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April 17, 2013

Development Strategy

Energy for Growth

By Nitin Desai


The Twelfth Plan aims at a high growth rate that is sustainable and inclusive. An energy policy that is also sustainable and inclusive is absolutely central to this task.  It will have to aim simultaneously at rapid supply growth, security of supplies, equity and efficiency, four elements that are conspicuously missing at present.

Take supply growth. The rate of increase of primary energy supply from domestic sources has been distinctly lower in the post liberalisation era. According o the CSO's Energy Statistics the decadal growth of domestic primary energy supply fell from 86% in the eighties to 29% in the nineties, when growth had not yet accelerated, and 55% in the next decade of high growth. Part of the explanation may lie in improved efficiency in big manufacturing consumers like steel and cement plants and part in the growing share in GDP growth of services , which rupee for rupee, may be less energy intensive.  But the largest part of the explanation lies in the rapid growth in energy imports and that brings us to the whole question of energy security.

India's import dependence for energy supplies has grown substantially in the past decade. Coal imports were under 5 million tonnes in 1990-91. In 2012-13 they have exceeded 110 million tonnes, and this in a country that considers itself well endowed with coal reserves. In crude oil there has been no major find comparable to Bombay High, which came to our rescue in the eighties, despite several rounds of exploration licensing.  Today the cost of crude oil imports is the major cause of the vulnerability in our balance of payments and has led to a current account deficit that is more than twice as large as prudence demands.

The dependence on imported oil is not going to end and may well increase judging by the Integrated Energy Policy which projects import dependence in excess of 90% for crude oil, up to 50% for natural gas and up to 45% even for coal. These are huge numbers, particularly for crude oil, and this has led to a search for secure sources of overseas supply.  Many, including T.N.Ninan in this paper, have argued for a strategy of competing with the Chinese, who are on an aggressive buying spree, and securing concessions overseas. But there are some who are sceptical because owning concessions will not help if the local government turns hostile. But Ninan is right because, if the Chinese are tying up supplies, we could have double  problem of an unreliable local government and uncooperative Chinese concessionaires . Hence as a defensive strategy we may have no choice but to play this game.

Incidentally one way of protecting supplies in a politically fraught situation is to have national ownership of lots of oil tankers, including many involved in third party trade. The oil in these supertankers on the high seas is as good as a strategic reserve because contracts can be broken and the tankers diverted to supply domestic needs if the political situation so demands.

Tying up overseas supply sources in nationally owned concessions is helpful; but the core challenge of energy security is to build up domestic supply. It is truly absurd for India to leave domestic coal unused in the ground and hunt for secure sources of oil, or even coal,  abroad. But using coal, as carbon concerns become paramount, involves a serious effort at developing clean coal technologies and carbon capture and storage. We are doing precious little in this area. The Chinese, while they pursue overseas concessions, are even more vigorous in their pursuit of coal technology research. The lead they will build in this area may be an even bigger threat to energy security than their overseas concessions.

Energy supply security can also be pursued by a much more vigorous effort to deploy renewable energy and nuclear power.  A recent study has put the potential of wind energy in India at 2000GW which is twenty times larger than the current official estimate. The nuclear option has more implementation problems, but has more potential for long term energy security particularly with fast breeders and thorium reactors. Energy security is also strong argument for making efficiency as important a part of energy policy as supply management.

Energy security is meant to protect energy consumption. This is where the issue of equity becomes central. India needs three energy policies - one for the 10% of the population that has a near western lifestyle, another for the 40% who are acquiring the means to aim for this lifestyle and a third for the 50% who need to consume more commercial energy to raise their productivity and improve the quality of their life. The problem is that the commercial energy system is one in terms of pricing and investment. Thus the price and tax policy required for a rational approach to the 10% high consumers will be quite perverse for the 50% who need to be persuaded to consume more commercial energy. A similar dilemma arises for the policy priorities for renewables. Meeting the energy needs of those who are deprived of adequate energy, many of whom are in remote areas, may need an emphasis on off-grid solutions. But containing the carbon emissions may be better served by grid connected power. Hence we end up with an energy policy that tries to do too many things. But hopefully with the aspirant 40% group expanding  and more and more of the left out people and regions being brought into the mainstream this will become more manageable.

Finally on sustainability. The big issue here is climate change and containing carbon emissions. We will have to accept that global pressures will impose some carbon limits on our energy policy within the  lifetime of the plants being built now, particularly if we continue to make common cause with countries like China which are already under global pressures to reduce their carbon emissions. But, for us, the local sustainability challenges of local air pollution and the conflict between coal extraction and forest conservation are even more important.

Our policy czars must understand that energy policy is more than subsidy management.   It requires a political commitment to implement a national energy supply strategy built around the goals of energy security, equity and efficiency.

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