Draft Report of the Expert Committee on Integrated Energy Policy

8/8/2019 Draft Report of the Expert Committee on Integrated Energy Policy

1/153


2/153

Contents

Page No.

Preface i

In Summary iixiv

1 Chapter I. The Challenges 120

1.1 The Energy Scene 1-15

1.2 The Issues 15-16

1.3 The Vision 16

1.4 Need for an Integrated Energy Policy 16-18

1.5 Approach 19-20

2 Chapter II. Energy Requirements 2134

2.1 Total Energy Needs 21-222.2 Required Electricity Generation 23-25

2.3 Indias Coal Demand for Non-Power Use 25-26

2.4 Indias Oil Demand 26

2.5 Indias Non-Power Natural Gas Demand 26-27

2.6 Total Commercial Primary Energy Requirement 27-28

2.7 Non-Commercial Energy Requirement 28-30

2.8 Summing Up 31-34

3 Chapter III. Supply Options 3555

3.1 Indias Energy Reserves 35-42

3.2 Supply Scenarios 42-48

3.3 Implications for Supply Options 48-52

3.4 Energy Independence in an Oil Scarce World 52-55

4 Chapter IV. Energy Security 5671 4.1 What is Energy Security? 56-57

4.2 The Nature of the Problem 57-59

4.3 Policy Options for Energy Security 59-69

4.4 Energy Security for the Poor 69

4.5 Policies and Initiatives for Energy Security 69-71

5 Chapter V. Energy Policy Options/Initiatives 7283 5.1 The Emerging Backdrop 72-76

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

76-83

6 Chapter VI. Policy for Energy Efficiency and Demand Side

Management8491

6.1 Large Potential for Saving Energy 84-91

7 Chapter VII. Policy for Renewable and Non-Conventional Energy

Sources

9298


3/153

8 Chapter VIII. Household Energy Security: Electricity and Clean Fuelsfor All

99102

8.1 Electricity 99-100

8.2 Cooking Energy 100-101

8.3 Subsidy through Debit Cards to BPL Households 101

8.4 Fuelwood Mission 101-1029 Chapter IX. Energy R&D 103106

10 Chapter X. Power Sector Policy 107109

11 Chapter XI. Coal Sector Policy 110113

12 Chapter XII. Oil and Gas Sector Policy 114115

13 Chapter XIII. Energy-Environment Linkages 116123

13.1 Energy Supply Side: Environment Concerns 116-118 13.2 Environmental Dimensions of Demand Side Impacts 118

13.3 Understanding the Determinants of Air Quality 119-121

13.4 Long-term Sustainability of Indias Energy Use 121-123

Concluding Comment 124

Annexures 125-136

Annexure-I: Order Constituting the Committee 125-127

Annexure-II: Gist of Earlier Energy Policy Committees/Groups 128-135

Annexure-III: Calorific Value of Various Fuels and Conversion Factors 136


4/153

Preface

Efficient and reliable energy supply is critical for economic growth. Theavailability of conventional energy sources is limited and may not be sufficient in thelong run to sustain the process of economic development. Further, the base of the

countrys energy supply system has steadily shifted from renewable to non-renewablesources. India meets about 30% of its energy needs through imports. With theincreasing share of fossil fuels in the energy supply/use, the share of imported energymay go up further. Development of newer energy sources thus acquires importance.The challenge is to ensure adequate supply of energy at the least possible cost. Theenergy policies that we have adopted since independence to subserve the socio-economic priority of development, have encouraged and sustained many inefficienciesin the use and production of energy. We pay one of the highest price for energy inpurchasing power parity terms. This has eroded the competitiveness of many sectorsof the economy. Another important aspect is to provide clean and convenient lifelineenergy critical for their well-being to the poor even when they cannot fully pay for it.Therefore, the need for an effective and comprehensive energy policy is an urgentimperative.

In view of the above, a decision was taken by the Prime Minister and DeputyChairman, Planning Commission to set-up an Expert Committee to prepare anintegrated energy policy linked with sustainable development that covers all sources ofenergy and addresses all aspects including energy security, access and availability,affordability and pricing, efficiency and environment. The committee was constitutedon 12th August 2004 and was to submit its report within six months i.e., by 11thFebruary 2005. Given the complexity involved and wider consultation needed, the

term of the committee was extended upto 11th October 2005.

It is my pleasure and also my privilege to thank all the Members of theCommittee for their many important suggestions and sparing their valuable time forfinalisation of this report.

I am also thankful to the officers and staff of the Power & Energy Division fortheir contributions in the preparation of this report, particularly Shri Surya Sethi,Member-Secretary of the Committee, for his many ideas, contributions and help indrafting the report and ensuring consistency and clarity. Dr. A. Mohan, S/ShriR.C. Mahajan, M. Satyamurty, R.K. Kaul, I.A. Khan, B. Srinivasan, Rajnath Ram and

Dr. M. Govinda Raj provided many inputs and support.

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

Finally I want to thank Shri Sanjay Vasnik for diligently, carefully andcheerfully typing many drafts of the report.

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

Planning Commission &Chairman, Expert Committee on Integrated Energy Policy

Dated: 21.12.2005

i


5/153

In Summary

India faces formidable challenges in meeting its energy needs andproviding adequate energy of desired quality in various forms to users in a

sustainable manner and at reasonable costs. India needs to sustain a 8% to 10%economic growth to eradicate poverty and meet its economic & humandevelopment goals. Such economic growth would call for increased demand forenergy and ensuring access to clean, convenient and reliable energy for all toaddress human development. To deliver a sustained growth of 8% through 2031,India would, in the very least, need to grow its primary energy supply by 3 to 4times and electricity supply by 5 to 7 times of todays consumption. By 2031-32power generation capacity would have to increase to 778095 MW and annualcoal requirement would be 2040 mt, if we dont take any measures to reducerequirement. Along with quantity the quality of energy supply has to also improve.The energy challenge is of fundamental importance to Indias economic growth

imperatives.

The broad vision behind the energy policy is to reliably meet the demandfor energy services of all sectors including the lifeline energy needs of vulnerablehouseholds, in all parts of the country, with safe and convenient energy at theleast cost in a technically efficient, economically viable and environmentallysustainable manner. Assured supply of such energy and technologies at all timesconsidering the shocks and disruption that can be reasonably expected isessential to providing energy security to all. Meeting this vision would require thatIndia pursues all available fuel options and forms of energy, both conventionaland non-conventional, as well as new and emerging technologies and energysources. Coal shall remain Indias most important energy source till 2031-32 andpossibly beyond. India will need to take a lead in seeking clean coal technologiesand, given its growing demand, new coal extraction technologies such as in-situgasification to tap its vast coal reserves that are difficult to extract economicallyusing conventional technologies.

The approach of the Committee is directed to realise cost-effective energysystem. For this the following are needed:

(i) Markets that promote competition.

(ii) Pricing and resource allocation to take place under market forcesunder an effective and credible regulatory oversight, as far aspossible.

(iii) Subsidies to be transparent and targeted.(iv) Improved efficiencies across the energy chain.(v) Policies that reflect externalities of energy consumption.(vi) Policies that rely on incentives and which are implementable.

A competitive market without any entry barriers is theoretically the mostefficient way to realise optimal fuel and technology choices for extraction,conversion, transportation, distribution and end use of energy. The tax structure

and regulation across energy sub-sectors should be consistent and institutionalarrangements should provide a level playing field to all players. Social objectives

ii


6/153

should be ideally met through direct transfers. Environmental externalities shouldbe treated uniformly and internalised, as far as possible, under the polluter paysprinciple. An energy market with the foregoing features would minimise marketdistortions and maximise efficiency gains. An integrated energy policy is neededto ensure that energy availability does not become a constraint on Indias

economic growth and competitiveness.

While the medium to long-term challenges of ensuring competitive energysupplies are formidable, the immediate problem of power and coal shortages alsorequire policy actions. The policy recommendations have addressed theimmediate as well as the medium to long-term issues.

Some key recommendations are summarised below:

(i) Coal Shall Remain Indias Primary Energy Source till 2031-32, Currentshortages are a concern:

(a) Coal accounts for over 50% of Indias commercial energy

consumption and some 78% of domestic coal production isdedicated to power generation. Since prices were de-controlled, thesector has become profitable primarily as a result of price increasesand the rising share of open cast production. The present shortagecan be addressed by encouraging imports which are also neededfrom a longer-term perspective. Thus we need to facilitate coalimports and create the needed infrastructure. Imports also put acompetitive pressure on domestic coal industry to be efficient.

(b) The Committee has concluded that imported coal is far more costcompetitive to imported gas for power generation especially alongthe western & southern coasts of India. Such a cost advantage islikely to continue.

(c) At the same time domestic coal production should be stepped up byallotting coal blocks to central and state public sector units and forcaptive mines to notified end users. Coal blocks held by Coal IndiaLimited (CIL) which CIL cannot bring into production by 2016-17,either directly or through joint ventures, should be made available to

other eligible candidates for development and bringing intoproduction by 2011-12.

(d) Ideally, the Coal Mines (Nationalisation) Act, 1973 should beamended to facilitate (a) private participation in coal mining forpurposes other than those specified and (b) offering of future coalblocks to potential entrepreneurs.

(ii) Power Sector Reforms must focus on control over aggregate technical andcommercial losses of state power utilities. Only financially healthy statepower utilities can sustain the growing Central and State Public Sector

Units (PSUs) and provide the needed comfort on payment security toattract private investment in the power sector at internationally competitive

iii


7/153

tariffs. To control AT&C losses the Committee recommends that theexisting Accelerated Power Development and Reform Programme(APDRP) be restructured to ensure energy flow auditing at the distributiontransformer level through automated meter reading, geographicalinformation system (GIS) mapping of the network and consumers and

separation of feeders for agricultural pumps. Investment in developing theMIS that can support full energy audit for each distribution transformer isessential to reform and reduction in AT&C losses. This will fixaccountability and provide a baseline which is an essential prerequisite toprivatisation. The revised APDRP would provide incentives to SEBs linkedto performance outcomes and would also include incentives to staff forreduction in AT&C losses.

The Committee also recommends that a liberal captive and group captiveregime foreseen under the Electricity Act 2003 be realised on the ground.Indias liberal captive regime would not only derive economic benefits from

availability of distributed generation but also set competitive wheelingcharges to supply power to group captive consumers. This will pave theway for open access to distribution networks. This will facilitate privategeneration that limits its interface with the host utility to merely use of thedistribution network for a fee and thus can be realised even before AT&Closses are reduced. However, to achieve these objectives, the Committeefeels that it is essential to separate the cost of the pure wires business(carriage) from the energy business (content) in both transmission &distribution. Electricity Act 2003 recognises such separation for thetransmission sub-segment. Separation of content from carriage in thedistribution sub-segment, however, is foreseen only through the provisionof open access. The wires business within the distribution sub-segment isalso a natural monopoly and must be regulated as proposed under (iii) (e)below. Further, introduction of ABT and the upgrading of State LoadDespatch Centres to the technological level of Regional Load DespatchCentres will have to be realised.

(iii) Reduce Cost of Power: In terms of purchasing power parity, power tariffsin India for industry, commerce & large households are among the highestin the world. A number of measures are suggested to reduce cost ofpower.

(a) The Government Policy should seek to ensure that all generation &transmission projects started in the 11th Plan & beyond should becompetitively built on the basis of tariff based bidding under aprescribed price cap.

(b) Where a cost plus regime cannot be avoided and the payments areguaranteed by the Government of India (GOI) the internal rate ofreturn on total capital employed should bear a reasonablerelationship to the long-term government bond coupon at the time ofthe approval.

iv


8/153

(c) Government should seed the capital markets to develop marketbased instruments that effectively extend the tenure of debtavailable to power projects to say 20 years. This will reduce thecapacity charge in the earlier years and spread it more evenly overthe life of the project.

(d) Standardise the unit size and invite global tenders for 20 to 30 unitsto get substantial bulk discount.

(e) Distribution should be bid out on the basis of a distribution marginor paid for by a regulated distribution charge determined on a costplus basis including a profit mark up similar to that paid under (b)above.

(iv) Rationalise Fuel Prices: Relative prices play the most important role inchoice of fuel and energy form. They are thus the most vital aspect of

Integrated Energy Policy that promotes efficient fuel choices and facilitatesappropriate substitution. In a competitive set up, the marginal use value ofdifferent fuels, which are substitutes, is equal at a given place and timeand the prices of different fuels at different places do not differ by morethan the cost of transporting the fuels. Then the resulting inter-fuel choiceswould be economically efficient.

Prices of different fuels should not be set independently of each other. Asa general rule, all commercial primary energy sources must be priced attrade parity prices at the point of sale. This means FOB price for productsfor which the country is a net exporter and CIF price for which it is a netimporter. This principle is extremely relevant for the petroleum sectorwherein bulk of the crude is imported and India is fast becoming a netexporter of petroleum products. The only legitimate alternative to tradeparity prices in the petroleum sector is to permit full price competition atthe refinery gate and the retail level. To provide a cushion against thevolatility of prices on the international market, FOB or CIF prices, can beset on the basis of median prices over a month or three months.

Coal prices should ideally be left to the market and trading of coal,nationally and internationally, should be free. Only a competitive free

market can do an efficient job of price determination. A competitive marketrequires that there are multiple producers and that there are no entrybarriers to new producers or to imports. Steps to achieve these objectivesfor the coal market are summarised in paragraph (i) above. Pending thecreation of such a competitive market independent regulation of coalprices becomes essential.

Natural Gas is a non-tradable commodity in the absences of significantinvestments in pipelines or, alternatively, in liquification, cryogenic shipping& regasification. Thus the natural gas price can be determined throughcompetition among different producers (this presumes multiple sources

and a competitive supply-demand balance) or independently regulated ona cost plus basis including reasonable returns (where competing supply

v


9/153

sources are absent and/or demand exceeds available supply). Anotheroption could be to price gas on a net-back-basis. Should a scenariowherein gas becomes 15%-20% of Indias energy mix materialise by 2031-32; some 60% to 80% of the gas supply would be used for powergeneration. This would mean that beyond the level of gas consumption in

the fertiliser, petrochemical, automotive and domestic sectors gas mustcompete with coal, the key alternative for power generation. A competitivecoal market is thus important for setting a proper price of natural gas on anet-back-basis. An alternative to pricing domestic gas could be the netrealisation of the domestic natural gas producer after investing and gettinga return on the infrastructure needed to make the natural gas tradableacross borders.

Central and State taxes on commercial energy supplies need to berationalized to yield optimal fuel choices and investment decisions.Relative prices of fuels can be distorted if taxes and subsidies are not

equivalent across fuels. The equivalence should be in term of effectivecalorie. In other words they should be such that producer and consumerchoices as to which fuel and which technology to use are not affected bythe taxes and subsidies.

Environmental taxes and subsidies, however, are levied to affect choices.Differential taxes can be justified here if they appropriately reflectenvironmental externalities. A consistent application of polluter paysprinciple or consumer pays principle should be made to attainenvironmental objectives at least cost.

(v) Energy Efficiency and Demand Side Management: Lowering energyintensity of GDP growth through higher energy efficiency is key to meetingIndias energy challenge & ensuring its energy security. Indias energyintensity of growth has been falling and is about half what it used to be inthe early seventies. Currently India consumes 0.19 kilogram of oilequivalent per dollar of GDP expressed in purchasing power parity terms.This is equal to the energy intensity of the OECD and better than the 0.21kilograms of China, 0.22 kilograms of the US and a World average of 0.21.However, there are several countries in Europe at or below 0.12 withBrazil at 0.14 and Japan at 0.15. Thus, clearly there is room to improve

and energy intensity can be brought down significantly in India with currentcommercially available technologies.

India would need to and must succeed in achieving much lower energyintensity compared to its current level. Lowering energy intensity throughhigher efficiency is like creating a virtual source of untapped domesticenergy. It may be noted that a unit of energy saved by a user is greaterthan a unit produced, as it saves on production losses, as well astransport, transmission and distribution losses. Thus a Negawatt,produced by reducing energy need saves more than a Megawattgenerated. The Committee feels that upto 25 percent reduction in Indias

energy intensity is possible over current levels.

vi


10/153

Efficiency can be increased in energy extraction, energy conversion,energy transportation, as well as in energy consumption. Further, thesame level of service can be provided by alternate means requiring lessenergy. The major areas where efficiency in energy use can make asubstantial impact are mining, electricity generation, electricity

transmission, electricity distribution, pumping water, industrial productionprocesses, haulage, mass transport, building design, construction, heatingventilation & air conditioning, lighting and household appliances. As theIndian economy opens up to international competition, it would have tobecome more energy efficient. This is well demonstrated by Indias steel &cement industry. However, the Committee recommends the followingpolicies, some of which can be implemented through voluntary targetsundertaken by industry associations as opposed to through externaldictates and enforcement.

(a) The Petroleum Conservation Research Association (PCRA) should

be merged with Bureau of Energy Efficiency (BEE) that is seen asan autonomous statutory body under the Energy Conservation Act.The merged entity should endeavour to achieve financialindependence through energy savings it helps generate & may alsotap financial support from key industry players with an interest inIndias energy sector.

(b) Increase coal use efficiency in power generation from the currentaverage of 30.5 percent to 39 percent for all new plants.

(c) Require a least cost planning approach providing level playing field,in the very least, to Negawatts and Megawatts so that regulatorspermit same return on a watt saved as on the investment needed tosupply an additional watt.

(d) Promote urban mass transport, freight movement by railways, andenergy efficient vehicles. Enforce minimum fuel efficiency,standards for all vehicles.

(e) Force the pace of energy efficiency improvement in energy usingappliances and equipment and incentivise through golden carrotswhich give substantial rewards to the firm which firstcommercialises equipment that exceeds energy efficiency target.

(f) Enforce truthful labelling with major financial repercussions ifequipment fails to deliver stated efficiencies. In extreme cases

resort to black listing of errant suppliers at consumer informationweb sites and for government procurement.(g) Promote minimum life cycle cost purchase instead of minimum

initial cost procurement by government and public sector.(h) Annual audits must include energy audits for all specified energy

intensive industries and industries with a turnover exceeding sayRs.100 crores.

(i) Establish benchmarks of energy consumption for all energyintensive sectors.

(j) Disseminate information, support training and reward best practiceswith national level honours in energy efficiency & energy

conservation.

vii


11/153

(k) Institute specialisations in energy efficiency/energy conservation inall technical colleges and commence certification of such experts.

(vi) Augmenting Resources: Indias energy resources can be augmented till2031-32 by exploration to find more of coal, oil and gas, or by recovering a

higher percentage of the in-place reserves. Developing the thorium cyclefor nuclear power and exploiting non-conventional energy, especially solar,offer possibilities for Indias energy independence beyond 2050.

At a growth rate of 5% in domestic production, currently extractable coalresources will be exhausted in about 40 years. However, only about 45%of the potential coal bearing area has currently been covered by regionalsurveys. Further, it is felt that both regional as well as detailed drilling canbe made more comprehensive. Covering all coal bearing areas withcomprehensive regional & detailed drilling could make a significantdifference to the estimated life of Indias coal reserves. Finally, Indias

extractable coal resources can be augmented through in-situ coalgasification which permits using coal deposits which are at greater depthor not easily extracted by conventional methods. Similarly extracting coalbed methane before and during mining can augment the countrys energyresources. Again, enhanced oil recovery and incremental oil recoverytechnologies can improve the proportion of in-place reserves that can beeconomically recovered from abandoned/depleted fields. Finally, isolateddeposits of all hydro carbons including coal may be tapped economicallythrough sub leases to the private sector.

(vii) Role of Hydro and Nuclear: It is seen that even if India succeeds inexploiting its full hydro potential of 150,000 MW, the contribution of hydroto the energy mix would be around 5-6%. Similarly, even if a 20-foldincrease takes place in Indias nuclear power capacity by 2031-32, thecontribution of nuclear energy to Indias energy mix is also, at best,expected to be 5-6%.

Though its contribution to energy requirement is small, hydro electricitysflexibility and suitability as a peaking power make it valuable. Moreover,hydro development especially storage schemes are critical for India asIndias per capita water storage is the lowest among all its comparators.

Creating such storages is critical to Indias water security, flood control anddrought control.

Nuclear, on the other hand, theoretically offers India the most potentmeans to long-term energy security. India has to succeed in realising thethree-stage development process described in the main report and therebytap its vast thorium resource to become truly energy independent beyond2050. Continuing support to the three-stage development of Indiasnuclear potential is considered essential.

(viii) Role of Renewables: From a longer-term perspective and the need to

maximally develop domestic supply options as well as the need to diversifyenergy sources, renewables remain important to Indias energy sector. It

viii


12/153

would not be out of place to mention that solar power could be animportant player in India attaining energy independence in the long run.Even with a concerted push of 20-fold increase in capacity, renewablescan account for around 5-7% of Indias energy mix by 2031-32. While thisis small, the distributed nature of renewables can provide many social

benefits.

Subsidy for renewables may be justified on several grounds. A renewableenergy source may be environmentally benign. It may be locally availablemaking it possible to supply energy earlier than a centralized system. Gridconnected renewables could improve the quality of supply and providesystem benefits by generating energy at the ends of the grid whereotherwise supply would have been lax. Further, renewables may provideemployment and livelihood to the poor. However, the subsidies should begiven for a well-defined period or upto a well-defined limit and should belinked to outcomes (energy generated), and not just outlays (capacity

installed).

The Committees approach to policy for promoting renewables is to linkincentives to outcomes as far as possible. Even when a capital subsidy isneeded, it should be linked to outcomes.

Power Regulators must create alternative incentive structures such asmandated feed-in-laws or differential tariffs to encourage utilities tointegrate wind, small hydro, cogeneration etc. into their systems. A subsidycould also be given in the form of a Tradable Tax Rebate Certificates(TTRC) based on energy generated. The rebate claim becomes payabledepending upon the amount of electricity/energy actually certified ashaving been supplied.

An annual renewable energy report should be published providing detailsof actual performance of different renewable technologies at the state andnational level. This would include actual energy supplied from differentrenewable options, availability, actual costs, operating and maintenanceproblems etc. It should also report on social benefits, employment created,women participation and empowerment.

Policies for promoting many specific alternatives are suggested in themain text. These include fuel wood plantations, bio-gas plants, woodgasifier based power plants, solar thermal, solar water heaters, solarphotovoltaics, bio-diesel and ethanol.

It is also recommended that Indian Renewable Energy DevelopmentAgency Ltd (IREDA) be converted into a national refinancing institution onthe lines of NABARD/National Housing Bank (NHB) for the RenewableEnergy Sector. IREDAs own equity base can be expanded by the financialinstitutions of the country instead of continuing the current system of GOIsupport.

ix


13/153

(ix) Ensuring Energy Security: Indias energy security, at its broadest level,has to do with the continuous availability of primary commercial energy atan affordable price. Reducing energy requirement and increasing energyuse efficiency are the most important measures to increase energysecurity. However, it is still necessary to recognise that Indias growing

dependence on energy imports increases uncertainty regarding availabilityof energy at affordable prices.

How do we deal with this supply risk? The threat to energy security arisesnot just from the uncertainty of availability and price of imported energy,but also from the possible disruption or shortfalls in domestic production.Supply risk from domestic sources, such as from a strike in Coal India orRailways, also needs to be addressed. Even if there is no disruption ofsupply there can be the market risk of a sudden increase in oil price.Again, even when the country has adequate energy resources, technicalfailures may disrupt the supply of energy to some people. Generators fail,

transmission lines trip or oil pipeline may spring a leak. One needs toprovide security against such technical risks. Risks can be reduced byreducing the requirement of energy by increasing efficiency in productionand use of energy; by substituting imported fuels by domestic fuels; bydiversifying fuel choices (gas, ethanol, orimulsion tar sands etc.) andsupply sources; and by expanding domestic energy resource base. Riskscan also be dealt with by increasing ability to withstand supply shocks;ability to import energy and face market risk; and providing redundancy toaddress technical risks.

The policy recommendation include maintaining a strategic reserve for 90days of oil imports and/or buying options for emergency supplies fromneighbouring large storages such as those available in Singapore. TheCommittee, however, felt that obtaining equity oil, coal and gas abroad, donot represent adequate strategies for enhancing energy security beyondthe fact that they help diversify supply sources. In contrast, pipelines forimporting gas do enhance security of supply if the supplying countrymakes a major investment in the pipeline. The most critical elements ofour energy security, however, remain the measures suggested herein toincrease efficiency, reduce requirements and augment the domesticenergy resource base.

(x) Boosting Energy Related R&D: India would find it increasingly harder toimport the required commercial energy as Indias share of the incrementalworld supply of oil & gas could be as high as 20% since its demand isgrowing faster than that of industrialised nations. Research andDevelopment (R&D) in the energy sector is critical to augment our energyresources, to meet Indias long-term energy needs, to attain energyindependence, to promote energy efficiency and to enhance our energysecurity. R&D requires sustained and continued support over a long periodof time.

Energy related R&D has not got the resources that it needs. India needs tosubstantially augment the resources for energy related R&D and to

x


14/153

allocate these strategically. To take an innovative idea to a commercialapplication involves many steps. Basic research leading to a fundamentalbreakthrough may open up possibilities of applications. R&D is needed todevelop the concept and to prove its feasibility. This needs to be followedup by a working model at laboratory scale. Scaling up to a pilot project

follows if the economic potential looks attractive keeping in mind costreductions that could be achieved through better engineering and massproduction. Demonstration project, economic assessment and further R&Dto make the new technology acceptable and attractive to customers isrequired before commercialisation and diffusion can take place. Some keypolicy initiatives relevant to energy related R&D are detailed below:

(a) A National Energy Fund (NEF) should be set up by levying a cessof 0.1% of the turnover of all companies engaged in the field ofprimary/secondary energy production whose annual turnoverexceeds Rs.100 crores. At 2004-05 turnover levels, this should

collect Rs.500 to Rs.600 crores per year. In order to encourage thefirms to do their own R&D a rebate of upto 80% of this cess may begiven to firms for R&D carried out in-house. The R&D priorities haveto be based on a strategic vision which is frequently updated. TheNEF should periodically commission and fund such studies.

(b) A number of technology missions should be mounted for developingnear commercial technologies and rolling out new technologies in atime bound manner. These include coal technologies (wherein Indiashould take a lead) for efficiency improvement; in-situ gasification;IGCC and carbon sequestration; solar technologies for thermal andphotovoltaics; bio-fuels such as bio-diesel and ethanol; bio-massplantation and wood gasification and community based bio-gasplants.

(c) Coordinated research and development of all stages of theinnovation chain to reach a targeted goal such as in thedepartments of atomic energy and space research are suggestedfor more efficient industrial plant, machinery & processes, efficientappliances, hybrid cars, super batteries, nuclear technologiesrelated to thorium and fusion, gas hydrates, and hydrogen

production, storage transport and distribution.

(d) The NEF could provide R&D funding in support of applications,innovative new ideas, fundamental research etc. to researchers indifferent institutions, universities, organisations and even individualsworking independently.

(xi) Household Energy Security - Electricity and Clean Fuels for All: One oftoughest challenge is to provide electricity and clean fuels to all,particularly rural populations; considering the poor paying capacity, thelimited availability of local resources for clean cooking energy and the size

of the country and its population. Yet, given the fact that women and thegirl child carry most of the burden of the drudgery of gathering fuel wood,

xi


15/153

agricultural wastes and animal dung and also bear the brunt of the indoorair pollution; the urgency to meet the challenge should be high, if we are toachieve universal primary education for girls, promote gender equality andempower women. The considerable effort spent on gathering the bio-massand the cow-dung & preparing the same for use is not priced into the cost

of such energy. These fuels create smoke and indoor air pollution and areinconvenient to use. They have adverse impact on the health of people,particularly women and children. Easy availability of a certain amount ofclean energy, required to maintain life, should be considered as a basicnecessity. Energy security at the individual level means to ensure supplyof such lifeline energy need. India cannot be energy secure if her peopleremain without secure supply of energy at affordable cost.

Even if one assumes that some 30% of Indias households are unable topay for a lifeline electricity consumption of 30 units/month and a loss levelof about 40% in delivering these 30 units, the total need for free electricity

is about 7% of the current generation. At zero cost to the consumer, thistranslates into a subsidy burden of about Rs.9,500 crores a year assumingthe infrastructure is built under RGGVY. This burden would reduce overtime as 8% GDP growth is expected to reduce poverty at a rate thatexceeds population growth. Similarly, if one assumes that the same 30%of Indian households cannot pay for a lifeline consumption of 8 cylinders ofgas per annum while another 20% can only pay for 25% of the cost ofsupply of such lifeline consumption of gas; the subsidy burden amounts toabout Rs.34,000 crores annually at Rs.450/cylinder. Again, this subsidyburden would reduce over time with economic growth.

The foregoing demonstrates that a well-directed subsidy programmetargeted at the intended beneficiary is not unaffordable for a resurgentIndia. The benefits in empowerment, health, environment and reducedpressure on deforestation and hence the water table and soil erosion arewell worth the cost even without considering the benefits from the likelyincrease in productivity of rural India. The top 5% of Indias householdscould pay for this subsidy through a cess on their incomes or a morewidely distributed cess on consumption could fund this subsidy burden.

It is pointed out that even currently over 60% of the estimated subsidy

burden is being funded, although the benefits do not reach the intendedbeneficiaries due to poor targeting. The real issue is to target the subsidyprogramme well and ensure that those falling outside the subsidy net paythe full cost of supply. A well-targeted subsidy regime may only marginallyraise the current subsidy burden. A system of lifeline tradable entitlementsdelivered through smart debit cards could potentially be the answer.

In addition to the above subsidy other actions are also needed.

(a) Finance a large scale socio-economic experiment to operatecommunity sized bio-gas plants as a commercial enterprise either

by a community cooperative or by a commercial entrepreneur, as

xii


16/153

such bio-gas plants can meet the need for clean cooking energy ofa sizable segment of the rural population.

(b) Even with subsidies for clean fuel, it may not be easy to reach cleanfuels to the poor and they may continue to use fuelwood. As part of

the above programme, improve the efficiency of domestic chullahs& lanterns from the prevailing 10-12% to 20-25% which is easilyattainable. Couple this to improving ventilation in the cooking areaof the dwellings.

(c) To reduce drudgery of those who still need to gather fuel, villagewoodlots within one kilometer should be developed. To developsustainable energy supply, Womens groups can form co-operativesfor developing and managing fuel wood or oil seed plantations withthe same efforts that they put in searching and gathering fuel woodtoday. Provide finance through self-help groups to transform

women, who are today energy gatherers into micro-entrepreneursengaged in rural energy markets and energy management.

(d) Generate electricity through wood gasifiers or burning surplus bio-gas from the community bio-gas plants. Such distributed generatorsmay be able to reach electricity to villages sooner than the grid andmay be connected to the grid with a feed-in tariff as and when itreaches the villages. This will encourage such local generation, aspeople would not wait for the grid. Cover such distributedgeneration together with the local grid under the subsidy scheme ofRGGVY. Formulate a tariff policy for such distributed generation forboth household and productive use including agriculture.

(e) For setting up of off-grid generation facilities in rural areas,organised sector can be encouraged to adopt ruralcommunity/communities in their areas of operation.

(xii) Enabling an Environment for Competitive Efficiency: Apart from pricingpolicies, an environment that allows multiple players in each element ofthe energy value chain to compete under transparent & level terms isessential to realising efficiency gains within the energy sector. Currently

the Energy Sector is dominated by large Public Sector Companies andsome sub-sectors have natural monopoly characteristics potentiallyoffering economies of scale. Given this ground reality, independent &informed regulation becomes essential to realising competitive efficiencyat least till markets develop and mature. Such regulation must in the verylast ensure that:

(a) The regulatory responsibility/functions of the State are separatedfrom the Ministries that control the Public Sector Units thatdominate the energy sector; and

xiii


17/153

(b) Till competitive markets emerge, independent regulators should fixprices or price caps to mimic competitive markets based onprinciples summarized in para (iv) above.

(xiii) Climate Change Concerns: Concern for the threat of climate change has

been an important issue in formulating the energy policy. Even thoughIndia is not required to contain its GHG emissions, as a signatory to theUN Framework Convention on Climate Change and a country where theimpact on its poor due to climate change could be serious, this policy hassuggested a number of initiatives that will reduce the green house gasintensity of the economy. These are

- Energy efficiency in all sectors- Emphasis on mass transport- Active policy on renewable energy including bio-fuels and fuel

plantations

-Accelerated development of nuclear and hydro-electricity

- Technology Missions for clean coal technologies- Focussed R&D on many climate friendly technologies

*****

With the recommendations of the Committee, India can meet her energyrequirements in an efficient, cost effective way and be on a path of sustainableenergy security.

xiv


18/153

Chapter I. The Challenges

India faces formidable challenges in meeting its energy needs and providingadequate energy of desired quality in various forms to users in a sustainable mannerand at reasonable costs. India needs economic growth for human development, whichin turn requires access to clean, convenient and reliable energy for all. For the 8% to10% growth rate that we aspire for, our energy needs will increase correspondingly.

Along with quantity the quality of energy supply has also to improve. We need clean,convenient and reliable energy. Thus the energy challenge is of fundamentalimportance. The nature and dimension of this challenge becomes clear when we look atthe energy scene in the country today.

1.1 The Energy Scene2. Per capita consumption of energy in India is one of the lowest in the world. Indiaconsumed 520 kg. of oil equivalent (kgoe) per person of primary energy in 2003compared to 1090 kgoe in China and the world average of 1,688 kgoe. Theconsumption in US was 7,835 kgoe per person. Indias energy use efficiency for

generating GDP in Purchasing Power Parity (PPP) terms is better than the worldaverage, China and the US. (See Table 1). However, it is some 50% higher thanDenmark and 50% higher than UK, Japan & Brazil. Clearly, significant reduction in theenergy intensity of growth can be achieved based on existing technologies.

Table 1: Selected Energy Indicators for 2003

Region/Country

GDP PerCapita-

PPP (US $2000)

TPES PerCapita(kgoe)

TPES /GDP(Kgoe/$-2000

PPP)

Electricityconsumption per

capita (kWh)

kWh/$-2000

PPP

China 4838 1090 0.23 1379 0.29

Australia 28295 5630 0.20 10640 0.38Brazil 7359 1094 0.15 1934 0.26

Denmark 29082 3852 0.13 6599 0.23

Germany 25271 4210 0.17 6898 0.27

India 2732 520 0.19 435 0.16

Indonesia 3175 753 0.24 440 0.14

Netherlands 27124 4983 0.18 6748 0.25

Saudi Arabia 12494 5805 0.46 6481 0.52

Sweden 27869 5751 0.21 15397 0.55

United Kingdom 26944 3906 0.14 6231 0.23

United States 35487 7835 0.22 13066 0.37Japan 26636 4052 0.15 7816 0.29

World 7868 1688 0.21 2429 0.31

TPES: Total Primary Energy SupplySource: IEA (2005), Key World Energy Statistics 2005, International Energy Agency, Paris,

http://www.iea.org3. The level of per capita Energy Consumption is a good indicator of the level ofeconomic development as seen from Figure 1 where per capita energy consumption isplotted against per capita Gross Domestic Product (GDP). Figure 2 shows the
http://www.iea.org/http://www.iea.org/


19/153

importance of per capita electricity consumption to the level of economic development.Figures 1 and 2are plotted on logarithmic scale and thus their slopes indicate elasticityof per capita energy use w.r.t. per capita GDP i.e., per cent change in per capita energyfor every per cent change in per capita GDP.

Figure 1Total Primary Energy Supply (TOE) Per Capita (2003) vs. GDP Per Capita (PPP US$2000)

5

15

25

10

T

PESpercapita

1 0 0 0 0 2 0 0 0 0 3 0 0 0 0 4 0 0 0 0G D P p e r c a p i ta

Data Source: IEA (2005)

Figure 2Kilo Watt Hours of Electricity Per Capita vs. GDP Per Capita (PPP US$2000)

30000

10000

2

KWHpercapita

1 0 0 0 0 2 0 0 0 0 3 0 0 0 0 4 0 0 0 0G D P p e r c a p ita

Da ource: IEA (2005)ta S


20/153

3

ctricity Consumption Per Capita in 2002

4. If we look at the consumption of electricity, one of the most convenient forms ofenergy, we see that per capita consumption in India is way below that in other countries.Moreover, access to electricity is very uneven. Even though 85 percent of villages areconsidered electrified, around 57 percent of the rural households and 12 percent of theurban households i.e., 84 million households in the country (over 44.2% of households)did not have electricity in 2000. Improvement in human development is also stronglyassociated with access to electricity. In Figure 3, the Human Development Index (HDI)

which is calculated from literacy rate, infant mortality rate and per capita GDP (UNDP,2004) is plotted against per capita electricity consumption.

Figure 3Human Development Index (HDI) vs. Ele

0.3

0.35

0.4

0.45

0.5

0.55

0.6

0.65

0.7

0.75

0.8

0.85

0.9

0.95

1

0 1500 3000 4500 6000 7500 9000 10500 12000 13500 15000 16500 18000 19500 21000 22500 24000 25500 27000 28500 30000

Electricity consumption per capita (KWh)

HDI

India

Note: HDI for India 0.595 and Electricity per capita consumption 561 kWhrs.Data Sources: United Nations Development Programme(UNDP-2004) and IEA (2004)

5. Even those who have access to electricity suffer from shortages and poor qualityof supply. Unscheduled outages, load shedding, fluctuating voltage and erratic

bear a large burden of this pooruality of supply. Motors are over designed and consume more electricity. Voltage

shortage varies fromtate to State. In 2004 the peak shortage varied from 0 to 25.4 percent with all India

average of 11.7 percent. Similarly ene ge also varied from 0 to 20.1 percentwith all Ind scheduledcuts, reported load shedding and frequency corrections. However, unscheduled outagesand low voltage supplies are not included.

frequency are common. Consumers and the economyqstabilisers are needed for most expensive equipment. Diesel generators provide backuppower to industrial and commercial consumers. Inverters to tie over power outages areubiquitous in city homes. Equipment often gets damaged. Motors, compressors andpumps get burnt out often. And of course idle manpower and loss in production whenpower supply is interrupted add to the costs. The extent of powerS

rgy shortaia average of 7.3 percent (Figure 4). These shortages include


21/153

4

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

5

0

Gujarat

Punjab

Meghalaya

U.PM.P

M

aharashtra

Tripura

J&K

Haryana

Rajasthan

Chattisgarh

Uttaranchal

Assam

Karnataka

Nagaland

W.B&Sikkim

Mizoram

A.P

Delhi

Jharkhand

Ar.Pr.

Kerala

Tamilnadu

H.P

Manipur

Orissa

Goa

10

15

20

25

30

Peak Deficit Energy Deficit

Data source: Central Electricity Authority (CEA), 2005

6. Availability based tariffs (ABT) and unscheduled interchange of power introducedin 2003 for inter-state exchange of power have reduced voltage and frequencyuctuations. They are still, however, not as stable as one would like. Figure 5showsfl

improvement in frequency fluctuation. Excepting for the Northern region frequency waswithin normal band for more than 98 percent of the time 2004-05.

Figure 5Percentage of time Frequency in Normal Band (49.0-50.5Hz)

Source: Powergrid Corporation of India

0.00

10.00

1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

YEAR

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

%O

FTIME

20.00

NorthernRegion Western Region Southern Region Eastern Region

POST ABT /

ULDCPRE ABT /

ULDC


22/153

5

electricity boards, SEBs, remain financiallyick, and hence, unable to adequately meet their investment needs on their own orttract private capital to do so.

distribution segment and an inadequateansmission network wherein power cannot be easily moved from surplus areas to

n.

7. The power capacity has risen at the rate of 5.87% per annum over the last 25years. The total supply of electrical energy has risen at the rate of 7.14% over the sameperiod. This reflects the gradual improvement in the average Plant Load Factor (PLF)that stood at 74.8% in 2004-05. Consumption is constrained by supply and powershortages continue to plague the country. The shortages and poor quality of power arethe outcome of inadequate investments primarily in distribution & transmission.Generation has attracted bulk of the investment both at the Centre & the State level.

Aggregate technical and commercial (AT&C) losses which include theft, billing &collection inefficiency, and transmission and distribution losses, exceed 40% for thecountry as a whole. Consequently the statesa8. The Ministry of Power has set a target of adding a 100,000 MW of generationcapacity by 2012. This capacity addition programme includes the 41,110 MW proposedto be added in the 10th Plan. The capacity addition programme is designed to ensureavailability of reliable and quality power and the creation of an adequate reserve margin.The track record so far shows that plan targets have never been met. Even in the 10thPlan, the likely capacity addition will be under 31,000 MW. Further, the generationcapacity created does not have the desired mix of peaking, intermediate and base loadstations. Finally, the history of emphasis on generation investment results in loadingmore and more power on a broken downtrareas with a deficit. Industrial and commercial establishments have been forced to seekcaptive and standby generation to meet demand or provide quality supply on a 24X7basis to support critical processes and provide peaking support. There is good reasonto believe that over 40,000 MW of captive and standby capacity is in place. Thehousehold sector is managing with the help of inverters.

9. The sector is dominated by large state monopolies both at the Centre and theState level. Over 88.44% of the utility based generation is in the Public Sector whiletransmission is almost entirely in the Public Sector. Private distribution is limited toOrissa, Delhi and pockets of West Bengal, Maharashtra, Gujarat & U.P. A non-levelplaying field permeates the market place wherein the Central & Public Sector Units getguaranteed post-tax returns of 14/16% with full payment guarantee backed by the GOI.The state owned utilities are given zero or low returns by the Regulators who are underconstant pressure not to raise tariffs which are the highest in the world in PPP terms forthe paying industrial, commercial and household consumers. The financially sick StateSector Units are thus unable to invest on their own and remain a poor credit risk forprivate suppliers of energy. This reality has led to a growth driven by Central PublicSector Units (CPSUs) which is clearly unsustainable in the long-run since their onlycustomer is bankrupt. Massive investments required in distributions are unlikely to yieldadequate returns in the current set-up. The Government & the Regulators are strugglingto put in place an enabling environment and a Regulatory Framework that would nurturecompetition in each element of the Electricity Value Chain and yield the necessaryefficiency gains through such competitio


23/153

6

ctured ton outcome driven programme based on monitorable targets against established

aselines. Privatisation of distribution was also tried in Orissa and Delhi as anlternative but the results are, at best, mixed.

1. The power tariffs are structured on the basis of industrial and commercial usersross-subsidising agricultural and domestic power consumption. The agricultural sectorsupplied un-metered power and the farmers pay a highly subsidised lump sum based

n the declared horse power of their pumps. This leads to a zero marginal cost of powerhich promotes inefficient use and over exploitation of ground water. The domestic

sector also has a range of subsidies ba vel of consumption including a heavilysubsidised po ising cost ofsupply the burden of the cross disproportionately loaded onthe paying industrial, commercial & large household consumption. The tariff structurecreated incentive to the high paying consumers to pilfer power under the cover provided

lobby hastubbornl vernments partially compensate the SEBs forubsidy given to farmers and other specified consumers, AT&C losses have to be borne

n if such practices could have been justified in the formative years,

umption categories that gives them incentive to use power efficiently and thatrrests pilferage is very critical for a healthy power sector. The process of power sectorforms started in 1992 is still continuing. Despite some progress, the power sector has

10. APDRP was aimed at supporting distribution reforms through investments andincentives by strengthening sub-transmission and distribution network in the states toreduce the aggregate AT&C loss level and encourage efficiency improvements inmetering, billing and collection. The performance of APDRP, thus far, has fallen short ofthe promise held out in support of the programme. A total investment of only Rs.6,709crore has been realised in first three years of APDRP. APDRP has to be restrua

ba1cisow

sed on leorest segment which pays a lump sum monthly charge. With r

subsidy increased and was

by unmetered power. The habit of stealing power is now widespread. A vested interests been created and what is euphemistically called AT&C losses remainy high. While some state go

sby SEBs. Evenecessary corrective measures were not taken on the basis of the experience gatheredover subsequent years of operation. An effective way to subsidise farmers and certainother consaresome ways to go before becoming a competitive and efficient at meeting demand withquality power and being able to attract investments needed to keep up with the growingdemand on commercially viable terms.

12. The majority of Indias people use traditional fuels such as dung, agriculturalwastes and firewood for cooking food. These fuels cause indoor pollution. The 1999-2000 National Sample Survey (NSS) 55th round revealed that for 86 percent of ruralhouseholds the primary source of cooking energy was firewood and chips or dung cake.In urban areas too more than 20% households relied mainly on firewood and chips.Only 5 percent of the households in rural areas and 44% households in urban areasused LPG. Kerosene is used by 22% of urban households and only 2.7% of ruralhouseholds for cooking. Other primary source of cooking energy used by urban andrural household cover coke & charcoal, gobar gas, electricity and other fuels.


24/153

Figure 6Distribution of Households by Primary Source of Energy

Used for Cooking- India

7

0.00

0.20

0.40

0.60

0.80

N S S 5

R oun R ou

ural an

Household

1.00

Others

LP G

D un g C ake

F ire d Cw ood an h ips

N S S 50 th

R ound

5th

d

N S S 50 th

nd

N S S 55 th

Round

R U rb

N o ar tc oo kin g ra ng em e n

Sou (2001): Energy us In ou d 19 000 . NSS 55th Round,No. 464 (55/1. Nat Sa

, 2001.

13. Fi t much change has taken place in rural areas since the50th round of NSS (1994-95) whereas in urban households use of LPG has nearlydoubled.

14. Use of traditio ion and the cost of

gathering them impose a heavy burden on people particularly women and girls. Theneed to gather fuels may deprive the girl child from schooling. Use of such fuels,overtime, increases the risks of eye infections and respiratory diseases. Lack of accessto clean and convenient energy impacts the health of women & the girl child moreadversely as they spend more time indoors and are primarily responsible for cooking.Womens micro-enterprises (an important factor in household income, as well as inwomens welfare and empowerment), are heat-intensive (food processing), labour-intensive, and/or light-intensive (home industries with work in evenings). The lack ofadequate energy suppliesand other coordinated supportaffects womens ability touse these micro-enterprises profitably and safely. Furthermore, women often faceadditional barriers in making best use of available opportunities and obtaining improved

energy services. There are social and practical constraints related to ownership and

decision-makingand training. Th den of traditional fuels is some Rs.300 billion(SeeBox). An energy policy responsive to social welfare must address this fact. It is

fuelwood and ot

rce: NSSO ed by dian H sehol 99-2 ReportGovt. of India, August

0/6), ional mple Survey Organisation (NSSO),

gure 6shows that no

nal fuels for cooking with the attendant pollut

control over productive resources, women are typically excluded/marginalised fromand suffer barriers related to illiteracy, lack of exposure to informationus, the economic bur

estimated that in Rural North India 30 billion hours are spent annually in gatheringher traditional fuels.


25/153

8

15. The total qu Table 2 gives the

nsumption in India (July 1999 June 2000)Physical Units MTOE

antities of traditional fuels used are substantial.data on household energy use. The bio-mass based fuels dominate particularly in ruralareas. In rural areas they are used by households in all consumer expenditurecategories (See Figure 7). This means that their use would not wither away witheconomic growth.

Table 2: Household Energy CoFuel Type Rural Urban Total Rural Urban Total

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

Electricity (BkWh) 40.76 57.26 98.02 3.51 4.92 8.43

Dung Cake (Mt.) 132.95 8.03 140.98 27.92 1.69 29.61

Kerosene (M.ltrs) 7.38 4.51 11.89 6.25 3.82 10.07

Co 1.20 1.54 2.74 0.49 0.63 1.12al (Mt.)

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

Sn, Ministry of Statistics and Programme Implementation,

Government of India

Figure 7Pattern of Household Energy Consumption

ource: Derived from NSS 55th Round, (July 1999-June 2000) data, National SampleSurvey Organisatio

Figure 7(a): Monthly Per capita Household Consumption PatternRural India, 2000

0

2

4

6

8

10

12

14

16

18

20

0-225 225-255 255-300 300-340 340-380 380-420 420-470 470-525 525-615 615-775 775-950 950-1100 1100-

1300

1300-

1600

1600+

Monthly Per capita Consumption Expenditure (MPCE) Classes

InKGOE

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

Data Source: NSS 55th Round, (Ju une 2000), National Sample Survey

O Implementation,Government of India

ly 1999-J

rganisation, Ministry of Statistics and Programme


26/153

Figure 7(b): Monthly Per capita Household Consumption Pattern

Urban, India, 2000

0

2

4

6

8

10

12

14

0-300 300-350 350-425 425-500 500-575 575-665 665-775 775-915 915-

1120

1120-

1500

1500-

1925

1925-

2500

2500-

3000

3000-

3500

3500+

Monthly Per capita Consumption Expenditure (MPCE) Classes

InKGOE

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

Data source: NSS 55th Round, (July 1999-June 2000), National Sample Survey

Organisation, Ministry of Statistics and Programme Implementation,Government of India

The Burden of Traditional Fuels in Rural India

A study based on an integrated survey covering 15, 293 rural households (HHs) from 148 villages india shows the importance of clean fuels., expenditure on health and person days

Risk from all respiratory diseases and eye diseases increases with length of use of bio-fuels.

three states of Rural North India and one state in South Inymptoms of diseases related to both air and water pollutionS

lost, demographic and socio-economic information, measurements of air quality in the kitchen, outsidethe kitchen and the home were collected. Indicators for lung functions (Peak Expiratory Flow) weremeasured for most of the adults present at the time of the survey. The doctors examined a sub-sampleof individuals for confirmation of diseases.

The study estimated that

96% of households (HHs) use bio-mass energy, 11% use kerosene and 5% use LPG for

cooking. Most of them however use multiple fuels. Forests contribute 39% of the fuelwood need.

314 million tonnes of bio-fuels are gatheredannually.

85 million households spend 30 billion hours annually in fuelwood gathering.

Respiratory symptoms are prevalent among 24 million adults of which 17 million have serioussymptoms.

5% of Adults suffer from Bronchial asthma, 16% from Bronchitis, 8.2% from Pulmonary TB and7% from Chest infection.

9

Total economic burden of dirty bio-mass fuel was estimated to be Rs.299 billion. This consisted ofopportunity cost of time lost in gathering fuel, working days lost due to eye infection and respiratorydiseases and cost of medicine.

As women are the primary sufferers of the adverse impact of use of bio-mass fuels, there is a closelinkage between gender and energy. Gender and energy issues have remained on the periphery ofenergy policy, and require greater attention and backing.

Source:Parikh Jyoti et al (2005)*

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


27/153

10

6.01 mt ofrude oil products including refinery fuel. At the same time, domestic production of

crude oil has been between 30.3 mt to 33.86 mt (See Figure 8). Not only the domesticproduction has st n 700 MMT and50 MMT during this period. The total reserves were 739 MMT in 1990-91 & were

estimated to be 733 MMT in 2003-04. The proved reserves to production (R/P) ratio

were 22 in 2003-04. We now import 72.2% of our consumption and our importdependence is growing rapidly. This raises serious concerns about Indias energysecurity, our ability to obtain the oil it needs and the impact on the economy ofconstrained supply and the consequent increase in oil prices in the world markets.

Figure 8Domestic Consumption & Production of Crude Oil

16. Our consumption of petroleum products is increasing at the rate of 3.8% perannum during 2002-2004. In 2003-04, net of exports, India consumed 11c

agnated, reserves of oil have been hovering betwee7

0.26 0.456.828.29

0

1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

Years (1951-2004)

(Production and Consumption Figures Pertain to the Year Ending of the Concerned FinancialYear)

10.5119.14

57.75 33.37

3.46

106.97

116.01

20

60

80

100

120

140

illionTonnes

33.0232.2632.4340M

Domestic Crude Oil Production Domestic Crude Oil Consumption.

Data source: Ministry of Petroleum & Natural Gas

17. Till 1997, oil and gas exploration was mainly done by public sector firms.Progressive liberalisation of exploration, licensing policy has attracted some private and

foreign firms. The success of these explorations has been marginal in enhancing oilreserves. However, some sizeable gas reserves amounting to 680 mtoe (176 mtoeclaimed by Reliance & 504 mtoe claimed by Gujarats State Petroleum Corporations(GSPC) have been reported recently. More work is needed to estimate the extractableotential. Despite one of the most liberal exploration licensing regimes, India has failedp

to attract any oil majors to explore in India. This might be an indication of theirassessment of the potential in the Indian Sedimentary basins since typically theygenerally prefer to work large fields. Given the rising preference for gas as a fuel andfeedstock, India is also seeking to significantly raise gas imports through LNG and


28/153

11

539,475 to 5,717,456,uses from 93,907 to 552,899 and trucks from 343,000 to 2,088,918 over the period

Figure 9Growth of Transport Vehicles and Two Wheelers

in becoming a refining hub is not immediately clear.

Trans-National gas pipelines. Oil diplomacy is currently seen as a major tool forensuring Indias energy security along with acquisition of equity oil & gas overseas.

18. The total demand for petroleum products has grown at the rate of 5.4% perannum between 1980-81 and 2003-04. However, the demand growth has moderated to2.8% per annum over the last five years (2000-012004-05). Demand for petrol anddiesel has grown at 7.4% and 5.7% per annum respectively between 1980-81 and

2003-04. This is the outcome of growth of personal motorised transport and the rise inshare of road haulage. The numbers of two-wheelers have grown from 575,893 to41,478,136, three-wheelers from 36,765 to 1,881,085, cars frombbetween 1970-71 and 2001-02 (Figure 9). The vehicle population has continued to growat higher than historical rates. However, in the last 5 years (2000-2005) growth inconsumption of petrol and diesel has been far more moderate at 6.9% & 3.1%respectively. This reflects improved efficiency of vehicles and better roads. Table 3givedecadal growth of motor vehicles from 1970-71 to 1990-91 . In 2003-04, Petrol anddiesel in Transport sector accounted for 25.6 % of our total oil consumption.

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

19. Currently, the refining capacity in the country is more than the domesticrequirements, making India a net exporter of petroleum products. The projected additionto refining capacity both in public and in private sector will far exceed the demand andexport of petroleum products could become Indias largest export. Indias marginaladvantage20. The oil sector remains largely in the hands of the Central Public Sector Units(CPSUs). The exception is refining wherein some 26% of capacity is now in private

Gr owth o f Tw o W

575893

0

5000000

10000000

15000000

25000

300000

350000

40000

45000

1970-71 2001-02

heelers

41478136

20000000Nu

000

00

00

00

000

0

m

ber

Tw o Wheelers

Growth of Transport

36765

539475

93907343000

5717456

552899

0

1000000

Three

Wheelers

Cars Busses Trucks

Class of Vehicles

Vehicles

3000000N

um

4000000ber

5000000

6000000

7000000

18810852088918

2000000

1970-71 2001-02


29/153

12

1. The above pricing methodology when coupled to the fact that there are

carrier principle ine use of distribution & marketing sectors. A feature of the distorted market is the large-

hands. Oil product prices were set by the government under an Administered PriceMechanism (APM), which was dismantled in April 2002. The prices of inputs and theproducts are now determined on the basis of import parity principle even for productswherein India is a net exporter. However, the prices are fixed collectively by the publicsector oil companies and there is no price competition at the refinery gate or retailoutlets. The Government of India, through the Ministry of Petroleum and Natural Gashas frequently deviated from the import parity principle in fixing the effective price of

domestic crude as well as the price of petroleum products at the retail level. Currently,there is no independent regulation of the upstream or downstream petroleum sector.

2differential custom duties on crude and products, differential excise duties and centrallevies on products, differential state taxes and a pooling of the transport costs leads tomultiple distortions. These distortions and their impact on profitability of CPSUs and theprivate refiners are further compounded by the subsidies on LPG and Kerosene, whichis exclusively marketed by the CPSUs. Efficient cost based private refiners with nomarketing obligations have been making a killing in this distorted market. Even theCPSU refineries or upstream operations such as ONGC make large profits while oilmarketing companies loose money. This has restrained the growth of private sectorretailers who find it simpler to sell to the CPSU marketing companies at import parityprices. Other barriers to private sectors entry into retailing include a minimuminvestment hurdle of Rs. 2000 crores and the absence of commonthscale adulteration of petrol and diesel with subsidised kerosene. Finally, the LPG andKerosene subsidies are not reaching the intended beneficiaries.

22. The challenges facing the petroleum and natural gas sectors include: ensuringcrude oil and gas supplies in a constrained world market amidst rising prices, demandmanagement of petroleum products; rational pricing of petroleum products and naturalgas; removal of entry barriers for private players in distribution and retail business forcreating real market competition; regulation of upstream and downstream sectors,improving administration of LPG and kerosene subsidy and environmental managementthrough products upgradation.

Table 3: Growth of Motorised Transport Vehicles1970-71 1980-81 1990-91 2001-2002

Two-wheelers 575893 2530441 14199858 41478136Three-wheelers 36765 142073 617365 1881085Cars 539475 900221 2266506 5717456Taxis 60446 100845 243748 684490Jeeps 82584 120475 443734 1168868Buses 93907 153909 331096 552899Trucks 343000 554000 1355953 2088918

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


30/153

13

5.4%. Thermal power plants using coal, account for 60% of our total generationapacity. Indian coal has high ash content and low calorific value, the average being

4. The coal sector is dominated by Public Sector Undertakings (PSUs) under the

d completely. Theountry is facing acute shortage of coking coal supplies, gap between demand of non-

on of underground workings and success thereof hasot met to expectations.

ted through a complex regime of linkages based onery limited rail infrastructure. In-spite of low (5%) import duty on thermal coal, the

coal consumption at coastal sites is currently minimal.

, and several coal blocks have beenffered to potential entrepreneurs for exploiting coal for their own consumption. Foreign

ct (FDI) in coal mining has been allowed and coal mining by jointenture companies is permitted. Coal blocks have also been allocated to other PSUs

23. Coal has been the mainstay of Indias energy supply. Coal consumptionincreased from 140 million tonne in 1984 to over 400 million tonne in 2004 with a growthrate ofc4100 kcal/kg compared to 6000 kcal/kg of imported coal. The average calorific value ofcoal burnt in Indias power plants is only about 3500 kcal/kg. The high ash content

results in higher emission of suspended particulate matter (SPM). However, the sulphurcontent of Indian coal is very low. Hence emission of SO2 during combustion is also low.Since SPM is relatively easy to trap, Indian coal is relatively clean coal. Despite largereserves of coal, domestic supply is falling short of demand and coal has to beimported.

2Central & State Governments. Central PSUs engaged in production of coal and lignitecontributes nearly 90% and 73% of total production of coal and lignite respectively. Coalsector was nationalised in 1971/1973 after recognising the need for scientific andplanned development of resources and improving the working conditions in the existingmines. The objectives of nationalisation have not been realiseccoking (thermal) coal and its supply is increasing and quality of thermal coal has beendeteriorating over the years. The increasing share of opencast mines is one of thecontributing factors for deterioration in quality. There is only marginal improvement inproductivity. Level of mechanisatin25. Lack of competition, absence of suitable benchmarks for different operationalparameters and the absence of an independent regulator for the sector haveconstrained the growth of coal industry. Problems of land acquisition & rehabilitation,stiff legislations covering forest conservation and environment management have, alsoto some extent, affected the pace of development of the coal sector. Indian Coal isinternationally competitive at the pit-head. However, its pricing has remained non-transparent and distribution is restricvimport has been sluggish. This is primarily due to constraints of port capacity and thecost associated with multiple handling and inland transportation of imported coal.Unfortunately

26. Entry of private sector in coal production is essential for realising efficiency gainsand augmenting the domestic coal supply. Consequently, the Coal MinesNationalisation (Amendment) Bill 2000 was introduced in Parliament for bringing insuitable legislative amendments to permit private sector entry into coal sector. However,its passage is still awaited. Pending new legislation the captive mining policy wasformulated, within the bounds of existing legislationoDire Investmentvunder Central and State Governments for coal mining.


31/153

14

7. Large estimates of total coal resources give a false sense of security becausehe total

source into mineable category. The capacity of PSUs engaged in exploration hasrestrict hecoupled with es only limitedincentive to explore in detail coal beyond 300 m depth.

28. Clean ergy conversion andlimiting emission, research & development initiatives for establishing additional sourcesof ene suseated coal rin infancy.

29. hile we have developed indigenous technological capability in all aspects ofnuclea we tedavailability of uranium. In fact, at present uranium shortage has forced us to operate thesmall n artechnically poindigenous fu ited even though the eventual potential isvast.

30. Thereinvolves reladisplacementbe resettled ay have other environmentalconsequences such as impact on aquatic life and downstream ecosystems. Someperson savoid these p a muchmore variable supply of power.

31. Givenhad a speciasignificant grenergy sourc remainedmall. They have not yet fully occupied the niches they could have.

2. The energy sector in India has evolved under the strong lead provided by publicsector. scompetition ato some infirm3. Environmental problems associated with energy use have become severe in

many nabove safe liworld. The Sutaxis and thre eptember, 2001. Other cities are following

is lead. Yet in our energy strategy environmental concerns have to be factored in toreduce ssstrategy is ec

2the current and foreseeable technologies convert only a small fraction of tre

ed t pace of proving indicated and inferred resources. The limited capacity,the economics of opencast and underground mines, giv

coal technologies for improving efficiency of enrgy ch as coal bed methane, in-situ gasification of un-mineable and deep

eserves and liquification of coal are promising areas for action but are still

Wr po r, our ability to develop nuclear power is restricted by the very limi

ucle generation capacity that we have created at a load factor below what isssible. The pace at which we can expand nuclear power generation usingel sources is thus severely lim

is large unexploited hydel potential in the country. Development of thistively long gestation lags. Moreover, storage schemes often involveof people and submergence of land. The project affected people need to

and rehabilitated. Also, storage schemes m

s thu oppose development of large storage schemes. Run of the river schemesroblems at the cost of much lower utilisation of hydro energy and

the shortage of conventional fuels, non-conventional energy sources havel attraction for the country. Despite many years of efforts and despite

owth of mini-hydro and wind power, the contribution of non-conventionales such as wind, solar, biogas, etc., to our total energy use has

s3

Thu power, coal, oil and gas industries are largely under public sector. Lack ofnd without the accountability enforced by a bottom line discipline, have ledities in the sector.

3urba areas. Most of our cities have concentration of one or more pollutants

mit. In fact many Indian cities are among the most polluted cities in thepreme Court mandated use of Compressed Natural Gas (CNG) for buses,e-wheelers in Delhi beginning S

themi ion of local pollutants as well as global pollutants to ensure that the energy

ologically sustainable.


32/153

15

34. The cofrom forests, forestation, thinning of forests and loss of habitat andbio-diversity.

35. Thus ls, growing dependence onported oil that is becoming dearer by the day and a power sector with financial health

that di ra

human welfarour long-term energy requirements and strategic options to fulfil them so that we maynot get locked into paths that we may regret later.

1.2 The is

ntinued dependence on bio-mass based fuels quite a bit of it obtainedposes a threat of de

the immediate problems are shortages of fueim

scou ges growth in a country that needs energy for growth and for improving

e. At the same time these problems should be addressed in the context of

sues

6. The energy scene described above raises a number of issues. We divide thesetw : those that need to be addressed from a long-term perspective and

ose that are pressing problems in the short-term.

(c) What institutional reforms are needed to get competitive efficiency? Howgth of public sector units that dominate energy

sectors? How to obtain credible, independent, transparent and consistent

iciency? How to encourage energyconservation and energy use efficiency? In particular how to reduce the

troleum fuels for transport? What policies are needed to promotefuel efficiency and alternatives in transport?

of climatechange would require that India continues to grow its energy supply in a

er without compromising its economic growthimperative. Indias long-term energy strategy must factor this in.

3into o categoriesth37. From a long-term perspective a number of issues need to be addressed:

(a) How much energy do we need over the long run? Given our resourceswhat should be our strategy to meet the growing demand?

(b) How to promote efficient allocation of various fuels and energy forms todifferent uses? What should be the relative prices?

do we leverage the stren

regulatory oversight in the energy sector?

(d) What is the role of renewables in it? How to promote its development?

(e) How to increase Indias known energy resources? What new technologiesare relevant for Indias future? How to promote their development? Whatshould be our R&D strategy?

(f) What is the scope for increasing energy efficiency of the system? Whatpolicies can lead to higher eff

use of pe

(g) How to ensure energy security? What is the role of obtaining equity

energy abroad? How to reduce dependence on imported energy?

(h) How to encourage an energy system that keeps air pollution within theacceptable limits? The growing global concern for the threat

responsible mann


33/153

16

38.

er shortages? How do we expandcapacities for generation, transmission and distribution? How to generate

rpluses with SEBs? How to improve the financial health ofSEBs? How to reduce AT&C losses?

h cost plus regime? How to introduce competition? How to encourageprivate sector participation in the power sector? How to provide open

?

energy to all? How to develop an energysystem that is poverty and gender sensitive?

(e) How to provide access to electricity to all households? Considering some

.3 The Vision

The pressing problems are:

(a) How to deal with persistent pow

investible su

(b) How to reduce the cost of power and improve its quality? How to do awaywit

access in a level playing field

(c) How to ensure fuel supply for power generation? How to expand coalsupply in a cost effective way? How to promote investment in coalproduction? How to expand production by captive mines? How to facilitateimport of coal to meet shortfalls in domestic supply and wherever importsare cost effective?

(d) How to provide clean cooking

consumption of electricity as a merit good that we want all to consume,how should it be financed?

(f) How to provide subsidy for electricity and clean cooking fuels to certainconsumers e.g., poor households or agricultural pumps, in ways that donot encourage wasteful use of electricity?

139. The broad vision behind the energy policy is to reliably meet the demand fornergy services of all sectors including the lifeline energy needs of vulnerable

nient energy at the least costtechnically efficient, economically viable and sustainable manner considering different

emergconfideexpectall.

1.4 ted Policy

ehouseholds in all parts of the country with safe and conveinfuels and forms of energy, both conventional and non-conventional as well as new and

ing energy sources and to ensure this supply at all times with a prescribednce level considering the shocks and disruption that can be reasonably

ed. In other words the goal of the energy policy is to provide energy security to

Need for An Integra

n integrated policy arises because different fuels canbstitute each other in both production and consumption. Alternative technologies are

efficienefficienfive separate Ministries (Coal, Petroleum & Natural Gas, Atomic Energy, Power and

40. The need to have asuavailable and there is substantial scope for exploiting synergy for energy system

cy to meet requirement for energy services. If the energy system is to bet, policies have to look at it as a system and have to be integrated. Currently with


34/153

17

Non-Calways ortunities for inter-linkages and synergy are missing and sub-ptimal solutions emerge. We briefly look at issues that call for an integrated policy and

rib ibutes of such a policy.

)

onventional Energy sources), each concerned with its own turf, policies are notconsistent, opp

odesc e some of the attr(a Relative Prices

Different fuels have different calorific values. Their efficiency in use andconvenience also differ. Moreover, they generate different kinds and amounts ofpollution. And yet often they are substitutes in specific uses. Their relative priceshave t

o be set in a way that the resulting inter-fuel choices are socially desirable.For this, their marginal use values per rupee of fuel need to be equivalent. Thus

e set independently of each other.

)

prices of different fuels should not b(b Consistent Tax Structure

Relative prices can be affected by taxes and subsidies. Excise and import dutieshave to be consistent across different fuels. It also requires that taxes on capitalgoods that use different fuels to produce the same output should be consistent ifwe desire optimal allocation of resources.

(c) Level Playing Field

All players and energy projects, public or private, large or small, mega projects ormicro projects, domestic or foreign should be treated equally if the sector is to be

(d)

efficient.

Uniform Treatment of Externalities

Different fuels may have different externalities in their production and for use.Thus for

example, coal involves mining with potential to damage land whilenuclear involves much smaller amount of mining but may pose problems ofwaste disposal. Bio-mass based fuels are renewables and may not add carbonemissions, but the air pollution caused by their use may have severe adversehealth impact. Policy needs to take an integrated view so that environmental

re attained at least cost.objectives a(e) Public Infrastructure

Documents

Draft Report of the Expert Committee on Integrated Energy Policy