be increasedfrom the current 15% to 50%, withoutincreasing the cost, we can have all thepower we need at competitive costs bycovering a small fraction of our land(the land required can be furtherreduced by putting photovoltaic cellson all roof tops). The surplus solar

power during day time can be used tosplit water to produce hydrogen thatcan provide electricity at night and canalso be used to run motor vehiclesusing fuel cells.

� Developing nuclear power based onThorium.

46. A focussed research effort in thedirection suggested by President Kalam needsto be initiated now as the sooner thesetechnologies are available, the better it will befor the country’s energy security andindependence.

54


4.1. WHAT IS ENERGY SECURITY?

Obtaining a secure and adequate supplyof a traded commodity, be it food or fuel, isgenerally a problem prevalent amongst poorpeople, poor regions or poor nations. With thepower to pay the price the rich often findwilling suppliers for what they want. TheWorld Energy Assessment (UNDP 1999) reportdefines energy security as: “the continuousavailability of energy in varied forms insufficient quantities at reasonable prices”. Thisdefinition needs to be modified to better reflectour situation.

2. We define energy security as follows:

“We are energy secure when we cansupply lifeline energy to all our citizensirrespective of their ability to pay for it as wellas meet their effective demand for safe andconvenient energy to satisfy their various needsat competitive prices, at all times and with aprescribed confidence level considering shocksand disruptions that can be reasonablyexpected”.

The various elements of this definitionthat may be noted are: “all her citizens”, “lifelineenergy”, “effective demand”, “safe andconvenient energy”, “at competitive prices”,“at all times”, “various needs”, “prescribedconfidence level”, “shocks and disruptions” and“reasonably expected”.

These are motivated by the followingconsiderations:

(a) It is important that energy is suppliedto all citizens. When the energy needsof only some citizens are met, it cannotbe a sustainable situation.

(b) It is necessary to provide “lifeline”energy to all citizens irrespective of

their paying capacity. Energy up to acertain level is a basic necessity andwhether the state supplies it or not,people will procure it in any waypossible. If the state does not providesuch lifeline energy, environmentaldegradation can be expected. Lifelineenergy consumption for those whocannot afford energy at market pricehas to be made good through subsidiesthat, preferably, target the intendedbeneficiaries directly. Energy securityrequires that the lifeline energy needsof the Nation are met in full.

(c) Effective demand, i.e. demand backedby the ability to pay at marketdetermined prices, should be met fully.If it is not, the rich will get what theydesire but the poorer classes won’t.

(d) If demand is not met at competitiveprices the competitiveness of the Indianeconomy would be compromised.

(e) Safe and convenient energy is desirableas use of traditional fuels such as woodor dung cakes causes indoor airpollution and leads to adverse impacton health, particularly that of womenand children.

(f) Energy is required in different formsto meet different needs. Energy in oneform cannot be easily substituted byother forms. Often such substitutioninvolves cost or loss in the quality ofservice. For example, kerosene canreplace electricity for lighting but at acost and a loss in quality of service.Fuel cells or batteries could replace ICengines using petrol or diesel but at acost.

(g) Energy should be available at all times.Interruptions in energy availability canimpose high costs on the economy andalso on human well-being.

Energy Security

Chapter IV

55

Energy Security

(h) To ensure energy security at all times,shocks and disruptions that can bereasonably expected must beanticipated. Ability to withstand suchshocks and disruptions is essential forenergy security. However, one cannotguard against all possible shocks ataffordable costs. The surety of energysupply cannot be 100 percent. One canensure supply only within a certainprescribed confidence level.

4.2 THE NATURE OF THEPROBLEM

3. Energy security has become a growingconcern because India’s energy needs aregrowing with rising income levels and agrowing population. At the same time, ourdependence on imported energy has increased.Up from 17.85% of Total Primary CommercialEnergy Supply (TPCES) in 1991, importsaccounted for 30% of our TPCES in 2004-05.What is of particular concern is that importscomprise largely of oil and during 2004-05, oilimports constituted 72% of our total oilconsumption.

4. Our projected energy requirement andvarious supply options show the country’sgrowing dependence on import of energy. Notonly oil and gas but also coal imports arelikely to grow substantially over time. Energysecurity, thus is an important concern forIndia’s energy policy.

5. The growing dependence on energyimport raises several concerns. India’srequirements of fossil fuels for the year 2030based on the scenarios of Table 3.7 (whichgives requirements for 2031-32) are projectedto be 337 to 462 Mt of oil, 99 to 184 Mtoe ofgas and 602 to 954 Mtoe of coal. If the globalfossil fuel supply increases by only 1.7%, asprojected by IEA, then India’s share in 2030would range from 5.8% to 8.0% for oil, 2.4%to 4.5% for natural gas and 16.7% to 26.5% forcoal (see Figure 4.1). Will we get all the energythat we need even when we are willing andable to pay the price? What will we do ifsupply is disrupted due to events outside ourcontrol? Wars, strikes, and political upheavals

in the oil exporting countries can suddenly anddrastically reduce global oil supply. Also in asituation of conflict, an oil blockage may beimposed against India. One can think of manysuch eventualities. How do we keep oureconomy going in such a situation? How dowe deal with this supply risk? The threat toenergy security arises not just from theuncertainty of availability and price of importedenergy, but also from the possible disruptionor shortfalls in domestic production. Supplyrisk from domestic sources, such as from astrike in Coal India or Railways, also needs tobe addressed.

6. The second concern is not disruptionof supply but the market risk of a suddenincrease in oil price. While we may be able topay for imports, a high oil price can causeinflation, slow down the economy and imposehardship on our people. Given that world oilprices have fluctuated substantially over theyears (see Figure 4.2), the adverse impact on theeconomy of sudden and large increases in oilprice is perhaps a more likely risk than supplydisruption.

7. Any disruption in access to energy canbe very expensive in welfare terms as energy iscritical not only for economic growth but alsofor human survival and well-being. Forexample, if an increase in the price of oil, adisruption of oil supply or erratic power supplyforces farmers to reduce the use of their pumpsand tractors, the consequent reduction inagricultural output and employment can havea serious and adverse impact on the poor.Thus, a government may choose not toimmediately transmit a sudden large increasein the international price of imported energyto consumers. To be able to insulate consumersagainst such sudden price increase, governmentsmay have to bear the burden of this price risefor some time. This requires a certain resiliencein the government finances. Of course, if theprice increase persists, it has to be transmittedto the consumers sooner or later since oilimports constitute a large part of India’s oilconsumption and the subsequent import bill issizeable. Thus, India is exposed to pricefluctuations in the world market and we haveto accept this reality.

56


Figure 4.1India’s Growing Share in Global Energy Consumption

(Higher Projections)

Source: Projections are based on the scenarios of Table 3.7 reflecting a GDP Growth Rate of 8% forIndia and for World they are 2030 numbers from IEA, 2005

Figure 4.2World Oil Prices

57

Energy Security

8. Even when the country has adequateenergy resources, technical failures may disruptthe supply of energy to some people.Generators may fail, transmission lines couldtrip or oil pipelines may spring leaks. Theremay be many such accidents that disrupt thesupply of energy. One needs to provide securityagainst such technical risks.

4.3 POLICY OPTIONS FORENERGY SECURITY

9. The effectiveness of measures toenhance energy security depends on the natureof the disruption. The costs of the variousmeasures also differ. One wants to minimisethe expected cost for a desired level ofconfidence. Such measures include: reductionin the need for energy and the consequentreduction in energy imports; diversification ofsupply sources; maintenance of strategic reserve;and obtaining equity oil or gas abroad thatcould, under some cases, help in reducing theconsequences of both supply and market risks.

10. Actions to improve energy securitycan be classified broadly into two groups, onethat reduces risks and another that deals withthe risks after they occur. The major policyoptions are:

(a) Reducing Risks

- Reduce the requirement of energy byincreasing efficiency in production anduse of energy;

- Reduce import dependence bysubstituting imported fuels by domesticfuels;

- Diversify fuel choices and supplysources;

- Expand domestic energy resource base.

(b) Dealing with Risks

- Increase ability to withstand supplyshocks;

- Increase ability to import energy andface market risk;

- Increase redundancy to deal withtechnical risk.

4.3.1 REDUCE ENERGY REQUIREMENTS

11. Major opportunities exist in reducingenergy requirements without reducing energyservices. Improvement in energy efficiency orconservation is akin to creating a new domesticenergy resource base. Such efficiencyimprovements can be made in energyextraction, conversion, transmission,distribution and end-use of energy. All of theseefficiency improvements can come usingcurrently available commercial technologies.Some examples are detailed below:

(a) The efficiency of extracting fossil fuelsin India as well as other miningactivities can easily be improved bysome 10%. For fossil fuels this wouldmean a lower level of energy spent perunit of energy extracted.

(b) Fuel efficiency of Coal Power Plants:The average fuel conversion efficiencyof Indian power plants is just about30.5% though the new 500 MW plantshave efficiency of 36%. State of the artsuper critical pulverised fuel firedboilers can reach an efficiency level of46% depending on plant location.Under Indian conditions an efficiencylevel of 38-40% should be attainable.Considering our large dependence oncoal-based power plants, obtaining thistechnology for all new power plantsshould be our first target. Possiblepolicies to achieve this target are:

(i) Purchase technology, if available atreasonable price otherwise set-up atechnology mission to develop itindependently.

(ii) Offer to buy 20 plants of a standardsize, say 700 MW from any firmthat first commercialises 42%efficiency coal fired boiler forIndian coals at a price prescribed inadvance.

(c) Another major option is provided byfreight traffic. The share of railways intotal tonne kilometre (t-km) of goodstraffic has come down from 70% in1970-71 to 39% in 2003-04. If therailway carried 70% of the goods traffic

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today, it would carry 300 Bt-km ofadditional traffic. Assuming that all ofthis goods traffic would have beencarried by Railways using diesel, thediesel saved in year 2003-04 would havebeen around 5 Mt out of a totalconsumption of 40 Mt. If all of thegoods traffic was carried by Railwaysusing electric traction, the diesel savedwould have been around 8 Mt in 2003-04. Thus a significant saving of diesel ispossible if Railway operations can beupgraded to win back the haulage lostto road traffic. The needed policies are:

(i) The monopoly of ContainerCorporation (CONCOR) for thecontainer traffic on railways shouldbe ended.

(ii) Freight rates should be rationalisedand the cross subsidy to passengertraffic should be reduced, if noteliminated.

(iii) Timely delivery of goods shouldbe guaranteed, preferably byoperating scheduled goods trainsbetween large cities.

(iv) Dedicated corridors for goodstraffic should be developed,preferably on electric traction,between metro cities.

(d) Energy efficiency and demand sidemanagement also have a large scope toreduce energy requirement. Theseinclude the use of energy efficientappliances and automobiles, hybrid cars,energy efficient buildings, efficientlighting, cogeneration, distributedgeneration with Combined Heat andPower (CHP) use, energy efficient andwell-maintained irrigation pumps,smokeless improved woodstoves, etc.The needed specific policy initiativesare discussed in Chapter VI.

(e) In the long-term, promotion of publictransport in urban areas cansignificantly reduce energyconsumption particularly the need forimported oil and gas. Some advanceactions that can be taken now are asfollows:

(i) Develop effective and attractive

mass transport such asunderground, elevated trains, lightrail, monorail or dedicated bus lanesin existing metros.

(ii) For medium size cities, make plansfor efficient public transportcorridors to serve future populationand acquire the right of way. Publictransport can then be furtherdeveloped as the city develops.Development of city infrastructurecan be financed by graduallyincreasing permissible built up areaor Floor Space Index (FSI) andauctioning the right to build. Evenexisting land owners should berequired to purchase the additionalright to build, if they want toextend their buildings.

(iii) Congestion charges and parking feesshould be levied in city centres todiscourage the use of private cars.

4.3.2 SUBSTITUTE IMPORTED ENERGY BY

DOMESTIC ALTERNATIVES

12. Energy security can be increased byreducing the need for imported energy bysubstituting it with other forms of energy.Though this does not reduce the need for totalenergy, it reduces import dependence. If thedomestic substitutes increase dependence onone particular fuel, however, it can increasedomestic supply risk. Conversely, if substitutesdiversify the domestic energy mix, they canalso reduce supply risk particularly if thesubstitutes are local renewables. Someimportant options include:

(a) Electrification of railways can replacediesel trains. Of course this calls forinvestment in electrification of tracks,electric locomotives and electricitygeneration. However, with crude oil atUS$70 a barrel, electric traction can beeconomically attractive on routes withlower traffic density than before. Suchelectrification can lead to thesubstitution of imported diesel withdomestic coal.

(b) Wood plantations with a potential ofyielding up to 20 tonnes of wood per

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Energy Security

hectare per year in a sustainable waycould significantly expand the domesticenergy resource base. Wood can beburned directly or gasified for powergeneration. This would reduce the needfor future gas/coal imports.

(c) Bio-diesel and Ethanol can substitutediesel and petrol. Bio-diesel becomesparticularly attractive when it is derivedfrom inedible oilseeds from trees thatneed little water and fertiliser and canthus grow without care on wasteland.

Table 4.1Sources of India’s Oil Imports – 2004-05

Country Oil Imports % of Total(Mt) Imports

Middle East Region Iran 9.61 10.03

Iraq 8.33 8.69

Kuwait 11.36 11.85

Neutral Zone 0.15 0.15

Oman 0.14 0.14

Qatar 1.19 1.24

Saudi Arabia 23.93 24.96

UAE 6.43 6.71

Yemen 3.51 3.66

Sub Total 64.64 67.43

Other Regions Angola 2.44 2.55

Brazil 0.29 0.30

Brunei 0.81 0.84

Cameroon 0.35 0.36

Congo 0.14 0.14

Egypt 2.12 2.21

Equador 0.15 0.16

Equitorial Guinea 1.66 1.73

Gabon 0.28 0.29

Libya 1.47 1.53

Malaysia 3.43 3.58

Mexico 2.28 2.38

Nigeria 15.08 15.73

Russia 0.16 0.16

Sudan 0.33 0.34

Thailand 0.27 0.28

Sub Total 31.23 32.57

Total 95.86 100.00

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Ethanol can be obtained from molasses,which may have other economicallymore paying uses. Ethanol can also beobtained from other starchy crops andfrom cellulosic plant matter. Thecompetition for using limited landresources and availability of water posethe main challenges to increasing theproduction of ethanol.

(d) Use of hybrid vehicles and/or of electricvehicles, cars, scooters and motorbikescan significantly reduce requirementsof petrol. This requires developmentof low weight, high density batteries.An advantage of such vehicles is thatindividuals can adopt this technologywithout the development of asupporting fuel supply network aswould be required by hydrogen or fuelcell based vehicles.

(e) If hydrogen can be produced as a by-product of industry or with locallyavailable energy sources, hydrogenbased vehicles could provide an optionto reduce dependence on oil imports.

(f) Coal can be converted into oil as isdone in South Africa. The technologyis well-developed and in use for years.Sasol is routinely available at fillingstations along with petro and diesel inSouth Africa.

4.3.3 DIVERSIFY SUPPLY SOURCES

13. The impact of a short-term disruptionin the normal source of supply will depend onhow important that source is in our totalimport mix. Thus the first measure forincreasing security is to diversify our sourcesof supply both domestically as well as for theimport of oil or gas. India currently importsoil from many different countries as can beseen from Table 4.1. While we import oil from25 different countries, nearly two-thirds of ourimports are from four countries, i.e. SaudiArabia, Nigeria, Kuwait and Iran.

14. Energy security can be increased notonly by diversifying sources of import of aparticular fuel but also by diversifying theenergy mix by using different types of fuels.

An economy that uses coal, oil, gas, nuclear,hydro and renewables of various kinds isnaturally less dependent on one particular fuel,and hence less vulnerable to supply disruptionsof either domestic or imported energy sources.The security provided by such diversificationis enhanced when the ability of the users toswitch among fuels increases. One should assessthe uses in which different fuels or energyforms can substitute each other. In anemergency if rationing of a particular fuel isneeded, this process can be made less costly byencouraging the use of substitutes by specificusers. This can also have a bearing on the sizeof the strategic reserve that one needs.

15. Apart from sourcing oil or LNGimports from different countries, supply riskscan also be reduced by policy coordinationamong importing and exporting countries, byimporting gas through pipelines, or gettinghydropower from neighbouring countries.Many countries in India’s neighbourhood havevery large resources of natural gas. Amongthese are Iran, Turkmenistan, Bangladesh andMyanmar. Turkmenistan’s gas can beaugmented by gas from Uzbekistan,Kazakhstan, Azerbaijan and the Astrakhanlittoral on the Russian shore of Caspian sea.Developing such a supply chain poses geo-political challenges. Payoffs are large andattempts must be made to overcome suchobstacles. However, gas imports through trans-national pipelines raise their own issuesconcerning energy security.

(a) Policy Coordination: Not onlyimporters but also exporters benefitfrom stable prices. Major Asian oilimporters like India, China, Japan,Republic of Korea and major Asiansuppliers like Saudi Arabia, UAE,Kuwait, Iran, Qatar and Oman all havea stake in securing oil supply anddemand. A cooperative relationship -perhaps under an Asian EnergyAssociation - can help in reducingfluctuations in oil supply and prices.

(b) Import of Gas Through Pipelines:Gas imports from, say, Iran throughPakistan, or from Central Asia throughAfghanistan and Pakistan or from

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Energy Security

Myanmar through Bangladesh doprovide a higher degree of energysecurity compared to equity oil or gas.This is so because of the security ofsuch supply. The supplying countrytypically invests in the pipeline andhence has a stake in maintaining thesupply. Also, if supply to India isstopped, alternate buyers along theroute may be difficult to find and thepipeline cannot be easily diverted like,for example, a LNG ship. Thus therisk of disruption from the supplier isrelatively smaller. There is, however,the risk of sabotage of the pipeline as ittransits through different countries.This can be guarded against by thefollowing:

(i) Create an interest in the pipelinefor all countries through which ittransits. For example, a commonpipeline shared by India andPakistan will have substantial gainsfor Pakistan too. There areeconomies of scale that reduce costsfor Pakistan over the alternative ofobtaining gas through a pipeline ofits own. Also Pakistan would earntransit fees. With this, a disruptionshould it occur, would likely be ofa short duration.

(ii) Get multilateral agencies to investin the project by way of equityand debt.

(iii) Enlarge the domestic buffer stockof LNG, have redundancy inregasification facilities and ensurethat, in the case of a disruption,the supplier would be obligated toprovide compensatory supply inthe form of LNG. Such additionalbuffer stock can only be justifiedas cost of energy security.

(c) Import of LNG: Importing LNGthrough long-term contracts provides aflexible alternative to pipelines. Sincethe global gas market has developedand LNG trade has increased, the priceof natural gas is likely to match theopportunity cost of selling it as LNG.Thus, the cost advantage of piped gas is

not likely to be very large and has tobe balanced against the risks of pipelinediscussed above.

(d) Import of Hydro-Power ThroughNepal/Bhutan: Substantial scope existsfor import of hydro-power from Nepaland Bhutan. Their combined potentialis estimated to be in excess of 55,000MW. This could enhance energysecurity as hydro-power (which isparticularly suited for meeting peakpower demand) can replace natural gas-based generators which are also usedfor peaking purposes. The problem ofarriving at an agreement on the priceof power needs to be resolved. Thedevelopment of a market for powertrading in the country provides abenchmark that should make this tasksimpler. Nepal and Bhutan may begiven the right to sell power to anyoneon the market to ease this process.

4.3.4 EXPAND RESOURCE BASE AND DEVELOP

ALTERNATIVE ENERGY SOURCES

16. Our resource base can be expanded inmany ways: enhance recovery from existingresource bases; explore to find new reserves;obtain equity energy abroad; and develop newsources of energy through R&D.

(a) Enhanced Recovery: Enhanced oil, gasand coal recovery from existing fieldsis an obvious option. India’s recoveryof in-place reserves can improve easilyby 5-10 percentage points. Better minedesign and the use of technologicallyadvanced mining techniques are validoptions. In the case of oil and gas,Improved Oil Recovery (IOR) andEnhanced Oil Recovery (EOR)techniques can improve exploitation ofin-place reserves. Recovery of oil andgas from abandoned and/or marginalfields may also be taken up. However,the cost of such recovery should bebalanced against the total amount ofoil or gas that may be recovered fromthe field.

(b) In-situ Coal Gasification: Similarly

62


for coalfields, in-situ gasification maypermit much higher recovery of coalthan can be economically mined byconventional techniques. Technologydevelopment for in-situ gasificationshould be vigorously pursued and entrybarriers for gasification removed.

(c) Coal Bed Methane: Methane isadsorbed in coal seams. This Coal BedMethane (CBM) usually escapes intothe atmosphere when coal is mined.Tapping and utilising the CBM as asource of commercial energy has beenin vogue in the US and Australia forseveral years. The estimated potentialof CBM in India is in the range of1400-2600 billion cu. metres (BCM)(1260-2340 Mtoe). The Governmentformulated a CBM policy in 1997 andthe development of CBM is aconcurrent responsibility of theMinistry of Petroleum and Natural Gasand the Ministry of Coal. So far, 13blocks have been awarded throughcompetitive bidding and 3 blocks bynomination to various PSUs/privatecompanies for exploration andproduction of CBM. The estimatedCBM resources in these blocks are 850bcm (765 Mtoe) and a total productionof about 23 MMscmd at peakproduction level is expected from theseblocks. In addition to this, the Ministryof Coal - with the assistance of UNDP/GEF - is implementing a CBMRecovery and UtilisationDemonstration Project in the Jhariacoalfields under the Coal Science &Technology programme. Promotion ofCBM exploration and production isessential to expanding the domesticresource base in the short to medium-term.

(d) Exploration: Efforts can be steppedup to find new reserves. Recent successby private as well as public sectorcompanies such as Reliance and GujaratState Petroleum Corporation Ltd. infinding gas shows the need to attractmore players in exploration in thecountry. Exploration for all energy

resources - coal, oil, gas and Uranium- should be stepped up. Offshore windenergy potential should also be mapped.

(e) Equity Oil, Gas, Coal from OtherCountries: Obtaining equity oil abroaddoes not particularly increase oilsecurity beyond diversification, if any,of supply sources. The political risk ofdisruption of the supply of equity oilthrough embargos or nationalisationetc., would be similar to risk entailedin oil import from the same country.It also provides a right to a resourcefor a period that is typically longerthan that provided by options andfutures contracts. To the extent thatIndia owns that oil abroad, whether itis brought to India or sold in theinternational market, the value remainsthe same. Thus obtaining equity oilabroad should be mainly looked uponas a commercial investment decision. Ifthe amount of money invested inobtaining equity oil were to earn ahigher return in an alternateinvestment, then such investmentprovides a better level of comfort foraccessing oil at even higher prices inthe future. Equity oil, however, doesincrease the country’s access to importsin the same way as a long-term supplycommitment. Thus we should exploreand seize economically attractiveopportunities for equity energy abroad.However, such investments must factorin all country, political and logisticrisks. A simple way to ensure anindependent oversight of the techno-economic viability of a new investmentwould be to require that it raises atleast two-thirds of the funding requiredthrough off-shore commercial loans/equity on a stand-alone basis withoutrecourse to sovereign guarantees andwithout recourse to the balance sheetsof India’s national energy companies.

(f) Using Energy Abroad: In case Indiacan get access to cheap gas in gas surpluscountries, it could consider setting upcaptive energy intensive units such asfertiliser plants in these countries.

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Energy Security

Alternatively, India could set up captiveliquefaction plants to bring LNG intothe country.

(g) Coal to Oil: Rising oil prices in theworld market makes conversion of coalto oil economically attractive. Sasolclaims that its technology forconverting South African coal to liquidsis viable if crude oil stays above US$45/barrel. India should establish theviability of Sasol technology withdomestic coal and establish the break-even price at which coal to liquidswould make sense for Indian coal.Another step in this direction wouldbe the inclusion of coal to oilconversion in the list of captive useunder Section 3(3) of the Coal Mines(Nationalisation) Act, 1973, so thatdedicated coal blocks could be allocatedfor this purpose.

(h) Gas to Liquid (GTL): In addition tosourcing piped natural gas and LNG,natural gas liquids may be anotheroption. Major investments are beingplanned for conversion of gas to liquidin countries with large gas reservesviz., Qatar, Nigeria and Australia. India,with strong political ties with Russiaand CIS countries, can consider settingup GTL plants in these countries underlong-term arrangements wherein Indiagets a share of the produced liquids.However, a comprehensive study toevaluate technology, available resourcesand the economics involved is necessaryprior to entering into any collaborativearrangement.

(i) New Domestic Sources: The domesticresource base can also be expandedthrough developing hitherto poorlydeveloped or new sources of energy.Some of these resources may requireR&D to make them economical.Among these are:

(i) Nuclear Power: With meagreavailability of Uranium in thecountry and vast resources ofThorium, any long-term nuclearstrategy has to be based on

Thorium. The three stage strategyof development of nuclear powerfrom pressurised heavy water basedreactors to fast breeder reactors toThorium based reactors requires asustained R&D effort. Success inthese efforts could deliver some2,50,000 MW of nuclear power by2050 and much more thereafter.Given the limited resources of oil,gas and Uranium, solar energy andThorium based nuclear option arethe only two sizeable sources (apartfrom fusion) of energy for thecountry. Thus, the Thorium optionmust be pursued. Failure toeconomically develop India’sThorium based nuclear potentialto the fullest will significantlyincrease India’s dependence ondomestic and imported coal.Nuclear power will not onlyenhance energy security but alsoyield rich dividends by reducingcarbon emissions.

(ii) Gas Hydrates: Very large reservesexist in Indian waters and have thepotential to provide vast amountof gas. Technology to exploit theseeconomically in ecologically safeways is yet to be developed.However, the potential size of theresource makes it critical tovigorously pursue R&D.

(iii) Wind: The potential for onshorewind power has been assessed tobe 45,000 MW. The Wind EnergySociety of India claims it to be ashigh as 65,000 MW. However,given that the average capacityfactor realised by India’s wind farmsis only about 17%, the totalcontribution to energy from theseplants would be relatively small.Thus while wind power may bepursued for environmental andeconomic reasons, its contributionto energy security will remain verylimited. Off-shore wind powerpotential has not yet been assessed.As mentioned above such

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5 Pachauri, R.K. (2005): Addressing the Challenge of Energy Security. A report prepared for the AsianDevelopment Bank by The Energy and Resources Institute (TERI), New Delhi.

assessments should be taken upimmediately.

(iv) Solar: Solar energy, if it can beeconomically exploited constitutesa major energy resource for thecountry. Solar electricity generatedthrough either the thermal routeor using photovoltaic cells providescomparable amounts of electricityper unit of collector area. Bothmethods currently provide about15% conversion efficiency. Whileit is clear that the ratio of capitalcost to the efficiency of energyconversion needs to be broughtdown significantly, solar thermaland solar photovoltaic routes toelectricity generation remainattractive alternatives to enhanceIndia’s energy security. Nano-technology holds the hope formaking a major breakthrough insolar photovoltaic technology. It isstressed here that solar waterheating is cost effective for Indiaeven today and can reduce India’sdemand for oil, gas and coal ifpursued to meet the hot waterdemand in industry and households.

(v) Energy Plantations: Growing fuelwood for running power plantseither directly or after gasificationcan save the coal or gas used forgenerating power. Since thecountry’s energy needs are growing,imports of coal and LNG are alsolikely to grow. Fuel woodplantations can help improveenergy security. The scope for suchplantations is substantial. Forexample, if 10 million hectares ofwasteland can be converted to fuelwood plantations with a sustainedyield of 200 Mt of wood per year,it would obviate the need for some200 Mt of domestic coal. Moreoversince wood is a renewable fuel, nonet carbon emission takes place.Thus all compensatory afforestation

should be made in the form ofenergy plantations to improveIndia’s energy security.

4.3.5 INCREASE ABILITY TO WITHSTAND

SUPPLY SHOCKS

17. Once imports are minimised anddiversified, the shortage due to disruption ofsupply from any one country will be small andcan be dealt with by maintaining a strategicreserve. A stock of oil can be kept either instorage tanks or in the form of ability to gethigher output from existing wells at shortnotice.

18. If the supply disruption is total, suchas might occur through a blockade in a situationof conflict, the size of the buffer stock neededwould depend on the expected length of supplydisruption. In today’s world local wars are notlikely to last beyond a few weeks often due tothe interventions by the world community.Thus the size of the buffer stock need not bevery large. Pachauri (2005)5 argues as follows:

“Strategic reserves of crude oil andpetroleum products were firstrecognised as a policy tool in theaftermath of first oil shock in 1973.Major industrialised nations gottogether and formed the InternationalEnergy Agency (IEA), which wascharged with the task of coordinatingthe purchase of oil during a futureshock and of coordinating the drawdown of reserves during the hour ofcrisis. Currently, IEA membercountries hold strategic stocks of about90 days of net imports and there arealready talks of increasing the cover to120 days. Strategic reserves do not comecheap. According to an estimateprepared by the Engineers IndiaLimited (EIL), the capital cost ofbuilding a strategic reserve of 5 Mt ofcrude oil at Rajkot (2.5), Mangalore(1.5) and Vishakhapatnam (1.0) areRs.1225.2 crores with a mixture of

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Energy Security

concrete tanks and rock caverns. Themaintenance cost of these facilities iscalculated as 29.3 crores. This excludesthe cost of crude”. (At $70/barrel 5 Mtof crude equivalent to about 14 days ofnet imports is estimated to costRs.11,545 crore)

“No extensive exercise has been doneevaluating the benefits of StrategicPetroleum Reserve (SPR) for India.APEC (APEC, 2000) concluded“emergency oil stocks could be themost effective means for minimisingthe economic cost of interruptedsupplies and high oil prices”. (APEC –Emergency oil stocks and EnergySecurity, Tokyo March 2000). It furthersaid that this was true for a largeeconomy or a group of economies.Similar conclusion was reached byLeiby and Bowman (The Value ofExpanding the U.S. Strategic PetroleumReserve, Paul N. Leiby 7 DavidBowman, Oak ridge NationalLaboratory, November 2000) whoconcluded that benefits from expandingthe size of reserves for the US economyare enormous”.

“The strategic reserves of crude oil/petroleum products, held by developedcountries serve as a global commongood. Draw down of such reservesduring a crisis has an impact on theworld oil market, which is integratedto a fair extent. Thus, poorer countriescan reap the benefits of strategic reserveswithout holding it. Otherwise also, itseems practical to have regional strategicreserves that would not only entaillower costs but will also expand thepossible benefits among manycountries. Regional cooperation inSouth Asia in this respect can befruitful. For a country like India, giventhe uncertainty about benefits, it maybe more economical to hold theminimum reserves required to tide oververy short-term supply disruptions”.

19. These arguments suggest a strategic oilreserve of around 30 days at most. However,

an oil reserve of 90 days is maintained bymany countries, which they also use as abuffer stock against price fluctuations. Wemight use that as a thumb rule for our strategicplus buffer stock reserve. Such a reserve canalso provide enough room to curtail domesticneeds by switching over to alternate fuels,rationing to restrict some uses and promotingthrift thereby making it possible to manage alonger supply disruption. The effectiveness ofsuch a reserve can be increased if it is a part ofregional reserve or is cooperatively operatedwith reserves of other countries such as theIEA member countries.

4.3.6 INCREASE ABILITY TO IMPORT ENERGY

AND FACE MARKET RISKS

20. To guard against the market risk of asudden price increase, we need to keep ourenergy import bill within a certain proportionof our foreign exchange earnings or maintain astock of foreign exchange to address volatility.

21. Options contracts and the futuresmarket can be used to reduce the risk of pricevolatility. If the energy market is competitivethen managers can be expected to use theseinstruments to reduce their risk. Even then,for public sector management, special schemesmay have to be designed to provide incentivesto minimise import costs. However, optionsand futures may not be available over a longduration. Equity oil or gas holdings abroadmay provide better security against suddenprice increases.

22. A buffer stock can also help in reducingthe impact of short-term volatility in prices.As pointed out above its effectiveness increaseswhen it is worked cooperatively with reservesof other countries.

4.3.7 INCREASE REDUNDANCY TO DEAL WITH

TECHNICAL RISK

23. The obvious solution against technicalrisks is to provide redundancy. For example,electrical networks minimise probability of aloss of load by providing alternate routes.Similarly, power plants carry standby capacityor a spinning reserve to address the technical

66


risk of same station going off the grid or of asudden increase in demand. Some redundancymust be built into the design of all energyinstallations to address such technical risks.

4.4 ENERGY SECURITY FOR THEPOOR

24. Even when the country has adequateenergy and even when there are no technicalfailures, the poor may not get clean energy.The issues and policies for providing energysecurity to the poor are discussed later inChapter VIII.

4.5 POLICIES AND INITIATIVESFOR ENERGY SECURITY

25. India’s energy security concerns have,thus far, been largely defined by a narrowfocus on supply disruptions and the consequentneed to increase redundancy in our stocks ofcrude oil and petroleum products through thecreation of a strategic storage. In reality, India’senergy security concerns go well beyond anarrow focus on a likely supply disruption inour crude oil imports. India’s energy security,at its broadest level, has to do with thecontinuous availability of primary commercialenergy at a competitive price to fuel oureconomic growth and to provide reliable accessto modern forms of primary and secondaryenergy and energy services needed for lifelinesupport to over 50% of our population whichlacks access to any form of commercial energybarring the unreliable and often costly supplyof PDS kerosene primarily for lighting. Again,energy security requires that such access tolifeline energy be ensured even if it requiresdirected subsidies.

26. We have discussed how to reduce riskto our energy security by way of policiesaimed at reducing our energy requirementsand import dependence (through efficientproduction, transmission, distribution and useof energy, development of efficient energymarkets, instituting well-targeted “lifeline”entitlements, and diversifying/expanding thedomestic resource base using commercial ornear-commercial technologies). India’s abilityto effectively manage such risks can only grow

with her rising economic and political staturein the World economy. Yet, there are certainadditional policies that can be instituted toenhance our energy security. These are:

� A legal claim to energy resources abroadcan marginally enhance India’s energysecurity to the extent that such a claimincreases the diversity of supply sources.Equity oil and gas abroad are beingcurrently pursued. The PlanningCommission, recognising the loomingcoal import requirements, has been,emphasising equity coal for the pastthree years in order to further increasethe diversity of supply of fuels.Nonetheless, these acquisitions shouldbe primarily assessed as commercialinvestments. Thus, while theGovernment must aggressively supportacquisition of energy assets overseas,companies active in this field must beforced to securitise the assets withinternational funding instead of thecurrent practice of acquisitions basedon 100% equity. The process ofsecuritisation essentially creates aninterest of other investors in the cashflow anticipated from the asset beingacquired. This will not only provideindependent oversight on the qualityof such acquisitions but also strengthenour legal claim over these assets underextreme situations.

� Another mitigating policy could be todiversify imported fuels as well as thesources of such imports. Today, almost100% of our energy import is in theform of crude oil with 67% beingsourced from the Middle East. Astrategy to import larger quantities ofGas, LNG, coal, ore emulsion, ethanoletc, as additional energy sources shouldbe considered. Further, imports fromother countries can be enhanced forstrategic diversification of supplysources.

� Power plants at coastal locations shouldbe set up with captive jetties to run onimported coal.

� If and when the gas pipeline from Iran

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Energy Security

materialises, we may have a suddenincrease in supply of natural gas ofnearly 30 Mtoe a year. After meetingthe feedstock requirement for fertiliserand chemical plants, the temptationwill be to use this increased supply forpower generation. Advance planningshould be done to use this gas in moreappropriate ways such as in distributedgeneration and CHP applications wherewe can get an efficiency of 80% ormore.

� India currently has stocks equal toabout 85 days of requirement excludingline-pack and the strategic stocks forthe defence department that aremaintained by Indian oil. However,these stocks are more in the nature ofraw material and finished goodinventories (for which facilities hadbeen built during the comfortable cost

plus regime) and not in the nature ofstrategic reserves. Internationally, a 90-day strategic reserve is consideredadequate for providing security againstshort-term supply disruption and/orextreme price spikes. India couldearmark part of the available storagecapacity with oil companies as strategicreserve controlled by the Government.Japan follows this practice and requiresits oil companies to carry and maintaina strategic reserve. Additional strategicstorage may also be built to supplementsuch mandated strategic reserves.Regional cooperation in South Asia inthis respect can be fruitful. For acountry like India, given theuncertainty about benefits, it may bemore economical to hold the minimumreserves required to tide over veryshort-term supply disruptions.

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India has to depend on a mix ofdifferent fuels to meet its energy requirement.The opportunities and economics forsubstitution vary with place, time andapplication. To ensure that options selected byindividuals and firms lead to an efficient strategyfor the country, appropriate policies need tobe followed within an integrated frameworkand in the context of the emerging backdropdetailed below.

5.1 THE EMERGING BACKDROP

2. Energy for Growth: The discussionin Chapters I through IV provides the necessarybackdrop to the Energy Policy Options/Initiatives that India needs to pursue. India hascommitted herself to eradicating poverty andempowering its people with education andhealth. Given that the population is expectedto reach 1.47 billion by 2031-32, and the factthat sizeable part of India’s population, today,is living below the poverty line, rapid growthrates of around 8% per annum over the next25 years are essential for attaining these goals.To fuel a sustained 8% annual growth, ourenergy scenario faces major challenges. Even aconservative projection of India’s energy needsto fuel this level of economic growth requiresthat basic capacities in the energy sector andrelated physical infrastructure such as rail, ports,roads and water grow by factors of 3 to 7times by 2031-32 alongside a 20-fold increase innuclear and a 40-fold increase in renewableenergy. If we cannot assure supply at even theconservatively projected levels of commercialenergy (1.35 to 1.70 billion tonne oil equivalentby 2031-32 compared to the 2003-04 level of327 Mtoe), we will not be able to grow at 8%per annum. This level of commercial energyconsumption yields a growth in total energyconsumption that ranges from 4.3% per annumto 5.1% per annum over the 2003-04 level ofconsumption. However, to supply the energy

needed, it is essential that India, once againgives energy the same importance it was givenin the first 30 years of its planned development.With the current emphasis on market drivengrowth, this implies that India must make adeliberate effort to create an enablingenvironment that attracts the requiredinvestments into energy and relatedinfrastructure, and an environment that exploitsthe synergy of public private partnership.

3. “Lifeline” Energy for All: Access tosafe, clean, convenient and reliable energy isvital for people’s well-being. Clean cookingenergy is essential for freeing women and girlsfrom the burden of indoor air pollution andthe drudgery of long hours spent in gatheringfuel wood and dung. Clean cooking energy isthus also a tool for empowering girls andwomen to pursue education and enrichedlivelihoods. Again, a minimum amount ofelectricity is essential to remove darkness,extend working hours and raise productivity.However, even when safe, clean and convenientenergy is available, the poor may not be ableto pay for it at market prices. No progressivegovernment can ignore its responsibility toprovide a “lifeline” level of energy inputs inthe form of electricity and clean cooking fuel.Such lifeline consumption is an essential partof energy security for India’s people. Further,such lifeline consumption would need to besubsidised for some consumers till income levelsrise to make such consumption affordable forall households. The good news is that suchlifeline consumption does not require morethan 75-80 billion kilowatt hours of electricity(BkWh) (about 12-13% of net electricitygeneration in 2004-05) and some 16-17 Mtoe ofLPG (about 4.5 to 5.0% of the 2004-05 level ofcommercial energy consumption). Further, itcan be said that currently not more than 75%of the lifeline consumption of electricity (60

Energy Policy Options/Initiatives

Chapter V

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BkWh) and some 85% of LPG (13 Mtoe) needsto be subsidised to varying degrees. Thesepercentages will fall relative to our totalconsumption over time. However, in absoluteamounts, these numbers are not likely to exceedthese levels of magnitude as consistent growthat 8% should reduce poverty levels and raisecapacity to pay to effectively negate the impactof population growth. What is essential, though,is efficient targeting which ensures that: (a)only lifeline level consumption is subsidised;and (b) the subsidy is enjoyed only by thosewho cannot afford to pay for such lifelineconsumption at market prices. However, evenwith full electrification and targeted subsidieson commercial fuels for cooking, India’sreliance on traditional non-commercial energysources will rise in absolute terms to some 185Mtoe in 2031-32 from the current level ofabout 150 Mtoe even as the share of totalprimary non-commercial energy consumptionfalls from about 30% to 10-12%. If we succeedin providing clean commercial fuels tohouseholds as proposed, this bio-mass wouldincreasingly get diverted for industrial use and/or power generation.

4. Role of Different Fuels: Given India’slimited resources of oil, gas, Uranium andhydro-power, it needs to develop alleconomically viable sources of energy. Theintegrated analysis of various energy resourcesand supply options reveals that even underaggressive growth assumptions for hydro (5times current levels) and nuclear (20 timescurrent levels), the contributions from the twotogether cannot exceed 8-10% of commercialenergy supply in 2031-32. However, both hydroand nuclear remain strategically important;hydro for providing much needed peakingsupport and storage capacity for water andnuclear to work towards India’s energyindependence in the long-run based onThorium. Renewable energy, even when itrises to 40 times its current level will, at best,meet only about 5 to 6% of India’s commercialenergy demand by 2031-32. Despite this,renewables remain important from the pointof view of increasing our domestic resourcebase. Fossil fuels maintain their domination inIndia just as in other parts of the world. Theshare of coal varies between 41% and 54% and

that of oil and gas together between 32% and41% of total energy. Abundant Thorium andsolar resources might become important sourcesfor India beyond 2050 provided we promoteR&D now to be able to realise this potential inthe future. Under the most optimistic scenariosfor hydro, renewable and nuclear growth, anddomestic supply levels for coal (3.8 timescurrent levels), oil (3 times current levels) andgas (more than 5 times current levels), India’simport dependence for commercial energy, in2031-32, would range from a low of about 29%in the most energy efficient scenario to about59% in the most energy intensive scenario.Realistically speaking, it is likely that Indiawould need to import some 40-45% of itscommercial energy requirement compared tothe current level of under 30%. Domesticcommercial energy supplies will then need torise four times in aggregate over the next 25years if import dependence for commercialenergy is not to exceed 40%.

5. India’s Energy Intensity: The energyintensity of India’s growth has been falling andthough it is currently about half what it usedto be in the early seventies, there remainssignificant room to improve. Improvement inenergy intensity creates a virtual source ofenergy by reducing the total energy needed tosustain a given level of growth. Whiledifferences in the structures of differenteconomies may result in different energyintensities, available data clearly shows thatenergy intensity can be brought downsignificantly in India with commercialtechnologies that are currently available. Thecountry must endeavour to do so at the earliest.

6. India’s Energy Demand in the GlobalContext: Putting India’s likely energy demandin 2031-32 in a global perspective, one sees thatChina’s current energy consumption is 1100-1200 Mtoe and USA’s current consumption is2400-2500 Mtoe. In comparison, Indiaconsumed about 348 Mtoe of commercialenergy in 2004-05. With a projected populationof just under 1.47 billion in 2031-32, India’sper capita energy consumption (based on themid point of the range of scenarios developedin Chapter III) will be marginally above China’scurrent per capita consumption or be about

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one seventh of the current US per capitaconsumption. What this means is that India onper capita basis, currently consumes under 6%of what the US consumes and under 41% ofwhat China consumes and will, by 2031-32,consume just under 15% of current USconsumption levels and equal China’s currentper capita consumption. More importantly,India’s per capita energy consumption that isless than 27% of 2003-04 level of global averageenergy consumption, shall in 2031-32 alsoremain just about 74% of the current globalaverage. On simple considerations of equityalone, therefore, India cannot be denied thislevel of energy consumption by 2031-32.

7. On an incremental basis, assuming theworld’s fossil fuel supply grows at about 2%,India’s incremental fossil fuel demand willaccount for 21% of the incremental worldsupply of fossil based commercial energy by2031-32 in the most fossil fuel intensive scenario.In the least fossil fuel intensive scenario, India’sincremental share of the incremental worldsupply of fossil fuel based commercial energywill be 13% by 2031-32. India’s share of worldsupplies of fossil fuels in 2031-32 would risefrom a level of 3.7% to a low of 7.6% in themost energy efficient scenario and 10.9% inthe most energy intensive scenario. It is pointedout that it is this incremental demand fromIndia when coupled with the much higherincremental demand from China that is citedas putting pressure on fuel prices and is raisingapprehensions in the world community. Thefact is that the incremental US demand for oilwas twice that of India and China’s was twicethat of US over 2000 to 2004. The real issue isnot the incremental demand from India butthe dire need to curb consumption and realiselife style changes in the developed world. IfIndia is to be denied even the modest levels ofenergy consumption cited in Paragraph 6 evenin 2031-32 then we can forget about eradicatingpoverty or meeting the millenniumdevelopment goals. Further, if the energyconsumption levels in the developed world arenot brought down significantly the climatechange goals shall never be met irrespective ofthe growth in Indian demand. Finally, the 8%GDP growth trajectory is as important toreducing poverty in India as it is to enable

India to absorb technologies and policies thatlower its energy intensity.

8. Growth in a Constrained EnergyMarket: Irrespective of the final level ofdemand, India’s growing demand forcommercial energy supply has to be seen inthe context of a tightening global energy marketwith rising prices and stagnant outputs. Theworld oil demand is expected to grow fromthe current level of 81-82 million barrels perday to 110 million barrels a day by 2020 at agrowth rate of 1.8% per annum. Nearly 65%of crude oil is traded across borders. Theworld gas production is expected to rise from2420 Mtoe to 3418 Mtoe by 2020 at a growthrate of 2.2% per annum. However, less than25% of gas is traded across borders eitherthrough pipelines (natural gas) or to a lesserextent as LNG (30% of the total gas trade).The US production of oil peaked in 1970 andNorth American gas production is widelybelieved to have peaked in 2000. The world oiland gas production are expected to peak in the2010-15 and 2015-2020 time frames respectively.The growth in the demand of primary energies,over time, has not lead in the past to anexhaustion of reserves because the right pricesignals lead to new, more competitive, sourcesof energy that take their place. Nevertheless,the uncertainties of energy markets, particularlyin moving supplies to where they are needed,coupled with the long lead times of newinvestments in developing new and alternatereserves/sources of primary energy and addingcorresponding refining/liquefaction/transportation capacities reinforce the view thatthe supply-demand balance for oil and gas islikely to remain tight for the foreseeable future.Even if this is considered to be a pessimisticoutlook, India should be prepared for it.

9. The common belief that current pricesof oil are high is only true in nominal terms.If one looks at historical oil prices in constant2005 dollars then the recent average of about$55-60 per barrel is comparable to the averageprice of US$53.50 that prevailed between 1974-1985. In fact, in comparable 2003 dollars oilprices were at an all time high of $80 a barrelin 1980 and were at $72 a barrel during thefour year period 1979-1982. These facts are

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behind the low impact that currently nominallyhigh oil prices are having on global inflationand the predictions of higher prices to come.

10. It is thus of utmost importance thatalternatives to oil which are based on domesticresources are pushed. Energy efficiency, energyconservation, development of substitutes andR&D to make them economically viable shouldget high priority. Some of the possibilities areidentified in Section 3.4.

11. Coal Remains India’s Most ImportantEnergy Source, Gas Share Remains Low:Coal emerges as the most important energysource for India accounting for not less than41% of our energy mix under any scenario andpotentially reaching 54% of the energy mixunder certain scenarios. Even at the 41% level,India will need 1.6 billion tonnes (about 4times the current production). At the highershare requirement could rise to 2.5 billiontonnes (over 6 times the current production)of coal from domestic sources. The additionalcoal requirement from domestic sources willbe even higher if the past trend of fallingdomestic coal quality is not arrested. Indiacould also import 250 to 500 Mt of superiorcoal to reduce local coal requirement by 375 to750 Mt per annum. It is pointed out, however,that currently only about 700-800 Mt of coal isinternationally traded. Associated port and railhandling would have to rise in capacity toachieve any of the above scenarios. Gas undervarious scenarios is seen to account for only5.5% to 11% of our energy mix in 2031-32.Achieving a gas share in the 10-11% range inIndia’s energy mix presumes successfuldevelopment of the Krishna-Godawari (KG)basin potential, exploitation of coal bedmethane and success with trans-national gaspipelines and LNG imports. Clearly India’spolicy framework must recognise the pre-eminence of coal and the importance of gettingthe required technology to maximally exploitthe large in-place reserves of coal.

12. Development of New Sources:Depending upon the level of increase indomestic coal production to meet growingdemand, India’s currently known reserves ofextractable coal will not last beyond 45 years.

Thus, we have to stretch out our energyresources as much as we can by promotingenergy efficiency and conservation. To augmentour energy resources, we should also promotethe development of new sources of energy.

13. Energy Coordination Committee:The above backdrop and the discussions in theprevious four chapters establish: (i) theinescapable dependence of growth across allsectors of the economy (including social sectors)on the assured availability of energy supplies atcompetitive prices; (ii) the existence of crosscutting issues impacting various sub-sectors ofenergy and the related infrastructure for itsproduction and delivery; (iii) the massiveinvestment needs of the sector for increasingdomestic supply and ensuring energy securityfor all; (iv) the need to raise technology levelsand mounting specific R&D efforts undermission mode; and (v) instituting targetedsubsidies for lifeline energy needs. Thesefeatures and the need for rational pricing &taxation to promote inter-fuel substitutions,cost reduction and efficiency gains etc. underlinethe need for an integrated energy policy. Theyalso provide the basis for the Integrated EnergyPolicy Committee to support the PlanningCommission’s 10th Plan proposal for “Creationof an Apex Body on Energy under thechairmanship of the Prime Minister”. Such abody at the highest level of government isessential for operationalising the kind of policydecisions enumerated below. An “EnergyCoordination Committee”, under theChairmanship of the Prime Minister, hasalready been created to review and approvepolicies for the energy sector as a whole.

5.2 POLICIES COVERING ENERGYMARKETS, REGULATION,PRICING, TAXATION,SUBSIDIES, EXTERNALITIESAND INSTITUTIONS

14. Meeting Growing Energy Needs in aCost-Effective Way: To meet growing energyneeds in an efficient, cost-effective way requiresa policy framework that realises efficiency inproduction, transmission, distribution andconsumption of all available types of energy,and that provides incentives to supply required

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energy. Promoting transparent and competitivemarkets for all forms of energy supplies/services isthe first policy initiative that the governmentmust take as part of its integrated energy policy.Such competitive markets provide the best meansto extract efficiency gains from the sector.

15. Having said this, it is also recognisedthat in some sectors within the energy sector(especially power) truly competitive marketsmay be difficult and costly to realise. Efficient,strong and independent regulation can,however, address this concern effectively.Transparent and competitive markets that offera level playing field to all participants, and areindependently regulated, are essential to thecreation of an enabling environment fordomestic and foreign investment flows frompublic and private sources to the energy sector.Energy efficiency in extraction, conversion,transmission, distribution and consumptionrequires that all players and all energy projects,public or private, mega projects or microprojects, domestic or foreign, are treated equallyunder a consistent policy framework. Moreover,appropriate pricing of various energy sourcesand services is needed to realise efficient choiceacross fuels. The policies to achieve competitiveand transparent markets must recognise thedominance of large public sector units in mostenergy sub-sectors. Many of these PSUs arefinancially strong but their strength has beenacquired in a protected public sectorenvironment. The presence and strength ofdominant and efficient public sector units canbe an asset in the transition to a competitiveset-up as they, through their participation couldprovide a starting benchmark that the marketsmust better. Some key specific initiatives neededto support such an overall policy commitmentacross the energy sector, and for each of theenergy sub-sectors, are described below.

16. Independent Regulation: Independentregulation is critical to attaining competitiveefficiency in the energy sector since the sectoris characterised by large economies of scale andhas natural monopoly characteristics in sub-sectors such as transportation and distributionnetworks. It is important that all sub-sectors ofthe energy sector are regulated and done so ina consistent manner. Today, only the power

sector has a regulatory framework. A Regulatorfor the petroleum sector is being established. ARegulator for coal is also needed. The regulatoryframework must ensure the following:

� To provide genuinely independentregulation across each sub-sector of theenergy value chain, the regulatoryresponsibility/functions of the Statemust be separated from the Ministriesthat control the PSUs that dominatethe energy sector and are the principalowners of over 75% of India’s energyassets and related infrastructure.

� Since domain knowledge is important,a common Regulator is notrecommended for all energy sub-sectors.However, to provide cohesion andconsistency of regulation across allenergy sub-sectors, the Regulatorsshould meet regularly and arrive at thecommon principles that emerge fromthis Integrated Policy.

� There should be a common appellatetribunal for all the energy sub-sectors.

� The functioning of regulatoryinstitutions must be improved by:

• Creating an autonomousRegulatory Academy

• Institutionalising the selection ofRegulators and their impactassessment under the RegulatoryAcademy

• Mandating training for allRegulators

• Granting financial autonomy toregulatory institutions

• Limiting the quasi-judicial role ofRegulators to tariff setting anddispute resolution

• Providing a system that makesRegulators accountable toParliament

• Mandating annual reports from allRegulators that detail progressunder and compliance with thevarious provisions of the Act theyare regulating

� In order to give independent regulationa fair chance of success, the government

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should create the enabling policyenvironment for competitive andtransparent markets by eliminatingbarriers to entry and removing pro-public sector biases.

� It should also be recognised thatregulation and competitive markets arenot substitutes for one another.Similarly ownership is no guaranteefor efficiency and replacing a publicmonopoly by a private one is unlikelyto yield efficiency gains. Privatisationof dominant public sector enterprisesin the energy sector is likely to beeffective only if a well-regulated and acompetitive market exists/results.

17. Relative Prices for Efficiency: Relativeprices play the most important role in choiceof fuel and energy form. They are thus themost vital aspect of an Integrated Energy Policythat promotes efficient fuel choices andfacilitates fuel substitution towards specificobjectives. In a competitive set-up, if themarginal use value of different fuels which aresubstitutes for one another are equal at a givenplace and time, and if the prices of differentfuels at different places do not differ by morethan the cost of transporting the fuels, thenthe resulting inter-fuel choices will be efficient.Prices of different fuels cannot be setindependently of each other. However, this isthe current practice and the domestic energyprices are not only uncompetitive but sufferfrom a number of distortions as detailed inParagraph 19 below.

18. In perfect markets the relative prices ofdifferent energy supplies and services yield themost optimal fuel mixes, investment flows andeconomic outcomes. At the margin, competingenergy sources providing the same end serviceare priced identically per unit of such servicedelivered. However, such perfect energymarkets do not exist in most countries. Supply/resource constraints, priority of domesticenergy resources over imported energy

resources, lack of substitutability, externalitiessuch as ease of use, differences in achievablelevels of efficiency, differences in specificinvestment levels per unit of energy, differencesin environmental impact etc. – all combine tothwart rational markets for energy. Add tothis mix policies that look upon energysupplies/services selectively and differently forpurposes such as raising fiscal resources andproviding subsidies; – or politically differentperceptions of what constitutes a long-term“social good” and what is best for the “nationalinterest” and what one gets is a recipe for ad-hoc policies that are, more often than not,inconsistent. To obtain competitive efficiencyin this environment requires continuousengagement by policy makers at the senior-most administrative and political levels and aset of dedicated and fiercely independentRegulators to achieve near optimal marketbehaviour.

19. The Distortions in Pricing Energy inIndia: As pointed out earlier, based onpurchasing power parity comparisons, theIndian consumer pays one of the highest tariffsin the world6, for energy supplies/services. Atpresent in most energy sub-sectors there isvirtually no competition. Despite thedismantling of the Administered PriceMechanism in the petroleum sector and pricecontrols in the coal sector, Governmentcontrols hydrocarbon pricing. The currentpolicy is to price petroleum products atinternational parity without any competitionamong incumbents. However, this policy isnot being followed. Further, prices are loadedwith taxes and levies that are not uniform andlack consistent policy drivers. Access topetroleum products including subsidisedkerosene meant for the Public DistributionSystem is limited. There is a need to examine:(a) why the so called import parity price isused for oil products wherein India is a netexporter; (b) why trade parity prices are notused; (c) what is the basis on which importparity is calculated; (d) the practice of burdeningoil marketing with kerosene and LPG subsidies

6 Based on country reports we have calculated that in 2002 the average purchasing power parity price in UScents per kWh was 30.8 in India, 7.7 in US, 9.5 in Germany, 15.3 in Japan, 20.6 in China and 27.6 inBrazil.

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and the leakages in these subsidised products;and (e) the practice of making upstreamcompanies share the subsidy burden of oilmarketing companies. Serious entry barriersremain for new entrants to import productsand market the same freely. Natural gas suppliesare well below current demand levels andmultiple prices prevail in the market. Coal hasbeen deregulated under a monopoly supplier,even though the import and transportationinfrastructure for moving coal remains bothdeficient and largely in the hand of Governmentmonopolies. Again there are serious entrybarriers for new entrants wishing to mine coal.Supplies of coal barely match demand. Power,a secondary form of commercial energy, isgrossly overpriced (for the paying industrial,commercial and large domestic consumers) sinceover 40% of the energy through put is eithernot paid for or bills for it are not collected bythe State utilities. Uranium fuel used in India’snuclear plants costs at least three times theprevailing international prices due to very poordeposits. Wind power in India delivers onlyabout 17% capacity factor on average, India’shydro sector has been plagued with significantdelays and cost over-runs, and the Himalayangeology makes siltation a major issue in hydrodevelopment and the realisation of our fullhydro potential thereby affecting costs of hydro-power. Non-commercial energy is consideredto be practically free since opportunity costs oflabour spent in collecting firewood or cowdung and preparing the same are rarely factoredin. Taxes on petroleum products are a keysource of government revenue but not uniformacross products and, finally, differential statetaxes and custom duties on crude and petroleumproducts introduce further distortions in energypricing in India.

20. While keeping energy prices high hashelped limit demand, it has definitely madeIndian industry, agriculture and commerce lesscompetitive and has constrained consumption,both of which subdue economic growth. Highenergy prices are akin to a tax burden on theconsumer and the economy. Given India’senergy supply constraints and its energysecurity concerns, national priorities willrequire that all available energy resources beoptimally exploited. Rational pricing of energy

supplies and services must ensure that: (i)distortions are removed across all energy andenergy service sub-sectors; (ii) appropriatepriority is given to the development of localenergy resources and related infrastructure; (iii)energy conservation and energy efficiency areencouraged; (iv) India’s competitiveness israised; and (v) economic growth is spurred.Key policy principles and initiatives in pricingenergy supplies and services that cut across allenergy sub-sectors of India are enumeratedbelow.

� As a general rule, all commercialprimary energy sources must be pricedat trade parity prices at the point ofsale. This should be particularly so forthe oil sector where imported crudeprovides over 70 percent of domesticconsumption of petroleum products.Even when the global oil marketdominated by Organisation of thePetroleum Exporting Countries(OPEC) is not a competitive market,the trade parity prices reflect India’sopportunity costs. However, thedomestic economy may have to beprotected against short-term volatilityin the International market caused byspeculators and manipulators. Thegovernment can do this by adjustingtaxes and duties in a revenue neutralway. An alternative could be to allowprice adjustments based on lagging 1-3month average prices, thereby forcingoil companies to use short-termhedging. Another alternative would beto use long-term supply contracts linkedto a variety of more stable energy priceindices. Of course any persistent pricechange that cannot be absorbed bychange in taxes and duties, should bepassed on to the domestic consumers.Several arguments are made to maintainthe status quo of import parity pricingin the oil sector. However, the onlylegitimate alternative to trade parityprices is full price competition atrefinery gate and retail levels in acompetitive environment with lowentry barriers and multiple players.Once full price competition is

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permitted on the inputs as well as theoutputs at all levels and theGovernment stops interfering in pricesetting, trade parity prices will prevailand the need for building up costs ona normative basis with possibilities ofpadding up, as is currently being done,will be obviated and efficiency gainswill emerge in procurement andmarketing. Prices of petroleumproducts will also vary across thecountry reflecting actual costs andrelative regional strengths of the oilcompanies.

� While the above idea works for tradedgoods, non-traded goods have to behandled differently. Prices of non-tradedcommercial energy supplies can bedetermined through competitionamong different producers (thispresumes multiple sources, low entrybarriers, and a competitive supply-demand balance) or independentlyregulated on a cost plus basis includingreasonable returns (where competingsupply sources are absent, entry barriersare high and demand exceeds availablesupply). The cost plus regulation musttake into account any realisation thatis achieved out of by-products pricedand sold on competitive terms. Toillustrate this point, the cost plus regimepricing natural gas in India does nottake the full credit for by-products as itcontinues to price the C

2/C

3

components of natural gas well belowtheir traded or competitive prices.

� To trade natural gas either throughtrans-national pipelines or as liquefiednatural gas (LNG) requires a largeinvestment in pipelines or gasification/regasification facilities (in smallquantities natural gas is nearly non-tradable). If sufficient gas is availablesuch investments may be worthwhilebut carry risks related to long-termprice for LNG. In a competitive setup, the producers of associated andnon-associated natural gas have theoption of liquefying the gas andtransforming it into a tradable

commodity or, alternatively, piping itto an export market. Either optionadds cost (inclusive of return on capitalemployed) to transform the non-tradable natural gas to a tradablecommodity based on investments. Thenet-back-realisation by the gas producerwould thus be the price of gas at thelandfall point which makes it possiblefor the gas producer to incur the extracost of making it tradable and yetcompete effectively in the end marketwith other suppliers of natural gas,LNG or alternate energy forms. Thisnet-back-price should then become theminimum price for the domestic userof such natural gas. At this net-back-price the gas supplier has the choice ofselling gas domestically or taking theinvestment risk and exporting the samethrough a pipeline or by conversion toLNG.

� Given limited production of naturalgas in India, economic considerationsmay well require that domesticallyavailable gas be made available first tothose end-uses that best extract itseconomic value among competing end-uses. Such end-uses in India could, forexample, be fertiliser, petrochemicalsCNG vehicles and power in that order.All of these end-users could competefor the natural gas available fromdomestic sources with a floor pricethat would be equivalent to the net-back-price that the producer could haveobtained as described above. Undersuch a scenario natural gas would firstmeet the fertiliser, CNG &petrochemical demand in full beforereaching the power sector. In realitythis situation is complicated by thefertiliser subsidy regime and the powerpricing regime both of which allowpass through of feedstock/fuel costs.Again gas use may be consideredeconomically more justified for peakingpower that must be priced differentlybut it is not. There is also a SupremeCourt order that requires preferentialallocation of gas for CNG vehicles.

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Unless these ground realities changegas may need to be allocated under acost plus regulation.

� However, with limited availability ofnatural gas, domestic prices in acompetitive set up would reach theprice of imported regasified LNG priceor even exceed it if LNG importfacilities do not exist. Since some ofthe priority uses of gas have externalities(e.g. the lower air pollution due toCNG buses) in a situation of limiteddomestic availability, such a user wouldbe willing to pay a CNG premiumover diesel, the alternate fuel. To avoidsuch distortions, till such time that abetter demand-supply balance emerges,some allocation of gas to specific usesalong with restraints on the price ofnatural gas may be needed. Onceadequate natural gas is available eitherthrough LNG or piped gas imports ordomestic natural gas, the marginal usein India would likely be powergeneration where natural gas will haveto compete with domestic or importedcoal. Of course, a gas-based power plantcan be a peaking plant in which case itwill have to compete against alternativesources of peaking power. The marketdetermined price of natural gas wouldbe one at which power generated usingnatural gas would have the same costas power generated through thecheapest alternative which would mostlikely be a coal-based plant. Newdomestic gas developments and theJoint Venture fields developed underNew Exploration Licensing Policy(NELP) rounds would need to take theforegoing pricing policies into account.

� How should one allocate natural gas ina shortage? If there were no otherdistortions, a competitive market wouldbe the ideal mechanism. However,given that a certain degree of self-sufficiency is considered desirable fordomestic fertiliser production,allocation of natural gas to fertiliserplants on a priority basis may berequired to ensure adequate domestic

production. Also, as long as fertiliserproducers have feedstock cost as a passthrough gas price determined throughcompetition would be distorted. Thecase for allocating compressed naturalgas to the transport sector is also strongas long as the Supreme Court’s mandatecontinues to require the use of CNGby buses, taxis and auto-rickshaws. Inthe long-run, however, air pollutionshould be controlled by stipulatingemission standards and not bymandating a particular fuel, since airpollution can also be controlled by useof clean diesel. There would then beno need to allocate gas for transportsector.

� It must be recognised that the bulk ofIndian coal cannot be easily traded.The Power Sector consumes about 80%of the domestic coal production. Withan ash content of over 40% and acalorific value averaging only 3500 kcal/kg., most of the coal sold to the powersector would have to be “prepared” tobe made tradable. This would entailboth cost and additional investment.In international trade, shipping andhandling of coal typically accounts for30-35% of the cost of coal with anaverage calorific value of about 6000kcal/kg. In India transport and handlingcosts can reach 200% to 300% of thepit head price of coal when moved toTamil Nadu, Karnataka, Maharashtra,Goa, Gujarat, Rajasthan, Delhi,Haryana, Punjab and parts of UP. Thisreinforces the need for washing andpreparation of coal by the coal suppliersince high grade energy used fortraction is used to transport a lowgrade fuel and useless ash. Further, itbrings into focus the need to graduallydecrease cross subsidies in railways sincethe rail freight for coal and othercommodities is higher than what canbe economically justified. Eliminatingcross subsidy surcharges on themovement of primary energy sourcesand other bulk freight items will notonly make energy prices more

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competitive but will also shift freighttraffic from the far less energy efficientroad sector to the railways. Offeringopen access to rail lines for privatemovers may be another way to makerail movements more efficient. As aresult of high freight rates importedcoal is competitive at coastal locationsall along India’s Western Coast andparts of Tamil Nadu.

� The price of coal should vary withquality and its calorific content. Costof production varies with the scale andtechnique of production as well as withgeological conditions. A central planneris highly unlikely to have the neededinformation to set prices in a rationalmanner. Only a competitive freemarket can do an efficient job of pricedetermination. A competitive marketrequires that there is also competitionon the supply side, i.e. that there aremany producers and no entry barriersto new producers. Entry of new playersin coal mining should be facilitated,trading of coal should be madecompletely free and coal prices shouldbe left to the market once competingsuppliers come into the market.

� Would this make coal expensive? Aslong as there is also competition onthe supply side, coal prices will remainnear the cost of production, includinga reasonable return on investment. Newentrants would whittle away any excessprofits. Even when domestic producerstake time to augment production,competition from imports will keepthe price in check. At the portsdomestic coal has to compete withimported coal and the delivered priceof coal calorie cannot exceed the landedcost of imported coal calorie. This alsoputs a natural constraint on coal pricesat mine mouths since they have to bebelow the landed cost of imports minusthe transportation cost from mine toport. If coal is exported, the minemouth price cannot exceed FOB priceminus the transport cost.

� Given current ground realities coal

prices cannot be determined in acompetitive market open to all users aslong as there is a single dominantsupplier and the largest coal consumingsector, i.e. power, operates on a cost-plus regime making it indifferent tocoal prices. Under the prevailingconditions, a strategy for competitiveprice discovery is possible as follows:

(i) High quality coking and non-coking coal which is exportablemay be sold at trade parity pricesas determined by the import parityprice at the nearest port minus15%. This practise is currentlybeing adopted for supply of goodquality coking coal to the steelindustry.

(ii) Twenty percent of the productionmay be sold through e-auctions.Quantities to be sold through e-auctions from different mines mustbe determined annually with anindependently monitored monthlymine-wise schedule that is enforcedby an independent coal Regulator.

(iii) The remaining coal should be soldunder long-term Fuel Supply andTransport Agreements (FSTAs).Regulated utilities should beallowed upto 100% of their certifiedrequirements through FSTAs.Other bulk consumers may haveto be given partial FSTAs based oncoal availability. Any shortfallsshould be met through e-auctionsupplies or imports.

(iv) The pithead price of coal underFSTAs will have to be revisedannually by a coal regulator on abasis that inter-alia takes intoaccount prices obtained through e-auctions, the FOB price ofimported coal (both adjusted forquality) and the production costinclusive of return based onefficiency standards.

(v) Coal prices should be made fullyvariable based on Gross CalorificValue (GCV) and other qualityparameters.

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� A competitive coal market is importantfor setting a proper price of naturalgas. This is so because in a market thatdoes not have any constraints in gassupply, the marginal use of gas will bepower generation which places it incompetition with coal.

� Entry barriers for new miningcompanies must be dismantled, andtime taken for awarding blocks,granting clearances and opening minesreduced significantly. India also needsto invest in port facilities and createcoast based power generation capacitiesbased on imported coal. These stepswould facilitate trade and benefit fromthe discipline of competition that tradeprovides. Improved port capacities andcoastal power plants with dedicatedjetties will not only yield competitiveefficiency through imports but can alsofacilitate movement of domestic coalthrough coastal shipping, therebyproviding a competitive alternative tothe stretched bulk freight capacity ofrailways.

� All secondary energy resources shouldbe priced based on competitiveprocurements by the service provider.Regulators must facilitate multiplesuppliers for all secondary energyresources and energy services. Wherethe service is provided by a naturalmonopoly such as a pipeline or adistribution network, rents must beindependently regulated and, wherepossible, competitively procured undernormative and regulated caps. All suchnatural monopolies must be purecommon carriers and service providerswith no interest in the content.

21. A competitive price regime can beestablished in the power sector once tariffbased bidding becomes the norm during the11th Plan period. Similarly, prices of petroleumproducts at the refinery gate can be freed andcompetitively set. However, coal and gas pricescannot be left to the market till a number ofcoal suppliers emerge, gas availability improves,or till fertiliser prices are deregulated. Thus,

Regulators are necessary for these sectors to setprices that will mimic markets as outlinedabove.

22. Consistency of Taxes Across Fuels:Currently Central & State taxes on variousforms of primary and secondary energy are asignificant part of the final price. Moreimportantly, these taxes are not appliedconsistently, thereby resulting in significantprice distortions. Taxes are essential to raisingrevenues but the following policies are essentialto ensure that they minimally affect energychoices:

� Central and State taxes on commercialenergy supplies need to be rationalisedso as to become neutral to fuel choicesand investment decisions. Relativeprices of fuels can be distorted if taxesand subsidies are not equivalent acrossfuels. In other words, taxes andsubsidies should be such that producerand consumer choices as to which fueland which technology to use are notaffected by them.

� The equivalence of taxes acrosscompeting fuels should be uniform withrespect to energy service delivered dulyadjusted for prevailing overall energyefficiency levels and any other specificexternality relevant to specific fuels.This would result in the least distortionas it would take into account effectivecalories and the conversion efficienciesof alternate fuels.

� Making the energy sector fully“Vatable” or rationalising taxes andeliminating differential taxation by StateGovernments can reduce distortions.

� Eliminating custom duty differentialson crude and petroleum products,differential levies on alternate fuels,removing or applying a uniform lowcustom duty on all imports for energysector projects/investments/supplies areother measures critical to rationalisingtaxes in order to minimise distortionsin energy markets. This can be done ina revenue neutral way.

79


� Removal of misplaced incentives suchas those available to Mega PowerProjects is needed. While the rest ofthe world is recognising the higherefficiency of distributed generatingfacilities, India is providing incentivesto Mega Projects. Consequently, StateGovernments opt for Mega projectsthat claim the incentives and then swappower among themselves to meet theguidelines of the Mega power policythereby creating unnecessarytransmission capacity and movementof power back and forth. There shouldbe no discrimination in availableincentives based on size or type oftechnology or fuel used.

� In fact, incentives should be similar foreach of the energy sub-sectors so thatbalanced development takes place. Anytax concession or duty exemptionprovided should be available to allenergy sub-sectors unless it supports awell-documented economic benefit.

23. Dealing with Externalities: Whiletaxes to raise revenues should be levied in away that least affect fuel/energy choices,environmental taxes and subsidies can be usedto actually affect fuel/energy choices. Someoptions available to deal with environmentalexternalities could be:� A consistent application of the “polluter

pays” principle or “consumer pays”principle should be made to attainenvironmental objectives at least-costwhere prescribed environmental normsare either not applied consistently ornot being adhered to. Methodologiesneed to be developed to do thisconsistently.

� Using incentives, cross subsidies, taxbreaks for public investments tomaximise the more energy efficient railfreight, electrification of railways,building double decked freight trains,improved mass transportation options,R&D for efficient engines or fuelalternatives etc., could also help mitigateenvironmental concerns.

� Certain conservation objectives maybe better served through appropriateregulations such as minimum vehicleoccupancy ratios, minimum fuelefficiency norms, or even allowing oddand even numbered vehicles on roadon alternate days etc.

� Taxes and subsidies to create differentialpricing and achieve the above objectivesrun the risk of creating perverseincentives. As an example, lowertaxation of diesel to boost publictransport has several negative outcomessuch as adulteration, less emphasis onefficiency in road transport carriage,agricultural and off-road applications, anegative environmental impact and thespawning of diesel passenger vehiclesenhancing all of the foregoing negatives.Thus care should be exercised in usingtaxes and subsidies.

24. Environment is not the only externalitythat can be managed through differential taxrates. Differences in taxes may be justifiedbased on documented benefits from exploitationof domestic resources, maintaining internationalcompetitiveness, creation of employment orsimilar objectives.

25. Subsidies for the Weaker Sections:Subsidies designed to benefit weaker sectionsof the society remain poorly targeted and resultin serious price distortions and malpractices.Most of the LPG subsidy is actually benefitingthe rich and the upper middle classes. A largepart of the PDS kerosene is used for adulteratingdiesel and burned in standby generating sets.Agriculture and household subsidies onelectricity provide the basis for theft of powerby industrial and commercial consumers. Thefollowing policy options exist to address thisconcern:

� Moving the prevailing subsidies andcross subsidies in the energy sectordesigned for the weaker sections of theeconomy to the Central and StateBudgets will go a long way in removingprice distortions, providing optimalprice signals and eliminatingmalpractices.

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� Subsidies that cannot be targeted in afool-proof manner should be madeavailable as minimal entitlements toeveryone. Consumption in excess ofthe minimum should be charged at fullcost of supply. Further, entitlementsshould be made tradable if notconsumed by requiring the serviceprovider to cash the entitlement at thefull marginal cost of supplying theunderlying energy resource or service.

� Another way to provide subsidiesefficiently is to make service providersbid for making the entitlementsavailable to the beneficiaries at least-cost to the State.

26. Institutional Reforms forCompetitive Efficiency: Neither appropriatepricing nor independent regulation bythemselves, can lead to competitive efficiencyif dominance by one or two large public orprivate sector units continues and if the publicsector remains handicapped by lack of authorityto take commercial decisions. Ease of entry forother players from both public and privatesectors and competition from the world marketwill create incentives to be efficient.

27. Public Sector Autonomy to Ensure aCommercial Culture: All public sectorcompanies must be managed by independentboards with no more than two governmentnominated Directors including just one fromthe incumbent Ministry. All other Directorsshould be nominated independently withnecessary sitting fees and consequentresponsibilities under the Companies Act. No

Director should have a direct or indirectbeneficial interest in the company exceeding aprescribed monetary equivalent of say Rs.2lakhs, in any financial year.

28. The Dismantling of Entry Barriers:Entry of other firms from within the central,state or private sectors into all sub-sectors ofenergy should be facilitated. Thus, open accessto distribution networks, the removal ofrestrictions on captive coal mines, allocationsfor coal, oil and gas blocks in competitive andtransparent ways and creating a level playingfield for all players must be undertaken togenerate competition.

29. Developing Long-Term DebtMarkets: The Central and State Governmentsas well as term lending institutions must seedthe market for long-term (20 years plus) debt.This should be available to finance allinfrastructure, particularly energyinfrastructure. Options could include one ormore of the following:

(a) capital market based instruments;

(b) debt structures with 20 year repaymentschedules including bullets at the endof years 10-12 along with undertakingsfor take-out financing of the bullets asthey fall due;

(c) guarantees for later maturities;

(d) twenty year repayment terms withbuilt-in refinancing every 5 years;

(e) partial risk guarantees and other similarstructures that effectively provide 20year plus funding for the energy sector.

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Policy for Energy Efficiency and Demand Side Management

6.1 LARGE POTENTIAL FORSAVING ENERGY

The importance of energy efficiencyand demand side management (DSM) has clearlyemerged from the various supply scenarios andis further underlined by rising energy prices.Efficiency can be increased in energy extraction,conversion, transportation, as well as inconsumption. Further, the same level of servicecan be provided by alternate means that requireless energy. The major areas where efficiencyin energy use can make a substantial impactare mining, electricity generation, electricitytransmission, electricity distribution, pumpingwater, industrial production and processes,transport equipment, mass transport, buildingdesign, construction, heating ventilation andair conditioning, lighting and householdappliances. It may be noted that a unit ofenergy saved by a user is greater than a unitproduced as it saves on production, transport,transmission and distribution losses. Thus a“Negawatt” (a negative Megawatt) producedby reducing energy need saves more than aMegawatt generated.

2. In the 1990s, several studies haveestimated the potential and cost effectivenessof energy efficiency and demand sidemanagement (DSM) in India7. Despite thesepotential studies, actual implementation has

been sluggish. The 8th Five Year Plan made aprovision of Rs.1,000 crores for energyefficiency to provide targeted energy savings of5,000 MW and 6 Mt in the electricity andpetroleum sectors respectively. There is noclear quantification of the actual costs andsavings achieved. The 9th Five Year Planproposed the passing of the EnergyConservation Act and the setting up of theBureau of Energy Efficiency.

3. The 10th Five Year Plan proposesbenchmarking of the hydrocarbon sectoragainst the rest in the world. It also suggestsdemand side management specifically in thetransport sector. The target for energy savingsin the 10th Plan is 95,000 Million Units whichis about 13% of the estimated demand of7,19,000 Million Units in the terminal year ofthe 10th Plan. However, there is no specificallocation to meet the energy savings targets.

4. A study prepared for the AsianDevelopment Bank (ADB, 2003) estimated animmediate market potential for energy savingof 54,500 million units and peak saving of9,240 MW. Though there is some uncertaintyin any aggregate estimates, it is clear that cost-effective saving potential is at least 15% of totalgeneration through DSM. Additional savingsare possible on the supply side throughreduction in auxiliary consumption at

Policy for Energy Efficiencyand Demand Side Management

Chapter VI

7 Nadel, S., V. Kothari, and S. Gopinath (1991): Opportunities for Improving End-Use Electricity Efficiency inIndia, American Council for an Energy-Efficient Economy, Washington, DC.

Banerjee R., Parikh J.K. (1993): Demand Side Management in Power Planning – An exercise for H.T. Industriesin Maharashtra, Economic and Political Weekly, August, 7-14, pp. 1659-70.

Parikh J.K., Reddy B.S., Banerjee R. (1994): Planning for Demand Side Management in Electricity Sector, TataMc-Graw Hill Company Ltd., New Delhi.

Parikh J.K., Reddy B.S., Banerjee R. & Koundinya S. (1996): DSM Survey in India: Awareness, Barriers andImplementability, Energy, Vol. 21, No. 10, pp. 955-966.

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generating plants and lowering technical lossesin transmission and distribution. At present anestimate of the total volume of the energyefficiency consulting business (audit,performance contracting, engineering, technicalassistance and consultancy) is less than 1% ofits potential (DSCL, 2004)8.

5. Since Energy Efficiency (EE)/DSMschemes are often cost effective, is it necessaryto have policy interventions? In actual practicethere are several barriers that constrain theadoption of EE/DSM schemes including hightransaction costs, lack of incentives to utilitieswho perceive DSM as a loss of market base,

BOX 6.1Bureau of Energy Efficiency (BEE)

BEE was established under the Energy Conservation Act, 2001 with effect from 1st

March,2002 to meet the following objectives:

� To exert leadership and provide policy framework and direction to national energyconservation and efficiency efforts and programmes.

� To coordinate energy efficiency and conservation policies and programmes and take it tothe stakeholders

� To establish systems and procedures to measure, monitor and verify energy efficiencyresults in individual sectors as well as at a macro level.

� To leverage multi-lateral and bi-lateral and private sector support in implementation ofEnergy Conservation Act and efficient use of energy and its conservation programmes.

� To demonstrate delivery of energy efficiency services as mandated in the EC Act throughprivate-public partnerships.

� To interpret, plan and manage energy conservation programmes as envisaged in theEnergy Conservation Act.

Actions taken by BEE so far are given below:

� BEE has conducted National Certificate Examinations for selection of Energy Managersand Energy Auditors.

� Energy auditing agencies for accreditation on the basis of their energy auditing capabilitiesand institutional set-up have been cleared by BEE.

� Draft norms for fixation of specific energy consumption in Cement and Pulp & PaperIndustries have been framed and these norms are under discussion prior to finalisation.

� Task forces in 7 Energy Intensive Sectors have been set-up and best practices on energyconservation are being discussed by these task forces.

� Industries are being motivated to take up energy efficiency measures through institutionof National Energy Conservation Award Scheme of Ministry of Power.

� Energy Audits for 9 Govt. buildings have been completed that include RashtrapatiBhawan, Prime Minister’s office, South Block (Defence Ministry), Rail Bhawan, SancharBhawan, Shram Shakti Bhawan, Transport Bhawan, R&R Hospital, Delhi Airport and AllIndia Institute of Medical Sciences (AIIMS) and implementation plans have been prepared.

� Energy Conservation Building Code has been prepared and is under review by thestakeholders.

8 DSCL (2004): Catalysing Markets Through Innovative Financing and Competitive Procurement for EnergyEfficiency, G.C. Datta Roy Presentation available at www.bee-india.nic.in

83


inadequate awareness, lack of access to capital,perceived uncertainty concerning savings, ahigh private discount rate, limited testinginfrastructure with which to ascertain savingsand an absence of a reliable measurement andverification regime. Policy interventions arerequired to address these barriers.

6. To conserve petroleum products, thePetroleum Conservation Research Association(PCRA) was set-up by Ministry of Petroleumand Natural Gas (MOPNG) in 1978. TheBureau of Energy Efficiency (BEE) wasestablished under the Energy Conservation Act,2001, with effect from 1st March, 2002, underthe Ministry of Power (MOP). The mission ofBEE is to develop policies and strategies onself-regulation and initiate market interventionsaimed at reducing the energy intensity of theIndian economy. While BEE has made abeginning (see BOX 6.1), a lot more needs to bedone. BEE does not have a fulltime head and,as of September 2005, had only 4 professionalson staff.

7. Since nearly one third of total energyis used for domestic cooking, efficiency of thecooking process should be given a high priority,particularly since this process is currentlymarked by poor level of efficiency.

8. To promote energy efficiency andconservation we need to create an appropriateset of incentives through pricing and otherpolicy measures. Barriers to the adoption ofefficient technologies have to be removed andencouragement to develop and deploy moreefficient technologies has to be provided. Publicpolicy can set the pace for such developmentby offering attractive rewards and imposingbiting penalties.

9. An enabling institutional framework isessential to achieve the objectives listed above.Details of such an institutional framework arelisted below:� The BEE should be made an

autonomous statutory body under theEnergy Conservation Act and beindependent of all the energy ministries.It should be funded by the Central

Government. A cess on fuels andelectricity (adjusted for the cess on fuelsused for generating electricity) can bejustified as a user charge. BEE staffingshould be substantially strengthened.

� Existing national energy efficiencyorganisations like the PetroleumConservation Research Association(PCRA) should be merged with theBEE. This will ensure that the BEE isresponsible for energy efficiency for allsectors and all end-uses.

� Based on the recommendations of themerged autonomous body thegovernment could directly providefunding support to financial institutionsfor promoting energy efficiencyprogrammes.

� Energy efficiency and conservationprogrammes and standards should beestablished and enforced. The BEEshould develop such standards for allenergy intensive industries andappliances as well as develop modalitiesfor a system of incentives/penalties forcompliance/non-compliance. Thesestandards should be at levels equal toor near current international norms.

� Mechanisms for independentmonitoring and verification of achievedenergy savings and the cost effectivenessof programmes must be established.Evaluation reports should bequantitative and made publiclyavailable. An annual report of theinvestments and savings made throughspecific energy efficiency and DSMprogrammes should be prepared by theBEE and reported to the Parliament.The feedback from the monitoringexercises should help in modifyingprogramme designs.

� Truthful labelling must be enforcedwith major financial repercussions ifequipment fails to deliver statedefficiencies. In extreme cases, one canresort to black listing errant suppliersat consumer information web sites andon government procurement rosters.

84


� Verification and labelling requirestesting laboratories. A programme forsetting up such laboratories in public,private and the NGO sectors is needed.

� National Building Codes should berevised to facilitate and encourageenergy efficient buildings.

� Large scope exists to make buildingsenergy efficient. Construction materialsare energy intensive and the use ofappropriate materials and design cansave a significant amount of energy notonly in construction but also duringuse by building occupants. Innovativeand energy efficient buildingtechnologies should be widelypublicised through an annual prize.Reducing energy needs for heating andcooling by orientation, insulation andusing temperature differences in earthor water at some depth could also besignificant.

� Improvement in energy efficiency andDSM require actions by a large numberof persons and institutions. To mobilisethem, the first task is to createawareness of the scope of possibilitiesand the extent of gains one can makethrough such measures.

� Promote and facilitate energy servicecompanies (ESCOs) that can identifyenergy saving options and providetechnical support needed for executionto industries and commercialestablishments.

10. Some policy initiatives can yield quickreturns with small effort just like plucking lowhanging fruits. These could include —

� Regulatory commissions can allowutilities to factor EE/DSM expenditureinto the tariff.

� Each energy supply company/utilityshould set-up an EE/DSM cell. TheBEE can facilitate this process byproviding guidelines and necessarytraining inputs. A large number ofpilot programmes that target thebarriers involved and have low

transaction costs need to be designed,tested with different institutionalarrangements, with different incentives,and with varied implementationstrategies. Innovative programmedesigns can then be rewarded.

� Implementing Time-of-Day (TOD)Tariffs: All utilities should introduceTOD tariffs for large industrial andcommercial consumers to flatten theload curve. Utilities should supportload research to understand the natureof different sectoral load profiles andthe price elasticities of these loadsbetween different time periods tocorrectly assess the impact of differentialtariffs during the day. The utility shouldhave focus group meetings withindustrial or large commercialconsumers, document a few potentialcase studies illustrating the potentialfor shifting loads and provideinformation and analytical supportalong with implementation of the TODtariff.

� Facilitating Grid Interconnection forCogenerators: Enforce mandatorypurchase of electricity at fixed pricesfrom cogenerators (at declared avoidedcosts of the utility) by the grid toencourage cogeneration. The buying/selling price should be time –differentiated and declared by the stateregulatory commissions at the time ofeach tariff notification.

� Improving Efficiency of Industrial,Municipal and Agricultural WaterPumping: Institute measures thatencourage adoption of efficientpumping systems and shifting ofpumping load to off-peak hours. Thepublic sector should be mandated todo so, and the private sector could beencouraged to do so through time-of-day pricing. This will help reduce peakdemand and energy demand.

� Instituting an Efficient MotorsProgramme: This initiative shouldfocus on manufacturers/rewindingshops and target market transformation,

85


by providing incentives to supplyenergy efficient motors.

� Instituting an Efficient BoilerProgramme: This initiative shouldfocus on industry and provideincentives for replacement of oldinefficient boilers.

� Promoting Solar Hot Water Systems:This programme should aim at bothindustrial and household needs of hotwater.

� Promoting Variable Speed Drives:All large industries should be requiredto assess suitability of variable speeddrives for their major pumping and fanloads.

� Undertaking Efficient LightingInitiative: Utilities should launch pilotefficient lighting initiatives in towns/cities (similar to the BangaloreElectricity Supply Company(BESCOM) programme in Bangalore).Features should include warranties bymanufacturers and deferred paymentthrough utility bill savings.(International examples are available atwww.efficientlighting.net)

� Improving Cooking Efficiency:Efficiency of cooking stoves should beimproved by targeting manufacturersand requiring them to label stoves sothat the consumers know the cost offuel used. Energy efficient utensils andefficient cooking practices should bepromoted as they offer a very largescope for reducing fuel consumption(see www.bachatcooker.com).

� Making Energy Audits CompulsoryFor All Loads Above 1 MW: Energyaudits should be done periodically andbe made mandatory for publicbuildings, large establishments(connected load >1 MW or equivalentenergy use >1MVA) and energyintensive industries.

� Reaping Daylight Savings: Savingdaylight by introducing two time zonesin the country can save a lot of energy.

11. Medium to long-term initiatives couldinclude —

� Adoption of a least-cost planning andpolicy approach that ensures thatenergy efficiency and DSM have a levelplaying field with supply options. Theregulatory commissions should invitebids for DSM while approving newcapacity additions. Thus, if a staterequires an additional peak demand of1,000 MW over the next five years, theutility can ask for bids fromIndependent Power Producers (IPPs)as well as Energy Service Companies(ESCOs). For example, an efficientlighting programme may offer to save150 MW at a cost of Rs.5,000/peakkW saved. This would then becomepart of the least-cost plan before puttingin new power plants that may costRs.40,000-50,000/peak kW generated.Similar exercises should be adopted forthe oil sector.

� Initiate benchmarking exercises fordifferent industrial sectors, hotels,hospitals, buildings, etc. In eachsegment, the benchmark would providethe theoretical minimum energyconsumption, the best practice andspecific steps required to reduce energyconsumption. A road map (5-10 years)should be created for energy efficiencyimprovements in each industrysegment. The BEE can catalyse thebenchmarking process by bringingtogether energy auditors, researchers,end-users and providing the requiredfunding.

� The Government (Central/State),Railways, Defence and public sectorunits constitute a large market segmentfor energy intensive products. The basisfor selecting a vendor is usually onlythe lowest initial cost. It isrecommended that the procurementprocess be modified based on theminimum annualised life cycle cost (seeBOX 6.2). A manual should be preparedestablishing the methodology forannualised life cycle costing with a

86


simple spreadsheet package to enableeasy implementation.

� Though life cycle costing seemsparticularly relevant for appliancepurchase since appliances are oftenbought without consideration ofoperating costs, it should be used forall decision-making and alternativesshould be compared in terms ofexpected present discounted values oflife cycle cost.

� Increasing Efficiency of Coal-BasedPower Plants: Require NTPC andSEBs to acquire technology to enhancethe fuel conversion efficiency of theexisting population of thermal powerstations from an average of 30% to35%. No new thermal power plantshould be allowed without a certifiedfuel conversion efficiency of at least38-40%. While competitive tariff basedbidding can balance fuel efficiencyagainst capital cost and provideincentives for efficiency improvement;in the absence of such competition thepace of efficiency improvement needsto be forced.

� Shifting Freight Traffic to Railways:Improve railway service to win backthe long-distance freight traffic carriedby trucks today that consume five timesas much diesel per net tonne kilometerof freight carried. Construction ofdedicated freight corridors anddismantling of the ContainerCorporation (CONCOR) monopolyare critical measures for this. Already,the railways have permitted privateoperators. Carrying 3000 billion tonnekilometres (Bt-km) of freight (half ofprojected freight traffic in 2031) by railinstead of trucks can save approximately50 Mt of diesel per year. To attractfreight traffic, railways must ensuretimely and secure delivery. This can beaccomplished by operating scheduledcontainer trains and by charging freighton the container, rather than thecontent, so that the customers can lockand seal it.

� Promote Waterways: Water transportis energy efficient. Make investment toprovide the needed infrastructure tofacilitate water transport.

BOX 6.2Initial Cost and Life Cycle Cost

In many cases of energy equipment the annual costs of operation predominate as comparedto the capital cost. However the operating costs are often not considered at the time of thepurchase, as they are part of the total electricity bill and recurring maintenance costs. Thepurchase decision is based on the initial cost. Table shows the initial cost and the annualisedlife cycle cost (ALCC) for some typical energy appliances based only on the annual electricitycost since it is the main cost component for these products.

Table: Comparison of Initial Cost and Life Cycle Cost

Sl. Equipment Rating Initial cost Annual ALCC Cost of

No. (Rs) Electricity (Rs) electricity as

Cost (Rs) %of ALCC

1. Motor 20 hp 45,000 600,000 605,720 99.0

2. EE Motor 20 hp 60,000 502,600 512,700 98.0

3. Incandescent Lamp 100 W 10 1168 1198 97.5

4. CFL 11 W 350 128 240 53.6

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Figure 6.1Reduction in the Energy Consumption of Refrigerators Sold in the United States of America

Source: Wiel, S. (2001)9

� Promote Urban Mass Transport:Promote urban mass transport byproviding quality services which maybe partially financed by imposingcongestion, pollution and parkingcharges on those who use personalisedmotor transport. Plan for future masstransport corridors in smaller cities andacquire the right-of-way. As the citygrows, the permissible built up areamay be gradually increased. Howeverthe additional right to build shouldremain with the local government,which it can auction to finance masstransport and other urbaninfrastructure.

� Fuel Efficient Vehicles: Promotehybrid vehicles in India, which areinternationally already availablecommercially. Also promote thealready commercial flexi fuel vehicles

that can burn varying proportions ofethanol-blended fuels.

12. At an 8 percent growth rate, we willnearly double our capital stock in nine years.Energy using equipment and appliances willalso spread rapidly. Thus, the manufacturers ofequipment and appliances should be targetedto force the pace of improvement in energyefficiency. The following steps may be takento improve efficiency of energy consumingequipment:

� Mandate time bound targets of energyefficiency for industrial equipment,boilers, and appliances such as motorvehicles, pump sets, refrigerators, waterheaters, boilers, etc.

� Create competition amongmanufacturers to be the first to achievethe target through a “golden carrot”which is a large monetary reward to

9 Wiel, S. (2001): Introduction, Energy Efficiency Labels and Standards: A Guidebook for Appliances,Equipment, and Lighting, S. Wiel and J.E. McMahon, eds. (Washington, D.C., Collaborative Labelling andAppliance Standards Programme (CLASP).

88


the first one to commercialise productswhich provide, say a minimum savingof 20% over the best existing designwithin a given time frame. The SuperEnergy Efficient Refrigerator Projectin the US is a successful example ofsuch a policy initiative(see Figure 6.1).

� Mandate clear and informative labellingin well-designed standardised forms forequipments and appliances. Combinethis with consumer awarenessprogrammes that illustrate the savingsand possible associated gains.

� Strengthen appropriate labelling bycreating regional facilities for testingand certification. Such a labelling/standards initiative should be supportedby analytical studies to establishequipment consumption benchmarks(minimum achievable energyconsumption targets).

13. Industries may need technical supportto identify and execute energy saving options.Energy service companies (ESCOs) can providesuch support. We need to promote and facilitateESCOs. Some possibilities include—� Financing Support – The support for

ESCOs could be in the form of

payment security mechanisms (this maybe required for projects inmunicipalities, government buildings),partial credit guarantees, or venturecapital. Financial institutions may beencouraged to provide these.

� Encouraging different business models– For ESCOs to be successful in Indiaa variety of alternative business modelsneed to be attempted to determine theappropriate ones in the Indian context.The BEE could facilitate 15-20demonstration ESCO projects indifferent sectors. These should be well-documented, independently monitoredand made available to the public. Thiswill encourage more entrepreneurs toinvest in ESCOs.

� ESCOs as producers of “Negawatts”may be given the same tax breaks thatare available for renewable energyprogrammes or other energyinvestments.

� Providing an institutional frameworkfor independent monitoring &evaluation of projects delivered byESCOs. This would involveindependent testing laboratories andsetting benchmark standards.

89

Policy for Renewable and Non-Conventional Energy Sources

An examination of India’s primaryenergy balance shows that renewables accountfor about 32% of primary energy consumptionin 2003-04. Of this, the major contributor istraditional biomass mainly used in cookingfollowed by electricity generation from largehydro plants. The actual share of modernrenewables (see Figure 7.1) in India’s energymix is significantly lower (about 2% of thetotal).

2. Adverse local environmental impacts(SO

x, NO

x, SPM) and global environmental

impacts (green house gas emissions mainly dueto carbon dioxide) associated with fossil fueluse have resulted in an increased emphasis onrenewables. Figure 7.1 shows a listing of someof the commonly used renewable options.Renewables can be used for space heating,cooling, water pumping, cooking and for almostany end-use that is presently met by fossilfuels.

3. As the country is short of energyresources the need to develop all energy sourcesincluding renewable options is paramount. Our


Chapter VII

Figure 7.1Renewable Energy Options

90


efforts in the past have not been as successfulas we would have liked. Many renewables havehigh initial costs (see Table 7.1). Oftendevelopment efforts have been sub-critical andsubsidy driven growth has not providedincentives for technical improvements or costreduction. There are also externalities of theuse of renewables, the benefits of which do notaccrue to the user.

mandated in many countries (see Table7.2). The regulated feed-in tariffs shouldhave time-of-day features that improveeconomics of renewable power.

� With the capital subsidy available forimproving rural access having becomeuniform for both remote and grid-connected villages/habitations, Ministry

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

Sl. Source Capital Cost Estimated Cost of Total InstalledNo. (Crores of Generation Capacity

Rs/MW) Per Unit (MW)(Rs./kWh) (upto 31.12.2005)

1. Small* Hydro-Power 5.00-6.00 2.50-3.50 1748

2. Wind Power 4.00-5.00 3.00-4.00 4434

3. Biomass Power 4.00 3.00-4.00 377

4. Bagasse Cogeneration 3.00-3.50 2.00-3.00 491

5. Biomass Gasifier 2.50-3.00 3.00-4.00 71

6. Solar Photovoltaic 25-30 15.00-20.00 3

7. Energy from Waste 5.00-10.00 4.00-7.50 46

*<25 MW

4. Renewable energy may need specialpolicies to encourage them. This should bedone for a well-defined period or up to a well-defined limit, and be done in a way thatencourages outcomes and not just outlays.Suggestions include:

� Capital subsidies which only encourageinvestment without ensuing outcomeshould be phased out by the end of the10th Plan.

� Power Regulators must seek alternativeincentive structures that encourageutilities to integrate wind, small hydro,cogeneration etc., into their systems.All incentives must be linked to energygenerated as opposed to capacitycreated.

� Respective power Regulators shouldmandate feed-in laws for renewableenergy where appropriate as providedunder the Electricity Act and as

of Power (MOP) and Ministry of NonConventional Energy Sources (MNES)need to better coordinate the outcomesof RGGVY, MNES’s ruralelectrification programme, and thenewly developed pilot projects underVillage Energy Security Programme.Similar coordination is also called forbetween the rural electrificationprograms, telecom and roadconnectivity initiatives and certainsocial sector programs. Bundling ofservices is likely to achieve greatersuccess and is more likely to yieldsustainable structures that are replicablethrough separate franchises.

5. Price subsidy for renewables may bejustified on several grounds. A renewable energysource may be environmentally friendly. Itmay be locally available making it possible tosupply energy earlier than possible through a

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91


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centralised system. It may also provideemployment and livelihood to the poor.

6. The environmental subsidy forrenewables could be financed by a cess on non-renewables and fuels causing environmentaldamage.

7. All price subsidies should be linked tooutcomes. Thus, for example, giving a capitalsubsidy on a wind power plant providesencouragement to set-up a power plant butdoes not provide any additional incentive togenerate power. Instead a price premium onfeed-in tariff for wind power into an existingpower grid ensures outcome for the outlay.For grid connected renewables, RegulatoryCommissions (RC’s) should provide feed-inlaws to permit renewables to supply electricityto the grid. RC’s should ensure that therenewables are given a tariff at least equal tothe avoided cost of generation.

8. A premium on feed-in tariff may notbenefit a stand alone plant in a remote area.For such a plant, a capital subsidy may berequired. Such a capital subsidy, however, canbe linked to the amount of power actuallygenerated if it is given in the form of TradableTax Rebate Certificates (TTRCs). The rebateclaim would then become payable whenelectricity is generated and would be linked tothe amount of electricity generated. This willalso encourage earlier exploitation of betterwind sites. The need to keep the TTRCstradable arises from the possibility that smallgenerators may not have adequate taxableincome to benefit fully from tax rebates.

9. In areas where there is no electricitygrid, there should be minimum clearances/permissions required for setting up aDistributed Generation (DG) system. Supplycompanies/entrepreneurs should be free to set-up micro-grids and recover revenues fromcustomers. This is already provided for in theElectricity Act. Each state should clearly defineguidelines to facilitate this process.

10. A critical issue in distributed generationfor rural electrification is the cost recovery and

the implementation mechanism. Differentpolicy experiments for implementation of DGin different regions should be attempted. Thevillage panchayat aided by the state energyagency and technical experts should decide theappropriate technology option (biogas, biomassgasification, wind-diesel, micro-hydel, bio-oil-engine) for their village. For isolated systems itis beneficial to link the DG system to anindustrial load (cold storage, oil mill etc.) toimprove its load factor and hence its economicviability. The capital subsidy should be basedon the annual generation, and should preferablybe in the form of an annualised subsidy to beprovided based on actual generation. Theseprojects can be set-up by panchayats,independent power producers or renewableenergy service companies. A mechanism ofbidding can be used to obtain the annualisedsubsidy level sought for sustainability. Forexample, if it is decided to electrify a villageusing a dedicated producer gas engine andbiomass gasifier, bids may be obtained for thesupport required annually for the concessionperiod per kWh of actual generation. Theproject would then be given to the lowestbidder. Such a programme would require actualtracking of annual generation. This is feasibleusing existing technologies of remotemonitoring and would add only incrementallyto the system cost.

11. An annual renewable energy reportshould be published providing details of actualperformance of different renewable technologiesat the state and national levels. This wouldinclude actual energy supplied from differentrenewable options, availability, actual costs,operating and maintenance problems etc. Themonitoring should also encompass otherparameters like user profiles (in order to ensurethat government support is indeed going topoor households), as well as livelihoodoutcomes such as increased income, improvedfood security and gender impacts. In fact, thisalso applies to rural electrification, where themonitoring parameter should not just be thevillages and/or hamlets electrified. Monitoringmust be based on actual households electrified,hours of electricity received by these householdsand the various impacts described above. In

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addition to monitoring the performance ofdevices, the assessment should critically reviewthe programme objectives and the strategyadopted in order to suggest course correctionsas required. Information on any system that isreceiving government support should be madepublicly available. It is essential to ensure thatindependent assessment of performance is donefor all renewable projects receiving governmentfunding. This will help in tracking programmes,avoiding repeating mistakes and providing mid-course corrections.

12. The Department of Science andTechnology (DST) has set up TechnologyBusiness Incubators for entrepreneurs forrenewable energy, energy efficiency and ruralenergy. However, entrepreneurs also needfinance. Financial institutions should beencouraged to set-up Venture Capital Fundsfor energy entrepreneurs. DST should monitoractual success on the ground and reshape itsprogramme based on actual results/feedback.

13. The following specific policies topromote various renewables are recommended:

� Mini Hydro: A detailed survey shouldbe carried out to identify potentialsites. Identified sites should then beauctioned. For plants which are notconnected to an existing grid, bids forthe lowest tariff with a pre-specifiedpremium in the form of TTRCs shouldbe invited. For village level plants, theentrepreneurs should be encouraged tosupply power to meet otherrequirements such as agro processingand milling and if such productive loadsare not available, the entrepreneursshould develop sustainable integratedschemes that aim at developing thecommunity as a whole. If the plant canfeed into a grid, the grid should berequired to accept power at theregulated feed-in tariff with time-of-day features, and the plant site shouldbe auctioned off for minimum premiumin the form of TTRCs linked toelectricity generation. Theresponsibility for investments needed

to connect to the grid should be fixedin advance before the bidding.

� Wind Power: For wind power, siteselection is freer than hydro-power andwind plants can be set-up on privateland. Thus there may be a need toauction only sites on public property.The same two types of auctions maybe followed as described above forhydro-power plants. Where cultivationis not affected, a wind turbineinstallation should be permitted onagricultural land without requiring itsconversion to non-agricultural land.

� Bio-Diesel: The production of bio-diesel needs to be encouraged in a waythat primarily involves outcome relatedfiscal incentives for its economicproduction. Certain vegetables oils canbe directly mixed with diesel, especiallyfor stationary applications, in certainproportions without any significantprocessing. Transesterification ofindustrial oils (with high levels of freefatty acids (FFA) or vegetable oils canyield bio-diesel which can substitutefossil fuel-based diesel in both stationaryand motive applications. Non-edible oilssuch as those obtained from Jatrophaand Karanj are gaining attention forproduction of bio-diesel in India.Currently, significant uncertaintyprevails over the exact yields fromJatropha or Karanj cultivation withestimates ranging from a low of 0.4tonne of diesel per hectare to 1.0 tonneof diesel per hectare.

Bio-diesel can be encouraged inalternative ways. One way is toencourage oil companies to take thelead in developing large-scale plantationsdirectly through contract farming byindividual farmers, self-help groups(SHGs), rural cooperatives, panchayatsetc. In this case the problem of pricingof seed and bio-diesel are internalised.Another way is to let organisedindustries, self-help groups orcooperatives on the line of Amul,pursue Jatropha, Karanj and other

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suitable plantations. They may sell theoil extracted or set up transesterificationunits individually or collectively to sellbio-diesel either to oil companies forblending or directly to consumers injerry cans.

Up to 100% tax rebate can be providedfor investments made in plantationsand bio-diesel processing throughTTRCs linked to actual bio-diesel/seedproduction. In addition, TTRCs couldinclude a premium for use ofrenewables, employment generationand an environmentally preferable fuel.In cases where the TTRCs are acquiredby the oil companies, organisedindustry and/or large cooperatives, acompetitive environment with multipleplayers would ensure that the benefitsare shared with the ultimate grower.Further, this green fuel can be madefree of taxes and levies currentlyimposed on diesel based on fossil fuelswith the bulk of the benefit beingpassed on to the end-consumer as isdone in countries such as Germany,Spain, Italy and USA. A part of thebenefit could also be used to build afund that would provide price supportto the Jatropha/Karanj farmer in theevent that world price of fossil fuel-based diesel goes below a certain pre-set price. The investment incentive canbe adjusted as economic viability isestablished and the country achieves alevel of output that meets the targetedreplacement in both stationary andmotive applications. Employmentgenerated in cultivating bio-plantationsmay be made eligible for coverage underthe National Rural EmploymentGuarantee Scheme.

A parallel initiative based on bio-dieselproduction from the residual industrialoil produced as a by-product whilerefining edible oils may also beencouraged. Significant quantities ofsuch residual oils are available in worldmarkets but current imports into Indiaattract different levels of custom duty

based on end-use. A duty of 65% isimposed on use of such residualindustrial oils for conversion to bio-diesel. If this duty is reduced to 5% asin the case of crude oil, it would bepossible to produce diesel based onsuch imports of industrial oil at aboutRs.25/litre. This may be sold directlyto consumers by producers or to oilfirms without levying any of thecurrent taxes and levies imposed onfossil based diesel. Again, the oilcompanies may be required to pass onbulk of the benefit to the consumers.

Thus the following policies arerecommended for bio-diesel:

• Support Jatropha, Karanj and othersimilar species, with incentives assuggested above.

• Since the end objective is topromote bio-diesel and significantresearch is still needed to establishviable germ plasms and genotypesfor bio-fuel plantations, it isrecommended that the parallelroute based on industrial oils bepursued immediately through areduction in import duty to 5%for high FFA vegetable oils forconversion to bio-diesel.

• Transesterification facilities set upby importers of industrial oils mayalso be given TTRCs.

• Encourage direct and local sale ofbio-diesel where feasible. This canbegin with the metro towns.

• As a green fuel make bio-diesel freeof excise and levies charged on fossilfuel-based diesel.

• Bio-diesel and/or blends of bio-diesel should be sold with fulldisclosure and priced differentlyfrom pure fossil fuel based diesel.

� Ethanol: Ethanol is a more complexissue. At the outset it is stated that anyinvestment in R&D andcommercialisation of cellulosic ethanolmay be given a full tax credit for aninitial period of 5 years based ondelivery of defined outcomes. Ethanol

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blending helps diversify energy mixand so improves energy security. If theethanol is produced domestically theimpact on energy security is even better.

There is no surplus ethanol availablein the country for blending in petrolfor motive energy. India has beenimporting ethanol since 2002 andbecame the largest importer from Brazilin 2005 with imports of 411 millionlitres. This was over 9% of the worldethanol trade in 2005. The importedalcohol was primarily used by thechemical industry as it could not accessdomestic alcohol.

As a comparison, a 5% blend of ethanolin petrol in India would require 610million litres of ethanol – some 14-15%of world trade in ethanol. Clearly, theforegoing numbers show that domesticavailability of ethanol in India (whichdepends on cane production & yields)and India’s policy on blending alcoholwith petrol can significantly affectdomestic and world prices of ethanol.Needless to add that the fate of thechemical industry in India hangscritically in balance between policiesthat decide end-use of domesticallyproduced ethanol on one hand and thelowering of barriers to internationalcompetition in chemicals on the otherhand.

An ethanol blending programme wasannounced in 2003. The programmecould not succeed because of non-availability of ethanol. However,domestic prices of ethanol have doubledsince 2003 to reach import parity prices.Ethanol in India is produced as a by-product of the sugar industry frommolasses. About half the domesticproduction is used for potable purposeswhile the balance is used by industrywhich supplements shortfalls throughimports. The value addition in industryis on average 2-3 times higher than thevalue addition as an additive to petrol.

India is the only large country wherepotable liquor is produced from

molasses – most other countriesproduce potable liquor from grain. Forthe Indian liquor industry domesticmolasses remains the cheapest optionsince ethanol import for potablepurposes attracts a custom duty of150%. Since the liquor industryprovides huge tax revenues to bothcentral and state governments, theyhave traditionally managed to maintaintheir hold on domestic molasses basedethanol to meet their need. Theremaining domestically availableethanol is simply inadequate to meetthe needs of both the domestic chemicalindustry and blending with petrol. Thusone or both, the chemical and thepetroleum industry have to importethanol, on which custom duty of only10% is levied, to meet their needs.

Sugarcane yields in Brazil are some23% higher on average and sugar yieldsfrom sugarcane is about 34% higher.The cost of producing sugarcane basedethanol in Brazil is 40-50% that ofIndia. Brazil produces 42% of world’sethanol. USA, the second largestproducer of ethanol, with 37% share ofworld production, produces ethanolfrom corn which is heavily subsidised.The per capita land availability in Brazilis more than 15 times and in USAmore than 10 times that in India. Only1% of the cultivable land in Brazil iscurrently under sugarcane productionand water availability is not a problem.Thus Brazil’s ethanol industry hassignificant growth potential. In Indiawater is a big constraint and sugarcaneplantations have remained at 3.8 to 4.2million hectares over the last 15 years.Given persistent shortages in grain, lackof water and pace of urbanisation,India’s acreage under sugarcane is notlikely to increase.

It is pointed out that the calorific valueof ethanol is only 56% of petrol.However, blending improves burningefficiency and thus ethanol is pricedsome 30-35% below gasoline prices in

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Brazil which is the biggest user ofethanol for motive purposes.

Given the above facts, availability ofmolasses based alcohol from the sugarindustry is unlikely to growsignificantly. Even if new sugarcaneacreage comes up in water rich areas ofBihar and U.P., it should ideally replacecurrent acreage in water scarce areassuch as Maharashtra. Productivity gainsare potentially possible and the same,if achieved, would by themselves noteven be able to keep up with the likelygrowth in demand if the blendingprogramme takes off in earnest. Evengrain based alcohol would becomeviable only if we first address our foodsecurity concerns and agriculturalgrowth rises to at least 4% level. Thusthe options available to India to increaseavailability of ethanol in the short tomedium term are:

(a) aggressively support alternate routesto ethanol such as cellulosic ethanoland low water intensity crops suchas sweet sorghum;

(b) raise sugarcane yields and divertincreased cane output for ethanolproduction;

(c) promote grain-based alcohol to theextent possible especially fromspoilt grains;

(d) remove barriers to import ofethanol for all end-uses; and

(e) like equity oil seek ethanol acreagein Brazil – the world’s cheapestproducer of ethanol.

Thus the following policies arerecommended:

• Set import tariff on alcoholindependent of use and at a levelno greater than that for petroleumproducts.

• Require that oil companies mayblend upto 5% of ethanol withpetrol but do not mandate oilcompanies to do so.

• Price ethanol at its economic valuevis-à-vis petrol but not, in anyevent, above its import parity price.

• Companies in India such as PrajIndustries and International CropsResearch Institute for the Semi-Arid Tropics (ICRISAT) havedeveloped commercial varieties ofsweet sorghum. To encouragealternate routes to ethanol, suchproduction may be procured at thefull trade parity price of petrol for5-7 years instead of being purchasedat its true economic value based oncalorific content duly adjusted forimproved efficiency.

• As a green fuel, however,government may wish to waive allor part of the excise and leviescharged on petrol to the extentthat it contains ethanol. However,bulk of the benefit must be passedon to the consumer.

• Petrol pumps must declare if theyare selling blended petrol and priceit differently.

• Incentivise cellulosic ethanol withinvestment credits as detailed above.

� Fuelwood Plantation: Cooperativesshould be encouraged and facilitated togrow tree plantations in villages.Cooperatives which are open to allmembers of the community should begiven government land on a long-termlease. Women should be encouraged toset-up and manage such plantations sothat the time they now spend ingathering fuel can be spent productivelyin a way that empowers them. Theyshould also be provided finance. Iforganised and managed properly, suchplantations are economically viable andsuccessful as shown by the experienceof National Tree Growers CooperativesFoundation [Parikh et al (1997)10]. Fieldbased NGOs could also be involved inthis activity. To encourage large-scaleplantations, based on contract farming,

10 Parikh Jyoti K. and Reddy B. Sudhakara, Editors (1997): Sustainable Regeneration of Degraded Landsthrough people’s participation”, Tata McGraw Hill Publishing Co. Ltd., New Delhi.

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the corporate sector could beincentivised to build wood based powerplants with assured access to benefitsannounced under the liberal captivepolicy enunciated in the Electricity Act,2003.

� Electricity from Wood Gasification:This process can provide electricitybased on gasification of wood and canbe very useful especially in remotevillages. The same set of policiesindicated for micro hydel and windpower plants should be followed here.

� Community Biogas Plants: Biogasplants have been promoted for familieswith 5 or more cattle head to obtain 2to 3 cubic metre of gas per day. Theestimated potential is 14 million plants.This leaves out the dung of all thosewho have fewer animals and also wastesthe surplus gas that may be producedin warmer months. The real potentialof biogas is thus in community levelplants. To encourage private orcommunity entrepreneurs to set theseup, they need to be provided land andfinance. Also to have the willingparticipation of all the cattle owners inthe community requires an appropriateoperating strategy. Parikh and Parikh(1977)11 have shown the possibility ofsuch a strategy. The essential policyrequired is the provision of land andfinance.

� Family Size Biogas Plants: If fuelefficient cooking utensils and methods,with which 60% to 70% energy can besaved, are used than even a biogas plantwith one or two cattle heads canprovide the bulk of required energyfor a family’s cooking. This wouldavoid the institutional complexity ofoperating community level biogasplants. Compact and monolithic biogasplants suitable for one, two or threeanimals are now available. Trials withsmall biogas plants and energy efficient

cooking should be carried out toexamine their acceptability.

� Solar Thermal Water Heaters (SWH):These are economical. The main barrierto their adoption is the expense ofretrofitting plumbing in households andindustries. Building laws should beamended to ensure that all newbuildings and factories have solar waterheaters. Existing households,commercial establishments and factoriesshould be encouraged to install solarwater heaters through a DSMprogramme run by electricity utilities.Alternatively incentives may be givenin the form of income tax rebates,property tax rebates, rebates in transferfees and rebates in electricity charges.The government, including the defenceand public sector, account for asignificant amount of new constructionand installation. They can set theexample by conforming to revisedbuilding laws.

� Solar Thermal Power Plants: Theeconomic viability of solar thermalplants has not yet been fully established.To encourage entrepreneurs to investin such plants, a higher premium offeed-in tariff may be given. The higherpremium can be justified given thehigher risk and may be available toonly the first 5000 MW of solar thermalplants.

� Solar Photovoltaics: Even thoughpresent costs of photovoltaics are veryhigh, since the ultimate potential isvery large, incentive to commercialiseand lower the cost may be providedthrough a higher feed-in tariff, againfor the first 5000 MW of installedcapacity.

14. We do not recommend any particularset of renewables as the preferred mix. Theattractiveness of a particular option dependson local circumstances and each option has its

11 Parikh J.K. and Parikh K.S. (1977): Mobilisation and Impacts of Biogas Technologies, Energy, Vol. 2, pp. 441-445.

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own niche and unique advantage. The policyinstruments we have recommended permit alloptions to compete on a level playing field.

15. Some institutional arrangements topromote renewable energy are needed. Theseare:

� Restructure existing Commission forAdditional Sources of Energy (CASE)providing it independent status andauthority de-linking it from theMinistry of Non-Conventional Energy

Sources and making it responsible foroverall development of RenewableEnergy Programmes in the country.

� Convert existing Indian RenewableEnergy Development Agency Ltd(IREDA) into a national apexrefinancing institution on the lines ofNABARD/National Housing Bank(NHB) for the Renewable EnergySector by bringing equity from banks,insurance companies and financialinstitutions in the country.

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Household Energy Security

One of toughest challenges before us isthe provision of electricity and clean fuels toall; and in particular to rural populationsconsidering their poor paying capacity, thelimited availability of local resources for cleancooking energy, and the size of the countryand its population. Yet considering that womenand the girl child carry most of the burden ofthe drudgery of gathering fuel wood,agricultural wastes and animal dung and alsobear the brunt of indoor air pollution, theurgency to meet the challenge should be highif we are to achieve universal primary educationfor girls, promote gender equality and empowerwomen. The considerable effort spent ongathering biomass and the cow-dung and thenpreparing them for use is not priced into thecost of such energy. Additionally, these fuelscreate smoke and indoor air pollution, areinconvenient to use and have an adverse impacton the health of people, particularly womenand children. Easy availability of certain amountof clean energy required to maintain life shouldbe considered a basic necessity. Energy securityat the individual level implies ensuring theavailability of such energy. This requires thefollowing:

� Electricity in all households – Whileunder its National Common MinimumProgramme the Government of Indiais committed to electrification of allhouseholds in 5 years, its flagshipprogramme, Rajiv Gandhi GrameenVidyutikaran Yojana (RGGVY),launched to achieve this is designed toprovide access to all households andactually electrify only BPL householdsby 2009-10. A programme that ensuresthat all households have electricityneeds to be developed.

� We must also set a goal to provideclean cooking energy such as LPG,NG, biogas or kerosene to all within10 years. It may be noted that therequirement of cooking energy doesnot increase indefinitely with income.Thus the total amount of LPG requiredto provide cooking energy to 1.5 billionpersons is about 55 Mtoe.

� Meanwhile we could provide fuel woodplantations within one kilometre of allhabitations. Those who do not haveaccess or cannot afford even subsidisedclean fuels will need to gather wood.Neighbourhood plantations within onekilometre of each habitation can easethis burden and reduce time taken togather and transport wood.

� To develop sustainable energy supply,women’s groups can form oil seedplantations or tree-growing co-operatives to manage and produce bio-fuel & fuel wood with the same effortthat they put into searching andgathering fuel wood today. Financethrough self-help groups should beprovided to transform women, whoare today’s energy gatherers intotomorrow’s micro-entrepreneurs forenergy management.

2. Energy security for the poor should gobeyond providing energy for subsistence. Onemust recognise the need to provide energy tothe poor to increase their livelihoodopportunities, production capacities andincomes so that eventually they can affordclean and convenient energy sources. For thepoor in rural areas we need an integrated rural

Household Energy Security:Electricity and Clean Fuels for All

Chapter VIII

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energy programme to ensure energy security.What needs to be done is discussed below.

8.1 ELECTRICITY

3. The Rajiv Gandhi GrameenVidyutikaran Yojana (RGGVY) aims toelectrify the 1,25,000 unelectrified villages,connect all the estimated 2.34 crore unelectrifiedhouseholds below the poverty line (BPL) andaugment the backbone network in all thecurrently electrified 4.62 lakh villages by 2010.While the BPL households are connected freeof cost, the rest of the programme receives a90% capital subsidy. The 5.46 crore unelectrifiedhouseholds above the poverty line are expectedto get an electricity connection on their ownwithout any subsidy. However, going bycurrent experience the hope that the abovepoverty line households will seek connectionson their own may not be realised. The fact isthat up to 40% of the households remainwithout electricity even in States that havebeen fully electrified.

4. Expansion of connectivity underRGGVY will require a correspondingexpansion of supply capability. Given thepresent widespread and endemic shortage ofpower in many states, special action is neededto facilitate and encourage decentraliseddistributed generation (DG) systems so thatcommunities can take their destiny in theirown hands instead of waiting for utilitycompanies to supply electricity reliably. TheDG plants in villages where grid extension isnot proposed are covered under RGGVY’ssubsidy programme. In grid connected areasalso DG plants can benefit from the incentivesprovided by MNES.

5. For RGGVY to deliver electrificationof all households, the following needs to beaddressed:

� Scope of RGGVY must be redefinedto include electrification of allhouseholds.

� Power plants based on woodgasification have been shown to befeasible as well as economical. Enoughwoody biomass is available in many

parts of the country for a village togenerate adequate electricity to meetits needs. It is possible that a villagegoes in for the DG option feeding alocal grid in the first instance.Subsequently, the village could getconnected to the grid in the normalcourse of grid expansion. At that stage,the DG facility can possibly providegrid support by feeding-in power atthe lagging end of the grid. A case canbe made for subsidising DG even invillages proposed to be electrifiedthrough grid extension.

� To make RGGVY sustainable, abusiness plan that makes it financiallyviable 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.Women’s self-help groups can beempowered to do so as well. Anessential requirement for sustainabilityis the need to promote payingproductive loads in each village.

6. A policy that gives 30 units ofelectricity per month to each household as amatter of entitlement is recommended. Asalready pointed out, such lifeline consumptionis not likely to require more than 75-80 billionunits in absolute terms. As already stated, notmore than 60 billion kWh of this lifelineconsumption needs to be subsidised to varyingdegrees even in 2031-32. Any consumptionbeyond the lifeline consumption should be atfull rates. Putting such a lifeline energy supportregime in place would require metering andtargeting the subsidies to the needy. Thedecentralisation of the billing and collectionforeseen under RGGVY and the distributiontransformer based accountability foreseen underthe revised APDRP are likely to prove helpfulin targeting such lifeline support. However,the most desirable solution remains theprovision of direct cash subsidies to the needythrough smart cards. In deciding the level ofsubsidy, it must be recognised that even the

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Household Energy Security

poorest household does spend something onenergy for lighting and hence must pay aminimum amount for obtaining the lifelineelectricity support. As per the NSS 55th RoundSurvey in 1999-2000, among the households inrural areas that had electricity, those thatbelonged to the poorest 5% of all ruralhouseholds spent more than Rs.300 per yearfor electricity. Thus a charge of Rs.1.0 perkWh for the first 30 units per month shouldbe within the capacity and willingness of eventhe poorest 5% of households.

8.2 COOKING ENERGY

7. Providing clean cooking energy to allis also a big challenge. The 2001 census foundthat 625 million do not have any access tomodern (cooking) fuels. It is also true thatabout 70% of the energy used for cooking inIndian households comes from non-commercialfuels. This may be a result of underlying genderbias wherein the bulk of the cooking energy is‘managed’ using non-commercial fuels collectedmostly by women and the girl child, with littleinvestment, management or technology inputsand little political or administrative backing.They need attention and help.

8. The available clean cooking fuels areLPG, biogas, kerosene and electricity.Electricity is, in our context, a relativelyexpensive form of cooking energy and shouldbe provided only in very specific circumstanceswhere other options do not work or are moreexpensive due to remoteness and or agro-climatic conditions. While these fuels causeless pollution in the kitchen, only biogas iscarbon neutral. Other clean fuels are producergas and coal based Dimethyl Ether (DME)which may be cheaper than LPG. These,however, require extensive development inproduction and marketing.

9. If most of the animal dung available inrural India is fed into biogas plants (eithercommunity size with each producing >20 m3

of gas per day or family plants suitable for one,two, three or more cattle heads), supplementedwith suitable other biomass and with improvedmicro-organisms, some 30 to 40 percent ofrural cooking energy need can be met by

biogas. With energy efficient cooking systems,energy need can be substantially reduced andbiogas can meet much of cooking energy needs.Community biogas plants managed ascommercial enterprises need to be encouragedwith finance and provision of land.

10. LPG is the most convenient cookingfuel. If we desire that all households use it,then, besides setting up a distribution network,the poor will have to be provided financialassistance. However, as indicated earlier, lifelinelevel of LPG consumption that needs to besubsidised is estimated as only about 13 Mtoeeven in 2031-32. Again, the most effective wayof targeting differing levels of subsidy to supportlifeline consumption of cooking energy is byproviding it directly to the end-consumer incash through smart cards.

11. At present kerosene is subsidised.Distribution of subsidised kerosene has notbeen without problems. The current deliverysystem of kerosene subsidy by keeping theprice of kerosene to the consumer low andcompensating the oil companies for thedifference in the consumer price and the importparity price has led to shockingly high rate ofcorruption in the petroleum distributionagencies. A lot of kerosene to be distributedunder PDS system is diverted for theadulteration of high priced diesel even at thedepot level. Based on NSS data we estimatethat only 56 percent of kerosene released byStates reaches people as PDS kerosene. Sincethe different between price of diesel and PDSkerosene was Rs.21 per litre in 2005-06, aleakage of 44 percent implies that Rs.10,400crore were made by unscrupulous distributors.Removing the subsidy may improve theavailability of kerosene in rural areas for atleast those who can afford it. They will usemore of kerosene freeing biomass based fuelsfor the poor. Once houses are electrified underRGGVY, or by providing them with solarlighting systems, the need to subsidise kerosenefor lighting will also no longer be there. Ifkerosene is to be subsidised as a cleaner fuel,the only way of preventing this perniciousadulteration and the widely prevalentcorruption is to make the price of kerosene

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and diesel very close and give the subsidy tothe consumer directly by way of coupons orsmart cards.

8.3 SUBSIDY THROUGH DEBITCARDS/SMART CARDS

12. The best way for providing subsidy forelectricity and cleaner fuels, kerosene or LPG,is to give an entitlement to the targetedhouseholds equivalent to 30 units of powerand 6 kg. of cooking gas or equivalent amountof kerosene to cover one or both needs. Asystem of debit cards or smart cards may beintroduced whereby the targeted householdsget a credit of different amounts of cash for thepurchase of these entitlements. The availablecredit on the debit/smart card can only beused for purchase of these entitlements. Withmodern ICT, card readers operated on batteryand feeding data using mobile technology canwork in rural areas of the country too.

13. The problem of bogus cards has plaguedour public distribution system. How do weensure that bogus debit cards would not beissued? One way to do this is to put the namesof all cardholders on the village board andinternet. Another option would be to providecards with physiological identification.

14. Even if a household decides to sell theentitlement and not use power, LPG andkerosene, it would still be welfare improving.The poor who prefer to sell their entitlementand still gather biomass based fuels would bebetter off as there would be much lesscompetition for it. The effort and time involvedmainly of women and girls in gathering fuelwould go down. To reduce the adverse impactof indoor air pollution on their health, womenshould be informed about possible defensivemeasures, such as ventilating the kitchen byremoving a brick or two under the roof, usingimproved smokeless chulahs, keeping thechildren away from the stove and minimisingthe exposure to smoke, etc.

15. Within this broad strategy the suggestedpolicy actions to provide electricity and cleanerfuels to all are summarised below:

� Provide a monthly entitlement of 30units of electricity and 6 kg. of LPG orequivalent amount of kerosene for oneor both lifeline energy needs through asystem of Smart/Debit Cards withvarying levels of direct cash support totargeted households as detailed above.

� To facilitate distributed generationunder RGGVY to enhance the speedby which we can electrify allhouseholds. Revise the scope ofRGGVY to cover actual electrificationof all households. Most importantlydevelop a viable revenue model forRGGVY.

� Eventually when the grid supplyreaches the villages electrified using DG,the local generation could feed powerprice into the grid, at regulated feed-intariffs, to support the lagging ends ofthe grid.

� For setting up of off-grid generationfacilities in rural areas, encourage theorganised sector to adopt ruralcommunity/communities in their areasof operation. Even tax rebates may beconsidered linked to actual outcomes.

� A large-scale socio-economicexperiment should be financed tooperate community sized biogas plantseither by a community cooperative orby a commercial entrepreneur. Thisshould assess various managementmodels in a scientific manner andexamine whether the inclusion of thepoor and disadvantaged can beguaranteed. Successful managementmodels should be replicated on a large-scale.

� Community land should be allocatedto women’s self-help groups and theyshould be provided with finance andtechnical help to develop fuel woodplantations in convenient locations.

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Energy R&D

Research and Development (R&D) inthe energy sector is critical to augment ourresources, to meet our long-term needs, topromote efficiency, to attain energyindependence and to enhance our energysecurity.

2. A look at the projections ofInternational Energy Agency (IEA), the EnergyInformation Administration (EIA), BritishPetroleum (BP) and Shell reveals the continuinggrowth in global fossil fuel consumption till2030. India may find it harder and harder toimport required energy as our requirementsare growing faster than the growth in theworld’s total fossil fuel supplies. The solutionfor India lies in: (a) reducing requirements byusing fuel/energy more efficiently; (b) seekingsubstitutes to fossil fuels; (c) shifting to fuelefficient modes of transport; (d) augmenting itsdomestic energy resources; and (e) adoptingleading commercial or near commercial lowcarbon and high-energy-efficiency technologiesthat extract and use coal, our most abundantprimary energy resource, in a more sustainablemanner. Energy R&D has a critical role toplay in all these areas. The policy initiativesthat stand out for India are detailed in thischapter.

3. Energy R&D has not got the resourcesthat it needs. We need to substantially augmentthe resources for energy R&D and to allocatethese strategically. To take an innovative ideato a commercial application involves manysteps. Basic research leading to a fundamentalbreakthrough may open up possibilities ofapplications. R&D is needed to develop anynew concept and to prove its feasibility. Thisneeds to be followed up by a working modelat laboratory scale. Scaling up to a pilot projectfollows if the economic potential is attractivekeeping in mind cost reductions that could beachieved through better engineering and mass

production. Demonstration projects, furthereconomic assessment and more R&D then gointo making the project acceptable andattractive to customers beforecommercialisation and diffusion can take place.

4. At each stage appropriate support needsto be provided for R&D. The nature of thesupport and the attendant institutionalarrangements will differ. India has used threeapproaches; technology development missionsthat require coordinated research anddevelopment of all stages of the innovationchain to reach a targeted goal such as in thedepartments of atomic energy and spaceresearch; technology roll out missions todevelop and roll out commercial or nearcommercial technology such as the missions toprovide rural telephony; and broad based R&Dsupport to research institutions, universitiesand others through project funding.Technology Missions are the most appropriatemechanism, particularly when it requirescoordinated action in a number of differentareas, which may involve different governmentministries, departments or levels and the privatesector. A technology mission whether fordevelopment or roll out not only brings asingle point focus to dispersed initiatives in therelevant field but also provides support toresearch projects in universities and researchinstitutions with the aim of delivering themission objectives. Technology missions mustcover areas that are of critical importance toIndia’s long-term energy needs. Whilecoordinated effort is desirable for all R&D inall links of the innovation chain, it becomescritical to place such a coordinating role undera commercially oriented entity, with well-identified targets, when one needs to roll outalready commercial or near commercialtechnologies in a time-bound manner. Fundingfor specific projects to be taken up inuniversities and R&D institutions as a part of

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such programme should be routed through thecoordinating agency for time-bound outcomes.In either approach, it is emphasised that R&Drequires sustained support over long periods oftime.

5. Based on these considerations, werecommend the following:

� A National Energy Fund (NEF) shouldbe set-up to finance energy R&D. Ourexpenditure on R&D excepting foratomic energy, which as of todayprovides less than 3 percent of ourtotal electrical energy supply, isminiscule compared to what industryand governments spend in developedcountries. In the developed world,industry generally spends more than 2percent of its turnover on R&D. InIndia, the total expenditure on R&Din 2004-05 was Rs.610 crores12 forAtomic Energy and Rs.70 crores forMinistry of Power, Coal and Non-Conventional Energy Sources. Even atone-tenth of the rate at which industryin developed countries spends on R&D,i.e. 0.2% of the turnover of all energyfirms whose turnover exceeds Rs.100crores a year, we end up with Rs.1000to Rs.1200 crores per year which willincrease over time. We should bespending much more than this onR&D. Much of R&D can be considereda public good. There is, thus, a strongcase for funding by the governmenteither directly or through fiscalincentives. The latter accounts for thebulk of government support in thedeveloped countries. Fiscal incentives,however, have not resulted insignificant expenditure on R&D byIndian industry. An annual allocationshould be made by the government forenergy R&D. To begin with, for thefirst year Rs.1,000 crores, excludingatomic energy, may be provided tothis fund. Individuals, academic research

institutions, consulting firms, privateand public sector enterprise, could allcompete for grants from this fund foridentified and directed research.

� The fund should be governed by anIndependent Board with representationof Department of Science &Technology (DST), PlanningCommission and Energy Ministries.However, a majority should be outsideexperts. It would support all stages ofR&D from basic research to diffusionwith appropriate policies, resources andinstitutions.

Each identified technology goal shouldbe broken down into its constituentbasic research and applied research.Both types of research should beallowed to access funding from theNEF but all activities must becoordinated to deliver defined goals/targets/milestones in a time-boundmanner.

The fund should promote theformation of consortia betweenindustry, research institutions, andacademia in each of the identifiedenergy technology areas. A virtualnetwork of energy research institutions,like laboratories of Council of Scientific& Industrial Research (CSIR),Department of Science & Technology(DST), Department of Biotechnology(DBT) etc. and private sector, shouldbe created to assist in pooling resourcesand exploiting synergies throughdispersed but well coordinated anddirected research for identifiedtechnologies.

� Each company in the field of energyshould be mandated to spend at least0.4% of its turnover on R&D. Anycontribution made by the company toNEF could qualify for full deductionfrom the income taxes due from thecompany.

12 Only about 15% of this amount viz., Rs.610 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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� The NEF should aim at making Indiaa global leader in energy technologiesmost relevant to India’s energy securityfor sustained growth.

6. We have already identified someprojects for R&D earlier. However, werecognise that the world of technology isdynamic and one should be flexible in one’sstrategy.

� Resources devoted to research indifferent areas depend on the economicimportance of that particular area, thescope of technology and the likelihoodof success of R&D in developing these.The latter changes with time as newdevelopments in science & technologytake place and uncertainty reduces.R&D priorities have to be based on astrategic vision which is frequentlyupdated. Of critical importance isresearch and analysis to outlinetechnology road maps. The NEFshould commission, encourage and fundsuch studies on a regular basis in anumber of institutions and throughindividuals.

� The NEF should support energy policymodelling activities in a selectedinstitution on a long-term basis.Different modellers should beperiodically brought together in anenergy modelling forum to addressspecific policy issues.

7. In view of the discussion above theCommittee felt the need for several NationalTechnology Development Missions crucial toIndia’s long-term energy security. Thesetechnology missions must pull together allcurrent efforts and resources being devoted tothe technologies relevant to the mission andplace their responsibility as separate but linkedparts of a single chain of command workingtowards specific and time-bound deliverables.The missions must engage industry, academiaand India’s R&D infrastructure of laboratoriesand research institutions. The missionsidentified below exclude nuclear energy asresearch in that field is progressing well underthe various institutions controlled by the

Department of Atomic Energy and coversfission, fusion, breeding of fissile material, useof Thorium as also a number of non-energyrelated fields. The following NationalTechnology Missions are recommended:

� In-situ coal gasification: Given its vastreserves of relatively poor quality coalwhich might prove uneconomical forextraction beyond 300 meter depthusing convention technologies, Indianeeds to take the lead in developingthis technology in order to enhancethe life of its most important anddominant energy resource. Thistechnology would extract energy fromdeep seated coal without the high ashthat accompanies Indian coal.

� Integrated Gasification CombinedCycle (IGCC) is a clean coaltechnology that India has been pursuingfor some 3 decades. These efforts shouldbe brought under a mission to establishefficacy with Indian coal and likelycommercial viability.

� Coal to liquids and/or gasified coalto liquids: If crude settles at above$45/barrel on a long-term basis,adapting this technology to Indian coalcould increase India’s energy security.This technology was successfullydeployed in South Africa using SouthAfrican coal. They have tested Indiancoal and confirm that the technologyworks.

� Carbon capture and sequestrations:India’s energy mix will remaindominated by coal at least to 2031-32and possibly beyond. In order to growin a sustainable manner capturingcarbon and sequestering it wouldbecome critical for India in the yearsto come. Such technology has alreadybeen deployed commercially inconjunction with enhanced oil recoveryfrom adjacent oil fields in threelocations worldwide.

� Bio-energy mission: This missioncould cover three distinct areas relatedto bio-energy. These include: (i) Bio-diesel from non-edible oils such as

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Jatropha and Karanj; (ii) Cellulosicethanol; and (iii) energy plantations. Abio-fuel mission to plant Jatropha orother appropriate oil plants on 4,00,000hectares of wasteland within three yearshas been undertaken to assess yieldsunder alternative agro-climatic and soilconditions, diverse cultivation practicesand different levels of inputs such aswater and nutrients. The mission willidentify germ plasm of promise anddevelop high yielding varieties. Even ifthe experiment shows little scope foreconomic exploitation of bio-diesel, theexpenditure could be justified just as afailed oil exploration effort, by thelarge local employment generated. Asimilar mission needs to be mountedfor energy plantations wherein thebiomass generated could be gasified orcombusted directly in wood firedboilers for power generation. Fundsavailable under NREGA (NationalRural Employment Guarantee Act)could be used for meeting the cost ofplanting under both these schemes.Production of cellulosic ethanol isgetting considerable attention and Indiashould also mount a separate missionfor R&D in this emerging energysource.

� Storage technologies: Storagetechnologies are important for usingintermittent sources of power and forthe automotive sector. Superconducting storage devices and superbattery technology should be focusedon, given that cost and higher capacityto weight ratios are still big challenges.

� Solar: Solar technology is often seen asrelevant for niche applications. Giventhat solar energy is one of our majorenergy sources and the only renewableenergy source with sufficient potentialto meet almost all our energy needs,we should give a high priority todevelopment of solar technology forlarge-scale deployment. A technologymission should be mounted to breakbarriers to wider use of solar thermaland for bringing down the cost of solar

photovoltaic by a factor of five as soonas possible.

� Advanced materials: Severaltechnologies depend on developingadvanced materials. A mission tosupport this could actually cut acrossseveral technologies and could also drawfrom current work done in a variety offields such as nuclear, space, transport,etc. for applications in the field ofenergy.

� Hydrogen: Development of Hydrogenas an energy carrier is being pursued inmany countries. Hydrogen can be usedto generate electricity in a fuel cell orit can be burnt directly in internalcombustion engines. Hydrogen,however, has to be produced byexpanding another primary orsecondary form of energy. This can begas, coal, oil, solar energy, biomass,hydro or nuclear energy. It is alsopossible to produce it throughmicrobial action. A mission coveringall aspects of hydrogen production,storage, transport, deployment and use,can be justified on three considerations:

(i) Since many countries are workingon hydrogen, the R&D onapplications will find internationalmarket.

(ii) Some of the R&D for fuel cellbased vehicles is common forelectric vehicles which may becomeattractive with advancement ofbattery technology; and

(iii) If economic production ofhydrogen through electrolysis ofwater using solar energy, and/ornuclear energy or from microbialaction materialises, and storage,transportation and distribution ofhydrogen becomes economicallyviable, hydrogen could become aclean and endless energy option.

� Gas hydrates: A technology missionfor assessment and exploitation of gas-hydrates is justified given India’sabundant gas hydrate reserves in deepwaters.

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8. The Committee has identified thefollowing areas wherein technologies are eitherfully commercialised elsewhere or are nearcommercialisation. Even technologies that havebeen commercialised elsewhere a certainamount of adaptation may be called for. In allthese areas, technology roll out missions areproposed. An industry, or a group of industriesor a commercially oriented agency should beasked to take the role of lead coordinator andseek early acquisition, adaptation andcommercialisation. R&D funding for in-houseresearch and directed outsourced researchshould be provided based on competing offers.

� A number of energy efficiencytechnologies including DSMtechnologies. Technology Information,Forecasting & Assessment Council(TIFAC) can be asked to identifyspecific technologies ready foradaptation and/or commercialisation inIndia.

� Recovery of coal bed methane and minemouth methane. Blocks have beenallocated already. ONGC and othersholding blocks should be asked toindicate firm dates for tapping thisenergy and identifying any specifichurdles or technology needs.

� Fluidised bed boilers and advancedcirculating bed fluidised boilers shouldbe promoted for use with low qualityIndian coals and/or washery rejects.BHEL, L&T and others should beasked to take the lead in developingthis application and its wider use.

� Washing of Indian coal, requires that awell-established technology be adaptedfor Indian coals of different quality sothat yields and viability can beimproved. BHEL and NTPC shouldlead this effort with the support of theresearch institutions of the coalindustry.

� Reduction of SOx/NO

x and particulate

emissions to match global standards.NTPC, private sector and SEBs couldcompete for taking the lead on this.

� Current practices/technologies for

exploration and extraction of coal foradaptation in Indian conditions. CoalIndia and Neyveli Lignite to be giventhe lead in this area.

� Increased/enhanced oil and gas recoveryand recovery of hydrocarbons fromabandoned and isolated fields. ONGCshould be given a time-boundprogramme to acquire and deploy suchtechnologies.

� Fuel-efficient vehicles. The automotiveindustry should be asked to achievehigher fuel efficiency standards in stepsso as to reach efficiencies that are atleast twice current levels. Companiesreaching defined milestones first to begiven large cash awards along withfiscal incentives based on outcomes.

� Hybrid vehicles and battery operatedvehicles. Automotive industry to leadthe efforts in commercialising thesetechnologies. Large cash awards andfiscal incentives given based onoutcomes.

� Off-shore wind potential to be tapped.Wind mill manufacturers to take leadin delivering a time-bound programme.GOI to provide fiscal incentives.

� Alternate routes to alcohol such assweet sorghum should be promoted.Industries such as Praj and industrialalcohol users to compete for R&Dfunding and fiscal/cash rewards againstdefined outcomes.

� Promoting community bio-gas plants.The real potential of biogas is incommunity level plants. To have thewilling participation of all the cattleowners in the community requires anappropriate operating strategy.Individual and communityentrepreneurs should be encouraged toexperiment with alternate strategies byproviding land and finance. Industriesshould also be roped in to execute theprogramme through adoption ofvillages. Tax rebates to be provided ona graduated scale based on actualoutcomes in the field.

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9. The above list is neither acomprehensive list nor a mandatory one. It isan indicative list of technology areas relevantto India’s needs. The primary idea is to conductand fund research that is directed and outcomeoriented. All funding made available and fiscalincentives provided should be linked toachievement of defined outcomes. Finally, avariety of institutions and individuals can betapped but in a coordinated fashion to deliverdefined outcomes.

10. In addition to the two types oftechnology missions, the NEF should alsoprovide R&D support for application,innovation of new ideas, fundamental researchetc., to researchers from different institution,universities, organisations and even individuals.

11. Such a R&D programme will requirelarge number of trained researchers. However,a vigorous programme of research and teaching

in academic institutions will itself attractstudents and, over time, relevant expertise willdevelop. A number of academic institutionsshould be developed as centres of excellence inenergy research. Generous funding forfellowships for energy R&D may be providedto students pursuing post-graduate degrees.

12. Energy R&D, particularly that devotedto reduce green house gas emissions, hascharacteristics of global public good. Indiashould link up with other countries andcooperate with international R&D initiatives.India’s manpower strength in R&D can thenbe leveraged to get better results sooner and atlower cost. Joint research with shared IPRscould boost India’s R&D efforts significantly.Also, with our growing and diversified energymarket, R&D efforts can find quicker returnson successful commercialisation in India. Sucha strategy would give India its appropriateplace in global energy R&D.

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Power Sector Policy

When India became independent in1947, the country had a power generatingcapacity of 1362 MW. Generation anddistribution of electricity was carried outprimarily by private utility companies. A fewof these are still in existence. Power wasavailable only in a few urban centers; ruralareas and villages did not have electricitysupply.

2. The Electricity (Supply) Act, 1948, wasenacted to facilitate faster power sectordevelopment and State Electricity Boards (SEBs)were set up in all the states to achieve thedesired objective. All new generation,transmission and distribution came under thepurview of SEBs. The creation of SEBs led tofaster development of power sector in thecountry. However, financial constraints of theState Governments precluded the SEBs fromadding the desired capacity to meet the growingdemand. During the Fifth Plan period (1974-79) it was felt that Central Government shouldsupplement state governments’ efforts to expandthe power system in order to ensure that thecountry achieves the desired economic growth.The National Thermal Power Corporation(NTPC) and National Hydroelectric PowerCorporation Ltd. (NHPC) were set up in 1975and North Eastern Electric Power CorporationLtd. (NEEPCO) in 1976 to achieve thisobjective. Under the Department of AtomicEnergy (DAE) the country’s first NuclearPower Plant was set up in 1969. Later in 1987Nuclear Power Corporation of India Ltd(NPCIL) was set up by the DAE to developnuclear power plants in the country. TheseCentral Power Sector PSUs were responsiblefor their own transmission schemes till theNational Power Transmission Corporation(POWERGRID) was created in 1989 with theresponsibility of constructing, operating andmaintaining the inter-state and inter-regionaltransmission system of the country.

3. Although the Central Public Sectorunits delivered their objectives to a satisfactorylevel, it soon became evident that the publicsector dominance of this crucial sector wasincreasingly being seen as a weakness. Powersector reforms were initiated in 1991 toencourage competition and seek privateparticipation in each sub element of the sector,namely generation, transmission anddistribution. Fast Track private sector projectswith Government guarantees followed by theMega Power Policy were announced to attractlarge-scale private investment into the sector.These efforts did not bear fruit but theGovernment persisted and proceeded to usherin an independent and transparent regulatoryregime. After the enactment of RegulatoryCommissions Act, 1998, Central ElectricityRegulatory Commission (CERC) was set up atthe central level and twenty four states haveeither constituted or notified the constitutionof State Electricity Regulatory Commissions(SERCs) since then. The SEBs of A.P., Orissa,Haryana, Karnataka, U.P., M.P., Uttaranchal,Delhi, Gujarat, Maharashtra, Rajasthan andAssam have been unbundled and corporatised.

4. Despite these reform initiatives, mostof the SEBs continued to make financial lossesbecause of an unsustainable level of aggregatetechnical and commercial losses. Unpaid duesof the Central Public Sector Units mountedand, by 2001, had crossed the Rs. 40,000 croremark. These dues were seen as a majorimpediments to the reform process and weresecuritised under a tripartite agreement coveringCentral Sector Power Utilities, Coal India andRailways. The tripartite agreement guaranteedpayments to these Central PSUs and usedincentives to encourage commercial disciplineand initiation of reform process in the States.

5. It has become increasingly evident thatdistribution reform holds the key to long-term

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sustainability of the sector. Distribution hasbeen privatised in Orissa and Delhi but resultshave been mixed, at best. The presence of theprivate sector, even today, remains limited toabout 12% of generation and covers distributionin only a few cities. To encourage distributionreforms, the Accelerated Power Developmentand Reforms Programme (APDRP) waslaunched. APDRP supports distributionreforms in the states through investmentsupport and incentives for lowering AT&Closses. APDRP set out to bring down AT&Closses to 15% by 2007 from an estimated levelof 45% in 2002 and restore the financial healthof SEBs. However, the performance of APDRPhas fallen well short of the promise. Investmentin the distribution sector remains low and theoverall AT&C loss level continues to remainhigh.

6. As a result, power shortages remain apersistent problem. The inability to expandgenerating capacity, strengthen transmissionnetworks and improve distribution systemsreflect the financial sickness of SEBs. They donot have the resources to invest themselvesnor have the credibility to attract privateinvestors. The large AT&C losses are partly anoutcome of neglect of investment intransmission & distribution (T&D) over theyears. Substantial investments are needed inT&D. Simultaneously, changes have to be madeto better manage the distribution of electricity.The problems of pilferage, misclassification ofconsumers, under/over billing and non-collection of bills would also need to beaddressed. At the national level AT&C lossesstill exceeded 40 percent in the year 2004-05(CEA 2005). The ratio of energy billed toenergy available was a low 68 percent in 2004-05.

7. Among those that are billed forelectricity are large number of farmers anddomestic consumers who are subsidised. Crosssubsidies from industrial and commercialconsumers that were meant to fund thesubsidies given to farmers and domesticconsumers are, today, also funding the lossesand the inefficiencies of the distributioncompanies. Less than 48 percent of the billedenergy is sold to industrial and commercial

consumers (including sales to public waterworks and railway traction). However, this 48percent of billed energy yields over 70 percentof the actual revenue collected by the stateutilities. The cross subsidies cannot be raisedany further as they have reached a level whereindustries find it cheaper to set-up their owngenerating plants.

RESTRUCTURING OF APDRP

8. The problems with APDRP are: lackof baseline data to assign accountability andassess outcomes, poor preparation of projectsas revealed by some independent assessmentand a lack of incentives for the staff to reduceAT&C losses. APDRP needs to be restructuredas follows:

� Introduce automatic meter reading(AMR) of all distribution transformersto track how much loss occurred ineach area served by a transformer andestablish accountability. Back this witha Geographical Information System(GIS) that maps the distribution systemto facilitate power audits, pinpoint theoffenders and improve customer service.Introduce an incentive scheme for staffwhereby they share the additionalrevenue collected in their distributioncircle.

� Data generated with AMR and GISmapping can help split up AT&C lossesinto technical, billing, collection & theftand help in designing specific correctiveactions and assigning responsibility andaccountability. This data should bedisseminated to the public to createsupport for corrective action.

� Bifurcate agricultural pumping loadfrom the non-pumping load in all ruralfeeders. Use available technologicaloptions to limit and measure theamount of agricultural pumping energyprovided

� For all loads above say 50 kWh,introduce intelligent meters that permitreal time and remote recording of dataand allow remote control over thepower supplied by each meter. Thiswould help effective management of

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connected load and the reportedpilferage by large consumers.

� Introduce time-of-day pricing with shiftto electronic meters.

� All central assistance to stategovernments for the power sector mustbe linked exclusively to loss reductionand improved viability.

� The improvements listed above andthe base line data generated as a resultwould bring greater transparency inthe process of privatisation (if pursued)and provide a better estimate of thetransition funding needs underoutcome driven privatisation modelsthat seek to restore the viability ofdistribution.

POWER SECTOR REFORM

9. Ideally, agricultural consumers shouldbe metered and the subsidy should be givento the distribution utility by the StateGovernment based on actual energy delivered.However, given the political reality wheremany Chief Minister’s promise free power tofarmers, separation of feeders is suggested as asecond best solution. It will enable thedistribution utility to ration agriculturalconsumers and to meet their requirement atoff peak hours thus lowering the economicburden of free power to farmers and providingmore accurate estimates of real agriculturalconsumption.

10. Privatising distribution is seen by someas an alternative solution to reducing AT&Closses. Based on experience worldwide,privatising utilities is definitely part of thesolution. India’s experience with privatisingthe Delhi and Orissa distribution has, however,raised as many questions as it has answered.Where privatisation is politically feasible, itshould be done in a transparent manner basedon authentic base-line data and through agenuine round of competitive bidding. Thereshould be no shifting of the publicly announcedterms of privatisation post bidding. Therestructured APDRP can, in the very least,help create an authentic base line.

11. As the provisions of the ElectricityAct, 2003 take root, the pace of reforms islikely to accelerate and private sectorparticipation should become easier. The Actprovides the basic framework for encouragingcompetition in the sector and creates openaccess to encourage private sector investmentsin each element of the electricity value chain.Moreover, it permits setting up of captive andgroup captive power plants without theclearance of the distribution utility and providesfor wheeling power from the captive plants tocaptive consumers without any cross-subsidysurcharge. However, significant private sectorparticipation and competition still elude thesector. While movement of the reform processis in the right direction, actual achievementshave been minimal.

12. Worldwide, the efforts in introducingcompetition and in deregulating the powersector have yielded mixed signals. Emphasison competition has, in several countries,highlighted the limitations of open marketorientation, unbundling and open access. Theresulting stress on capacity creation especiallyin transmission, loss of price stability, unevensharing of benefits between large and smallconsumers, high institutional and transactioncosts etc. have together created support forintegrated utilities with monopolies in licensedgeographical areas. The question being askedtoday by some is if well-functioning regulationthat creates capacity through competition isnot a better answer than totally freecompetition that permits full access toconsumers. It has been seen worldwide thatspot markets, power pools, retail choices, etc.require an elaborate and often expensiveinstitutional and regulatory framework withoutwhich the benefits are difficult to achieve.Similarly worldwide experience shows thatprivatisation in the electricity sector cancertainly help but may not be necessary orsufficient to effect transformation.

13. It might be argued that in the electricitysector competition should be encouraged, whereappropriate, rather than taking it as a defaultprinciple. The lumpy investments needed tocreate capacity, the relatively large incrementalstep when new capacity is added, the gestation

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lag in creating additional capacity andenvironmental and logistical issues createhurdles to perfect competition in the powersector with available technology choices. Thiscould change in the future. Specifically withrespect to India, management reforms(particularly in the distribution sub-sector) areas important as a liberal captive and openaccess regime driven by a desire to createcompetition in the power sector. While itmight be utopian to assume that perfectregulation could substitute competition, it isunambiguously clear that regulation will indeedexpand once competition sets in. It is equallyunrealistic to assume that perfect competitioncan be introduced in the power sector in ashort time. The key for India might be effectivestakeholder involvement for successfulregulation. This may go as far as appointing anoffice of “Consumer Advocate” at the statelevel. Again, while privatisation is one possibleoption for distribution, it cannot be a pre-requisite or a necessary consequence of APDRPrestructuring. The door for reform under publicownership must be left open.

14. The above should not be read as a voteagainst entry of private sector into the powersector or negating the benefits of competition.As stated above, competition is very muchpossible in each element of the electricity valuechain under a well-functioning regulatoryregime. In the context of India, the strength ofthe dominant public sector can be effectivelyleveraged to introduce competition that extractsefficiency gains in generation, transmission anddistribution.

15. Capacity expansion is currently donemainly by the Central PSUs who have beeninsulated from payment problems by theTripartite Agreement (TPA) involving SEBs,State Government and Reserve Bank of India.The TPA protects payments to Central PowerSector PSUs, Railways and Coal India throughrecourse to the account of the state governmentswith the Reserve Bank of India. Although theTPA came into existence in 2001 in the contextof past dues of state governments to CentralPower Sector PSUs, Railway and Coal India; ithas been applied also to all new capacity createdby Central Power Sector PSUs, Railway and

Coal India since then. The states have beenmaintaining payment discipline vis-à-vis CentralPower Sector PSUs, but the long-term viabilityof the arrangement is questionable, particularlyas the share of Central Power Sector PSUs inpower generation keeps on increasing. Thereis, thus, an inescapable need to reform thepower sector.

REDUCTION IN COST OF POWER

16. There is at present no level playingfield between Central Power Sector PSUs andothers. The tariff of the Central Power SectorPSUs is determined on the basis of costs andnorms with a guaranteed 14/16% post taxreturn on equity. This tariff determinationregime gives little incentive to be efficient. Theprivate sector generators do not get the comfortof the payment security mechanism availableto Central Power Sector PSUs under the TPAand the State power utilities do not get theassured post tax returns.

� In cases where tariff continues to bedetermined on the basis of costs andnorms, regulators may either adopt areturn on equity approach or returnon capital approach, whichever isconsidered better in the interest ofconsumers. In deciding the level ofreturn provided, the regulator shouldinter-alia take into account the returnavailable on long-term governmentbonds and reasonable risk premiumsassociated with equity investments.

� Distribution should be bid out on thebasis of a distribution margin or paidfor by a regulated distribution chargedetermined on a cost plus basisincluding a profit mark up similar tothat described above.

� All generation and transmission projects(with the exception of one time capacityexpansion of up to 50% of installedcapacity of a generating plant) shouldbe competitively built on the basis oftariff-based bidding. Public SectorUndertakings shall also be encouragedto participate in such bids even thoughthe tariff policy allows them a 5 yearwindow wherein projects undertaken

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by the public sector need not be bidcompetitively.

� The liberal captive and group captiveregime foreseen under Electricity Act,2003, should be realised on the ground.India’s liberal captive regime will notonly derive economic benefits fromavailability of distributed generationbut set competitive wheeling chargesto supply power to group captiveconsumers. This will pave the way foropen access to distribution networks.

� The Ministry of Power (MOP) shouldfacilitate large-scale capacity addition(20,000 MW or more) to meet identifieddemands of beneficiary states throughinternational competitive bidding. Bulkorders of this size, to be delivered overa given time frame, can, if executedproperly, be used to: (a) lower capitalcosts; (b) introduce plants that deliverinternationally comparable conversionefficiencies; (c) promote coastallocations with dedicated facilities forhandling domestic coal transported bysea or imported coal; (d) realiseinternationally comparable emissionstandards; and (e) under certaincircumstances, create new domesticmanufacturing and engineering capacityto build power plants. Since theprojected capacity additions over thenext 25 years are more than 6,00,000MW, there is no danger of pre-emptingfuture competition or limitingtechnology options by such bulkpurchases.

� Any subsidy given to poor householdsor farmers should be funded by theState Government through its budget.

REGULATOR

� Existing projects and future investmentsthat are not competitively bid mustcomply with CERC’s tariff guidelines.States that do not comply should bemade ineligible for Central Sectorsupport for their power sector.

� Operationalise the flexible and enabling

captive regime foreseen under theElectricity Act and provide consumerchoice through open access. Thisrequires the development of normativewheeling and distribution costs atdifferent voltages by respectiveRegulators, the introduction of time-of-day pricing at the bulk and retaillevels, and the identification of crosssubsidies embedded in the cost ofsupply in each distribution circle. Time-of-day tariff may make gas-fired peakingstations economical.

� Electricity prices are currently set byState Electricity RegulatoryCommissions on cost plus basis.Regulators should set tariffs for anumber of years and differentiate themby time of day.

� Respective Regulators should adapt bestinternational practices that rewardutilities for seeking: (i) distributedgeneration with waste heat recoverywhere feasible; (ii) demand sidemanagement; and (iii) energyconservation and energy efficiencytechnology adoption through Negawattincentives.

� Regulators must establish feed-in-tariffsfor power from renewable energysources. The feed-in-tariffs should alsoprovide time-of-day benefits torenewable energy supplies.

17. Other policy initiatives needed are:

Transmission and Distribution

� Separate content from carriage in bothtransmission and distribution.Regulated caps for: (i) wheeling chargesat different transmission voltages; and(ii) distribution margins for consumersat different voltage levels must beintroduced. Competition should beintroduced in building transmissioncapacity on the basis of wheeling tariffsand in distribution on the basis ofdistribution margins.

� Inter-state transmission networks

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should be managed by a regulatedmonopoly. Transmission lines criticalfor inter-state flows of power and forsystem stability should also be managedby the central body, even if it is entirelywithin one state.

� Independent and/or fully transparentload dispatch is required at regionaland state levels to ensure a level playingfield among competing commoncarriers. An independent planning bodyfor transmission networks is necessaryto ensure proper development of suchnetworks.

Rural Electrification and DistributedGeneration

� Require the State Governments tonotify rural areas as required by theElectricity Act, 2003. Such notificationcould assist the emergence ofindependent rural suppliers ofelectricity thereby enhancing access forboth household and productive uses.Many remote villages may be providedelectricity and energy security throughlocally available renewable resources.

� To facilitate distributed generation andencourage generation by renewables,make grid connections for feeding insurplus power to the grid, at the grid’savoided cost, mandatory. In order thatthis does not jeopardise grid stability,variable frequency transformers forasynchronous network connections

may be used along with appropriategrid management.

� To set up off-grid or distributedgeneration facilities in rural areas,encourage the organised sector to adoptrural communities in their areas ofoperation. They can build localcapacities to operate such plants andeventually transfer the plants to localgroups.

� Ensure sustainable revenue models forrural electrification programmes.Without such revenue modelsprogrammes such as RGGVY areunlikely to be sustainable.

Adding Domestic Manufacturing andEngineering Capacity

� The available manufacturing andengineering capacity in the country isgrossly inadequate to support theambitious capacity addition programmein thermal, hydro, nuclear, renewableand T&D sectors. There is an urgentneed to create these capacities,preferably in the private sector.

18. In order to avoid power shortages andtake timely action annual electricityrequirements should be projected and year-wise targets for generation capacity be set forseven years. Each project, public or private,should be monitored along with a number ofmilestones. This will help entrepreneurs totake timely decisions to invest.

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Coal Sector Policy

The origin of coal mining in Indiadates back to 1774. Demand for coal startedrising mainly for use by the railways after 1885and coal production reached a level of over sixmillion tonne per annum by the beginning oftwentieth century. Coal mining waspredominantly done by the private sector andpricing was market driven. A surge in demandwas witnessed during the First World War,which multiplied many-fold during the SecondWorld War. Government control over prices,production and distribution was imposed uponthe coal industry during this period by theColliery Control Order, 1944 modified underthe Essential Commodities Act, 1946 and itremained in force even after independence. By1950, coal output had risen to about 32 Mt andRailways continued to be the single largestconsumer (31%) followed by Iron & Steel andbrass foundries (14%), brick kilns (9%), powerutilities (7%), cotton mills (7%), others (32%)including colliery consumption (11%).

2. The Coal Board was set up in 1951 forthe conservation of coal resources and safety ofmines under Coal Mines (Conservation &Safety) Act, 1952. The Mines & Minerals(Regulation & Development) Act, 1948, wasconsolidated in 1957 to deal with proceduresfor granting and operating mineral concessionsand prescribing royalties to State Governments.Also, the Mines Act, 1923, enforcing safety inmines and welfare of miners was replaced by amore comprehensive act in 1952.

3. After independence, the Governmentpassed an Industrial Policy Resolution in April,1956 thereby including coal in the list ofindustries earmarked for development in thepublic sector and the National CoalDevelopment Corporation (NCDC) wascreated in 1956 to carry on coal mining in thepublic sector. The Coal Bearing Areas(Acquisition & Development) Act was enacted

in 1957 to help NCDC acquire coal bearingland in various states.

4. Coal mining by the private sector ledto a situation wherein there were a number ofsmall pits, which functioned with little regardto conservation, safety of workers and use ofscientific methods of development. This led tohazardous working conditions and loss of coal.Recognising these, the coal industry wasnationalised in two phases - coking coal inMay 1972, and non-coking coal in May 1973.A holding company, Coal India Limited (CIL),was formed in November 1975, with severalcoal producing subsidiary companies based ongeographical location of coalfields and onecompany dedicated to mine planning anddesign. Mines belonging to NCDC were mergedwith different subsidiary companies. Tata Iron& Steel Company in private sector and IndianIron & Steel Company and the Damodar ValleyCorporation under the public sector continuedto operate their captive mines. SingareniCollieries Company Ltd. is the oldest publicsector coal company under the administrativecontrol of Government of Andhra Pradeshwith an equity share of 51%. The balance 49%belongs to the Government of India.

5. Lignite development was pursuedthrough a public sector enterprise, the NeyveliLignite Corporation Ltd. (NLC) established in1956. Besides NLC, lignite is also being minedby the State PSUs of Gujarat and Rajasthan.

6. Geological Survey of India (GSI) isvested with the responsibility of regionalexploration for coal. Mineral ExplorationCorporation Ltd. (MECL), Central MinePlanning & Design Institution Ltd. (CMPDIL)& Geological Survey of India (GSI) have beenidentified for undertaking promotionalexplorations to supplement regionalexplorations with a view to expedite

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exploratory efforts for coal and lignite. Detailedexploration is being carried out primarily byMECL & CMPDIL on behalf of the coalcompanies. Some of the mining and geologicalcorporations of the State Governments arealso taking up coal exploration on their own.

7. Coal consumption in the country hasbeen rising steadily and in 2005-06 Indiaconsumed some 432 Mt of coal. This includedimport of 17 Mt of metallurgical coal and 20Mt of thermal coal. Given limited reserves ofhigh grade metallurgical coal and the highcost of underground mining, India currentlyimports about 66% of its requirement ofmetallurgical coal. Thermal coal imports arenot significant. However, the quality ofdomestic thermal coal has deteriorated overthe years due to the increased reliance on themore cost-effective opencast mining. Theimprovement in overall labour productivityhas been marginal primarily because themechanisation of underground mines has notbeen successful to a large extent. The Industryalso continues to face problems in regard toland acquisition and rehabilitation.

8. Following the economic reformsinstituted in 1991, the private sector has beenallowed to mine coal for captive consumptionunder the Captive Mining Policy of 1993. Thecaptive mining policy allowed allocation ofblocks to designated end-users for mining coalfor their own use. The current list of authorisedend-uses includes power, steel and cementproducers. FDI was permitted in coal mining,and joint ventures were also permitted. A largenumber of coal blocks stand allocated to privateentrepreneurs for developing captive mines butonly few of these mines have startedproduction. The captive mining policy hassignificant hurdles and has not been a success,so far, either in raising domestic production orin increasing the number of domestic producers.State Government Corporations and CPSUsare permitted under the Coal Mines(Nationalisation) Act to take up coal mining atpar with CIL. Some state governments likeJharkhand and J&K operate small mines.

9. In line with the economic reformsaimed at raising the level of competition in

various core sectors, the government proposedto allow private participation in commercialcoal mining. A Bill was introduced in theParliament in April, 2000, to amend theprovisions of Coal Mines (Nationalisation) Act,1973, for facilitating private participation incommercial coal mining. The Bill proposes toopen up the coal sector to private investment,but it does not have the requisite politicalsupport for passage. While waiting for theApril 2000 Bill to be enacted by the Parliament,the Government is trying to remove the barriersto captive mining under the current law.

10. Keeping in view the railwayinfrastructure, distribution of coal amongvarious user industries and movement plansare controlled through a mechanism oflinkages. A long-term and short-term linkagecommittee allocates coal to various coreindustries such as power, steel, cement etc.The linkage committee, an inter-ministerialgroup, evaluates the requirement of coal byconsumers at the planning stage and links itto what seems like a rational source from along-term perspective after examining factorslike quantity and quality required, time frame,location of the consuming plants, transportlogistics and the development plan for thecoal mine. Unfortunately, the linkages remainfrozen, and as mines and users develop, theyno longer remain rational.

11. Coal prices were decontrolled totallyfrom the 1st of January, 2000 after scrappingColliery Control Order 1946; and coalproducing companies (CIL and SCCL) fixedprices on their own and revised the sameperiodically based on an escalation formulaunder a cost plus approach. As a result, coalprices have been revised several times in therecent past. Decontrolling price in amonopolistic situation is adversely affectingthe interest of consumers. In the absence of acoal market with competing suppliers, there isa need to develop a transparent mechanism forpricing domestic coal.

12. Currently there is no competition inthe coal sector and the public sector monopolycontinues. No regulatory framework is availableand in such a situation grievance redressal for

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Coal Sector Policy

consumers, particularly in regard to price/quality disputes, is difficult. To raise thecommercial performance of the industry tomeet international standards and to sustain theprojected growth of energy sector, it isimportant to address these issues.

13. Coal accounts for over 50% of India’scommercial energy consumption and some 78%of domestic coal production is dedicated topower generation. Since prices were de-controlled, the sector has become profitableprimarily as a result of price increases and therising share of the more remunerative opencast production. The sector has also recordedimprovements in productivity but despite theseimprovements, the coal sector scores poorlyagainst international comparators because ofexcessive manpower, poor project formulation,inefficient procurement, poor accounting andfinancial management systems, low productivityetc. Despite these inefficiencies domestic coalis internationally competitive at mine-mouth.In fact, coal at the mine-mouth is the onlyprimary or secondary form of energy in whichIndia is internationally competitive. Anotherpositive for the coal sector is its good safetyrecord when compared with internationalexperience.

14. A concern often voiced for India’s coalsector is the inefficient exploitation of the in-place coal reserves and the lack of control onmining practices that could potentially besterilising significant parts of existing reserves.Driven by short-run maximisation of economicbenefits if coal is mined in an open cast mineonly to the depth of 150 metres, and theoverburden is used to fill up the void, coallying in the lower horizon and reserves below150 metres depth in the same horizon, then getpractically sterilised as it would be even moreuneconomic for subsequent exploitation usingconventional mining technologies. At currentlevels of production growth, the knownextractable reserves will be exhausted in lessthan 45 years. A large part of India’s coalreserves may not be extractable with currentmining technologies. India must, thus, lead theway for extracting this energy through in-situcoal gasification in the interest of her energysecurity.

15. Primary energy from the coal resourcescan be augmented if mining plans exploit coalefficiently and if coal bed methane as well asmine-mouth methane is captured and used.The needed technology is globally availablebut has to be adapted to Indian conditions.Similarly in-situ coal gasification can use coalthat is difficult to recover with conventionalmining. Technology for in-situ gasificationneeds to be developed.

16. Most of India’s coal resources - proved,indicated and inferred - are said to be within300 meter depth. There is a concern that thisis an outcome of insufficient exploration ofdeposits below 300 meters and a sense thatexploiting coal below that depth withconventional mining is, in any event,uneconomical for low quality coal. Detailedcoal exploration is almost exclusively done byCMPDIL, which is a subsidiary of CIL.Concern has been raised about CMPDIL’sindependence under this structure. Moreover,CMPDIL’s drilling capacity is limited and thishas resulted in a limited detailed explorationprogramme for proving reserves. CMPDILshould be made an autonomous institute. Itscapacity should be strengthened andexploration for coal should be opened up toothers just as exploration for petroleum hasbeen opened up.

17. Enlarging the coal resource base isimportant to meet coal requirements. Underthe various scenarios coal requirement isprojected from a low of 1580 Mt to high of2555 Mt for 2031-32 and about 1128 to 1870Mt for 2026-27. Coal India Ltd. has targeted amaximum production of 839 Mt by 2025 in its‘Vision 2025’ document. Clearly, if India is toavoid large-scale imports of coal, not only doesIndia need to increase the pace of growth incoal production but also raise coal productiontargets significantly. What this requires is to:(a) increase the number of players in coalmining; (b) since Coal India currently hasblocks with 70% of the proven reserves, de-block those blocks that Coal India does notpropose to bring into production by 2016-17and assign them to captive users with acondition that these blocks be brought intoproduction by 2011-12; and (c) raise the

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exploration effort significantly to proveadditional reserves.

18. Building domestic capacity for miningequipment and significantly raising domesticengineering capacity is necessary to achieve theprojected level of production.

19. India is the third largest coal producerin the world but remains a marginal player ininternational coal markets. Even domestically,there is an absence of a coal market with bulkof the sale taking place under a system of coallinkages based on available rail capacity. Pit-head prices of coal are set by Coal India, themonopoly producer. Railways, anotherGovernment monopoly, cross subsidisespassenger traffic with coal freight therebymaking delivered price of coal 2-4 times thepit-head price of coal in states such as Punjab,Haryana, Rajasthan, Gujarat, Maharashtra, Goa,Karnataka, Kerala, Tamil Nadu, Western U.P.& Delhi.

20. The constrained supply of thermal coaland the projected requirement of thermal coalsuggest the need to import coal. By the end ofthe 11th Plan India’s import needs could riseto 50-60 million tonnes of high quality thermalcoal. Import of coal will also put a competitivepressure on the domestic coal industry to beefficient. No significant import of thermal coalis evident in the near future despite the factthat long-term import contracts would makeimported coal competitive against domesticcoal at coastal locations in the above states.The reason for this is the absence of coastalpower plants, inadequate port capacity and theneed to trans-ship imported coal on domesticrail/road linkages to consumption points. Whilepower generated at pithead and deliveredthrough HVDC transmission lines can becheaper than power generated from importedcoal at coastal location, there is a limit to theamount of generation that can be done atpithead due to environmental considerations.Coastal power plants based on imported coalthus have an economic space (see BOX 11.1).Thus India must:

� Encourage coastal power plants basedon imported coal.

� Develop the needed infrastructure forcoal imports.

21. Unlike in the rest of the world, coal inIndia is sold without any “preparation” or“dressing”. Simple deshaling, improved miningprocedures and sizing of coal could bring downthe average ash content of Indian coal to around35% from the current level of over 40%. Fullwashing could reduce the ash content further,thereby saving transport costs and resulting inmore efficient power plant design andoperation. Only a small fraction of thermalcoal is actually “washed” in India. One of thehurdles to washing is the prevailing uniquepractice of pricing coal on grades based onwide bands of Useful Heat Value (UHV) insteadof the fully variable system based on the moreprecise Gross Calorific Value (GCV) as donein the rest of the world.

22. In the light of the foregoing, the sectoris in serious need for market based reforms.The following policy initiatives are suggested:

Policies not requiring legislative amendments:

Increasing Number of Coal Producers

� Pending the passage of the Coal Mines(Nationalisation) Amendment Bill,2000, the number of players in coalmining should be increased throughavenues available under the existinglegislation that permits mining by stategovernments, public sector companiesand for captive use by recognised end-users (power, steel and cement).Captive block holders must bepermitted to sell incidental coalsurpluses during the development andoperation of a block to CIL. Group-captive mines should be allowed forsmall end-users, and a target must beset for the Ministry of Coal to achieveat least 100 Mt of captive productionby 2012.

� Coal blocks held by Coal India Limited(CIL) that cannot be brought intoproduction by 2016-17, either directlyor through joint ventures, should be

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Coal Sector Policy

BOX 11.1

Delivered Cost of Domestic and Imported Thermal Coal

Most of the domestic coal supplies to power sector fall under Grade E and F having averagedelivered calorific value of 3500 kcal/kg against at least 6000 kcal/kg of imported coal.Domestic and imported coal in terms of cost per million kilo calories of delivered heat valueat the consumer end were compared. It may be seen that the delivered cost of the power gradeIndian coal exceeds the cost of imported coal at port when transported to consumers beyond1000 km. Further, imported coal is the cheaper option even with inland transportation ofsome 500 km if domestic coal has to travel beyond 1400 km to reach the consumer.

Assumptions:

Domestic coal from mine to consumer and imported coal from port to consumer are beingtransported by rail. Landed CIF price of imported coal having GCV of 6000 kcal/kg is takenas US$60. Exchange rate assumed is Rs 44.50 per US$. Domestic coal price includes weightedaverage notified price of coal for the respective grades, royalty, stowing excise duty,transportation charges from mine to railway siding, central sales tax and rail freight. Landedprice of imported coal at port includes all applicable taxes and duties. However cost ofhandling imported coal at the Indian port and transporting it to the railway siding for inlandtransportation is not included. If this is done, the economical distance to which imported coalcan be transported inland will reduce further.

made available to other eligiblecandidates for development with thecondition that they be brought intoproduction by 2011-12. Allottees ofcaptive blocks in general should berequired to work the block within aspecified time limit failing whichallotment should be cancelled and/or apre-agreed penalty imposed.

� The gestation periods for the end-useproject may be different than that ofthe coal mine. To ensure that both themine and the end-use project aredeveloped in a cost-effective mannerthe innovative use of short-termlinkages can be made. This must belinked with strictly enforced guaranteesthat back performance related to both

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the end-use project and the captivemine.

� Transfer pricing of coal from captivemines needs to be established both forthe sake of assessing coal royalties aswell as tariffs in a regulated sector suchas power wherein coal cost is a passthrough. Even if power tariff isdetermined on the basis of competitivebidding, transfer price would be neededto assess state levies/royalties.

Pricing of Coal

� Ideally coal price should be determinedin a competitive market. This, however,is not possible as long as the numberof suppliers are limited and as long asfor the largest coal consuming sector,i.e. power, coal cost is passed throughand fully compensated in determiningelectricity tariff. However, since otherusers of coal are numerous and consumesubstantial quantities of coal, a strategyfor competitive price discovery ispossible. We recommend as follows:

• High quality coking and non-coking coals which are exportablemay be sold at export parity pricesas determined by import price atthe nearest port minus 15%. Thispractise is currently being adoptedsatisfactorily for supply of goodquality coking coal to the steelindustry.

• 20% of the total coal producedshould be sold through e-auctions.For e-auctions to be successful, CILshould, directly or otherwise,ensure availability of coal and offerit for sale to meet the total demand.Quantities to be sold throughe-auction from different mines mustbe determined annually with amonthly mine-wise schedule to beindependently monitored andenforced by a coal regulator.

• Remaining coal should be soldunder long-term Fuel Supply andTransport Agreements (FSTAs).

Regulated utilities should beallowed upto 100% of their certifiedrequirements through FSTAs.Other bulk consumers may beallowed partial FSTAs based oncoal availability. Any shortfalls inrequirement not covered by FSTAsshould be met through e-auctionsupplies or imports.

• Pithead price of coal under FSTAsshould be revised annually by acoal regulator on a basis that inter-alia take into account pricesobtained through e-auction, FOBprice of imported coal (bothadjusted for quality) and domesticproduction cost, inclusive of returnbased on efficiency standards.

� Replace the practice of grading coalunder wide bands of the empiricallydetermined UHV by the internationalpractice of grading coal based on GCV.This is expected to encourage efficientuse of coal and promote use of washedcoal.

� Coal prices should be made fullyvariable based on Gross Calorific Value(GCV) and other quality parameters.

Reducing Coal Cost

� Rail freight rates for coal transportshould be rationalised. Cross subsidysurcharges imposed on freight trafficto benefit passenger fares must bereduced. Alternate means for movingcoal through coastal shipping, river/canal movement and coal slurrythrough pipeline must be promotedwhere feasible.

� Infrastructure status should be extendedto the coal industry. Duties on capitalgoods imported for coalmines must belowered to put them at par with dutieson imports for other energy sub-sectors.

� There is a need to improve governancefor dealing with malpractices andcorruption in the coal industry. It iscommon knowledge that there is a

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significant black market for coalobtained through pilferage and illegalmining of abandoned mines workedby local inhabitants. Apart from theloss of royalty to the state there is,more importantly, loss of precious livesresulting from unsafe mining practices.

� Coal companies should be required asper international practice to “prepare”and “dress” coal prior to sale.

Facilitating production

� Strategies for matching the growth ofinfrastructure needed for movement ofcoal to load centres should be alignedwith the growth of coal industry.

� Wherever the techno-economicparameters of the geological resourcedemands development of undergroundmine, related technology must beencouraged by giving incentives tooperators because underground mininghelps preserve the land form and extractdeep seated resource.

� National Rehabilitation andResettlement Policy for people affectedby coal/lignite mining projects shouldbe mooted. Such policy should beacceptable to all state governments.

� Grounding coal projects is often delayeddue to environmental regulations anddelays in getting approval for theproject’s Environmental ManagementPlan (EMP). Simplification ofprocedures, preparation ofcomprehensive EMPs anddemonstration of environmentalresponsibility on the ground can helpreduce such delays. A reserve ofcompensatory afforestation built inadvance should be accepted againstspecific project-wise commitments toreduce such delays.

� Notify in-situ coal gasification and coalliquefaction as end-uses under thecurrent captive consumption policy.This will encourage private enterpriseto invest in development of these newtechnologies.

Regulation

� Institute an independent regulatorybody to regulate upstream allotmentand exploitation of available coal blocksto yield coal, coal bed methane, minemouth methane, coal to liquid and forin-situ coal gasification. The proposedRegulatory Body would, as an interimmeasure, approve coal price revisions,ensure supply of coal to the powersector under commercially driven long-term FSTAs, facilitate the developmentof formulae/indices for resetting coalprices under long-term fuel supplyagreements, monitor the functioningof the proposed e-auctions, ensure thatthe price discovery through e-auctionsis free of distortions, regulate tradingmargins, develop a mechanism foradequate quantities of coal importsunder long-term contracts to bridgethe gap between supply and demandthereby assuring that the e-auctions andconsequent price discovery does nottake place in a supply constrainedmarket and, finally, create theenvironment for a competitive coalmarket to operate. Once the marketmatures, all large consumers (includingpower) will become part of acompetitive coal market with purchasesthrough both long-term FSTAs and e-auctions. It is stressed that once acompetitive market develops the roleof Regulator in determining the priceswould become one of merely ensuringa free and transparent market for coal.A key responsibility of the Regulatorwould be to make India, with the thirdlargest reserves of coal in the world, along-term player in the highly liquidinternational market for coal thatrealises long-term trades under well-tested indices such as the Japan coalimport index.

� The proposed Regulator must facilitatereplacement of current coal linkagesfor power plants with FSTAs. As astep towards abolishing coal linkagescompletely, these linkages could bemade tradable in the first instance. This

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is expected to make coal movementsmore optimal and responsive to marketforces.

� The Regulator must ensure that minesare planned, designed and developed ina scientific manner giving dueimportance to coal conservationthereby maximising percentage of coalrecovery from geological blocks.

� The Regulator must standardise normsof operation, establish benchmarks andensure that coal companies raise theirlevel of competence to be at par withinternational standards.

Policies requiring legislative amendments:

� Amend Section 3 of the Coal Mines(Nationalisation) Act, 1973 to facilitate(a) private participation in coal miningfor purposes other than those specifiedand (b) offering of future coal blocksto potential entrepreneurs throughcompetitive bidding.

� Raise the domestic level of trading andmarketing of coal by removing it fromthe list of essential commodities.

� Amend the provisions of ContractLabour (Regulation & Abolition) Act,1970 to facilitate offloading of certainactivities in coal mining for improvedeconomics of operations.

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Oil and Gas Sector Policy

The Indian Petroleum industry is oneof the oldest in the world. Oil was struck atMakum near Margherita in Assam in 1867.The industry has come a long way since then.At the time of independence in 1947, thecountry produced about 0.25 Mt of crude oilin Assam and refined 0.23 Mt of crude oil.Digboi was the only refinery and the marketinfrastructure was confined to urban and wellpopulated areas.

2. The Indian petroleum industry in thepost independence period (1947-2005) has passedthrough three distinct phases

� Early phase (1947 to 1969)

� Development phase (1970 to 1990)

� The economic liberalisation phase(1991-2005)

3. Historically, the Indian petroleumindustry was controlled by few Anglo-American companies. They maintained theirdominance till the end of 1950s. Afterindependence, the newly independent statewanted to play a significant role in this vitalindustry. The industry policy resolutions of1948 and 1956 had clearly stated thegovernment’s aspiration and future plans forcore industries like petroleum. All futuredevelopment of the petroleum industry wasreserved for public sector undertakings. Butforeign assistance was a necessity at least in theearly stages. It was recognised that majorityownership and effective control of criticalindustries like petroleum should always rest inIndian hands and the need for developing anindependent and self-reliant petroleum industrywas felt. The industrial Policy Resolution of1956 specifically increased the role of publicenterprises, and led to the creation of Oil &Natural Gas Commission (ONGC), forexploration and production, and Indian Oil

Corporation (IOC) for refining and marketing.The Government took over the multinationalcontrolled petroleum companies like BurmahShell, Esso and Caltex between 1974-79. OilIndia limited (OIL) which was a Joint VentureCompany with equal share of Burmah OilCompany and Government of India became awholly owned PSU in 1981.

4. The steep increase in oil prices during1973-74 and hardly any increase in indigenousproduction of crude oil put a heavy burden onthe economy due to an escalating import bill.To meet this challenge, augmentation ofindigenous production of hydrocarbons andtheir accelerated exploitation became the keyelement of planning and development strategies.Both ONGC and OIL took up the challengeand formulated ambitious explorationprogrammes. The exploration efforts yieldedresults in the form of discoveries of oil and gasin a number of fields in the Bombay Off-shorearea. Oil was struck in Bombay High in 1974.This led to substantial increase in theproduction of crude oil thereby reducing theoil import bill considerably. Anotherprominent discovery was the South Bassein gasfield. Exploration was extended to otheroffshore areas like the Eastern coast and off theAndaman Islands, with varying degrees ofsuccess.

5. The liberalisation and globalisationprocesses started in 1991 have thrown up manyopportunities and challenges for the Petroleum& Natural Gas Sector in India. To increasedomestic production of crude oil and naturalgas, the New Exploration Licensing Policy(NELP) was launched in 1997-98. 110 blockshave been awarded under the five biddingrounds under this policy. The sixth round ofbidding (NELP-VI) for 55 blocks has recentlybeen announced. The acquisition of equity oil& gas abroad in a number of countries is also


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being pursued by both PSUs and Private Sectorcompanies. In order to meet the shortfall inthe demand of natural gas, imports from Iran,Myanmar and Central Asian Countries throughtransnational pipelines are being pursued. Theimport of gas in the form of liquefied naturalgas (LNG) has already started at the DahejLNG terminal in 2005. Other avenues forimport of LNG are also being explored.

6. The consumption for petroleumproducts including refinery fuels grew from2.72 Mt in 1947 to 120.17 Mt in 2004-05.Excluding refinery fuels, the consumption ofpetroleum products in 2004-05 was 111.59 Mt.India exported 18.21 Mt of products in 2004-05and product exports have risen to 21.5 Mt in2005-06. However, domestic consumption in2005-06 rose only marginally to reach 111.92Mt. India is now a net exporter of petroleumproducts. The crude oil production, which hadincreased from merely 0.25 Mt in 1947-48 to33.02 Mt by 1990-91, has stagnated since then.The balance requirement has been met throughimports. With the setting up of a number ofrefineries over the years, the country is self-sufficient in its refining capacity whichcurrently stands at 132.47 Mt. A number ofrefineries are either expanding their capacityor planning new investments with a view toexport products. Net of export, domesticproduction of crude met about 28% of thecountry’s requirement and the balance 72%was imported in 2004-05. With the increasingprices of crude oil in the international market,the oil import bill and oil security are causes ofconcern. To reduce the gap between demandand supply, in addition to enhanced productionof crude oil & natural gas, the oil companiesare seeking opportunities to tap coal bedmethane, blend motor spirit with ethanol andpromote bio-diesel as a diesel substitute and/orfor blending with diesel. However, these effortshave yet to make any impact.

7. With a view to create competition,new entrants are being allowed to markettransportation fuels namely, motor spirit, highspeed diesel and aviation turbine fuel sinceMarch, 2002. The Government has issued retaillicenses to Reliance Industries, Essar Oil, Shell,ONGC, Mangalore Refineries &

Petrochemicals Limited and the NumaligarhRefinery.

8. With the recent discoveries in theKrishna-Godavari basin, domestic natural gasis expected to become the second mostdominant commercial energy source in India.Efforts are being made to raise import ofnatural gas in the form of LNG and throughtransnational gas pipelines. The rising price ofnatural gas, though, would make ituncompetitive for use in the power sector.

9. Till 1975, the prices of petroleumproducts were based on import parity prices.Based on the recommendation of the Oil PriceCommittee of 1976, the Administered PriceMechanism (based on a retention pricingconcept) was introduced. This mechanism wasdismantled in a phased manner startingOctober, 1998 to 31st March, 2002. From 1stApril, 2002, the prices of petroleum productsexcept domestic LPG and Kerosene for PublicDistribution System (PDS) are again beingfixed on an import parity basis. However,with the recent steep increase in the prices ofcrude, the government has put on hold theincrease in prices by the oil companies. Theissue of pricing of petroleum products is underreview.

10. With a view to protect the poorersection of the society; subsidies on keroseneand Liquefied Petroleum Gas (LPG) had beenintroduced. These subsidies were to be phasedout by 31st March 2002, but this was notdone. A flat subsidy rate under “PDS Keroseneand Domestic LPG Subsidy Scheme, 2002”was approved. The subsidy was equal to thedifference between the cost price and issueprice as on March 31st, 2002 and was to bephased out in 3 to 5 years. The oil marketingcompanies (OMCs) were to adjust the retailselling prices of these products in line withinternational prices during this period. Again,this has not been done and with theunprecedented sharp increase in theinternational prices, the under recoveries ofOMCs on these accounts have been rising andseriously affecting their profitability. TheGovernment has been making good these losses,in part, by asking upstream companies to offer

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discounts on the price of domestic crude andby issuing GOI bonds to the oil marketingcompanies.

11. The petroleum and gas sector is alsodevoid of any competition or independentoversight of either its upstream or thedownstream activities. Despite the dismantlingof the Administered Price Mechanism, the GOIcontinues to control the pricing of automotivefuels, LPG, a large part of domestic naturalgas, and PDS kerosene. Again despite thepresence of several domestic, public and privateplayers as also some foreign groups, there is noreal competition in the sector except inperipheral products such as lubricants. In fact,the prevailing pricing & taxation policies andthe market structure provide significantprotection to refineries. The result is that India’srefining capacity exceeds the demand by 18%already.

12. Competition is limited in thedownstream sector to cornering retail outletsand is often wasteful. Efficiencies in retailingcan only be realised if companies are allowedto set their own prices and entry barriers fornew entrants are dismantled. These barrierscurrently include minimum investmentrequirements and lack of open access to certainmarketing infrastructure. The Petroleum &Natural Gas Regulatory Board Act, 2006 hasalready been notified and should, hopefully,raise the level of competition in the sector onlevel terms.

13. On the upstream side, the dominanceof the public sector continues although inrecent rounds of bidding under NewExploration Licensing Policy (NELP) domesticprivate sector and state sector participationand, to a more limited extent, foreignparticipation has emerged. India’s currentlyknown oil and gas reserves will be exhaustedin 23 years and 38 years respectively at currentproduction levels. While exploration has notresulted in any significant new oil find, largegas finds have been reported though uncertaintystill prevails with respect to precise gasavailability. The current upstream regulationprovided by DGH is neither independent norcomprehensive in a technical sense with respect

to optimal development of the hydrocarbonresources.

14. Given its lack of success in finding oiland gas in the Indian sedimentary basin, ONGChas been successfully acquiring equity oil andgas overseas. While these are largely commercialopportunities, they do help energy securityconcerns to the extent that they increase accessto a more diversified supply base under certaineventualities. Indian Oil Corporation has alsosuccessfully tapped retailing and refiningopportunities overseas. Other players have alsolooked at various opportunities overseas butwith little success. The risks of the overseasoperations are largely being carried on thebalance sheets of the parent Indian companies.

15. The following policy initiatives aresuggested for the oil and gas sector:

Pricing of Petroleum Products

� Full price competition at the refinerygate and at the retail level for allpetroleum products should be pursued.Differential pricing in different marketsmay be permitted to reflect the cost ofsupply. State governments may chooseto subsidise prices in remote areas in atransparent manner through theirbudgets. Similarly, the CentralGovernment could subsidise certainstrategic consumption or lifeline energyconsumption transparently through itsbudget.

� In case of products wherein demandfar exceeds available supply, exceptionsmay be made to the above policy offull competition. Such products mayneed to be allocated for specific end-uses and priced differently based oneconomically valid arguments. As anexample, the case of pricing andallocating gas has been detailed underChapter V.

� Till such competition is introduced wemay use a pricing mechanism thatmimics it. The pricing mechanism ofpetroleum products on import paritybasis needs to be replaced by a tradeparity basis i.e. products for which the

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country is a net exporter/importer overa specified time period should haveexport/import parity prices. A productfor which the country is self-sufficientshould have a price in between the twodepending on the price elasticity ofdemand for the product in the domesticmarket. Trade parity pricing shouldideally be a short-term measure; themost preferred option being pricecompetition at the refinery gate and atthe retail level.

� The domestic economy may have tobe protected against short-termvolatility in the International marketcaused by speculators and manipulators.An option to achieve this could be toallow price adjustments based onlagging 1-3 month average prices,thereby forcing oil companies to useshort-term hedging. Another alternativewould be to use long-term supplycontracts linked to a variety of morestable energy price indices. In a periodof continuously rising prices thegovernment can adjust the ad-valoremtaxes and levies in a revenue neutralmanner to cushion the price rise forthe consumer. Of course any persistentprice change that cannot be absorbedby change in taxes and duties, shouldbe passed on to the consumers.

Petroleum & Natural Gas Regulation

� There is a need to have an independentregulatory body to regulate upstreamallotment and exploitation of availableoil and gas reserves and providedownstream regulation that primarilyensures competition on level terms inrefining, transportation, distributionand retailing of oil and gas. TheRegulator must review the currentregime that limits competition fromboth foreign and domestic privateplayers in the downstream sectors. Akey responsibility of the Regulatorwould be to enforce universal serviceobligations by marketing companiesactive in a region as well as universal

and subsidised access to PDS keroseneand LPG by the intended beneficiaries.The notification of the Petroleum &Natural Gas Regulatory Board Act,2006, is thus welcome.

� On the upstream side, DirectorateGeneral Hydrocarbons (DGH), an armof the Ministry, oversees allocation andexploitation of oil & gas reserves andenforces profit sharing with exploration& production companies. The currentarrangement needs to be strengthenedand made independent.

Subsidy

� The high price difference betweenkerosene and diesel (Rs.21 per litre in2005-06) leads to large-scale diversionof kerosene from the public distributionsystem to adulteration of diesel.Similarly, differential pricing of LPGfor domestic and commercial use leadsto leakages increasing the burden ofsubsidies. The mechanism for subsidisedsupply of kerosene and LPG needs tobe revised so as to make it transparentand directed only to the targetedbeneficiaries. For this purpose, thepossibility of introducing a couponsand/or smart/debit cards directly tothe intended beneficiaries should beexplored. This would eliminate dualprices for kerosene and LPG in themarket. Further, the subsidies on theseproducts should be charged directly tothe budget and not loaded on to the oilcompanies.

� Ministry of Petroleum & Natural Gas(MOP&NG) could bid out availablesubsidies for LPG and kerosene toobtain the lowest price at which agiven amount of these products couldbe supplied to a defined number oftargeted beneficiaries or on the basis ofthe minimum subsidy at which thesecould be supplied in specified quantitiesand at specified price to the targetednumber of beneficiaries.

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Reserve Enhancement and Competition

� The assessment of the sedimentarybasins and development ofunconventional hydrocarbons such asshale gas, biogenic gas and tight gasreservoir/basins needs to be accelerated,and outsourcing of the evaluation ofpotential should be undertakenwherever needed.

� Provide level terms for foreignoperators willing to bring technologyand investment to recover oil/gas fromcurrently abandoned and/or marginalfields with the right of first refusal toacquire any/all of the production oncompetitive terms.

� All non-dedicated transportation anddistribution assets in the oil and gassector including facilities at ports andairports should provide services and/or access to competing suppliers undercommon carrier principles.

� Follow international best practicesgoverning the declaration ofhydrocarbon finds and claims relatingto in-place reserves discovered,acquisition of required technologies andpooling of development risks so as tomaximally exploit a reserve in a timelyfashion. This is critical to India’s energysecurity concerns.

� The Mumbai High Crude is lighterand sweeter than general crude averageand can fetch a higher price. Its pricemay be discovered through an openauction wherein Government can mopup incremental revenue.

� In line with crude oil and coal, NaturalGas and LNG may also be included inthe category of declared goods so thata central sales tax of 4% is levied onthem and exemption from any statesales tax is extended.

� Instead of a piecemeal approach toreform in the petroleum and naturalgas sector, there is a need to implementa comprehensive reform packageincluding pricing, regulation, industrystructure, subsidies, etc.

� Raise the level of diplomacy to accesshydrocarbon reserves overseas andrealise gas pipelines to India.

� Importing LNG through long-termcontracts provides a flexible alternativeto pipelines. Since the global gas markethas developed and LNG trade hasincreased, the price of natural gas islikely to match the opportunity costof selling it as LNG.

Strategic Reserves

� Maintain a reserve of strategic-cum-buffer stock equivalent to 90 days ofoil imports and/or buy options foremergency supplies from neighbouringlarge storages such as those available inSingapore. Operating the strategicreserves in cooperation with othercountries who maintain such reservescould also increase their effectiveness.

Natural Gas Allocation and Pricing

� Natural gas price can be determinedthrough competition among differentproducers where multiple sources anda competitive supply-demand balanceexist. As long as there is shortage ofnatural gas in the country and the twomajor users of gas, namely fertiliserand power, work in a regulated costplus environment, a competitive marketdetermined price would be highlydistorted. Such distortions would getfurther amplified by the prevailingregime of fertiliser subsidies & powersector subsidies and cross subsides. Insuch a situation price of domesticnatural gas and its allocation should beindependently regulated on a cost plusbasis including reasonable returns.

� Another option could be to price gason a net-back basis. Should a scenariowherein gas becomes 10-12% of India’senergy mix materialise by 2031-32,some 60% of the gas supply will beused for power generation. This wouldmean that beyond the level of gasconsumption in the fertiliser,

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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 thecost of peak or base electricity fromcoal, the cheapest alternative. Acompetitive coal market is thusimportant for setting a proper price ofnatural gas on a net-back basis. Analternative for a gas producer is toexport gas, in which case the domesticgas price could be the net realisation ofthe domestic natural gas producer afterinvesting and getting a return on theinvestment needed to make the naturalgas tradable across borders througheither a trans-border pipeline orthrough liquefaction and shippingfacilities. This suggests that in the short-term, natural gas prices should bedetermined on a cost plus basis by anindependent regulator.

Gas Pipeline Network

� The Petroleum and Natural GasRegulatory Board Act, 2006, provides

that the Regulator shall moderate accessto gas pipelines as common or contractcarriers. The Regulator shall also ensurefair trade and competition amongstentities, specify the pipeline access code,ascertain transportation rates forcommon or contract carriers anddetermine access to city or local naturalgas distribution networks so as toensure competition amongst entities asper the pipeline access code. Theseprovisions would pave the way foraccelerated development of the gaspipeline network in the country.

Using Gas Abroad

� In case India can use diplomacy toaccess cheap natural gas under long-term (25-30 years) arrangements, itshould consider setting up captivefertiliser and/or gas liquefactionfacilities in such countries. This wouldessentially augment energy availabilityfor India.

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Energy-Environment Linkages

In order to achieve sustainability in theenergy chain, it is important to identify,measure, value, and integrate the environmentalimpacts of activities in the energy sector.Environmental concerns are associated with allforms of energy including fossil fuels, nuclearenergy, and renewables, throughout the energychain from exploration/mining, transportation,and generation to end-use. However, the precisenature, intensity, and spatial extent ofenvironmental impacts varies across differentenergy forms. These effects can occur at thehousehold, local, regional, national or globallevels. India, with its size, diversity and currentpace of growth, needs to use and to develop allforms of energy sources optimally, in particularto be able to meet its poverty alleviation goals.

13.1 ENERGY SUPPLY SIDE:ENVIRONMENT CONCERNS

2. Energy production and use ofteninvolves environmental externalities. Theseexternalities, as well as any social externalitiessuch as for example, the social value ofemployment created in a bio-diesel programme,need to be economically valued and

appropriately reflected in the prices of variousfuels and energy sources.

� Studies should be carried out todetermine the economic value ofexternalities in the production and useof different sources of energy.

13.1.1 EXPLORATION, PRODUCTION AND

TRANSFORMATION OF FOSSIL FUELS

3. The environmental impacts of variousenergy options are of growing concern owingto increasing and widespread use of energy.Coal mining, exploration and production ofoil and gas (both on and off shore) have a widerange of adverse environmental impacts. Someof these impacts may be reversible, but manyare irreversible. Some of the adverseenvironmental impacts of open cast miningmay be contained, but on the other hand, theloss of biodiversity due to loss of, or severedisturbance to, habitats may be irreversible.Advanced technologies and better managementpractices may, however, reduce environmentalimpacts. For example, by using the latestexploration and drilling technologies, the


Chapter XIII

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

Stage of fuel cycle Natural gas Oil Coal

All stages/all fuels CO2, CH

4, N

2O, NO

x, CO, Reactive organic gases, Hydrocarbons, partial

trace metals, and thermal pollution

Exploration/Mining Drilling accidents, sludge Drilling accidents, Mining injuries, landsludge, SO

2degradation, SO

2, NO

x

Processing/Refining Refinery accidents, Refinery accidents, SO2, SPM

waste disposal waste disposal SO2

Transport/distribution Pipeline accidents, Pipeline accidents, SPM, SO2, NO

x,

Liquefied natural oil spills, SO2

CO, CO2

gas explosion

Conversion/electricity Ash disposal, SO2

Fly ash SO2, CO

2,

generation NOx, Sludge

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adverse impact of petroleum exploration onnatural ecosystems can be minimised.Transportation of coal and petroleum productsby rail, road and sea also causes considerableenvironmental damage. Pollutants associatedwith the combustion of fossil fuels SPM, SO

x,

NOx, and CO

2 either in transformation

activities (to petroleum products or power andheat combustion) or in end-uses pose a majorthreat to both ecological and manmaderesources, and to human health. Additionallythe poor calorific content of Indian coal impliesthat the disposal of fly ash generated in thermalpower plants is a major concern. Some of theenvironmental impacts associated with energybased on fossil fuels are summarised in theTable 13.1.

13.1.2 ENVIRONMENTAL IMPACTS OF

NUCLEAR POWER

4. While SPM, CO2, SO

x, and NO

x,

emissions and waste disposal are dominant inthe context of generating energy from fossilfuels, nuclear power is associated primarilywith risks of radioactive release. Environmentalimpacts identifiable at various stages of thenuclear fuel cycle are: mining (accidents, releaseof radon gas and radioactive dust from Uraniummines and mills), radioactive seepage from wasteand land degradation, processing (accidents),transport (accidents, risk of proliferation), andelectricity generation (risk of catastrophicaccidents, low and high level radioactive wastes).

Additionally, decommissioning of nuclearplants entails the disposal of radioactive wastes.While significant technological developmenthas been made in the area of radioactive wastedisposal and decommissioning, they are yet tobe proven at large enough scale to satisfactorilyresolve economic issues. However, despite theserisks, global data suggests that of all theconventional energy options, nuclear energyhas posed the least risks in terms of mortalityper billion megawatt hours of generation.

13.1.3 ENVIRONMENTAL IMPACTS OF LARGE-SCALE HYDROPOWER

5. The major impacts of large hydroprojects are rather site specific, and in particular,centre around submergence of land anddisplacement of traditional communities fromtheir ancestral domains. Such displacementinflicts a high social cost including change inthe resource base of traditional culture and aloss of livelihood. In such cases, rehabilitationefforts can address only a part of the socialcosts experienced. In addition, loss of pristinenatural forests and its associated uniquebiodiversity may occur due to submergence.Methane emissions, a major greenhouse gas,may also be emitted in large quantities ifinsufficient care is taken to remove vegetativematter susceptible to anaerobic microbialprocesses from the submerged area.Submergence of large areas may also increasethe risk of seismic events, for which dams need

Table 13.2Supply Side, Local and Regional Environmental Impacts

Impact/Option SO2, Solid Liquid Thermal impact Flora, Forest Involuntary

NOxTSP

sWaste effluent on receiving Fauna loss resettlement

waters impacts

Thermal power Y Y Y Y Y Y Y(inc. Mining)

Hydro-power N N N N Y Y Y

Nuclear Power N Y Y Y Y Y Y(inc. Mining)

Petroleum Y N Y Y Y Y Y(inc. Mining)

Transmission N N N N Y Y Y& pipelines

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to be designed, for if they lead to failure of thedam structure, it may be catastrophic fordownstream populations. Other adverse impactsinclude the spread of water-borne disease, suchas schistosomiasis.

6. Table 13.2 summarises the supply sideenvironmental impacts of the major forms ofconventional energy options:

13.1.4 ENVIRONMENTAL IMPACTS OF

RENEWABLE ENERGY

7. Energy from renewable sources isgenerally viewed as involving lowerenvironmental impacts than that based on fossilfuels, nuclear and large hydropower. The mainenvironmental benefits of renewable energysources is that they avoid the air pollutionemissions from fossil fuels and the catastrophicrisks associated with nuclear plants. Small hydroprojects may also help conserve water supply.Biomass based systems promote the cultivationof energy crops in wastelands and help arrestland degradation. Nevertheless, renewableenergy sources may also cause environmentaldegradation of a different kind. Unsustainableuse of biomass leads to depletion of forests,wind energy may cause noise, result in birdmortalities, and despoil the aesthetics oflandscapes. Large arrays of solar photovoltaicpanels put considerable demand on land andimpair aesthetics. Use of chemicals in themanufacture of solar panels and use of leadacid batteries cause several adverseenvironmental impacts. While bio-energy isgenerally considered carbon neutral over thevegetation life cycle, the potentialenvironmental impacts of such projects caninclude impacts on soil and water resources inaddition to an increased competition for land-use. Since net carbon emissions correspondonly to net deforestation, sustainable harvestedbiomass fuels do not add to green house gases.

13.2 ENVIRONMENTAL DIMENSIONS

OF DEMAND SIDE IMPACTS

8. The end-use of energy may also imposesevere environmental costs. Industrial andvehicular emissions have assumed seriousproportions in urban areas. Petrol-driven

vehicles are the major source of CO emissions,contributing over 85% of total emissions, whilediesel-driven vehicles are the major source ofNO

x, contributing over 90% of total emissions.

Improper use of energy in the agriculturalsector has resulted in the depletion ofgroundwater in several parts of the country.Indoor air pollution due to the domesticconsumption of both traditional andcommercial fuels is most likely the secondlargest source of disease, particularly amongwomen and children, in the country.

9. To understand the demand side ofenergy-environment interactions, one can beginwith an impact matrix that classifies each fuelby key end-use, environmental effects,indicators, and level of impact. For example,diesel fuel is (a) commonly consumed in trucksand buses; (b) has negative impacts onrespiratory health, acid deposition, leadcontamination and related health ailments, (c)has effluents of CO and particulates that canbe measured; and (d) generates environmentalimpacts at the community, local and regionallevels. To go beyond this simple level of matrixanalysis requires an assessment of the causes ofenergy related environmental concerns,information on the physical amounts ofpollution from each source that users areexposed to, and a quantification of impactsaccording to indicators for human health, theeconomy, and/or ecosystems.

13.3 UNDERSTANDING THEDETERMINANTS OF AIRQUALITY

10. Typically, the exhaust gases fromburning coal and oil contain particulates (SPM),sulphur oxides (SOx), nitrogen oxides (NOx),and volatile organic compounds (VOCs). Theconcentrations of these pollutants in exhaustgases is a function of the firing configuration,operating practices, and fuel composition. Gasfired plants produce negligible quantities oftotal particulates and the level of nitrogenoxides are about 60 percent compared to plantsusing coal. A number of factors during energytransformation (power generation and use ofpetroleum products in transportation) affect

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air quality. The knowledge of the directionand size of all these factors and their interactionis important for developing an effectivemitigation strategy. These factors include:

(1) Composition and characteristics ofemission sources including:

• Absolute emission levels• Height of emissions• Location of emissions

(2) Meteorological parameters such asrainfall, wind velocity, thermalinversion etc.

13.3.1 LEVELS AND TREND ANALYSIS OF

URBAN AIR QUALITY IN FIVE MAJOR

INDIAN CITIES

11. Historically, the national ambient airquality standards have differed by land-use,with the most stringent standards set for“sensitive” areas, followed by “residential, rural,and other areas”; and the most lenient standardsset for “industrial” areas. Figures 13.1 and 13.2provide SPM, RSPM, SO

2 and NO

2

concentrations for Delhi, Kolkata, Mumbai,Hyderabad and Chennai from 1993 to 2005.13

12. For the most part, in all five citiesexcept Chennai, were not in compliance withthe national annual average air quality standardsfor residential area for particulate matter duringthe period from 1993–2005, and particulatepollution remains a cause of concern today.The air quality data takes into considerationvarious energy transformation activities in thesecities. However, figures for SPM and RSPMlevels also include other activities such asconstruction, etc. In addition, in several cities,high levels of natural air-borne dust may havecontributed to the SPM/RSPM levels exceedingthe standards.

13. In contrast to particulate matter, annualaverage SO

2 concentrations were low during

the same period and in compliance with thenational annual average standards of 60

microgram per meter cube for residential areas.NO

2 concentrations were also low, except in

Delhi and Kolkata. Overall, by comparisonwith SPM, these two gas pollutants do notseem to be a major problem. However, withour growing energy requirements andconsumption levels of fossil fuels, the problemof local and regional air pollution should be animportant concern of energy policy.

13.4 LONG-TERM SUSTAINABILITYOF INDIA’S ENERGY USE

13.4.1 LOCAL AND REGIONAL IMPACTS

14. The question of long-term sustainabilityof India’s energy sector in relation toenvironmental impacts at local, regional, andnational level is important. In order that futuregrowth is sustainable, it needs to be resource-efficient and environmentally accountable. Thechallenge is to thus use conventional energyresources in a manner, which cost-effectivelymaintains environmental quality.

� Environmental taxes and subsidies basedon a consistent application of the“polluter pays” principle or “user pays”principle can go a long way inpreserving environmental quality. Thiswould be relatively easilyimplementable for organisedestablishments.

� In cases where such taxes and subsidiesare not easy to administer andtransaction costs are high, alternativepolicies such as setting emission andenergy consumption standards onequipments may be followed. Somespecific policies are discussed in thechapter on Energy Efficiency.

� Environmental impact assessment ofpower plants, dams, mines,infrastructure, construction etc., arealready required. Environmentalconditionalities and ameliorative actionsshould be specified to maintain thedesired level of environmental quality.

13 Source: For a Breath of Fresh Air, The World Bank, June 2005, updated with recent data

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Figure 13.1Air Pollution in Residential AreasAnnual Average SPM Concentrations

Annual Average RSPM Concentration

Annual Average SO2 Concentration

Annual Average NO2 Concentration

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Figure 13.2Air Pollution in Industrial AreasAnnual Average SPM Concentrations

Annual Average RSPM Concentration

Annual Average SO2 Concentration

Annual Average NO2 Concentration

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13.4.2 INDIA’S APPROACH TO CLIMATE

CHANGE

15. Climate change, resulting fromanthropogenic emissions and increasingconcentrations of a suite of gases (called“greenhouse gases” or GHGs) mainly due tofossil fuel use, certain agricultural and industrialactivities, and deforestation, has the potential,over the next few generations, to significantlyalter global climatic conditions. This wouldresult in large changes in ecosystems, leadingto possibly catastrophic disruptions oflivelihoods, economic activity, livingconditions, and human health. On the otherhand, the abatement of GHGs involvessignificant economic costs.

16. While climate change is a globalenvironmental issue, different countries beardifferent levels of responsibility for increasesin atmospheric GHG concentrations. Further,the adverse impacts of climate change will falldisproportionately on those who have the leastresponsibility for causing the problem, inparticular, developing countries including India.

17. Though India is a signatory to theUnited Nations Framework Convention onClimate Change (UNFCC), she is not requiredto contain her GHG emissions. India’s policiesfor sustainable development, by way ofpromoting energy efficiency and the use ofrenewable energy, changing the fuel mix to

cleaner sources, energy pricing, pollutionabatement, afforestation, mass transport in andof themselves result in a relatively GHG benigngrowth path.

18. India’s GHG emissions in 1994 were1228 million tonne (Mt) CO

2 equivalent, which

is below 3% of global GHG emissions.14 Inper-capita terms, it is 23 percent of the globalaverage, and 4 percent of USA, 8 percent ofGermany, 9 percent of UK and 10 percent ofJapan’s per-capita emissions in the same year.In terms of the GHG intensity of the economyin Purchasing Power Parity terms, India emitteda little above 0.4 tonne CO

2 equivalent per

1000 US dollars in 2002, which is significantlylower than those of the USA and the globalaverage. In terms of primary energy use, India’sshare of renewable energy (with zero net GHGemission) at 36 percent is far higher thanindustrialised countries can hope to reach inmany decades. Since GHG emissions aredirectly linked to economic activity, India’seconomic growth will necessarily involveincrease in GHG emissions from the currentextremely low levels. Any constraints on theemissions of GHG by India, whether direct,by way of emissions targets, or indirect, willreduce growth rates, and impair pollutionabatement efforts.

19. Anthropogenic climate change,significant responsibility for which clearly doesnot lie with India, may, on the other hand,

Table 13.3India Approved CDM Projects

No. of Projects CERs till 2012* Investment (Rs Cr)

Energy Efficiency 98 70,834,710 2973

Fuel Switching 15 28,307,202 4894

Industrial Process 19 71,665,674 558

MSW 7 3,871,096 256

Renewable 72 32,391,075 6934

Renewable (Biomass) 86 29,641,607 3477

Total 297 236,711,364 19092

*CER (Certified Emission Reduction) = One Tonne of CO2 eq abatement

14 Source: India’s Initial National Communication to the UN Framework Convention on Climate Change(UNFCCC), 2004.

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have severe adverse impacts on India’sprecipitation patterns, ecosystems, agriculturalpotential, forests, water resources, coastal andmarine resources, besides the increase in rangeof several disease vectors. Large-scale resourceswould clearly be required for adaptationmeasures for climate change impacts, ifcatastrophic human misery is to be avoided.

20. As the global concern vis-a-vis climatechange grows and as the threat of climatechange is perceived to be real, pressures onIndia to contain GHG emissions will rise.India should be willing to contain her GHGemissions as long as she is compensated for theadditional cost involved. India acceded to theKyoto Protocol on 26 August 2002. TheGovernment of India established NationalCDM Authority (NCDMA) in December 2003,with its office in Ministry of Environment and

Forests. As of 8th May 2006, a total of 297projects have been approved by the NCDMA.These projects expect emissions reduction of236 Million CERs till 2012 at a potential totalinvestment of more than Rs.190 Billion. Table13.3 below gives the sector-wise break up ofapproved projects and the expected totalemission reductions.

21. India recognises the possibilities ofselling GHG emission reductions. We shouldchoose options that permit doing so at a laterdate when it is found to be attractive. In anycase, for us the imperative is to push energyefficiency, promote modern renewables,develop new technologies that augment ourenergy supply such as in-situ coal gasificationthat also provides scope for carbon capture,and emphasise nuclear power. All of these willautomatically help reduce the GHG emissions.

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Concluding Comment

India faces an enormous challenge if it is to meet her energy requirement over the coming25 years and support a growth rate of 8 percent. This challenge can be met with a coherentapproach, which develops all available energy resources. The main areas of action, for whichdetailed policy recommendations have been made, are as follows:

� Reducing energy requirements through energy efficiency and conservation.

� Augmenting energy resources and supply.

� Rationalisation of fuel prices to mimic free market prices that promote efficient fuel choiceand substitution.

� Promoting coal imports.

� Accelerating power sector reforms.

� Cutting cost of power.

� Encouraging renewables and local solutions.

� Enhancing energy security.

� Promoting and focusing energy R&D.

� Promoting household energy security, gender equity and empowerment through targetedentitlements for the poor.

� Creating an enabling environment and regulatory oversight for competitive efficiency.

The broad policy framework and the development thrusts suggested here need to be mademore specific in certain areas. Once the policy framework is accepted, it will be necessary to chalkout roadmaps of development and draft specific policy measures for implementation.

With implementation of the recommendations of the Committee, India can meet herenergy requirements in an efficient, cost effective way and be on a path of sustainable energysecurity.

Concluding Comment

138

Integrated Energy Policy Annexure-I

No.M-11011/1/2004-EPU (P&E)Government of India

Planning Commission

Yojana Bhavan, Sansad Marg,New Delhi, 12th August 2004

ORDER

SUBJECT: SETTING UP OF AN EXPERT COMMITTEE TO FORMULATE ENERGYPOLICY

In pursuance of the decision taken by Prime Minister and Deputy Chairman, PlanningCommission to set up an Expert Committee to prepare an integrated energy policy linked withsustainable development that covers all sources of energy and addresses all aspects including energysecurity, access and availability, affordability and pricing, efficiency and environment, it has beendecided to set up an Expert Committee to formulate Energy Policy.

2. The composition of the Expert Committee is as under:

1. Dr. Kirit S. Parikh, Member, Planning Commission-Chairman

2. Shri Jagmohan Bajaj, ex-Chairman, SERC, UP

3. Prof. Rangan Banerjee, IIT, Bombay

4. Shri Pradeep Chaturvedi, Representative of the Institution of Engineers (India)

5. Sh. Gajendra Haldia, NCAER

6. Mr. Ajit Kapadia, Vice Chairman, Centre for Fuel Studies & Research, Vadodara

7. Dr. Urjit R. Patel, Chief Policy Officer, IDFC

8. Sh. Subimal Sen, Member, West Bengal Planning Board

9. Shri T.L. Shankar, Administrative Staff College, Hyderabad

10 Dr. Leena Srivastava, Executive Director, TERI

11. Secretary, Ministry of Power

12. Secretary, Ministry of Petroleum and Natural Gas

13. Secretary, Ministry of Coal

14. Secretary, Ministry of Non-Conventional Energy Sources

15. Secretary, Department of Atomic Energy

16. Secretary, Ministry of Environment & Forests

139

Annexure-I

17. Secretary, Planning Commission

18. Secretary General, FICCI

19. Secretary General, ASSOCHAM

20. Director General, CII

21. Shri Surya P. Sethi, Adviser (Power & Energy): Convenor

3. The Terms of Reference of the Expert Committee would be to address the following:

i) How to meet demand for energy of all sectors and energy needs of vulnerable sections inall parts of the country at the least-cost considering different fuels and forms of energysuch as coal, oil, hydro electricity, nuclear power, electricity and various non-conventionalenergy sources?

ii) How to ensure that energy input costs in India are internationally competitive?

iii) What policy including pricing policy would lead to efficient use of energy, promoteconservation and at the same time provide incentives to producers to produce adequateenergy to meet the demand without imposing an unsustainable subsidy burden on thesystem?

iv) How to ensure energy security against physical as well as financial risks (shocks) withthe desired degree of confidence level at minimum cost using alternatives such as physicaland financial stocks, options contract, acquisition of equity hydrocarbons abroad, inproviding energy security?

v) What is the role and importance of regional and international cooperation in promotingenergy security?

vi) What is the relative role of public and private investments in the development of eachenergy source or what is the scope for public-private partnerships to ensure adequatesupply?

vii) What are the institutional, legal and regulatory policies required to ensure competitiveenergy markets and effective implementation of suggested policies especially in anenvironment where public-private partnership is being encouraged?

viii) How to ensure that exploration for oil, gas, coal and hydrocarbons takes place at therequired level?

ix) What policies are needed to promote development and use of energy technologies?

x) How to accelerate the development of new and renewable sources of energy?

xi) How to ensure environmental sustainability of the energy sector through emission andeffluent control, appropriate choice of fuel, promotion of clean coal technology, energyconservation, restoration of mine sites, use of renewable resources, etc.?

xii) How to ensure uninterrupted supply of quality power to both urban and rural consumerson demand?

xiii) How to ensure supply of clean household energy in rural areas to improve the quality oflife of women and reduce the burden of indoor air pollution on them?

xiv) How to provide needed subsidies in non-distorting ways?

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4. The Expert Group will have the powers to co-opt/associate professionals/domain expertsinto the Group. The Expert Group will also have the powers to set up Sub Groups/SteeringCommittees of officials/non officials to finalise its views on specific issues. The Expert Groupshould, however, encourage active participation of the State Governments in the areas ofconcern of the Group.

5. The expenditure of the members on TA/DA in connection with the meetings of theExpert Group will be borne by the Ministry/Department/State Government to which themembers belong. In case of private members TA/DA will be borne by the Planning Commissionas admissible to the Class I officers of the Government of India.

6. The Expert Group will submit its report to the Planning Commission within six monthsfrom the date of its constitution.

7. The Expert Group will be serviced by the Planning Commission.

Sd/-(T.R.Meena)

Director(Admn.)

To

All Members of the Expert Group

Copy to:

1. Deputy Chairman, Planning Commission2. Minister of State (Planning)3. Members, Planning Commission4. Cabinet Secretary5. Secretary to the President of India6. Pr. Secretary to Prime Minister7. Joint Secretary to Prime Minister Sh. Jarnail Singh with reference to his

U.O. No.210/31/C/25/04-ES.I dated 15.07.20048. Pr. Advisers/Advisers, Planning Commission

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Annexure-IAnnexure-II

Gist of Earlier Energy Policy Committees/Groups

The two main committees set-up on energypolicy were the Fuel Policy Committee in1974 and Working Group on Energy Policy in1979. A brief on the constitutions, terms ofreference and the gist of their recommendationsis given below:

(I) THE FUEL POLICYCOMMITTEE (1974)

The Fuel Policy Committee wasappointed by the Ministry of Petroleum andChemicals, Government of India on 12thOctober, 1970. The terms of reference ofcommittee were as follows:

(a) Undertake a survey of fuel resourcesand the regional pattern of theirdistribution;

(b) Study the present trends in exploitationand use of fuels;

(c) Estimate perspective of demand bysectors (in particular the transport,industry, power generation industryand domestic fuel) and by regions;

(d) Study the efficiency in the use of fueland recommend:

(i) the outline of a national fuel policyfor the next fifteen years;

(ii) a pattern of consumption andmeasures, fiscal and otherwise,which would help the best use ofavailable resources; and

(iii) the measures and agencies, topromote the optimum efficiencyin use of fuel.

RECOMMENDATIONS

(i) General

1. If the energy plans and policies are tobe operationally meaningful, there is aneed for periodic review of the energypolicy. The review may be taken at

least once in three years and theplanning horizon extended at each timeto 15 years.

2. To set-up an Energy Board consistingof the ministers of concerned energyrelated ministries supported by asuitably structured Secretariat to assistthis board. The board may initiate orundertake any analysis relevant for thereview or revision of the fuel policy.

(ii) Coal Sector

1. Coal should be considered as theprimary source of energy in the countryfor the next few decades and the energypolicy of the country should bedesigned on this basic premise.

2. The need for developing an efficientand adequate transport system, whichwould ensure the flow of coal from thepoints of availability to the demandcenters should be noted.

3. The coal industry should accept theresponsibility to supply the requiredgrade of coal on a long-term basis, ifnecessary, by changing the source ofcoal supply from time to time or byblending different grades of coal tomake up the required grades.

4. To increase the productivity ofcoalmines, studies should be initiatedimmediately to determine the optimaluse and maintenance of machines, andfor training coal mines workers in theuse and maintenance of the same.

5. R&D work should be continued ontechno economic aspects of coalgasification and specific possibilitiesshould be investigated for using poorquality coal for gasification.

6. Railways constitute the most economicway of moving coal for most of the

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consuming classes and consumerlocations in India. Adequate attentionshould be paid to rail transportplanning in regard to development ofadditional line capacity, yard capacityand signalling and communicationwhich would facilitate a speedier turn-around time for wagons. Theaugmentation of the wagons fleetshould also be considered.

7. The selection of optimal technologyfor coal mining should be made oneconomic grounds using appropriateweightages for machine utilisationunder Indian conditions and keepingin mind the availability of an abundantlabour force.

(iii) Oil Sector

1. India’s oil policy should be based onan understanding of the internationaloil situation. It should be designed withthe specific objectives of

(a) Reducing the quantity of oilproducts to be imported;

(b) Reducing the total foreign exchangeexpenditure; and

(c) Improving the security of suppliesin crude and oil products requiredfrom sources outside the country.

2. Oil exploration in India should be givenpriority attention. The explorationactivities particularly in the offshoreareas and selected onshore areas shouldbe speed-up. There is an urgent need toaugment the capabilities of ONGC byproviding them with more modernequipment.

3. All attempts should be made to takeadvantage of the complementarities ofthe resource endowments of India.Meaningful bilateral agreements maybe entered into with oil exportingcountries including participation incrude production.

4. To provide insurance against short-runbreakdowns in the supply of crude tothe country, there is a need to build upstock of crude within the country.

5. While planning refining capacity, thereshould be a careful examination ofrefinery locations, the product mixrequired in each refinery, the extent ofsecondary process to be established anda feedstock choice in the fertiliserindustry.

6. Road and rail transport must becoordinated in an optimal manner inorder to manage the HSDO demand.Long distance movement ofcommodities by road should bediscouraged while simultaneouslyincreasing the capabilities of railtransport.

7. Fuel oil being a valuable raw materialfor the production of high costpetroleum products which have goodexport potential or can serve as importsubstitute, large quantities of it shouldbe earmarked for the high valueproducts like lubes, bitumen, petroleumcoke and wax.

8. The price of HSDO and keroseneshould continue to be kept at par witheach other to avoid diversion ofkerosene for use in transport sector.

9. The production of fertilisers, methanoland other chemicals based on naturalgas will have to be given preferenceover the use of natural gas solely as afuel.

(iv) Power Sector

1. Efforts should be made to develop amore optimal load structure:

(a) By setting up of more pumpedstorage schemes.

(b) By shifting production of electricityintensive industries from peak tooff peak periods.

(c) By general pricing of the industrialtariff and agricultural tariff toprovide incentive for use of moreelectricity during off peak hours.

2. In the overall interest of the economyand keeping in mind environmentalconsiderations, more power stationsshould be located at pitheads.

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Annexure-II

Depending on the local conditions,however, construction of powerstations at load centres can beconsidered on merits as a special case.

3. The schemes for setting up of regionalgrids and regional load dispatch centresshould be vigorously pursued.

4. A proper pricing policy for the powersupplies to the agricultural loads so asto encourage the consumers to use theoptimal size of pump sets, and to drawsupplies during off peak hours.

5. In the overall national interest andgiven the limited available resources,the setting up of captive power stationsshould not be encouraged.

(v) Domestic sector

1. To take up programmes of afforestationwith quick growing wood species toincrease the availability of firewood.

2. To intensify the popularisation of‘gobar gas plants’ in view of the socialbenefits of the nutrient production,pollution abatement etc.

3. The problem of substitution of non-commercial fuels with the commercialfuels in the domestic sector has to beconsidered with due regard to theoverall economic implications of theuse of different fuels in this sector.Pricing and distribution policies shouldbe based on a full understanding of thesocial costs of the use of different fuels.

(vi) Costs and prices

1. The price fixed for any fuel-coal, oil orelectricity should be such that theparticular fuel industry, as a whole, isenabled to earn a return of al least 10%on the investment made in the industry.

2. There should be a serious examinationof the need to continue the importparity formula for pricing of petroleumproducts and to evaluate other possiblemethods of fixing prices, which willbest serve the national interest.

3. The electricity tariff should be designed

so as to discriminate between the useof power during the peak periods andduring the off peak periods.

(vii) Technology

1. A National Fuel Efficiency service maybe instituted to ensure improvement inenergy efficiency in the industries.

2. Research and development in areasrelating to combined gas turbine –steam turbine plants should beintensified for increasing the overallefficiency of coal utilisation in thermalpower plants.

3. A long-term programme fordevelopment of coal to oil should bedrawn up.

4. R&D work on coal gasification andpipeline transport of coal gas should beundertaken.

5. R&D on solar energy in India may beconcentrated on the development ofthin-film technology, developing lowcost solar water heaters etc.

6. Development of battery poweredvehicles, fuel cell technology, FastBreeder Reactors etc. should beemphasised.

(II) THE WORKING GROUP ON ENERGY

POLICY (1979)

The Working Group on Energy Policy(1979) was constituted by an order of thePlanning Commission on 6th December, 1977,with a view to “carry out a comprehensivereview of the present situation in the light ofrecent developments both within the countryand outside, to develop a perspective for thenext five to fifteen years and to recommendappropriate policy measures for optimalutilisation of available energy resourcesincluding non-conventional sources of energy”.The terms of reference of the Working Groupwere set out as follows:

(a) To estimate the perspective energydemand in the different sectors of theeconomy and regions of the countryby 1982-83 and a decade thereafter;

144


(b) To survey the present and perspectivesupplies of energy;

(c) To recommend measures for optimumuse of available energy resources; and

(d) To outline the national energy policyfor the next five years, fifteen yearsand the longer term conservationpolicy.

RECOMMENDATIONS

General

1. A reappraisal of our economicdevelopment strategies, especially thoseelements of the strategy which have a directlink to energy consumption like technologychoice, location policies, urban growth, andmechanisation in agriculture etc., with referenceto the new awareness of the energy supply anddemand in future needs to be addressed.

2. Examination of the technologicalprocesses and the achievable levels of efficiencyfor each industry or equipment, and to prescribethe standards of efficiency to be achieved byenergy users or equipment manufacturers.

Oil Sector Policies

1. All efforts should be made to reducethe demand of oil to levels even belowwhat is forecast in the Optimum LevelForecast (OLF). It would be prudentto plan a pattern of growth of theeconomy, which is less dependent onoil. Demand Management should formthe most important element of oilpolicy in the future.

2. The techno-economics of convertinggas into liquid fuels for use in thetransport sector should be examined.

3. Larger investment should be made insecondary processing like Hydro-crackers, catalytic crackers or delayedcoking equipment, which wouldconvert the heavy end products tomiddle distillates.

Coal Policy

1. Planning and construction of coalmines

should proceed on a steady basiswithout linking specific mines tospecific consumers.

2. There is a need to develop a well-defined policy towards mechanisationof coal mines taking into account theneed to increase production veryquickly and with due consideration foremployment and training implications.In doing so the changes in the share ofopen cast and underground mines andthe optimal technology that could beused in such mines would also deservecareful consideration.

3. There is a need to synchroniseinvestment in coal production and coaltransportation by railways with dueflexibility so that transport would notbe a constraint to the use of coal.

4. The idea of washing non-coking coalshould be pursued cautiously andresorted to only where its techno-economic benefits are clearlyestablished. The planning of thermalpower stations based on middlingsshould proceed in step with planningof coal washeries. There are alsopossibilities of using the rejects andmiddling as raw material formanufacturing domestic fuels similarto soft coke.

Power Sector Policies

1. Power planning in the future shouldbe based on the concept of an optimalmix of thermal/nuclear and hydrostations in which the hydro stationsshould take the Peak and the thermalstations provide the base load.

2. With the steeply increasing costs ofpower generation, it might becomemore remunerative to invest in Systemimprovements that might reduce lossesin T& D, than investing in additionalcapacity and if this is done, it may bepossible to reduce losses still further.

3. Detailed State-wise and region-wisepower planning studies should beundertaken.

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Annexure-II

4. It is essential that a long-termtransmission plan be prepared for eachregion, which could be executed in aphased and systematic manner.

Rural Energy Policy

1. A comprehensive survey of all theenergy needs in a village communityshould be carried out.

2. Pilot installations should be set-up asearly as possible for Micro-hydelstations to be constructed in rural areason irrigation canals.

3. A study should be made to installcommunity type biogas plants and theutilisation of gas from such plants forhouseholds, pumping and industrialapplications should be explored.

Cost and Prices in the Energy Sector

1. The energy prices must at least reflectlong-run marginal costs and allow for areasonable return. A suitableinstitutional framework for regulating,monitoring and adjusting energy pricesin a mutually comparable mannershould be set-up.

2. A tariff schedule for electricity thatdistinguishes between peak and off-peakconsumption on a diurnal and seasonalbasis may be put in place. The relativeprices of different fuels shouldencourage the required inter-fuelsubstitutions.

Research and Development in the EnergySector:

(a) Oil Sector

1. R & D efforts aimed at enhancing ourexploration capability, maximisation ofyield from oil reservoirs and efficientutilisation in all the consuming sectorsneed to be encouraged. In this context,Secondary and Tertiary recoverytechnologies should be developed tomaximise yield from oil reservoirs.

2. The potential of Hydrogen as asubstitute for liquid fuel for thetransport sector should be examined.

(b) Coal sector

1. R&D activities in the areas ofgasification and liquefaction of coal andtheir economics under Indianconditions must be pursued.

2. R & D efforts in the field of coalcombustion (e.g. fluidised bedcombustion) & other technologiesshould be reviewed and intensified sothat these technologies are adequatelydeveloped for use in both industrialand power sector.

3. Research on coal beneficiation forachieving better coal recovery fromwasheries, utilisation of rejects, etc.,may be intensified.

(c) Nuclear Energy

1. R&D work for development of FastBreeder Test Reactor (FBTR) beingconstructed at Kalpakkam should beexpedited.

2. Development work for fabrication ofreactors based U

233 with Thorium needs

to be carried out.

(d) Power Sector

R&D efforts are recommended in thefollowing areas:

1. Improvement in the methodologyof load estimating and forecasting,power system planning etc.

2. Reliability of Power Systems3. Optimisation of System Economics4. Software development for problems

in power system operation, loadflow, short circuits etc.

5. Research in the problems ofIntegrated operation of PowerSystems

6. Improvement in Power Systemprotection techniques.

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(e) Other Energy Technology Areas

1. R&D effort should be intensifiedfor development of alternativetechnologies (Solar energy, Windenergy & biomass) thatappropriately harness these sourcesof energy.

2. Research on biomass should bedirected towards identification offast growing species, methods ofincreasing the photosyntheticefficiency and development of cost-effective processes utilising bio-degradable materials for producingfuels-gaseous as well as liquids withhigh priority.

3. R&D to establish the feasibility ofintegrated systems based on solar,wind, biogas, and mini hydrowherever available, will have to beexpeditiously undertaken.

(f) Sectoral Policies/Prescriptions

(a) Transport

1. The coordination of rail and roadtraffic and the extent to whichother less intensive modes likeinland waterways, coastal shippingetc., can be used should beunderstood and encouraged.

2. Accelerated pace of electrificationof the high-density traffic trunkroutes, especially those connectingBombay, Delhi, Calcutta andMadras deserves seriousconsideration.

(b) Agriculture1. Standards of fuel efficiency have to

be prescribed for electrical anddiesel pumps and the manufacturerspersuaded to adopt a time boundapproach of increasing theefficiency of pumps to the levelsuggested in the report. Similarlyin the case of diesel tractors also

there is a need to prescribe fuel-efficiency standards.

2. Improve the design of the animaldrawn water lift and agriculturalimplements, which would increasethe useful energy delivered byanimal driven appliances/implements.

(c) Household sector

1. Setting up of standards of fuelefficiency for manufacture oflighting and cooking appliances andintroduction of more efficientchulhas at subsidised rates on alarge-scale.

2. Efforts must be made to maximisethe use of agricultural waste as fueldirectly by burning or byconversion into liquid/gas fuels bymicrobial conversion. Biogas plantscapable of using more ofagricultural waste are to bedeveloped.

(d) Industry sector

1. In many of the industries thespecific energy consumption isinversely proportional to the levelof capacity utilisation. Therefore,the utilisation factor should beimproved with special reference toconservation of energy.

2. Co-generation holds prospects oflarge energy savings in the industrialsector, as it improves the overallthermal efficiency. Such possibilitiesin existing industries should beidentified and pursued. Further, fornew industries the energyimplications of the technologychosen need to be studied to selectthe least energy intensive option,particularly with respect to the useof depleteable sources of energyand electricity.

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Annexure-I

Calorific Values, Units and Conversion Factors

Calorific Value of Various Fuels

Sl. Name of Fuel Unit Calorific ValueNo. (kilo-calories)

1. Biogas M3

4713

2. Kerosene kg 10638

3. Firewood kg 4500

4. Cow-dung Cakes kg 2100

5. Coal kg 4000

6. Lignite kg 2865

7. Charcoal kg 6930

8. Soft coke kg 6292

9. Oil kg 10000

10. LPG kg 11300

11. Furnace Oil kg 9041

12. Coal gas m3

4004

13. Natural gas m3

9000

14. Electricity kWh 860

Conversion Factors

Kilo Calorie 3.96832 BTU, 4186.8 Joules

Kilowatt Hour 3412.14 BTU, 3.6x106

Joules

Btu 0.252 Kilo Cal, 1.055 Kilo Joules

US Gallon 0.833 Imperial Gallon, 0.134 Cu. Feet 0.00378 Cu.M

Imperial Gallon 1.2009 US Gallon, 0.1605 Cu. Feet 0.0045 Cu.M

Cubic Metres 264.172 US Gallons, 219.969 Imperial Gallons, 35.3147 Cu. Feet

Cubic Feet 7.4805 US Gallons, 6.2288 Imperial Gallons, 0.0283 Cu. M

1 BkWh Hydro or Wind Electricity 0.086 Mtoe*

1 BkWh Nuclear Electricity 0.261 Mtoe

1 Mt of Coal 0.41 Mtoe

1 Mt of Lignite 0.2865 Mtoe

1 Billion Cubic Meter of Gas 0.9 Mtoe

1 Mt of LNG 1.23 Mtoe

1 Mt of Fuel wood 0.45 Mtoe

1 Mt of Dung Cake 0.21 Mtoe

*Mtoe conversion factors are taken as per International Energy Agency (IEA) Practice

Annexure-III

148


Units Name Remarks

BCM Billion Cubic Meter = 109

m3

BkWh Billion Kilowatt Hours

Bt Billion Tonne = 109

Tonne

GWe Giga Watt Electrical

GW-Yr Giga Watt Year = 8.76 x 109

kWh

kcal Kilo Calorie = 4186.8 J or 396832 Btu

kg Kilogram -

kgoe Kilogram of Oil Equivalent -

kW Kilo Watt = 103

Watt

kWh Kilo Watt Hour = 3.6x103

J, also expressed as Unit

M. ha Million hectares

M. ltrs Million litres

MMBtu Million British Thermal Unit Traditional British unit

MMscmd Million Standard Cubic Meters per Day Traditional unit used in gas industry

Mt Million Tonnes = 106

Tonne

Mtoe Million Tonnes of Oil Equivalent -

MVA Million Volt Amperes

MW Mega Watt = 106

Watt or 103

kW

MWe Mega Watt Electrical

MWt Mega Watt Thermal

T Tonne Same as Metric Ton = 1000 kg

tkm Tonne Kilometer tonne of material moved by km

TWH Terawatt Hour

Crude Oil Tonnes (Metric) Kilolitres Barrels US Gallons

Tonnes (Metric) 1 1.165 7.33 307.86

Kilolitres 0.8581 1 6.2898 264.17

Barrels 0.1364 0.159 1 42

US Gallons 0.0032 0.0038 0.0238 1

Natural Gas B Cu. B Cu. Mtoe Mt-LNG Trillion MillionMeter-NG Feet-NG BTU Barrels

of Oil

B Cu. Meter 1 35.3 0.9 0.73 36 6.29

B Cu. Feet 0.028 1 0.026 0.021 1.03 0.18

Mtoe 1.111 39.2 1 0.805 40.4 7.33

Mt-LNG 1.38 48.7 1.23 1 52.0 8.68

Trillion Btu 0.028 0.98 0.025 0.02 1 0.17

Million Barrels of Oil 0.16 5.61 0.14 0.12 5.8 1

Units

Documents

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