Opinion India’s energy trilemma

To achieve this ambitious target,India will need to increase its primary energy supply by four to five times,and its electricity generation capacity/supply by six to seven times,as compared to 2003-04 levels. By 2031-32 power-generation capacity should increase to nearly 800 GW from the current capacity of about 206 GW. This represents both a significant challenge and a huge opportunity for such an industrious nation.

For India’s economic development to continue apace,it will have to ensure three things. First,that adequate financing is made available for building and upgrading energy infrastructure. Second,that appropriate measures are taken to address skills shortages in the sector. Third,that the country selects and builds the right kind of energy infrastructure in order to diversify and modernise the country’s energy mix.

In 2011,according to the annual global energy sustainability index produced by the World Energy Council (WEC),India ranked 84 out of 93 countries on this measure,down from 58 in 2010. India’s energy security dimension has declined relative to other countries and it continues to struggle in the other two dimensions of the “energy trilemma”. Its performance in social equity is weak,mainly because a significant proportion of the population does not have access to electricity. India’s environmental performance,too,is weak,due largely to poor air and water quality,high emissions from electricity generation and high overall per capita emissions.

As we consider how to meet the challenges that lie ahead,it is worth noting that India’s recent electricity blackout brings into sharp focus the policy gap between the Central and state governments. Central power agencies adopt a national perspective,while their state-level counterparts are more concerned about meeting local needs first. A report by a Central government inquiry committee found that one of the main factors contributing to the grid collapse was the excess withdrawal of electricity by state utilities. In addition to suggestions on technical and distribution issues,the report advised better regulation to guard against over-consumption of electricity,and better coordination of planned outages between the states and regional grids. Low electricity tariffs,with cross subsidies,have also led to financially weak state utilities. This has had an adverse impact on the entire electricity value chain as generators struggle to recoup their investments.

This challenge is not unique to India. Many countries that keep energy prices artificially low for social and economic reasons often face similar reduced levels of investment. Given low expected rates of return,the private sector struggles to provide the massive funding required to build energy infrastructure. Coupled often with changing policy frameworks,low energy prices constrain deeper private investment in a country’s energy sector,which ultimately can lead to limited development,causing a “Catch 22” situation.

Countries such as South Africa have had to deal with this issue and there is even an unwillingness to invest in developed countries such as the US,where electricity tariffs are low. These prices are now depressed by the so-called shale-gas revolution,which has led US power manufacturers to switch fuel sources from coal to cheaply priced gas.

In the long term,a robust and sustainable energy policy is best achieved by providing a balance between the needs of energy security,equitable energy access and environmental impact mitigation. Countries with a diversified energy mix tend to produce more sustainable energy systems. The bulk of India’s power generation is made up of coal and hydro,accounting for 55 per cent and 21 per cent,respectively,of total installed capacity. The use of these fuels is no surprise — India has the fifth-largest coal deposits and among the largest hydropower potential in the world. However,India is looking at ways to further diversify its energy mix and this is a positive move.

In a dynamic world with constant energy pressures,it can be difficult for governments to achieve the right balance. In order to do so,governments need to establish coherent,predictable and transparent energy policies that adopt a holistic view. Truly successful energy policies will need to complement and interact with the needs of transportation,industry,environment and agriculture. Such an approach in the long term will lead to a more sustainable energy supply that will deliver the growth to which India aspires.

This article is an adaptation of a chapter contributed to a white

paper. 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

Stuart Neil MVO,director,and Philip Thomasisis scenarios project manager,World Energy Council