Articles and Commentaries |
January 4, 2024

Energy Policies for India

Written By: Ajay Shankar

Provision of reliable quality round the clock affordable power supply to all is a core energy policy objective. This is an essential prerequisite for all economic activity of the industrial era. For households, it is a minimum need. The provision of clean cooking energy to all households transforms the quality of life of women. It is the objective of the Ujjwala program and is a key SDG (Sustainable Development Goal). Being Atma Nirbhar and increasing energy security is a strategic requirement. The transition away from fossil fuels and reaching net zero is imperative to save mankind, including ourselves, from the impending disaster of global warming. The simultaneous pursuit of these objectives in a coordinated, harmonious and mutually consistent manner have to propel energy policies which need to evolve, adjust and adapt based on experience and the needs of changing circumstances.

The provision of clean cooking energy makes such a remarkable difference to the quality of the lives of women. The time spent in collecting firewood or preparing cow dung cakes, which were the biomass energy sources for cooking of the preindustrial era is large, a few hours at least. The smoke is neither good for the lungs nor for the eyes. One could perhaps attribute gender bias to the provision of clean cooking energy not getting much higher priority earlier. Not that efforts were not made; for decades attempts were made to design and make smokeless cook stoves using biomass. Success was claimed and demonstrated. But switchover from the traditional modes of using biomass on a significant scale did not happen. Over 85% of households continued to use traditional biomass.

The decisive transformation began with the commencement of the Pradhan Mantri Ujjwala Yojana (PMUY) in 2016. Under this program a free gas cooking stove and cooking cylinder along with the gas (LPG) connection are being given to women of Below Poverty Line (BPL) rural households. This is being provided by the central government. This funding has made the achievement of the success of the program possible. The OMCs (Oil Marketing Companies) have done a tremendous job in extending their supply network into rural India at such extraordinary speed. The program is being implemented in phases with the present sanction going up to 2025-26. As of 25th December 2023, 9.998,939 households had got connections under the program. The objective is to cover all households. India is well poised to achieve this SDG goal well before 2030.

Along with achieving full access the objective is the complete switchover to clean cooking and giving up using biomass. The LPG cylinder refill is now being subsidised by Rs 200. For the really low-income households, finding money for a refill remains a challenge. In the recent state elections, promises of providing cylinders at Rs 500 upped to Rs 400 were made. At the political grassroot level such a promise seemed worthwhile. This issue will not easily go away. Sooner rather than later a way forward for providing cheaper refills would be worth considering. Two options suggest themselves. One would be to go back to the old ways and get the OMCs to cross subsidise; provide cheap refills and recover the cost from all their other consumers. An alternative more direct way would be to impose a cess on the sale of oil, petrol and diesel, and gas to raise the resources to provide explicit direct subsidies to the OMCs.

Going forward and thinking of the medium to long term objective of getting to net zero, LPG would need to be replaced by biogas, a renewable source of energy, or by electricity which in turn would be becoming green and carbon free. Seen from this perspective, LPG becomes an interim mediate solution. The transition to electricity is easier to promote. State governments have started giving higher quantities of free electricity to households in fulfilment of the election promises of the parties in power ranging from 100 to 300 units per month. It turns out that in 100 units basic cooking of simple meals can be done. The simpler challenge is to promote the sales of induction stoves to get ordinary households to discover that with the newer variants developed in India in recent years Indian food can be cooked on electricity conveniently. There is good case for doing bulk procurement to get prices to fall as was made to happen with LEDs and distribute them at a subsidised rate through the electricity Distribution Companies with the cost being recovered in instalments. Giving it practically free also makes sense. The subsidy on LPG needed from the central government would decline, the subsidy for free electricity comes from the state government. Further, the per unit cost of energy in electricity terms is lower than the per unit energy cost in LPG. Taking an overall macro view the subsidy needed for electricity is lower than for LPG.

Biogas is emerging as an option that is worth pursuing now. Cow dung which was being used for cooking is now available. Compulsions of electoral politics led to promises of buying cow dung at Rs 2 per kg. Cow dung is a renewable source of energy. It can be converted at a far lower cost in a decentralised manner at the village level into useful commercial energy. Cooking biogas was attempted in a big way in the 1980s. It failed as pilot projects were not done to bring the technology to a level where biogas for cooking could be supplied to households round the clock at full pressure to take care of all cooking needs. The maintenance back up for repair services was not put in place. Then no business model for sustainable operation was put in place. Even if the capital investment is a grant, the operation and maintenance has to be financially sustainable. The operator in the village has to be thought of as a franchisee who should earn enough to have the right incentive to grow the business. It would be good to take up small pilot projects in different regions and evolve the viable technological processing and delivery system and in parallel the business model, and then see how much subsidy is needed and how best to provide it so that the transaction costs and subsidy delivery points are the least.

Reliable quality round the clock and affordable electricity supply to all is the goal which India is achieving much earlier than expected. In the year 2000, India had more than 400 million people without access to electricity, the largest number in the world and more than sub–Saharan Africa. According to the IEA (International Energy Agency) India was likely to achieve full access in the 2040-50 decade. India has surprised itself and the world by providing full access before 2020. The IEA acknowledged that the achievement of providing access to over 500 million people in a decade was the best in the history of electrification in the world.

Electrification had been the responsibility of the states. A huge gap emerged by the 1980s. Some states had completed village electrification and were proceeding well with electrifying households. On the other hand, in the weaker states extension of rural electrification came to a near standstill. Parliament was informed in reply to a question in 2001 that Bihar was expected to take over 700 years to complete village electrification. There were 125,000 unelectrified villages, primarily in the states which were being left behind in development; UP, Bihar, West Bengal, MP, Assam and Orissa. The central government recognised the need for doing something, sanctioned an interest subsidy scheme which did not even take off, and then after much deliberation came up with a National Mission which went on to transform India. The central government took the big decision to finance the program fully with a 90% grant and a10% loan. The real innovation which made for success was to bypass the state government and provide funds directly through the Rural Electrification Corporation for specific projects for completing village electrification in a compact area and implemented through a turnkey contract. For a weak state like Bihar the services of the public sector undertakings (PSUs) were used to enable the execution of a very large programme with many projects. Bihar alone had 40,000 unelectrified villages. Once village electrification was complete, the complete electrification of all households under the Saubhagya Program was taken and completed by 2019.

In parallel, the landmark legislation of the Electricity Act,2003, which delicensed investment in power generation and promoted competition led to a surge in private investment in generation. New generation capacity rose sharply and the country for the first time had adequate generating capacity. Rural areas in Bihar started getting 16-18 hours of power supply every day. The shortages being experienced were due to inadequate investment in last mile distribution to be able to carry the electricity needed for meeting full demand. Or the state distribution did not buy all the electricity they needed for meeting full demand as they did not have the money to pay for it.

The financial health of distribution companies has remained an intractable problem. This is a state issue. The situation varies from state to state and across time. In the states, this is so important politically that Chief Ministers have to take decisions. The Electricity Act had solved this problem by giving the independent State Electricity Commissions (SERCs) the responsibility of fixing tariffs which would give revenues for the commercial viability of the distribution business. Separately, it empowers the state governments to provide for subsidised power supply to any class of consumers by paying the money to the distribution companies for subsidised supply. As a result, the state governments are giving money for the free or nearly free supply of electricity to farmers. About 80, 000 crores are being given annually. This is support for agriculture. More recently, some states are providing 100 to 300 units free to households as a welfare measure, treating this level of consumption as a minimum need. Here again they are required to pay for subsidised power supply to the power distribution companies. But as the finances of the states are constrained and political parties do not have internal robust processes of debating the costs and benefits from different welfare measures and affordability in terms of state finances to take prudent sustainable decisions, adverse consequences result.

The SERCs get politically constrained and do not give the tariff increases that are required. In Delhi there is the strange situation of Regulatory Assets of over Rs 20,000 crore existing in the books. These are dues to be paid for by consumers in the future through tariff increases. In many states loans are taken to pay for current power purchases leading to an unsustainable pile up of debt. With inadequate cash, investments in upgrading the last mile network to meet increasing demand gets neglected and parts of India get more power cuts when demand rises at the height of summer when the air conditioning load peaks. Then in some states the governance culture is of entrenched large scale rent seeking. Privatisation is the solution in these states, either explicitly as in Delhi which is the best route or in a disguised form through franchisees which many states are attempting. It is for each state to choose. The positive development is that the central government is affecting the long overdue closure of soft options. These were supply of electricity by generating companies without full timely payments, provision of essentially working capital loans to meet revenue shortfalls without enforcing any conditions of tariff increases required to repay debt. If these hard constraints are sustained the states would have no option but to act. The actions would be overdue tariff increases in efficient states and privatisation in states where governance is the real problem.

Going forward, we have to make the energy transition to becoming net zero. Prime Minister Modi has consistently displayed ambition and leadership, whether in making the Paris Agreement possible, or in taking the world by surprise by announcing at COP26 in Glasgow in 2021 that India would have 500 GW of non-fossil fuel capacity by 2030, probably the largest increase in 2030 target by any country after Paris. By then India was well on the way to achieving far more than its Paris commitments which in turn were higher than what the policy establishment had then considered as being feasible. In Glasgow, the Prime Minister also announced that India would become net zero by 2070 giving a reasonable ten-year additional time from China’s declaration of 2060 as the year they would become net zero.

The remarkable feature of India’s ongoing successful energy transition is that it is taking place with competitive private investment. This is the result of smart pragmatic policies crafted to suit Indian realities. The key is the repeated invitation of bids for the supply of solar, and wind power by SECI (Solar Energy Corporation of India) with the selected bidders entering into long term Power Purchase Agreements (PPAs) of 25 years. The price and off-take certainty from the state distribution companies for the duration of the long-term contract with the implicit guarantee of the state behind the process provided extraordinary risk mitigation. Successful bidders have been able to raise money from domestic and international markets at highly competitive rates. Competitive pressures from repeated bids where a number of developers had emerged has led to efficiency gains. India is now among those having the lowest costs for solar power. Scaling up of the quantities being bid out is taking India steadily towards the 500GW mark by 2030.

The share of renewables in electricity has reached 10%. It is rising rapidly. This poses new issues. As the sun does not shine and generate electricity at night, how is demand to be met at night. In the short run this can be done by thermal power but for greater decarbonisation of electricity, storage of renewable energy becomes essential. Fortunately, there are mature technologies for storage. Pump storage hydro projects (PSPs) on rivers where there are hydropower projects can be developed. Off river pump storage projects can be developed wherever the natural topography permits the creation of two reservoirs at two different heights. Electricity is used in these projects to pump the water up to the reservoir at the greater height. When needed the water is allowed to fall to run a turbine and generate hydro power. If only green carbon free electricity is used to pump the water, we get carbon free electricity at night from these projects. The Ministry of Power has issued user friendly guidelines for PSPs and there is rising interest in developers and state governments.  In addition to PSPs there is the technology of Concentrated Solar Thermal Projects (CSPs) with storage. In this, the sun’s ray are reflected from large mirrors to a single point, stored in molten salt and the stored heat is used to run a conventional thermal turbine when needed at night to generate electricity. Battery storage is needed for EVs (Electric Vehicles). For large scale grid level storage batteries are still being evolved and are at present the most expensive option. The CEA (Central Electricity Authority) has estimated the need for 72GW of storage by 2032.

In a recent SECI contract under execution the price of renewable and storage for supply during the day and at night is lower than from a new thermal plant. Hence, on purely commercial and price considerations, India need not build any new thermal plants. As the pace of execution of storage projects gathers momentum, there would be confidence that reliable round the clock power supply for increasing demand can be ensured only with renewables and storage. After all additional demand is met by renewables and storage, a view would need to be taken about winding down the existing thermal capacity in the next decade in a just transition. The costs of winding can be comfortably met by well planned decisions of extracting the gains from the appreciation of land values in the thermal generation value chain of coal mines and thermal plants. So, one can visualise the path to fully carbon free green electricity which is not only the least cost way of meeting additional demand but also where the cost of a just transition of closing down all thermal capacity may not only finance itself but could even generate some surplus.

The recent rapid success of the EVs in increasing market share raises the expectation that India may be moving along with the rest of the world away from the internal combustion vehicle. In Europe, the sale of fossil fuel vehicles is scheduled to end by 2035. As all surface transport, 2, 3 and 4 wheelers including buses and trucks, becomes electric and all electricity in parallel becomes carbon free, India would be reducing about 555 of its total emissions. India is already moving in this direction.

The challenge of getting to net zero lies in industrial processes in products like steel and fertiliser, and in sipping and civil aviation where electricity cannot replace fossil fuels. Green hydrogen is seen as the solution for most hard to abate sectors. India has launched its own Green Hydrogen Mission and aims to be at the global frontiers in terms of cost of producing green hydrogen and its downstream uses. The Mission is being well funded and is covering the full value chain of the manufacture of electrolysers, production of green hydrogen, its storage and transport and downstream uses for the production of green steel, green ammonia for further use in producing green fertiliser and shipping. The challenge would lie in developing competitive industry structures, nudge movement down the cost curve and achieve globally competitive industrial capacities in the entire value chain of downstream uses with the minimum outgo of scarce budgetary resources. Once downstream projects go into production and cost discovery takes place for each segment it would then be possible to take rational decisions of which sectors to be given higher priority for scaling up depending on the cost disadvantage and carbon footprint. India could then choose the pace at which it would begin to decarbonise its hard to abate sectors and move to net zero.

India is gaining competitive advantage with its rapid energy transition. The transition is gathering momentum. The reduction of 55% of all emissions by having a carbon free electricity system and only EVs on the road is feasible and the process is already under way. For the rest, the picture would start getting clearer by the end of this decade as the first pilot projects of the Hydrogen Mission in the hard to abate sectors get completed. India could even find itself in a position to move to net zero much earlier.

Author Brief Bio: Mr. Ajay Shankar is a Distinguished Fellow, Director-General’s Office, The Energy and Resources Institute (TERI). He has had rich and varied experience in public service for over forty-five years, primarily in the fields of industry, the power sector and urban development. He was a member of the premier Indian Administrative Service which he joined in 1973 and retired as Secretary, Department of Industrial Policy and Promotion in the Government of India in December, 2009. He is the President of the Board of Trustees of the Foundation for MSME Clusters (FMC). He is a member of the Board of Management of JK Lakshmipat University where he is also the Chairman of their Center for Policy Studies. He has a Masters in Political Science from Allahabad University and a Masters in Economics from Georgetown University, Washington D.C..

 

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