Energy Scenario in India

V. Raghuraman
Senior Advisor- Energy
Confederation of Indian Industry

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 Contents
Page No.

Section I: Information on Indian Energy Sector . . . 1

1.1 Introduction. . . . . . . 1

1.2 Supply Options . . . . . . 1

1.2.1 Coal. . . . . . . . 1
1.2.2 Oil & Gas. . . . . . . 1
1.2.3 Hydro Energy . . . . . . 2
1.2.4 Nuclear . . . . . . . 2
1.2.5 Renewable Energy . . . . . 2
1.2.6 Coal Bed Methane . . . . . 3
1.2.7 Other Fuels . . . . . . 3

1.3 Consumption Pattern . . . . . 4

1.4 Distribution of Primary Energy . . . . 4

1.5 Energy Pricing . . . . . . . 4

Section II: Energy Scenarios . . . . . . 5

A. Business As Usual. . . . . . . 5

2.1 Power Sector . . . . . . 5

2.2 Oil & Gas . . . . . . . 11
2.3 Coal . . . . . . . 12
2.4 Energy Conservation Act . . . . 14

B. An Ideal Situation . . . . . . 14

C. Worse Case Scenario . . . . . . 19

Section III: Conclusion . . . . . . . 20

Sources . . . . . . . . . 21

Annex 1 . . . . . . . . . 23

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 Section I: Information on Indian Energy Sector

1.1 Introduction

India ranks sixth in the world in total energy consumption and needs to accelerate the
development of the sector to meet its growth aspirations. Energy shortages act as a major
barrier, which could obstruct the stream of development.

Although India is rich in coal and abundantly endowed with renewable energy in the
form of solar, wind, hydel and bio-energy but its hydrocarbon reserve is really small (0.4
per cent of world’s reserve). India, like many other developing countries, is a net
importer of energy whose more than 25 per cent of primary energy needs being met
through imports mainly in the form of crude oil and natural gas. The rising oil import bill
has been the focus of serious concerns due to the pressure it placed on scarce foreign
exchange resources and also largely responsible for energy supply shortages. The sub-
optimal consumption of the commercial energy adversely affects the productive sectors,
which in turn hampers economic growth.

1.2 Supply Options

If we look at the pattern of energy production, coal and oil accounts for 52 per cent and
33 per cent respectively with natural gas, hydro and nuclear contributing to the balance.
In power generation front, nearly 62 per cent of power generation is from coal fired
thermal power plants and 70 per cent of the coal produced every year in India has been
used for thermal generation.

1.2.1 Coal

Coal resources in the country are about 5.7 per cent of the proven reserves of the coal in
the world. The geological reserves in India are estimated to be 211.59 billion tones down
to a depth of 1,200 meters. About 80 per cent of the coal reserves are in the non-coking
category. Total lignite reserves in the country are estimated to be 34.17 billion tones,
about 88.15 per cent of which are located in Tamil Nadu.

1.2.2 Oil & Gas

India has about 0.04 per cent of the world’s proven reserves of hydrocarbons. The
prognosticated geological resources of hydrocarbon in the country are estimated at 21.31
billion tons, of which 61 per cent are offshore. The recoverable reserves of crude oil and
natural gas in India are given below:

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 Area Crude oil Natural Gas
(in million tons) (in B.Cu.M)
--------------------------------------------------------------------------
Onshore 308 279
Offshore 352 369
Total 660 648
------------------------------------------------------------------------------------

1.2.3 Hydro Energy

Hydropower is a clean and economically cheap source of energy. Hydro stations are best
choice for meeting the peak demand. Hydroelectric projects have long useful life (nearly
50 years), which help in conserving scarce fossil fuel. It is estimated that at least 75 per
cent of the surface water, which gets drained into the sea without proper utilization can be
harnessed to generate energy through hydel projects.

Viable hydro potential in India is assessed to be about 84,000 MW at 60% load factor
(1,48,700 MW installed capacity). In addition, 6780 MW in terms of installed capacity
from Small, Mini, and Micro Hydel schemes have been assessed. Besides that, 56 sites
for pumped storage schemes with an aggregate installed capacity of 94,000 MW have
been identified. So far, only 15% of the potential have been harnessed and 7% is under
various stages of development. Thus remaining 78 per cent of the potential remains
untapped.

1.2.4 Nuclear Energy

The nuclear power program in India is based on natural uranium and indigenous thorium
resources. Available reserves of natural uranium can support a programme of 10,000
MWe power generation based on PHWR technology. The present estimates show that the
known deposits may yield 363,000 tons of thorium oxide, which may produce 900,000
BU of electricity when used through breeder reactors.

1.2.5 Renewable Energy

Being a tropical country, India is abundantly endowed with renewable energy sources. In
the area of power generation about 3 per cent of power-generating capacity based on
renewable energy has already been installed in the country. The potential and exploited
potential of various renewable energy technologies is given in the table below.

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Table 1. Renewable Energy Potential & Achievement
--------------------------------------------------------------------------
Source/Technologies Unit Approximate Status
Potential
-----------------------------------------------------------------------------------------------
Power from Renewables:

Wind MW 45,000 1,507

Small Hydro MW 15,000 1663

(upto 25 MW)

Biomass/ MW 19,500 343

Bagasse based co-generation

Solar PV Power MW/Sq. Km. 20 47

Energy Recovered from Wastes:

Urban & Industrial MWe 1700 15.15

Waste

Energy for Rural Area:

Biogas Plants Nos. 12 Million 3.128 Million

Improved Chulha Nos. 120 Million 32.89 Million

------------------------------------------------------------------------------------------------
[Source: Ministry of Non-conventional Energy Sources (MNES) & Planning
Commission]

1.2.6 Coal Bed Methane (CBM)

India has 400 Billion Cu. M. of CBM with heat value 8500-9000 K Cal/ Sq. Cu. M.
CBM, a clean fuel for power generation, is currently being wasted during coal mining.
This release not only creates safety hazards in coalmines but also causes global warming
when released in the atmosphere. There is a need to explore this wasted potential.
Different strategies should be worked out for unexplored and explored coalmines
depending on the quality and quality of CBM available.

1.2.7 Other Fuels:

Fuel wood, animal waste and agricultural residues are the “non-commercial” sources of
energy that continue to meet the bulk of the rural energy requirement. In addition, there

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also exists the potential of oil shale and gas hydrates in India. As per present estimate
available, the potentials are 6156 trillion cubic meters of gas hydrates and 600 million
tons of oil shale.

1.3 Consumption Pattern

In the consumption front, industrial sector in India is a major energy user, accounting
for about 52 per cent of the commercial energy consumption. Per capita energy
consumption in India is one of the lowest as shown in Fig. 1. But, energy intensity,
which is energy consumption per unit of GDP, is one of the highest in comparison to
other developed and developing countries. For example, it is 3.7 times of Japan, 1.55
times of USA, 1.47 times of Asia and 1.5 times of World average. Thus, there is a huge
scope for energy conservation in the country.

Fig. 1

Per Capita Energy Consumption

India 290
293
Pakistan
China 597
4017
Germany
4026
Japan
8080
USA

0 2000 4000 6000 8000 10000

Kg. of Oil Equivalent

Source: CMIE

1.4 Distribution of Primary Energy

The distribution of primary commercial energy resources in India is quite skewed, 70 per
cent of the total hydel potential is located in the Northern and Northeastern regions where
as the Eastern region accounts for nearly 70 per cent of the total coal reserves in the
country. The Southern region, which has only 6 per cent of the total coal reserves and 10
per cent of the total hydel potential, has most of the lignite deposits occurring in the
country.

1.5 Energy Pricing

In the pre-reform period, the commercial energy sector was totally regulated by the
government. The economic reform and liberalization, in the post 90s, has gradually
welcomed private sector participation in coal, oil & gas and electricity sectors in India.
The energy prices in India have been under the administered regime and subsidies are

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being provided to meet certain socio-economic needs of the public. This has led to
distortion and inefficiency in the use of different sources of energy. Government has
taken serious steps to deregulate the energy price. The prices of all grades of coal have
already been deregulated and that for petroleum sector will be completed by March,
2002. In electricity sector, most of the SEBs has started taking reform measures and
regulatory commissions have been set up to determine tariffs based on economic
rationale.

Section II: Energy Scenarios

A. Business As Usual (BAU)

The primary energy requirement is anticipated to be 455 MMTOE in 2001-02 and is

projected to be 556.2 MMTOE and 722.3 MMTOE in the terminal years of the Tenth and
Eleventh Plans respectively. However due to an anticipated decline of the energy
intensity, the actual demand may be 5 – 10 percent below the estimated figures. The
recommended fuel mix for the Tenth and Eleventh Plan Period is given in the Table 2.

Table 2: Recommended Fuel Mix

S.No. Primary Fuel 2001-02 2006-07 2011-12

(anticipated) W.G. S.C. W.G. S.C.
1 Coal & Lignite 36.1 35.9 36.0 38.4 36.0
2 Oil 23.4 26.1 23.5 25.7 23.0
3 Gas 7.2 7.4 7.0 7.7 7.5
4 Hydro Power 1.7 2.3 3.0 2.6 3.5
5 Nuclear Power 0.9 1.1 1.5 1.9 2.5
6 Wind Power 0.1 0.1 0.1 0.1 0.1
7 Traditional Fuels 30.6 27.1 28.9 23.6 27.4
100.0 100.0 100.0 100.0 100.0
Source: Planning Commission (W.G. – Working Group S.C. – Steering Committee)

2.1 Power Sector

In power sector, all India Installed Capacity of electric power generating stations under
utilities was 104917.5 MW as on 31-03-2002 consisting of 26261.22 MW hydro,
74428.82 MW thermal, 2720 MW nuclear and 1507.46 MW wind, detail break up of
which is given in Table 3.

From the historical data it has been found that power generating capacity had increased
impressively at a rate of over 12 per cent per annum during the 1960s. The 1970s could

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not maintain the momentum and recorded an annual increase of 7.5 per cent. Capacity
addition during 1980s and 1990s recorded growth rate of 8.1 and 4.5 per cent
respectively. Thermal generation during 1990-91 to 1999-00 moved up to 8.4 per cent per
annum while growth in hydel generation was only 1.3 per cent per annum in the same
period.

On the consumption side, industrial sector is the principal consumer of electricity

followed by agricultural and domestic sector. The share of electricity consumption by the
industrial sector has been declining considerably due to higher power tariff and
uncertainty in supply. The domestic sector shows the highest growth rate in electricity
consumption in the recent past. On the other hand, electricity consumption in the
agricultural sector has been rising at a rate of 7-8 per cent due to government’s policy of
supplying heavily subsidized power to the farmers and massive rural electrification.

In 2001-02, energy and peak load shortages were 7.5 and 12.6 per cent respectively and
according to CEA estimates these shortages will be ballooning day by day as GDP
growth accelerates to an ambitious 8 to 10 per cent. Under such circumstances,
imaginative repositioning of the power sector is the need of hour to double the existing
capacity by 2012 in order to meet the higher growth trajectory and also accomplish the
targeted mission of “Power for All’ by 2012.

Table 4 India’s perspective plan for electric power for zero deficit power by 2011/12
(power on demand)

Thermal Gas / LNG / Nuclear

Hydro (MW) Total
(Coal) (MW) Diesel (MW) (MW)

Installed capacity as Gas: 10,153

61,157 2720 25,116 100,010
on March 2001 Diesel: 864

Additional capacity
53,333 20,408 9380 32,673 115,794
(2001-2012)

Total capacity as on 114,490 31,425 12,100 57,789

215,804
March 2012 (53.0%) (14.6%) (5.6%) (26.8%)
Source: Tenth and Eleventh Five-Year Plan projections

The Ministry of Power (MOP) has drawn up a Blueprint of action to realize the targets.
The notable feature of the strategy is the marked deviation from the traditional supply
side bias with undue stress on adding generation capacity to an integrated development
encompassing all the aspects of generation renovation, modernization, transmission,
distribution, demand side management and energy conservation. The action plan also
includes private sector participation and there by bringing competition by restructuring
the monolithic State Electricity Boards (SEBs) to enable consumers to get best service at
affordable prices.

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Since India has a vast coal reserve, it is expected that power generation from coal will
continue to maintain its share in future. But in order to achieve higher thermodynamic
efficiency, minimizing environmental impact and cost effective utilization of high ash
Indian coal, Min. of Power (MOP) is focussing on coal benefeciation, pit head power
generation, cheap imported coal for coastal power plants, super critical technologies, heat
rate improvement program in the power plants, fly ash management and scaling up of the
power plants. Emphasis has been given to increase the share of hydro, nuclear, gas and
renewable power.

Financial sickness of SEBs

In the first four decades after independence, the provision of infrastructure services in
India was largely in public domain. During that period, there was a common belief that
only public sector could serve the government’s interests. Indian power sector had been
operated in a monopolistic environment where decisions were not always taken on a
commercial basis. The sector was governed by the Indian Electricity Act (EA), 1910 and
Electricity Supply (ES) Act, 1948. The State Electricity Boards (SEBs), which have
monopolistic power to generate and distribute electricity in their respective states, are
caught in a vicious circle of shortage of resources and poor operational and financial
performances. In 2000-01 the total commercial losses have reached an alarming figure of
Rs. 24,000 Crores. In addition, the outstanding dues of Central Public Sector
Undertakings have now reached to Rs. 26,000 Crores, which is threatening their viability.
The financial sickness of most of the SEBs is mainly due to the irrational tariff structure,
high T & D losses and poor collection efficiencies.

The ill health of SEBs has gradually led to a consensus regarding the need for
restructuring this sector. Over the past decade, government has taken several steps aimed
at power sector reform in order to make them independent profit centers and deliver
reliable electricity at affordable prices. Efforts of power sector reform have included:

Unbundling of the SEBs and running competitive privatization programmes to a

well defined timetable

Enabling independent and competent CERC/SERCs, especially in the areas of

tariff setting.

Securitisation of outstanding dues of SEB

In this aspect it is important to mention that first part of Montek Singh Ahluwalia
Report, which recommended the measures for one time settlement of outstanding dues of
SEBs and CPSUs, has been submitted to MoP in May 2001. As per the report, as on
28.02.2001, the SEBs owed about Rs. 41,473 Crore to various CPSUs and Railways. The
report recommended that this financial liability should be taken over by their States and
CPSUs should also share this burden by waiving off part of their debt.

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Private Sector participation

In 1991, government allowed private sector participation in power generation. A number

of IPPs (Independent Power Producers) came forward and put up proposals for about
95,000 MW capacity additions but those proposals could not be translated into viable
projects. There have been major slippages in meeting targets of capacity addition. During
IX Plan Period, capacity addition by Private sector is only 28.8 per cent against the target.
Seeing the dismal financial condition of SEBs, the sole off-taker of power, all the project
developer sought for state government’s guarantee and central governments counter
guarantee to minimize the risk. GOI had selected eight fast track projects and provided
them counter guarantee. Later, for other projects this idea was abandoned and
alternatively escrow account mechanism was formulated to do the same. The awarding of
project was initially through Memorandum of understanding (MoU) which faced a lot of
controversy due to lack of transparency so in 1995 competitive bidding method was
adopted. In 1998, Mega Power project policy was announced to reap the advantage of
economies of scale associated with large-scale projects. Power Trading Corporation
(PTC) was set up to buy power from these projects and sell it to eligible states.

The performance of state and central public sector was also far from satisfactory and only
50% of the planned capacity addition could be achieved during VII and IX Plan. The
crisis somehow could be delayed due to improvement in national average plant load
factor (PLF) to more than 69%, rapid increase in captive generation and unexpected
slowdown in manufacturing sector in last few years. Thus, the 90s can be termed as the
decade of missed opportunities for the power sector.

Distribution Reform

MoP has correctly realized that generation privatization would not produce desired
results until and unless there is reform in distribution sector. Distribution privatization is
of utmost urgency because if the government privatize generation without improving
revenue collection, it is difficult to attract investments in generation, as the generators
would have to take into account highly risky cash inflows, and would typically insist
upon escrow/state guarantees. The strategies initiated by MoP for distribution reforms
include:

Development of District wise distribution improvement plans/projects for all districts.

Setting up of District level Energy Committee for monitoring and resource planning.

Development of 60 distribution circles as Centers of Excellence for distribution
reforms. The funds for the project would be provided by center under APDRP.

100 per cent metering for all consumers combine with utility and information
management system for promoting energy conservation and reduction of theft.

High voltage T & D lines to prevent theft and reduce technical losses.

Signing of MOUs with States for undertaking distribution reforms in a time bound
manner.

Tariff rationalization by SERCs

Privatization/ corporatization of distribution

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MoP is encouraging and extending support to the States to undertake reforms by
choosing a model that suits them best from the options that are available. Power sector
reforms started with Orissa and by now almost all the states have initiated reform
processes. Present status of reform and restructuring of SEBs is given in Annex 1.

Electricity Bill

The Bill has been tabled in the Parliament. Some of the salient provisions of the bill are:
de-licensing generation and freedom for captive generation, open access to the
transmission system; mandatory formation of State Electricity Regulatory Commission
(SERC), open access in the distribution system in phases; trading of power recognized as
a distinct activity; payment of subsidy through budget; flexibility to the State
Governments to choose the model of reform; tribunal for appeal against CERC/SERC
decisions etc. The Central Government would also prepare a National Electricity Policy
in consultation with State Governments. The progressive policies and enabling provisions
would open new opportunities for setting up merchant generators, utilization of captive
generation and the market development. It is expected that Electricity Bill will give a
major boost to the process of power sector reforms throughout the country.

Rural Electrification

Rural electrification provides extended working, selling, shopping hours; employment

creation through small enterprises; increased income from women-led micro-enterprises
(basket making, electronics repair, carpentry, tailoring, fish net weaving etc.); extended
study hour for the children and improvement in quality of life.

Rural electrification in India has suffered badly over the last decade mainly because of
the poor operational and financial health of SEBs. Although 86 per cent of the total
villages have got electrified over the years, nearly 80,000 villages are yet to be
electrified. Moreover, use of electricity in rural areas for households and other productive
purposes like small industries are rather limited. Rural people are often not in a position
to afford the cost of electricity and they meet their basic energy needs through the use of
energy sources like firewood, cow dung, agricultural residue and kerosene. However,
inefficient exploitation of these resources led to environmental degradation. An action
plan on 100 per cent village electrification within next 6 years has been prepared in
which rural electrification would be treated as a Basic Minimum service.

Table 5. Measurement of Rural Electrification

NO. OF TOTAL NO. OF NO. OF VILLAGES

STATES VILLAGES VILLAGES IN ELECTRIFIED/TOTAL
ELECTRIFIED IN THE STATE NO. OF VILLAGES
THE STATE
Andhra Pradesh 26,565.00 26,586.00 0.9992
Assam 19,019.00 24,685.00 0.7705
Bihar 47,837.00 67,513.00 0.7086

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Gujarat 17,936.00 18,028.00 0.9949
Haryana 6,759.00 6,759.00 1.0000
Himachal Pradesh 16,635.00 16,997.00 0.9787
Jammu & Kashmir 6,315.00 6,445.00 0.9798
Karnataka 26,663.00 27,066.00 0.9851
Kerala 1,384.00 1,384.00 1.0000
Maharashtra 40,412.00 40,412.00 1.0000
Madhya Pradesh 67,959.00 71,526.00 0.9501
Orissa 33,625.00 46,989.00 0.7156
Punjab 12,428.00 12,428.00 1.0000
Rajasthan 34,252.00 37,889.00 0.9040
Tamil Nadu 15,822.00 15,822.00 1.0000
Uttar Pradesh 87,930.00 112,803.00 0.7795
West Bengal 29,319.00 37,910.00 0.7734
Sources: Profile of States, Bharti Publication
Annual Report on Working of SEBs and EDs.: planning commission

Power Tariffs

It has been suggested that a rational tariff policy needs to be evolved to give a boost to
the power sector reforms. So far, single part tariff based on Rate of Return Methodology
has been used to determine tariff in India, although, the regulation based upon single-part
tariff system does not give adequate flexibility to the energy companies to optimize
customers’ consumption patterns. Other types of tariff setting methodologies, which have
been prevailing in India, are Performance based Tariffs and Competitive Bidding for
mega-power projects.

Two-part tariff, comprising of fixed and variable charges have been practiced in many
countries throughout the world. Two-part tariff is supposed to be efficient as it
encourages economic dispatch and the financing of generation resources, as well as
improves the optimization of consumption patterns. In India, Availability Based Tariff
(ABT) order issued by CERC has been challenged by National Thermal Power
Corporation (NTPC), as according to NTPC, it contains several inconsistencies. With
implementation of ABT, the prospect and volume of power trade are likely to increase.

Power Trading

Power trading is in a nascent stage, characterized by low volumes, and evolving

commercial mechanisms. Strengthening of inter-regional transmission links has led to the
total inter-regional power transfer capacity of about 5500 MW. Although still inadequate,
this is reflected in the rapid growth of inter-regional exchanges in last 5 years (table
below).

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 Inter-regional Exchange

14000 12275
12000

Energy in MUs
9874
10000 9041
7297
8000 Energy
5093 (MUs)
6000
4000 2754
2000
0
1996- 1997- 1998- 1999- 2000- 2001-
97 98 99 00 01 02
Year

During 2001-2002, inter-regional energy exchange in India as a whole was to the extent
of 12,275 MUs, which is about 2.4% of the energy generation. Most of it (more than
78%) was from the Eastern Region and firm in nature. Power exchanges between other
regions are seasonal and non-firm, depending on surplus and deficit in neighbouring
regions. Intra-regional exchanges are also prevalent which are seasonal and non-firm.
With passage of time, intra-regional exchanges are also picking up fast and are more
successful as they do not face the transmission constraints in majority of cases. Lack of
proper market mechanism (absence of tariff structure to promote merit order operation
and encourage trading of power), lack of statutory provisions for direct sale by
Independent and Captive Power Producers, Grid Indiscipline and credit-worthiness of
SEBs are the key inhibitors.

2.2 Oil & Gas

India is a net importer of oil, whose 70 per cent of the crude requirement are being made
through import. Due to geo-political problems and uncertainties, global oil price is highly
volatile in nature. In order to de-link the external oil price shocks from Indian economy,
Government of India (GOI) had introduced the system of the Administered Price
Mechanism (APM) in 1976. In APM regime, which was the cost plus system of price
determination, government fixed the prices based on the cost of production and the rate
of return of 12 per cent (post tax on net worth).

The present refining capacity in the country is in the level of around 114.7 MMT per
annum. There are plans of expansions of existing refineries and implementation of grass
root refinery projects by different oil companies. In the deregulated scenario in the
petroleum sector, the implementation of additional refining capacity will depend on
growth in economy, growth in consumption of petroleum products etc. It is expected that
the country may have a refining capacity of about 184 & 360 MMT at the end of 2007
and 2025 respectively.

The total demand of oil is expected to reach about 362 MMT by the year 2025, assuming
the base case i.e with GDP projected to grow at 6.5% per annum till 2025. Further in line
with international trends, it is estimated that the share of the middle distillates would
increase from current level of 59-60% to about 65% by 2025. The import of crude oil is
estimated to go up from present level of about 85 MMTPA to 151 MMTPA during the

13
10th plan period. The oil import bill is estimated to increase from US$ 17-18 billion in the
present to around US$ 31.3 billion in 2006-07, which will put enormous burden on the
balance of payment condition of the country.

The gas industry seeks to play an important role in the growth of the energy sector in
India. Hydrocarbon Vision projects a natural gas demand of 313 Mcmd and 391 Mcmd
by the years 2011-12 and 2024-25, respectively, from the existing demand and supply of
115 Mcmd and 65 Mcmd, respectively.

Natural Gas is primarily used in gas-based power projects (utility and captive) and also
by the fertiliser sector as feedstock in the manufacturing process. Natural gas is being
increasingly used as fuel by the transport sector and has major usage in the industrial
sector as eco friendly fuel. At present, gas based power projects account for 11% of
power generation and are expected double their share in energy supply by the year 2011-
12. The Government intends promoting Liquefied Natural Gas (LNG) imports for
consumption in power projects.

In order to bring competition, GOI decided to phase out APM regime by free market
operation. In upstream sector, cost-plus formula for crude oil purchased by National Oil
Companies has been withdrawn from April-98. In downstream sector, retention price
concept for the refineries has been abolished. Refinery gate prices for controlled products
are being fixed based on import parity. Prices of all petroleum products have also been
decontrolled from April 2002 and the oil companies are allowed to fix the prices
depending upon the market conditions.

The subsidies and cross-subsidies that were prevailing during APM regime have been
removed but in order to meet certain social obligations, government would still continue
providing subsidy on kerosene and LPG for the time being. The government has already
made provision for subsidy in the budget as the Oil Pool Account has already been
dissolved.

The oil companies have started the accounting practice of revising their refinery gate
prices to import parity level. They propose to do this twice a month as they have made it
clear that they cannot take the burden of losses arising from suppressed retail prices
indefinitely. The current hikes in the prices of petrol and diesel were in line with the oil
industry's intention to keep domestic prices in step with global price movements.

2.3 Coal

During the IX plan, coal demand increased from around 300 million tones in 1996-97 to
353 million tones during 2001-02, implying a cumulative growth rate of 3.3 percent per
annum. This is significantly lower than the IX plan target growth rate of 6.85 percent.
The reasons for this slow growth are the failure of new coal-based power plants to
materialize, a slump in the steel sector, lower demand in the cement sector, and overall
sluggishness in the economy. Against the projected demand of 453 million tonnes the

14
anticipated availability is projected to be 405 million tonnes in the terminal year of X
Plan.

In 1972-73, the Indian government nationalized the coal industry, primarily to develop
the sector, since it was considered to be of strategic importance for rapid industrial
development. Coal India Ltd (CIL) was incorporated as a holding company for seven coal
producing subsidiaries and a planning and design-focused company. As part of the
economic liberalization program, government controls regarding pricing and distribution
are being relaxed. The government also allowed private sector participation in coal
mining. Foreign participation, subject to fulfillment of other requirements, has also been
allowed. However the response towards captive mining has not been encouraging and
remains lukewarm. In order to attract private investments in coal mining, the Government
is contemplating to introduce a new Coal and Lignite (Regulation and Development) Act.
The new Act would allow for competitive bidding of coal blocks to be handled by an
independent authority. It will also allow the private mine developer to hold 100% equity.
These actions are expected to boost coal production in the long term. However, policy
initiatives will take time to get translated into actual increase in coal production.

The geological formation of Indian coal makes it high in moisture and in ash of high
abrasion, erosion and fusion characteristics, but low in heating value, sulphur and alkali
content. These attributes necessitate special features in the design of boiler plant to ensure
desired performance and high availability. Poor coal quality has serious impact on plant
operation and thermal efficiency.

Total ash generated in India from power plants is presently about 95 Million tonnes per
year. Management of such huge quantity of ash would call for quantum jump in ash
utilization from the present level of about 10-15%. Norms for emission and disposal of
fly ash should be structured liberally for next 5 to 10 years till the power supply
conditions improve. Environment concerns are no doubt vital but timing can be
configured such that each phase of development matches with aspiration for cleaner
environment.

MOEF brought out a notification requiring existing power stations to achieve full ash
utilization in 15 years time and new units in 9 years time. Achieving full utilization level
of ash in such a time frame is a big challenge before the power plants.

Power stations will gain a lot if they use beneficiated coal for power generation. The
Ministry of Environment and Forests, Govt. of India, through its notification has made
mandatory the use of beneficiated coal having ash less than 34 % for all power stations,
located at a distance of 1000 km from the mine and/or located in sensitive/critically
polluted zones. The power plants using FBC and IGCC technologies are exempted to use
beneficiated coal irrespective of their locations. Central Pollution Control Board (CPCB)
has also suggested third party & pithead coal washing. It is estimated that pithead coal
washing will increase the cost only by 2 to 3 per cent.

Coal beneficiation

15
The use of beneficiated coal has gained acceptance in steel plants and power plants
located at a large distance from pitheads. Currently, India has 21 large coal washeries but
only two are devoted to power requirements. There is enormous scope for private
investment in this area, with the Government now permitting build-own-operate (BOO)
washery projects by coal companies and as agents of coal consumers.

2.4 Energy Conservation Act

The enactment of The Energy Conservation Act, 2001 spells out the roadmap for the
country to move up the energy efficiency ladder and would radically change the approach
towards energy conservation efforts. The Energy Conservation Act aims to focus on the
enormous potential for reducing energy consumption by adopting energy efficiency
measures in various sectors of the economy

The Act provides for statutory measures to establish a statutory authority called the
Bureau of Energy Efficiency. The Bureau will be established by merging the existing
Energy Management Centre to effectively co-ordinate with designated consumers and
agencies for performing functions necessary for efficient use of energy and its
conservation.

The Act also confers upon the Central Government, State Governments and the Bureau,
certain powers to enforce measures for efficient use of energy and its conservation. There
is provision for compulsory annual energy audit of large consumers.

The key issues that need to be addressed are:

• Evolution of a roadmap/ action plan for energy efficiency both at the central and
state level.
• Development of energy efficiency standards and norms for industrial products,
equipment and processes as well as energy conservation codes for buildings.
• Facilitating Energy Conservation through innovative financing as also promotion
of ESCOs.
• Promotion of Research & Development and Transfer of Technologies as well as
creating facilities and mechanisms for technology verification and undertaking
technology demonstration projects.
• Create awareness and disseminate information for efficient use of energy and its
conservation
• Certification procedures for energy managers and preparation of educational
curriculum on efficient use of energy and its conservation
• Development of Sectoral strategies to conserve energy in energy intensive sectors

B. An Ideal Situation

Several empirical studies have established that for India, energy consumption
unidirectionally causes economic growth (Masih & Masih, 1996; Adjaye-A, 2000;

16
Ghosh, 2001) via the indirect channel of effective aggregate demand, improved overall
efficiency and technological progress, without any feedback effect. So, proper policy
framework should be undertaken in the energy sector, in terms of more investment,
improved efficiency of use, diversification of energy supplies and cost-effectiveness of
resource utilization for sustainable economic growth in an environmentally responsible
manner.

a. ACCELERATE REFORMS AND RESTRUCTURING IN THE ENERGY

SECTOR, IMPLEMENTATION OF ENERGY CONSERVATION ACT &
RATIFICATION OF ELECTRICITY BILL.

• Energy Conservation is synonymous with energy generation. Conservation is

cheaper than incremental cost of energy production. This concept gets more
prominence in today’s Indian scenario, where one MW of power generation costs
as much as 3 to 4 crore whereas the same power can be saved with less
investment. If the consequent benefits of rise in productivity are included, the net
cost of energy conservation to the economy is much less.

• All India average T & D losses are around 22-23 per cent for the last few years
although these losses in some states like Delhi, J&K etc. are as high as 45 per cent
while in some states, it is as low as 16 per cent. As per CEA recommendation, the
T&D losses should be aimed at 8% and maximum could be around 15%. All India
average T & D losses are around 22-23 per cent for the last few years although
these losses in some states like Delhi, J&K etc. are as high as 45 per cent while in
some states, it is as low as 16 per cent. As per CEA recommendation, the T&D
losses should be aimed at 8% and maximum could be around 15%. Under such
circumstances, projected demand will be reduced to 25-30 per cent. According to
a recent Mckinsey & Company study, India can save $12 billion by 2005 by
improving efficiency in power generation and removing transmission bottlenecks
and distribution breakdowns as it will bring down the new capacity addition
requirement from 18 gw to 6 gw.

• Indian industry did not pay much attention to energy savings. The high-energy
consumption in the Indian industries is due to the fact that most of the
manufacturing units still depend on old machinery, relatively high cost of capital
as compared to European/USA standards and uncertainty about the long-term
growth of the particular industrial sector. In India, energy intensive industries
namely fertilizers, aluminum, textiles, cement, iron & steel, pulp & paper, and
chlor- alkalis consume around 65 per cent of total industrial energy. A recent
World Bank report shows that Indian Industry has the potential to save 20 to 30
per cent of total energy consumption

b. CREATING ENABLING ENVIRONMENT TO PARTICIPATE PRIVATE

ENTERPRISES IN A COMPETITIVE ENVIRONMENT AND ESTABLISHMENT
OF MARKET DETERMINED PRICES FOR ENERGY.

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♦ Petroleum Regulatory Board Bill 2002 – proposes a common Regulator for petroleum
products and natural gas. Since petroleum products industry and the natural gas
industry in India are at two different stages of development with the former being
significantly more mature than the nascent gas industry, therefore, separate guidelines
for the two sectors, particularly with respect to transmission infrastructure and
distribution franchises, in the proposed regulatory framework are important. The gas
sector would need investment encouraging measures, to build and extend the
network. It is also important that foreign and private sector participation is
encouraged in all aspects of the Gas Chain.

♦ Regarding power tariffs, global experiences show that a multi-year tariff regime,
where the guidelines, rules and methods for determining tariff are well established
would be beneficial in minimizing risk and building confidence for the investors. It
also helps to and for consumers, improvement in efficiency translates into more cost-
effective tariff.

Most of the Eurasian countries are in transition phase like India. However, in the
Indian context with the reforms in the nascent stage, the experience of Eurasian
countries will be more appropriate. A review of the tariff structure of these countries
revealed that the transmission and distribution tariffs in India could adopt rate of
return or price capping (retail price inflation minus a pre-determined efficiency gain)
methods.

♦ In a regulated energy market, there is little need for hedging price risk because of the
deterministic nature of prices. Deregulation in the sector removes price controls and
openly encourages market entry, which in turn, encourage the development of
derivative markets. It is also important to have precise estimates on price elasticity of
demand for various energy products for smooth market operations. However, in
deregulated era, the government should take care of oil security along with optimal
sovereign control under unforeseen circumstances.

c. APPLICATION OF CLEAN COAL TECHNOLOGIES AND HIGHER SHARE

OF HYDRO, GAS, NUCLEAR AND RENEWABLE POWER IN THE POWER
PORTFOLIO.

♦ In terms of Long Range Marginal Cost (LRMC) advantages, nuclear power is a

genuine economic option for power supply at locations far remote from coal
reserves, particularly if hydel sources are not available in the vicinity. Cost of
nuclear power is comparable with that of coal based power at location 1000 KM
away from the coal pit-heads.

♦ The top down analysis show that the CDM could account for between 397-503
MMtC of emissions reduction required of Annex B in 2010 or between 33%-55%
of the total reductions required to achieve. The corresponding CDM flows could
be between $5.2-$17.4 billion. Using marginal costs of abatement in different

18
 countries to estimate the flow of CDM funds it is estimated that India would
collect between 7%-12% of the total global market for CDM-led investment.

India is planing to add about 12,000 MW power generating capacity from

renewables by the end of 11th. Plan, almost half of it will come from wind, 3500
from biomass and 2000 MW from small hydro. Proper policy initiatives can
enhance the share of renewables to 20 per cent of the total supply of power
against the targeted 10 per cent. Renewables are capable of meeting the energy
needs of rural areas in an economically efficient manner besides addressing
India’s energy security concerns.

There exists a close linkage between carbon trading and renewable energy market
development. Analysis shows that renewable energy technologies are among the
low cost options for carbon mitigation. In the next decade carbon trading could be
one of the issues, which can push the renewable technology.

d. CONSISTENT AND ENCOURAGING SEB POLICY ON CAPTIVE POWER

e. INTEGRATED ENERGY POLICY

♦ The power sector reform is suffering from the lack of progress in coal reforms
while coal movement suffers from the lack of tariff rationalization in the railways.
There will be integrated reform strategies in the entire energy chain.

♦ There will be an optimal fuel mix after considering the locations, potential,
development of various energy sources and other relevant information to bridge
the demand-supply gap in an economically and environmentally responsible
manner.

f. PROSPECTS OF TRADING

♦ Despite an overall demand–supply gap in India, there is significant off-peak

surplus and an inherent diversity in demand of various states. Substantial
opportunities, therefore, exist to improve the economic efficiency and security
of supply through trading of power. Also, developers of large-capacity private
power projects, for entering into forward sale contracts, had to deal
simultaneously with multiple state entities.

♦ The Government has decided to re-structure PTC’s capital base by raising the
authorised capital to a level of Rs. 7.5 Billion to be raised over a period of 3-4
years to enable PTC to structure projects upto 3000MW. The company’s
business plan projects trading volumes to grow from the level of 1617 MUs in
the FY 2002 to 30,000 MUs by the year 2010.

g. REGIONAL ENERGY COOPERATION

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 ♦ South Asia, which includes countries like Bangladesh, India, Nepal, Sri
Lanka, Maldives and Bhutan is characterized by low per capita income; low
per capita energy consumption and high disparity of income distribution and
energy consumption pattern among the consumer groups. This region is
extremely important to world energy market as demand supply gap has been
ballooning day by day and is causing concern in the international circles
because of high population growth, low energy efficiency in the industrial
sector, high energy demand to foster rapid economic growth path and
environmental degradation. South Asian countries need capital and energy to
propel economic growth and improve the quality of life in an environmentally
responsible manner. The region is endowed with untapped energy resources
but their development, efficient distribution and utiliation will require
cooperation and trade among the countries in this region.

♦ Although limited exchange of electricity already occurs between Nepal,

Bhutan and India, multilateral cooperation to develop and exchange energy
resources will have far-reaching economic and security benefits. India can be
benefited from electricity and gas import from neighboring countries to foster
its development aspirations; Bangladesh, Nepal, Bhutan and Myanmar could
realize significant economic benefits from the development and export of
hydroelectric power and natural gas and Pakistan’s economy could also
benefit from electricity export from independent power producer.

♦ So far, several cross-border electricity transmission interconnection projects

and gas pipeline schemes like double circuit 400 KV lines between Bhutan
and India; three radial 132 kV lines from Nepal to India; two 220 kV Direct
Current transmission between Bangladesh and India; privatized 500 kV
interconnection between Pakistan and India; gas pipeline from Iran to India
either sub sea or through Pakistan; sub sea gas pipeline from Oman to
Pakistan and from Myanmar to India; gas pipeline from Turkmenistan to
Pakistan and from Eastern Bangladesh to India have been identified. Some of
these projects are already under construction or in the advanced planning
stage.

♦ Coal prices in the International market is relatively stable and coal is well
dispersed around the would unlike oil concentrated in Russia and the middle
east and is subjected to unpredictable price volatility, it would make sense for
India to import coal with well drawn out long term contracts.

h. REMOVAL OF SUBSIDY

♦ A study by the International Energy Agency of the OECD in 1999 on the

under pricing of electricity in China, India, Indonesia, Iran, Kazakhasthan,
Russia, South Africa and Venezuela, found that reducing price subsidies in
India would reduce primary energy consumption by 13 per cent, Increase

20
 GDP through higher economic efficiency by 1 per cent, lower CO2 emissions
by 16 per cent, produce domestic environmental benefits including lower local
air pollution.

♦ Electricity subsidy ought to take the form of electricity stamps or

coupons scheme, which is issued and distributed by local panchate or
Zela Parishad to targeted consumers, who do not have the ability to
afford energy at its economic cost. The stamps/coupons can be
tradable and tradability would allow those consumers who want to
exchange electricity for food or other consumption items to do so.
Stamps collected by the distribution companies would entitle them to
subsidy revenue from the government and in this way, subsidization
can be entirely separated from the business of electricity distribution.

i. ENERGY SECURITY ISSUES

♦ As mentioned earlier, India is a net importer of crude oil and petroleum

products, giving rise to Energy Security Concerns and vulnerability to
external price and supply fluctuations. The demand for gas is also growing at
a faster rate and due to limited domestic reserves the country would have to be
dependent on gas imports. Middle East countries are the largest source for
oil/gas imports but the region is susceptible to disturbances and may result in
disruptions of oil supplies. The choices available to increase Energy Security
may include enhancement of strategic oil/gas reserve, investment in equity
abroad, enhancement of domestic oil/gas supply, diversification of sources of
oil/gas imports

C. Worse Case Scenario

Various worse possible situations that might arise are pointed below.

♦ Huge demand-supply gap due to poor vision and distortionary policies

♦ Slow Pace of Reform due to lack of understanding ground realities, lack of
political will and vested political interests,
♦ Lack of private sector investment in resource starved energy sector,
♦ Lack of infrastructure development for energy transportation and distribution,
♦ Poor hydro and nuclear capacity addition due to lack of investment and
oppositions from NGOs and environmental lobbies,
♦ Restricted captive power policy by the states on evacuation, wheeling, tariffs
and banking;
♦ Low yields of indigenous oil fields and larger dependence of oil import,
♦ Restricted cross border energy trading due to geo-political problems,
♦ Poorly manage oil import issue and possibility of depreciation of Indian
currency.

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 ♦ Opposition from tribal to open up new coal fields
♦ Poor power evacuation facilities
♦ Environmental pollution due to market failure

As mentioned earlier, energy consumption for India is a stimulus for economic

growth. The supply constrained sub-optimal consumption of the commercial energy
would adversely affect the productive sectors, which in turn would hamper the economic
growth in India.

Section III. Conclusion

Energy is the prime mover of economic growth and is vital to the sustenance of a
modern economy. Future economic growth crucially depends on the long-term
availability of energy in increasing quantities from sources that are affordable,
accessible and environmentally friendly.

The high cost and shortages of energy in India should also induce users to use more
energy efficient process. In industrialized countries, since the oil shocks of 1970’s, we
have seen that growth of GDP has been realized without a corresponding growth of
energy demand. A de-coupling has taken place. In a developing country like India, where
energy consumption is so low, such de-coupling could be expected to have only a small
impact. Thus, lack of causality between GDP and energy consumption cannot then be
explained on the basis of such de-coupling. Lack of causality can be explained by the
extent to which energy shortages have constrained growth in India.

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Sources

Adjaye-A, J., 2000. The relationship between energy consumption, energy prices and
economic growth: time series evidence from Asian developing countries. Energy
Economics 22, 615-625.

Masih, A. M. M. and Rumi Masih, 1996, Energy consumption, real income and temporal
causality: results from a multi-country study based on cointegration and error-correction
modeling techniques, Energy Economics 18, 165-183.

Ghosh Sajal, 2001. Testing cointegration and causality between energy consumption and
economic growth in India. The paper is a part of M. Phil Thesis entitled “Three Essays in
Indian Energy Sector” at IGIDR, India. The paper has also been communicated for
publication in Applied Economics.

Raghuraman, V, 2002, Follow up on the increase in oil price, Forthcoming

Energy Market Reforms in India, 2002 (Paper prepared by Indian members for World
Energy Council)

Energy, 2002, CMIE

Report of The Steering Committee on “Energy Sector” for the Tenth Five Year Plan,
2002, Planning Commission, GoI.

Blueprint for Power Sector Development, 2001, Ministry of Power, GoI.

Annual Report on “The working of SEBs & Electricity Departments”, 2002, Planning
Commission.

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