Why the energy future looks bleak

Given growing demand and constrained domestic supply,India will have to lean on imported fuel

Written by Martin Adams | Published: October 17, 2012 12:00 am

In late July 2012,half of India was plunged into darkness as several regional power grids collapsed,leaving 600 million people without electricity. The crisis was an embarrassment for India’s government,businesses and citizens: dysfunction in its energy infrastructure mocks the prospect of India one day achieving superpower status.

The Economist Intelligence Unit (EIU) sees India’s appetite for energy growing by 54 per cent between 2011 and 2020. But a range of problems,particularly artificially low energy prices and state involvement in fuel production,will exacerbate the difficulty of meeting surging demand and supporting economic growth.

The fundamental problem in the power sector is that consumers buy electricity for less than it costs to generate. Efforts have been made to liberalise generation: the Electricity Act of 2003 encouraged private investment,spurring an estimated 65 per cent increase in capacity between 2003 and 2011,to around 200 gigawatts (GW). This nonetheless greatly undershot India’s plans even as consumption jumped by 75 per cent.

On the transmission and distribution side the problem is political: local officials and politicians are loath to surrender control over dispensing electricity. Agricultural consumers (that is,rural voters) can often draw power for free,or receive steep discounts. Punishments for stealing electricity are rarely enforced.

Over time,not recouping the cost of providing electricity has left swathes of state electricity boards (SEBs) unable to invest properly in upgrading the inefficient grid. More than a quarter of India’s electricity is thought to be lost in transmission and distribution. The SEBs can become financially healthy only if subsidies are overhauled and they are permitted to charge market rates for power. They can then invest on the scale necessary to upgrade the dilapidated grid.

Pricing and political problems feed through into the market for energy resources. Coal,which fuels around 60 per cent of India’s electricity-generating capacity and accounted for an estimated 43 per cent of gross domestic energy consumption in 2011,is India’s most important natural resource; the country has the world’s fifth-largest reserves. Yet the coal sector fails to live up to its financial potential. State-owned Coal India Limited mines four-fifths of coal output but is obliged by the government to sell to power plants at below-market prices to safeguard electricity supplies,discouraging investment.

State intervention in coal throws up powerful disincentives to private participation. Private developers of power plants and the “captive” mines that supply them are strangled by red tape. Financing is in tight supply. In addition,ownership of national resources remains a sensitive subject: protests against state land-grabs to build mines are spreading. The ongoing Coalgate controversy also hangs over private investment.

Oil,the next most important element in India’s energy mix,faces similar problems. The EIU expects oil consumption to grow by almost one-half between 2011 and 2020. Domestic oil supplies,from scant proven reserves,will not keep pace. Here,too,subsidised prices discourage investment in production; a lack of skilled workers,shoddy infrastructure and the dominance of a state-owned entity are additional,familiar themes.

Planners want to capitalise on indigenous gas reserves believed to be considerably larger than India’s oil endowment. While the EIU is sceptical of predictions of an Indian shale-gas boom,large offshore finds have helped boost India’s gas reserves. We expect that domestic gas production will expand around 25 per cent by 2020. But this relies on India tapping foreign expertise to exploit hard-to-reach hydrocarbons. Joint ventures are likely to remain vulnerable to bureaucratic delays.

Of India’s other energy options,nuclear power currently plays a small role,but big plans are afoot. Officials have suggested that 600-700 GW of nuclear capacity could be built by mid-century. Yet even a target of 20 GW by 2020,compared with less than 5 GW today,appears optimistic. Opposition to nuclear power has grown louder following the Fukushima nuclear accident in Japan last year.

Renewable energy,by contrast,is poised for impressive growth,albeit from a very small base. India has rich renewable resources. Its installed wind power generating capacity will almost double between 2011 and 2020; India is already the world’s fifth biggest wind power market. Solar power generating capacity will surge from less than 1 GW last year to nearly 16 GW in 2020,thanks to favourable policies and solar’s off-grid applicability,which allows it to reach regions the electricity network does not. Hydropower,meanwhile,will account for nearly 60 GW of capacity by 2020,up from an estimated 44 GW in 2011. This falls short of government aspirations,owing to such impediments as the need to resettle communities displaced by dams.

Non-fossil fuels will nevertheless fail to shake the dominance of dirtier sources in India’s energy mix. The country’s carbon emissions from burning fuel will soar by 43 per cent between 2011 and 2020 — giving India little let-up in international climate change negotiations. Supplies of domestic fossil fuels will be constrained for the reasons discussed above,adding many billions of dollars to its import bill and deepening its energy security worries. The EIU projects that India’s output of coal,natural gas and oil will,collectively,fulfil only one-half of its fossil-fuel consumption by 2020,down from about 60 per cent today.

Ultimately,India will not be able to raise domestic energy production to levels that alleviate these worries without radical reform,particularly to electricity distribution and pricing. But the EIU expects the political appetite for structural reform to be weakened by the series of state elections that begins in November 2012 and continues until the general election in May 2014. The chances of meaningful change before then are slim. Wringing payments from the poor for access to power is hardly a winning manifesto message.

India’s electricity consumption is on course to swell by over 90 per cent from 2011 to 2020,but generating capacity will grow by less than 70 per cent,to 369 GW,during that period. Once power losses are factored in,there will be a large shortfall. Outages will continue to stall the engines of industry and commerce.

The writer is energy editor,EIU. The full version is published in a new EIU report: Empowering Growth: Perspectives on India’s Energy Future,at http://www.managementthinking.eiu. com/empowering-growth.html

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