Natural Resources and Energy Law

DR. RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY
Submission of Final Draft

Subject- Natural Resources and Energy Law Seminar

Topic- Options for Energy Efficiency in India and Barriers to
Their Adoption: A Scoping Study

Submitted to Submitted by
SHAKUNTLA SANGAM Choudhary Krishnavir Singh
Assi. Professor (Law) 8th Semester, Sec- A
Roll Number- 37

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TABLE OF CONTENTS
1. Introduction ......................................................................................................................... 1

2. Industrial Energy Usage ..................................................................................................... 3

Energy Efficiency in Indian Industry, 1973–94 .................................................................. 4
Government Policies Affecting Energy Efficiency in Indian Industry ............................... 7

3. Energy Efficiency in the Power Sector.............................................................................. 8

The Indian Power Sector: Background ............................................................................... 8
The Efficiency of Existing Thermal Plants ....................................................................... 10

4. Household Energy Usage .................................................................................................. 14

Consumption of Cooking Fuels in the Household ............................................................ 15
Adoption of Energy-Efficient Lighting ............................................................................ 18
Adoption of Energy-Efficient Household Appliances ...................................................... 19

5. Conclusions—Barriers to Energy Efficiency and Research Needs .............................. 22

Research Needs ................................................................................................................. 23

References .............................................................................................................................. 25

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ACKNOWLEDGEMENT

Doing work on a comprehensive topic like this requires a lot of guidance and carefulness and for
this, I am thankful to various people who helped me in writing this paper throughout the way.

Firstly, I am thankful to my teacher Shakuntla Sangam, for allowing me to work on this topic
and to guide me throughout in completion of this paper.

I am also thankful to my seniors, my batch mates who helped me in collecting material, gave
suggestions so that I can be able to work on this topic and give it my best.

I am also thankful to the library of Dr. Madhu Limaye Library staff for their gratuitous help to
me while working on this paper.

Krishnavir

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Options for Energy Efficiency in India and Barriers to Their

Adoption: A Scoping Study

Introduction
This study examines the economics literature on options for energy efficiency in India
and barriers to their adoption. Interest in the topic reflects the importance of energy both in the
development of the Indian economy and in India’s growing emissions of carbon dioxide.
Although carbon emissions in India remain low in per capita terms, total emissions are growing
and will continue to grow with industrialization and increases in electricity supply.
Improvements in energy efficiency (i.e., reductions in energy per unit of output) are often
suggested as a means of reducing carbon emissions. In many cases, improvements in energy
efficiency will pay for themselves through reductions in fuel costs and would, therefore, be
desirable even if climate change were not a concern.
The present study focuses on the empirical literature on energy efficiency opportunities
and barriers in India, as a guide for further research in the area. The empirical literature has
focused on four questions:
1. How does energy efficiency in India compare with energy efficiency in other
countries?
2. What would be the energy savings (and cost savings) from adopting certain energy-
efficient technologies?
3. Why are these technologies being—or not being—adopted?

4. What policies should be implemented to encourage their adoption, and if policies

have been implemented, how have they performed?

Most of the literature focuses on answers to the first two questions. Many studies
calculate energy per unit of output in various sectors (e.g., heat input per kWh or specific energy
consumed per unit of output for various industrial processes) and compare these with levels
attained in other countries or with “best practice.” 1Clearly, attaining best practice may not be
economically efficient in India, given current prices and interest rates. It is therefore important to
ask what would be the cost as well as the energy savings from adopting more energy-efficient

1Sathaye, J., and A. Phadke. 2006. “Cost of electric power sector carbon mitigation in India: international
implications.” Energy Policy 34(4): 1619–29
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technologies.

Other studies discuss qualitatively the reasons for not adopting energy-efficient
technologies in India. These include energy pricing policies (e.g., low electricity prices for
households and agriculture), other government policies (e.g., tariffs), high start-up costs, scarce
opportunities for funding investments, uncertainties about the benefits of investments, and lack
of information and awareness. These studies are very useful for identifying the range of
potential barriers. However, we find few studies that rigorously quantify the impacts of these
barriers or the impact of policies to promote energy efficiency2.
The gaps in the literature include studies that would quantify factors affecting the rate of
diffusion of energy-efficient technologies. Such studies would provide useful information about
the impact of changes in energy prices (as might occur, for example, through electricity tariff
reforms), changes in capital costs, energy efficiency standards, or technology adoption subsidies.
All of these changes in energy markets and policies will continue to have an important influence
on energy costs in India and the country’s CO2 emissions.

Also needed are studies that rigorously evaluate the impact of policies implemented since
the 1990s by the Government of India that could affect energy efficiency. These include reforms
in the electricity sector (both legislative reforms and the removal of tariffs on imported coal), the
relaxing of price and output regulations on certain energy-intensive industries, and energy
efficiency labeling requirements for appliances. Since there have been no rigorous econometric
studies of these policies, many research questions remain unanswered: Have reforms increased
efficiency in electricity generation? Has technical change in energy-intensive industries since the
early 1990s been energy saving or energy using? Has labeling promoted the purchase of more
efficient appliances, holding other factors constant? What would be the likely impact of a major
restructuring of electricity tariffs?3

The rest of the paper is organized as follows. Sections 2 and 3 address energy efficiency in the
industrial and power sectors. As in other modern economies, these are two of the most
important sectors because of their extensive use of fossil-based commercial energy and
opportunities for changes in technology and practice to improve efficiency4. Transportation is
not addressed in this review because improved energy efficiency in the sector involves a number
2 Sanstad, A.H., J. Roy, and J.A. Sathaye. 2006. “Estimating energy-augmenting technological change in developing
country industries.” Energy Economics 28(5-6): 535–38
3 Roy, J. 2000. “The rebound effect: Some empirical evidence from India.” Energy Policy 28(6-7): 433–38
4 Reddy, B.S., and R.M. Shrestha. 1998. “Barriers to the adoption of efficient electricity technologies: A case

study of India.” International Journal of Energy Research 22(3): 257–70

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of other considerations related to vehicle technology and urban transportation policies. Section 4
discusses the efficiency of energy consumption and adoption of energy-efficient technologies in
the household sector. In this sector, concerns over energy efficiency are much more interwoven
with the transition to modern fossil fuels from traditional renewable fuels, and with various
questions related to household well-being as well as energy expenditures5.

Industrial Energy Usage

After the power sector, industry is the largest consumer of primary commercial energy in
India. The top six industries in India in terms of energy consumption are aluminum, cement,
fertilizer, iron and steel, paper, and glass, which together account for about 40 percent of total
industrial fuel consumption. An extensive engineering literature examines the energy efficiency
of industries in India, most of which focuses on physical measures of energy intensity (i.e.,
energy per unit of output) and compares India with other countries. This literature, summarized
below, generally indicates that India’s industrial sector is less energy efficient (i.e., more energy
intensive) than that in developed countries, although energy efficiency has improved in some
industries over time. There is also considerable heterogeneity in energy efficiency across firms.

Energy Efficiency in Indian Industry, 1973–1994

Energy intensity is measured in physical terms as specific energy consumed per unit of
output (SEC).2 In most cases SEC is compared with best practice to determine the percentage
reduction in energy per unit of output that could be achieved by adopting best practices6. When
available, SECs for India are compared with values from other countries. All five industries
(aluminum, iron and steel, fertilizer, cement, and pulp and paper) were below world best
practice in terms of energy efficiency during the 1973–94 period. The greatest opportunities for
gains existed in iron and steel and pulp and paper, where reductions in energy per unit of output
achievable (based on 1990s technology) were on the order of 40 to 50 percent. The percentage
reduction in energy per unit of output possible in the cement and fertilizer industries was much
smaller—on the order of 20 percent or less. In the aluminum industry, the most efficient plants
in the mid-1990s compared well with international practice.
How has energy intensity in Indian industry changed over time? It is difficult to obtain a
time series on SEC for each of the five industries. To see how energy intensity has changed over

5 Reddy, B.S., and P. Balachandra. 2006. “Dynamics of technological shifts in the household sector—
Implications for Clean Development Mechanism.” Energy Policy 34(16): 2586– 99
6 Pohekar, S.D., D. Kumar, and M. Ramachandran. 2005. “Dissemination of cooking energy alternatives in

India—A review.” Renewable and Sustainable Energy Reviews 9(4): 401– 15

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time, Table 1 presents the rate of change in output per unit of energy (measured in constant
prices) for each industry, for the period 1973–74 to 1993–94. Output per unit of energy showed
a clear downward trend in the pulp and paper industry (implying that energy intensity has
increased) but an upward trend in iron and steel, especially after 1985,3 and an upward trend in
the fertilizer industry, until the end of the period. Energy intensity in cement exhibited little
change over the period as a whole. Output per unit of energy fell in the case of aluminum
industry, until 19887.

Government Policies Affecting Energy Efficiency in Indian Industry

Yang (2006) reviews industrial energy efficiency policies in India from 1980 to 2005.
Six major policies were implemented during this period: (1) disclosure of company-level energy
efficiency information; (2) accelerated depreciation for energy efficiency and pollution control
equipment; (3) establishment of the Energy Management Center under the Ministry of Energy;
(4) removal of price and output controls to promote industrial competitiveness; (5) energy price
reforms to guide energy efficiency initiatives and encourage international competitiveness; and
(6) passage of the Energy Conservation Act of 2001 and the Electricity Act of 2003. The Energy
Conservation Act resulted in the creation of the Bureau of Energy Efficiency (BEE), a statutory
body under the Ministry of Power. BEE actively promotes, manages, finances, and monitors
energy conservation efforts in the economy through energy audits. It also has the statutory
authority to8 implement mandatory energy efficiency standards but has not yet done so. To the
best of our knowledge, there have been no attempts to evaluate statistically the impacts of
these policies.

3. Energy Efficiency in the Power Sector

The power sector in India consumes approximately 43 percent of commercial primary
energy and generates 40 percent of India’s CO2 emissions. Energy efficiency in the power
sector is therefore of critical importance. Thermal power plants currently produce 71 percent of
India’s commercial electricity and are projected to account for 78 percent of electricity
generation in 2031, according to the Indian Planning Commission (GOI 2006). Part of the large

7 Reddy, B.S. 2003. “Overcoming the energy efficiency gap in India's household sector.” Energy Policy 31(11):
1117–27
8 Phadke, A.A., A.S. Jayant, and S. Padmanabhan. 2005. “Economic benefits of reducing maharashtra’s

electricity shortage through end-use efficiency improvement.” LBNL 57053. Lawrence Berkeley National
Laboratory
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literature on Indian power plants examines the thermal efficiency of existing plants, comparing
them with international performance and explaining variation in efficiency across plants. Other
studies focus on possibilities for energy-efficient investment in future plants. Before
summarizing this literature, we present a brief history of the Indian power sector9.

The Indian Power Sector: Background

In 1990, 63 percent of installed capacity in the electricity sector in India was owned by
state electricity boards (SEBs), 33 percent by the central government, and 4 percent by private
companies. This was the result of the 1948 Electricity Supply Act, which created SEBs and gave
them responsibility for the generation, transmission, and distribution of power, as well as the
authority to set tariffs. SEBs were connected in grids to enhance system reliability. By 1960, the
power system was organized into five regional grids, with regional electricity boards and
dispatch centers (Tongia 2003).4 SEBs operated on soft budgets, with revenue shortfalls made
up by state governments. Electricity tariffs set by SEBs failed to cover costs, generating capacity
expanded slowly in the 1960s and 1970s, and blackouts were common. To increase generating
capacity, the Government of India in 1975 established the National Hydroelectric Power
Corporation and the National Thermal Power Corporation, which built generating capacity and
transmission lines that fed into the SEB systems. The latter, which is the world’s sixth-largest
power producer, operates at a profit.
Beginning in 1991, the Government of India instituted reforms to increase investment in
power generation, reform the electricity tariff structure, and improve the distribution network.
Under the Electricity Laws Act of 1991, independent power producers were allowed to invest in
generating capacity. They were guaranteed a fair rate of return on their investment, with tariffs
regulated by the Central Electricity Authority. The Electricity Reform Act of 1998 made it
possible for the states to create state electricity regulatory commissions to set electricity tariffs.
The goal was to reform the existing tariff structure, which sold electricity cheaply to households
and farmers, and compensated by charging higher prices to industry. This had prompted firms to
generate their own power rather than purchasing it from the grid10, an outcome that further
reduced the revenues of SEBs. The result was that most SEBs failed to cover the costs of
electricity production. Reform of the distribution network was necessary because of the
extremely large power losses associated with transmission and distribution of electric power,
both technical losses and losses due to theft.

9 Persson, T.A., C. Colpier, and U. Azar. 2007. “Adoption of carbon dioxide efficient technologies and practices:
An analysis of sector-specific convergence trends among 12 nations.” Energy Policy 35(5): 2869–78
10 Newell, R.G., A.B. Jaffe, and R.N. Stavins. 1999. “The induced innovation hypothesis and energy-saving

technological change.” Quarterly Journal of Economics 114(3): 941–75

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Of the three goals of reform in the electricity sector, the most successful has been
attracting private investors11.

The Efficiency of Existing Thermal Plants

Coal-Fired Power Plants

As noted above, 84 percent of commercial electricity in India is generated by thermal
plants, and 75 percent by coal-fired plants. Several studies compare the energy efficiency of
thermal plants in India with that of plants in other countries. (2007) report an average thermal
efficiency of 29 percent for coal-fired Indian plants in 1998.5 This is lower than the average
efficiency reported for South Korea and more than 10 percentage points lower than Japan, the most
efficient country examined. According to Persson et al. (2007), average thermal efficiency was
approximately 29 percent between 1990 and 1998. This agrees with Khanna and Zilberman (1999),
who report that 60 percent of generating capacity had a thermal efficiency of 25 percent or higher in
1991; however, 5 percent of plants had an efficiency below 20 percent.
Ninety percent of the coal-fired generating units in India are subcritical, with a maximum
thermal efficiency of 35 to 38 percent. The fact that the average thermal efficiency of these
plants is below 30 percent is due in part to technical factors—the high ash content and low heat
content of Indian coal—and in part to inefficiencies in management. The use of coal with low
heat content or high ash content raises the heat input needed to produce electricity. The heat
content of coal used in Indian plants in 1990 averaged 4,000 kcal/kg, down from 6,000 kcal/kg
in 1960, with ash content between 25 and 45 percent. This was domestic coal, transported from
mines in central and east India. Imports of coal with a higher heat and lower ash content were
effectively prohibited by high tariffs (the tariff on imported coal in 1993 was 85 percent).
Facilities to wash coal to reduce its ash content (and also transportation costs) were not widely
available in the early 1990s.
Khanna and Zilberman (1999) investigate the sources and magnitude of energy
inefficiency in the electricity generating sector in India and its implications for carbon
emissions. They use data from the Central Electricity Authority of India for 205 boiler-turbine-
generator units belonging to 63 coal-based power plants for 1987–1991, which together
represent 75 percent of total coal-based installed capacity in 1991.12 They explain the heat input
required to produce a net kWh of electricity7 as a function of ownership of the plant, boiler

11 Nadel, S.M. 1993. “The takeback effect: Fact or fiction?” Proceedings of the 1993 Energy Program
Evaluation Conference, Chicago
12 Ministry of Petroleum. 2007. Annual Report 2006–07. Ministry of Petroleum and Natural Gas, Government

of India
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manufacturer, coal quality, age of boiler turbine, and capacity utilization. energy efficiency
increased with the use of coal with higher heat content and was lower at plants operated by SEBs,
holding factors such as plant age and capacity utilization constant13.
Specifically, they find that improving management practices to those in the private sector could
raise average thermal efficiency from 25.66 to 26.93 percent; use of high-quality coal could
raise it further, to 29.2 percent.
Khanna and Zilberman’s study suggests that inefficient operating procedures, lack of
coal-washing facilities, and high tariffs were, in 1991, barriers to higher thermal efficiency in
coal-fired power plants. In a subsequent study Khanna and Zilberman (2001) examine whether
plants would choose to use washed domestic coal if coal-washing facilities were available, or
would import coal if the tariff on imported coal were lowered. Assuming that all plants
maximize profits, they estimate that, when the tariff on imported coal is reduced to 35 percent
and washed coal is available, 68 percent of units use washed coal, and 18 percent, imported coal.
These proportions change to 52 percent and 34 percent when the tariff on imported coal is
reduced to zero. This suggests that 86 percent of coal-fired plants in 1991 would have found it
profitable to increase their energy efficiency by improving coal quality. The barriers to doing so
were the high tariff on imported coal and lack of coal-washing facilities.
Since the studies by Khanna and Zilberman, the Indian government has gradually
reduced the tariff on imported coal and has also mandated the use of washed coal under certain
circumstances. The current duty on imported noncoking coal is 5 percent, reduced from 85
percent in 1993. Beginning in 2001, the use of coal with ash content exceeding 34 per cent is
prohibited in any thermal power plant located more than 1,000 km from the pithead and in
urban or sensitive or critically polluted areas. Clearly, it would be of interest to examine the
impact of these regulations on the behavior of coal-fired power plants.
To our knowledge, there are no statistical studies testing the impact of removing tariffs
on imported coal or of coal-washing regulations on the quality of coal used in thermal power
plants in India, although more recent studies document existing inefficiencies in the Indian
power sector14.
Case studies have examined the impact of the reforms of the 1990s on power plant
ownership. Shukla et al. (2004) assess the impact of reforms on the electricity generation
industry in the states of Andhra Pradesh and Gujarat. The study finds a steady improvement in

13 Mehta, P.S. 2007. “Why was India’s Ecomark scheme unsuccessful?” Research Report. International
Consumer Unity & Trust Society (CUTS), India
14 McNeil, M., M. Iyer, S. Meyers, V. Letschert, and J.E. McMahon. 2005. “Potential benefits from improved

energy efficiency of key electrical products: The case of India.” LBNL-58254. Lawrence Berkeley National
Laboratory
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the efficiency of generation from coal and gas in Andhra Pradesh. However, generation from
cleaner sources like hydro has been declining. This changing generation mix has led to a steady
increase in CO2 emission intensities in the state. In Gujarat, on the other hand, reforms have led
to the emergence of various ownership structures with associated changes in fuel mix and
technology. There has been a steady improvement in the efficiency of generation with
reduction in carbon intensities.
It is also possible to ask whether coal-fired power plants are efficient in terms of their
use of all inputs. Thakur et al. (2006) evaluate how far various SEB-owned plants are within the
production possibility frontier, using data envelopment analysis. They find that bigger utilities
displayed greater inefficiencies and exhibited distinct scale inefficiencies. They conclude that
exploiting scale efficiencies by suitable restructuring and unbundling of SEBs could promote
greater efficiency.

Gas-Fired Power Plants

Since the reforms of the 1990s, gas-fired thermal plants have accounted for an increasing
share of newly constructed thermal plants. Most of these are combined-cycle gas turbine
(CCGT) plants, which can, in theory, achieve thermal efficiencies up to 60 percent. Persson et al.
(2007) report an average thermal efficiency of 46 percent for gas-fired plants in India in 1998.
This compares favorably with other countries: only South Korea and the United Kingdom are
estimated to have higher thermal efficiencies (50 percent and 48 percent, respectively). The
average thermal efficiency of gas plants in India has increased steadily since 1980 because of the
construction of CCGT plants15 and the use of gas plants to supply base rather than peak
electricity demand.
Whether CCGT plants will continue to be built in India depends on how the cost of
these plants compares with the cost of coal-fired power plants that would likely be built in India
in the near future. This is discussed in the next section.

The Potential Efficiency of Future Power Plants

With a planned sixfold expansion in electricity production by the year 2030 (GOI 2006),
78 percent of which is targeted to be produced by thermal power plants,8 the energy efficiency
of future investments is important. What plants are economically efficient depends on the
capital, operating and maintenance, and fuel costs of alterative technologies, as well as on
international options for carbon finance. Among the more energy-efficient options for thermal

15Mathur, R., C. Chand and T. Tezuka. 2003."Optimal use of coal for power generation in India." Energy Policy
31(4): 319-331
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plants in the near term are supercritical coal-fired plants and combined-cycle gas turbine plants.
Sathaye and Phadke (2006) compare the cost per kWh of four combined-cycle gas plants
and four coal plants proposed to be constructed in India. Because the CCGT plants produce
lower carbon emissions, the comparison allows the authors to calculate the cost per ton of CO2
avoided by building combined-cycle gas rather than coal plants. The cost is then compared with
similar costs in developed countries. From an energy efficiency perspective, the article is useful
in estimating the cost of increased energy efficiency in thermal power plants in India. The
authors find that the cost per kWh averaged over the CCGT plants is 5.48 cents16, versus 3.10
cents per kWh for the coal plants. This suggests that, at least at present, more energy-efficient
gas plants would require a considerable carbon premium to compete economically with coal-
fired plants.
Singh et al. (2006) analyze the barriers to adoption of cleaner and more efficient
technologies in the Indian power sector. They consider the adoption of three cleaner and more
efficient alternatives: integrated gasification combined-cycle coal technology, pulverized
fluidized bed combustion, and biomass integrated gasification combined-cycle technology.
Using a survey of major stakeholders in the Indian power sector, they identify and rank the
barriers to adoption of each technology in an analytic hierarchy process. High initial capital costs
and lack of proven reliability for the technology in India are the main factors cited as barriers to
adoption of these advanced technologies.

4. Household Energy Usage

India’s residential sector is a major consumer of energy whose energy demand will
grow with prosperity and population growth. Residential energy end use in India is sourced
both from commercial (electricity, kerosene, and liquefied petroleum gas, LPG) and
noncommercial sources (direct use of biomass). Households in 2003–2004 consumed 8 percent
of commercial energy and 85 percent of noncommercial energy in the Indian economy
Currently, more than 80 percent of the energy17 consumed by households takes the form
of biomass, which is used for cooking by 70 percent of all households (see Table 4). Most
biomass is burned in inefficient stoves, which are also a source of indoor air pollution. Two
sources of energy efficiency are cleaner fuels (kerosene and LPG) and more efficient stoves.
Although households often transition to more efficient, cleaner commercial fuels as their

16 Kumar, A., S.K. Jain, and N.K. Bansal. 2003. “Disseminating energy-efficient technologies: A case study of
compact fluorescent lamps (CFLs) in India.” Energy Policy 31(3): 259–72.
17 Kishore, V.V.N., and P.V. Ramana. 2002. “Improved cookstoves in rural India: How improved are they? A

critique of the perceived benefits from the National Programme on Improved Chulhas (NPIC).” Energy 27(1):
47–63
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incomes rise, another important source of energy efficiency is replacing inefficient wood and
kerosene stoves with more thermally efficient ones.
Note that in considering these efficiency options, various trade-offs among commercial
and noncommercial fuels figure prominently, and greenhouse gas emissions are more uncertain
than in industrial or power sector energy demand. Emissions could rise from a shift toward
commercial fossil-based fuels, but concerns over this impact would tend to be dominated by the
benefits of cleaner fuels for household health from reduced indoor air pollution. Given the
continued reliance on biomass for cooking and the health problems associated with indoor air
pollution, increased penetration of more energy-efficient wood-fired stoves also has an important
role. As discussed below, the impact on household time and money costs of switching to modern
fuels involves several conflicting influences; more efficient biomass stoves, for their part, reduce
either collection time or cost for purchased fuelwood18.

Consumption of Cooking Fuels in the Household

According to the Census of India (2001), more than half of all households still rely on
firewood for cooking (see Table 4), and 20 percent rely on other forms of biomass. In rural
areas, approximately 90 percent of households are dependent on biomass for cooking. In
contrast, cleaner fuels—kerosene and LPG—account for 19 percent and 48 percent, respectively,
of energy used for cooking in urban areas.

The Switch to Cleaner Fuels

Although cleaner fuels are much more efficient in terms of the usable energy they supply per
unit of heat input, they are likely to be more expensive, both in annualized costs and in the cost per
unit of usable energy—at least in the absence of energy subsidies. Reddy (2003) compares the
annualized costs of using a traditional wood stove, a traditional kerosene stove, and an LPG stove for
cooking. Although the LPG stove is much more energy efficient (achieving 60 percent efficiency)
than the kerosene stove (35 percent efficiency) or the wood stove (10 percent efficiency), its
annualized costs are much higher. The total annual energy costs of the LPG, kerosene, and wood
stoves are estimated to be Rs. 3164.7, 2405.7, and 1506.6, respectively.

Although this comparison is dependent on fuel prices and capital costs, it suggests that
more energy-efficient cooking fuels do not pay for themselves. The main reason for switching to

18Khazzoom, J.D. 1980. “Economic implications of mandated efficiency standards for household appliances.”
Energy Journal 11: 21–40
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cleaner fuels is that they are more convenient. Many studies suggest that with rising income
levels and urbanization, households in developing countries switch their primary cooking fuel
from biomass, including dung, crop residues, and wood, to transition fossil fuels such as coal and
kerosene, and finally to LPG, natural gas, or electricity (Heltberg 2004). Using National Sample
Survey (NSS) data, look at changing patterns of fuel use from traditional woodstoves to kerosene
and then from kerosene to LPG and electricity. All three studies note that the shift from biomass
as a source of fuel to relatively cleaner fuels, like kerosene, LPG, or electricity, is primarily
driven by income. Reddy and Balachandra (2006) project the shares of fuelwood, kerosene,
electricity, and LPG used for cooking in rural and urban areas for 2010 based on certain
assumptions10 and NSS (1999–2000) consumption patterns.
Those studies should not be interpreted as implying that prices do not matter; the capital
costs of an LPG19 or kerosene stove and the cost per liter of fuel do matter, and the Indian
government subsidizes both LPG and kerosene for domestic use. Kerosene is sold through the
government’s public distribution system (PDS) as well as by private suppliers. PDS kerosene is
subsidized (and also rationed), whereas private supply is not.11 Similarly, LPG is sold by private
firms as well as through the public sector (Ministry of Petroleum 2007).12 The subsidy to
consumers in 2005–2006 for kerosene and LPG was Rs.12.96/liter and Rs.170.32/cylinder (14.2
kg), respectively (GOI 2006), implying that the subsidized price for kerosene is about 40 percent
of the market price and 60 percent of the market price for LPG.13
The annual cost of LPG and kerosene subsidies in India is high (more than US$500 million
annually), and the subsidies have been widely criticized for their poor targeting (especially in the
case of LPG) and leakage (in the case of kerosene) (Barnes et al. 2005; Heltberg 2004). Subsidies
for LPG often go to middle- and upper-income households. Kerosene
subsidies are better targeted toward the poor, but kerosene sold for fuel is often redirected to
automotive uses—it is a close substitute for diesel, and diversion occurs whenever kerosene is
priced below diesel. Past kerosene subsidy schemes using coupons and ration cards have
failed as a tool for household fuel switching, even though among all the modern cooking fuels,
kerosene competes best with firewood.

Use of More Energy-Efficient Wood Stoves

Reddy (2003) and Reddy and Balachandra (2006) suggest that more efficient wood or
kerosene stoves will pay for themselves in fuel savings. Reddy (2003) calculates that purchasing
a wood stove of 30 percent thermal efficiency, compared with one of 10 percent efficiency, will

19Khanna, M., and D. Zilberman. 1999. “Barriers to energy efficiency in electricity generation in India.” Energy
Journal 20(1): 25–41
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yield a return on investment of 64 percent per year and will pay for itself through fuel savings in
a few months. The additional cost of a kerosene stove of 50 percent efficiency, compared with
one of 30 percent efficiency, will likewise pay for itself in energy savings in a few months.
More efficient wood stoves will also reduce indoor air pollution by reducing wood consumption
and achieving more complete combustion20.
Improved cook stoves have, however, been slow to penetrate the market in India (Glow
Asia Cookstove Programme 2000; Greenglass and Smith 2006). The National Program for
Improved Chulhas (NPIC), introduced by the Government of India in 1983, provided a minimum
subsidy of 50 percent to households that purchased the improved cook stove. From 1983 to
2000, approximately 35 million improved stoves of various types were distributed. In 2002 the
NPIC was deemed a failure and the program was discontinued. Only a few state governments
and NGOs have continued this and related projects.
The shortcomings of India’s NPIC system stemmed partly from its top-down, subsidized
approach to dissemination of improved cook stoves (Greenglass and Smith 2006). The central
government subsidy was applied directly to stove producers, who therefore did not consider
consumers’ preferences when constructing and marketing stoves. Improved stove dissemination was
therefore relatively slow, and stoves that were distributed often did not significantly improve upon
the efficiency of their traditional counterparts. Additionally, the large government subsidy inhibited
efforts in the private sector to develop and produce other types of improved stoves.
Kishore and Ramana (2002) estimate that the net benefits of the NPIC program were
lower than the government had projected. If the health benefits of using the improved cook
stoves are included, however, they contend that the program should not be deemed a
complete failure. The failure of the NPIC scheme to target resource-poor regions was another
reason for the lack of popularity among poor households (Sinha 2002).

Renewable energy cooking options such as solar cookers have also been introduced in
some states. Subsidies were provided to producers, to be passed on to the consumer. Pohekar
and Ramachandran (2006) find that solar cookers21 are the third most preferred alternative in
India after LPG and kerosene cook stoves. However, the same problems that arose with the
NPIC scheme led to failure here, too. Producer subsidies failed to stimulate changes in the

20 Jaffe, A.B., R.G. Newell, and R.N. Stavins. 2003. “Technological change and the environment.” In K.-G. Mäler
and J.R. Vincent (eds.), Handbook of Environmental Economics, Volume 1. Elsevier Science B.V
21 Heltberg, R. 2004. “Fuel switching: Evidence from eight developing countries.” Energy Economics 26(5):

869–87
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technical design of these stoves to meet the requirements of households22.

Greenglass and Smith (2006) describe new efforts to market improved cook stoves in
India. Factors affecting adoption of such stoves have been studied by Viswanathan and Kumar
(2005). The work is important, given that a significant portion of households in India will
continue to rely on biomass for fuel. The Indian Planning Commission estimates that if per
capita GDP grows at annual rate of 8 percent, the quantity of fuelwood consumed by household
will increase by 20 percent between 2006 and 2031 (GOI 2006)23.

Adoption of Energy-Efficient Lighting

Although electricity currently accounts for a small share of total household energy
consumption, it is the main source of energy for lighting and, as noted above, is predicted to
grow sixfold by 2031 (GOI 2006). Introducing energy efficient lighting and appliances in the
household sector is an important alternative to increasing generating capacity while also
reducing the growth of carbon dioxide emissions.
Lighting constitutes another major category of household energy use, accounting for
roughly 36 percent of total commercial energy consumption. Indian households rely mainly on
kerosene lamps or electricity for lighting. In urban areas, electricity is the primary source (89
percent) for lighting. In rural areas, kerosene lamps account for half (50 percent) and electricity
another half (48 percent) of energy for lighting. The quality of illumination from electric
lighting is much superior to light from kerosene lamps, and the cost per lumen can be lower for
electric lighting. On the other hand, battery-operated electric lighting is more expensive than
kerosene, given the cost of the batteries as a source of energy.
Compact fluorescent lamps (CFLs) are an efficient alternative to traditional incandescent
lamps for provision of high-quality lighting services. Even though CFLs are usually more expensive
than incandescent lamps, Reddy (2003) estimates the payback period to be 1.2 years which is cost-

effective, given the longer life of these lamps.14 He also estimates that the switch from a
kerosene lamp to a 13-watt CFL would pay for itself in less than 1 year24.

Currently, many CFLs are commercially available; however, their sales are low. Based
on survey data, Reddy and Shrestha (1998) find that lack of awareness, uncertainty, and high
22 Jaffe, A.B., and R.N. Stavins. 1994. “The energy paradox and the diffusion of conservation technology.”
Resource and Energy Economics 16(2): 91–122
23 Griliches, Zvi. 1957. "Hybrid corn: an exploration in the economics of technical change." Econometrica

25(4): 501-522
24 Greenglass, N., and K.R. Smith. 2006. “Current improved cookstove (ICS) activities in South Asia: A web-

based survey.” WHRC/IIMB Project Report for Clean Energy Technologies: Sustainable Development and
Climate Co-Benefits in India (CETSCO). Woods Hole Research Center, September
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 Natural Resources and Energy Law

initial costs are major factors leading to lower rates of adoption of more efficient lighting
systems. Kumar et al. (2003), using a survey administered to 900 households in Delhi, find that
awareness of CFLs among consumers, especially those with monthly family incomes lower than
Rs. 10,000, is very low. CFL use was low even among consumers who were aware of them. The
high price and lack of warranty appear to explain the low acceptability of CFLs25. No study to
date has statistically estimated and tested the factors that lead to the adoption of energy-efficient
lighting.

Adoption of Energy-Efficient Household Appliances

Apart from cooking and lighting, electrical appliances are a major source of
household energy consumption, especially in higher-income urban households. The share of
electrical appliances in household energy consumption is likely to increase significantly in the
future because of growth in per capita incomes.
McNeil et al. (2005) estimate the impacts of energy saving for two appliances used in
Indian households—refrigerators and air-conditioners. The switch from existing models to high-
efficiency models of refrigerators between 2010 and 2020 would result in a 45 percent per unit
energy savings, or a total of 77 million tons of oil equivalent (MTOE) saved, implying a net
present value of consumer savings equaling US$1.3 billion. More efficient direct-cool
refrigerators have a payback period of less than 3 years; more efficient frost-free refrigerators
have a payback period less than 2 years.15 For air-conditioners, models with energy efficiency
ratings (EERs) of 10.2 or lower have payback periods of less than 3 years, compared with
models with an EER of 9.0; however, the switch from the latter to models with an EER of 12.8
has a payback period of 20 years. Adoption of higher-efficiency models between 2010 and 2020
is predicted to result in a 6 percent per unit energy savings, or a total of 23 MTOE saved,
implying a net present value of consumer savings equaling US$1.2 billion26.

McNeil et al. (2005), Reddy (2003), and Reddy and Balachandra (2006) provide ex ante
studies of the implied potential savings from the usage of more efficient appliances. There is some
debate over the size of energy savings from energy efficiency improvements because of the rebound
effect; that is, by reducing the cost of energy use, increased energy efficiency leads to increased
consumption of energy. Thus, for example, a lower cost of energy for highly efficient refrigeration

252006. Integrated Energy Policy Report. Planning Commission, Government of India.

262005. Integrated Energy Policy Report—Draft Report. Planning Commission, Government of India,
December
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could induce some increased purchase of larger refrigerators27, offsetting some of the potential
energy savings. There appears to be no statistically significant evidence that efficiency
improvements in appliances in the United States have led to a rebound effect. The situation may be
different in a developing country, but to date there is only one study of the rebound effect in India.

Factors Affecting the Rate of Diffusion of Energy-Efficient Appliances

The rate of diffusion of energy-efficient technologies has been widely studied in the
international literature. One explanation for the slow initial rate of technology penetration is that
heterogeneous consumers receive different benefits from a technology. As the cost of the
technology falls, more consumers receive positive net benefits and adopt the technology. If
benefits are normally distributed across consumers, the rate of adoption will follow an S-shaped
curve (Jaffee et al. 2003). This suggests that higher energy prices or lower capital costs should
increase the rate of technology adoption. Empirical evidence from the United States suggests
that higher energy prices have encouraged the adoption of energy-efficient room air-
conditioners, central air-conditioners, and gas water heaters. There is, however, evidence that
decreases in capital costs have had a larger effect on adoption than corresponding increases in
operating costs. This suggests that either myopia (i.e., high discount rates) or capital market
constraints have played a role in technology adoption by consumers.
An alternative theory of technology diffusion posits that the limiting factor in technology
diffusion is information, and that the most important source of information is people who have
already adopted the technology.16 This implies that adoption itself generates information
externalities. These externalities and the fact that information is a public good provide a rationale
for government provision of information about energy efficiency. This has led to appliance
labeling requirements, which Newell et al. (1999) find to have encouraged the adoption of
energy-efficient air-conditioners and water heaters in the United States.
Related to lack of information are agency problems: if landlords make decisions
regarding refrigerator and air-conditioner purchases, but tenants play electricity costs, energy
costs will not necessarily be internalized in the purchasing decision (Sathaye et al. 2005).
Agency problems and lack of knowledge of the life-cycle benefits of energy-efficient28
technologies are often cited as a rationale for energy efficiency standards. In the United States,
minimum energy efficiency standards for appliances were implemented by some states in the
1970s. In 1987 federal standards were issued for 15 categories of household appliances. The

27 2002. Annual Report 2001–02 on the Working of State Electricity Boards and Electricity Departments.
Planning Commission, Government of India
28 Government of India (GOI). 1999. Annual Report 1999–00 on the Working of State Electricity Boards and

Electricity Departments, Planning Commission, Government of India

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U.S. evidence suggests that between 1990 and 1997, appliance standards saved U.S. consumers
1.9 quads of energy and $17 billion in energy costs.
Factors that are likely to prove important in affecting the diffusion of energy-
efficient appliances in India include appliance labeling schemes, energy efficiency
standards, opportunities for financing energy-efficient appliances, and electricity prices. We
discuss labeling requirements, efficiency standards, and electricity pricing below.
In response to the worldwide popularity of ecolabeling schemes, the Government of
India launched a voluntary appliance labeling scheme known as Eco-Mark in 1991. The aim was
to increase consumers’ awareness about environmentally friendly products in the market.
However, the scheme did not succeed in attracting participation from most manufacturers. Two
major reasons cited for the failure of manufacturers to participate were the cost of participation
and lack of consumers’ awareness.
A decade later the scheme was relaunched as the Standards and Labeling Program
(S&L), to be monitored under the newly created Bureau of Energy Efficiency. Thus far, S&L
covers agricultural pump sets, distribution transformers, motors, lighting products, refrigerators,
air-conditioners, and televisions. The labeling requirement is still voluntary, except for frost-free
refrigerators (beginning in 2007).17 Unlike the previous scheme, S&L uses a star rating system
to rate appliances. There is so far very limited analysis of the effectiveness and diffusion of
energy efficiency technologies through the S&L program in India.

The literature in the United States suggests that rising energy prices have contributed to
the development and adoption of energy-efficient technologies. As noted above (see also
Figure A.1), households in India generally pay an electricity tariff that is below the cost of
electricity generation. To predict the effect of tariff reform in the electricity sector on appliance
purchases requires econometric analyses of appliance purchases, which, to our knowledge,
have not been conducted in India. There is, however, qualitative evidence that consumers
consider electricity prices when purchasing major appliances.
more than half the respondents of a survey who resided in urban areas were likely to
consider refrigerators’ electricity consumption as a factor in their purchasing decisions.
However, only 29 percent of respondents in periurban areas considered electricity prices when
purchasing refrigerators. For all respondents, the refrigerator’s price was as important a factor
as electricity consumption. However, electricity consumption was the most important factor
that consumers considered when purchasing air-conditioners.

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Barriers to Energy Efficiency and Research Needs

Greater use of more energy-efficient technologies in India would in many but not all
cases pay for themselves in the form of energy savings. This prompts the following
questions:
(1) What influences some firms and households to adopt more energy-efficient technologies?
and
(2) Is this rate of adoption efficient? With answers to these questions, one could help design
policies to improve the economic efficiency of energy use and explore opportunities for
international cooperation and cofinancing to further improve energy efficiency as a measure
for reducing global CO2 emissions.
The diffusion of energy-efficient technologies is usually a slow process, whether in
developing or developed countries. The speed of diffusion can be retarded by a variety of
factors. A fundamental barrier is government policies that distort prices. One example of induced
energy inefficiency is the high electricity prices charged to industry, which stimulates self-
generation using inefficient diesel-powered generators. Sathaye et al. (2005) provide another
example in a sector not reviewed in this study, agriculture. They report that the energy efficiency
of agricultural pump sets in India is extremely low, which coincides with policies that heavily
subsidize electricity use for farmers.18 Replacing most pump sets would be fully cost-effective if
electricity were priced at marginal cost; however, the subsidies to electricity have prevented their
replacement.
Lack of information is another barrier. Since there are information externalities in this
case—adoption by one person conveys information to nonadopters—governments can
provide information about energy efficiency by requiring that appliances and machinery be
labeled to show their energy usage and that efficiency claims be certified. This is beginning to
be done in India, through the Bureau of Energy Efficiency, but some labeling programs are
still not mandatory.
A case also can be made for energy efficiency standards—requirements that all
appliances meet a minimum level of efficiency. Agency problems often arise in rental markets,
since landlords may not purchase energy-efficient appliances or make buildings energy efficient
if they do not bear operating costs.

Research Needs
There is a large international literature that examines factors affecting the rate of
diffusion of energy-efficient technologies. There are virtually no such studies for India. Such
studies would provide useful information about the impact of changes in energy prices (as might

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 Natural Resources and Energy Law

occur, for example, through electricity tariff reforms), changes in capital costs, energy
efficiency standards, or technology adoption subsidies. All of these changes in energy markets
and policies will continue to have an important influence on energy costs in India and the
country’s CO2 emissions29.
The Government of India has implemented a variety of policies beginning in the early
1990s that could positively affect energy efficiency. These include reforms in the electricity
sector (both legislative reforms and the removal of tariffs on imported coal), the relaxing of
price and output regulations on certain energy intensive industries, and energy efficiency
labeling requirements for appliances. Since there have been no rigorous econometric studies of
these policies, many research questions remain unanswered: Have reforms increased efficiency
in
electricity generation? Has technical change in energy-intensive industries been energy saving
or energy using since the early 1990s? Has labeling promoted the purchase of more efficient
appliances, holding other factors constant? What would be the likely impact of a major
restructuring of electricity tariffs?30
These are all positive, rather than normative, questions. Their answers, however, should
help policymakers understand consumers’ and firms’ behavior in the adoption of energy-
efficient technologies and thus inform government policy in this area.

29 Glow Asia Cookstove Programme. 2000. “Improved stove and climate change.” Glow: The Asia Regional
Cookstove Programme 22, November
30 Gillingham, K., R. Newell, and K. Palmer. 2006. “Energy efficiency policies: A retrospective examination.”

Annual Review of Environment and Resources 31: 161–92

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 Natural Resources and Energy Law

Conclusion

sectoral shares of energy consumption in India, by end user, for the year 2003–2004, as
well as energy consumption by the power sector. The power sector consumes 71 percent of the
coal, 6 percent of the oil, and 36 percent of the natural gas in India and is thus the largest
primary consumer of commercial energy. Industry is the largest end user of commercial energy
in the economy. Most of this is in the form of coal, which is used directly in production (e.g.,
coking coal in steel production) but also to generate electricity. Oil consumed by industry is also
used for power generation: much captive power is provided by diesel generators, especially for
small and medium-sized enterprises.19 The share of commercial electricity consumed by
industry has declined steadily since 1950
Source: GOI (1999, 2002).

Agriculture and transport currently consume smaller shares of energy but are no less
important in terms of energy efficiency. Agriculture accounts for 20 percent of total diesel
consumption in the country. The share of electricity consumed by agriculture is likely
understated by Table A.1. As Figure A.1 indicates, electricity is heavily subsidized for farmers,
and usage is often not metered. The share of energy consumed by transport, which includes
household consumption of gasoline and diesel, is rapidly growing.
In setting priorities for energy efficiency, it is important to consider future as well as
current energy consumption. The Indian Planning Commission predicts that electricity
production will increase by a factor of 6 by 2031. Although households currently consume only
25 percent of electricity, their share of electricity consumption is projected to increase by a
factor of 8 by 2031 (GOI 2006). Electricity consumption by industry is predicted to grow by a
factor of 5 (CCAP 2006). For this reason we have focused in our literature review on the
household sector, the power sector, and selected industries (aluminum, iron and steel, cement,
fertilizer, and pulp and paper).

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