ISAS Insights

No. 11 – Date: 9 January 2006

Institute of South Asian Studies

INDIA’S ENERGY POLICY:

S. Narayan ∗

The Draft Report of the Expert Committee on Integrated Energy Policy was put out by the
Planning Commission in December 2005 for comments. 1 The report examines the issues
from the point of view of energy requirements and the supply options, and attempts to
address issues of energy security.

The per capita level of energy consumption in India is half of that in China and one third the
world average. GDP per capita and energy consumption have a close correlation, and
therefore energy needs are likely to rise dramatically as the economy grows at 7-8% a year.
The elasticity of total primary commercial energy consumption is around 0.82 for India,
consistent with cross-country regression figures. In addressing energy policy issues, the
report attempts to move away from the traditional approach of determining optimal supply
strategy with quantitative targets. The report takes a broader approach of recommending an
enabling environment such that relative economics of alternatives are left to the combination
of technology and prices, and choices left to the economic decision takers. As such, the
document recommends broad policy alternatives, and has to be viewed against this context.

The commercial energy requirements have been estimated to the year 2031-32, assuming a
population of 1.46 billion at that time. At a 7% rate of growth, GDP would be over 5.5 times
that of today, and at 8% growth, over seven times. The scenarios depict a four to five times
growth in energy consumption, with electricity requirements going up from 633 BkWhr to
over 3,000 BkWhr, requiring a five to six fold increase in installed generating capacity from
131,000 GW in 2003-2004. This increase is expected to come from an increase in Hydro
from 75 BkWhr to 500 BkWhr, Nuclear from 18 BkWhr to 441 BkWhr, with coal based
energy generation projected at 78% of energy demand in 2031-32 and gas based generation
set to increase to 20% from the current level of 12%. The estimates for domestic energy have
been projected assuming that pattern of fuel use for a particular monthly per capita
consumption expenditure class remains the same as observed in the last NSS survey. The

∗
Dr S. Narayan is a Visiting Senior Research Fellow and Head of Research at the Institute of South Asian
Studies, an autonomous research institute in the National University of Singapore. He is the former
Economic Adviser to the Prime Minister of India.
1
The Draft Report of the Expert Committee on Integrated Energy Policy was prepared under the
chairmanship of Mr Kirit S. Parikh, Member (Energy), Planning Commission, India. A copy of the draft
report is available at http://planningcommission.nic.in/genrep/intengpol.htm.
projections continue to show a heavy dependence on traditional fuels like firewood and dung
cake of around 62% in 2031-32 (down from around 81% currently).

The interesting numbers are that crude oil use is expected to increase from around 105 MMT
in 2001 to a range between 264 to 324 MMT in 2024-25; demand for natural gas has been
estimated to grow from 62 MMSCMD in 2001 to a range between 195 and 225 MMSCMD in
2025, and demand for coal from 473 MTe in 2006-07 to over 1100 MTe in 2024-25. The
scenario summary, given a range of alternatives to choose from, including coal dominant,
forced hydro and forced nuclear scenarios, indicates that the fuel mix in 2031-32 could vary
between 42% to 65% for coal, and up to a maximum of 6% for nuclear and 4% for hydro. Oil
would be in a range of 28% to 33% of the fuel mix and Natural gas between 7%and 12%.
There is emphasis on realization of full potential of hydro-energy and a fast growth in nuclear
energy. Hydro potential for India has been estimated at 150000 MW, and the report
recommends its realization. Nuclear energy is recommended to grow 20 times to meet over
6% of primary energy requirements by 2031-32.

The real concerns in the study emerge in the supply side. Given that transportation fuels for
aviation, ships and road transport are likely to depend heavily on petroleum products, and that
the growth of urbanization would increase LPG and kerosene use significantly, there is only
limited flexibility in substitution of petroleum products. The best estimates of domestic oil
production in 2025 do not exceed 50 MTe. Therefore, imports would have to increase from
around 80 MTe of crude currently, to over 200 MTe in 2025. The world pumps around 87
million barrels of oil daily, and India’s total annual imports of crude are equivalent to around
a week of global crude production, or less than 2% of traded oil. Recent estimates, including
testimonies accepted by the US House of Representatives from experts as late as December
2005, indicate that while global oil production is unlikely to peak for the next 20 years, the
supply is likely to increase by 25% per day by 2015. The draft report envisages that, even in
the low growth scenario, Indian imports would have to double by 2015. This raises serious
concerns about availability as well as prices.

This is true for natural gas as well. Global production is growing at around 2% per annum,
and there are no signals that this rate of growth would accelerate in the next decade. Yet the
natural gas demand has been projected to double by 2015, and the availability of this fuel
would be constrained.

The worries about coal, the base fuel of the report, are even more serious. Of the total global
coal production of 4 billion tons per annum, coal trade is of the order of 700 million tons. The
requirement of coal as per the projections increases from 415 million tons in 2004-2005 to
2.7 billion tons in 2031-32, that is, in volume terms, 68% of global production and nearly
four times the current volume of global trade. Even in the scenario wherein there is full
development of hydro and acceleration of nuclear generation, the demand for coal is 2.1
billion tons per annum in 2031. Given extractable indigenous coal and lignite reserves of
around 14 billion tons, this represents around seven years domestic availability, nor is it
likely that global production and trade would grow to an extent that a reasonable management
of own resources could be supplemented by adequate imports.

The heavy reliance in the report on market mechanisms to arrive at an optimal policy mix do
not seem to have adequately taken note of the above global supply side limitations. Further,
there are already distortions in the fuel price market, in terms of inefficient labour intensive
coal production, multiple prices for gas and regulated prices for petroleum products. There

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are also historical factors that have resulted in industry, including steel plants, using cheaper
gas. In fact, the political choice of the locus of the gas pipeline has resulted in the
acceleration of a particular development along the pipeline. The report is silent about the
costs of removing these distortions, and who would pay for them. The report is also silent
about the investments needed to develop the massive infrastructure needed to develop the
port and transport infrastructure needed to handle the massive imports, and whether they are
to be added on to the fuel costs or to be treated as public goods. It would have been useful if
the report had followed through on its premise of market management of fuel choices, had
identified distortions and obstacles, and suggested solutions.

Finally, the suggestions for alternate approaches and technologies do not appear to be well
argued. Efficiency of energy use, in coal fired power stations, automobiles, and in domestic
use is indeed important but it is difficult to see the steps that the report is suggesting beyond
those that have been pursued all these years. The enthusiasm about gas hydrates, hydrogen
fuel, solar power and alternate energy sources has remained undiminished across many
energy committee reports; and this document offers no illumination why future efforts in the
country would be any different from the past. It would have been useful if the report had
examined why these have not taken off, and suggested changes in strategy, structures,
institutions as well as approaches from lab to use. As it stands, the reader has an apprehension
that the experts are clutching at straws.

The report is an important one in that there has been an attempt to look holistically at
different energy scenarios in the context of a 7% to 8% GDP growth and has to be
commended for its analysis.

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