The Gist of Yojana: August 2014

The Gist of Yojana: August 2014

Aspects of Energy Security: Trends and Policy Framework

The conceptual basis of energy security is much wider than merely securing energy supplies. The existing energy system relies primarily on the use of fossil energy coal, oil and natural gas for meeting power and non-power demand of final energy. Given the skewed distribution of fossil fuels, securing their supply for meeting the demand for energy is an essential component of energy policy framework for an energy importing country. However, the important aspects of energy security can be broadly classified as availability, reliability, affordability and sustainability. The availability aspect would constitute measures aimed at increasing the endowment of primary energy resources through domestic exploration and production; imports of primary energy resources (and even final energy such as electricity, refined petroleum products as the case may be) from energy supplying countries. The reliability aspect captures measures targeted at increasing the resilience of the energy sector to the uncertainties of international energy markets owing to geo-politics, political instability in the energy exporting countries and threats to the energy supply chain from terrorist groups, natural calamities etc. The affordability aspect caters to the issues related to energy pricing (such as concerns for volatility) and equity considerations (such as removing energy poverty and universal access to modern energy services). The sustainability aspect focusses on the negative environmental externalities arising from the energy system and highlights the need for its transformation and adaptation for addressing vulnerability on account of expected climate changes and increase in the frequency of extreme weather events.

Energy System: Definition, Importance and the Indian case

Energy system comprises of not just the energy conversion technologies, rather consists of all primary energy resources, processes and technologies required for energy transformation/conversion, transportation, storage and end-use. It also covers the interactions with the environment as a source of primary energy and as a sink for the assimilation of the various forms of waste generated in all the phases and processes right from the stage of making primary energy available to the stage of final end-us.

The Indian energy system, for meeting the demand for final energy of energy consuming sectors, draws its primary commercial energy supplies predominantly from fossil fuels - coal, crude oil and natural gas. In 2011-12, these fossil fuels taken together accounted for approximately 93.3 per cent of the total primary commercial energy supplied (i.e. domestic as well as imported but excluding non-commercial primary energy such as combustible renewables and wastes). The growing domestic energy demand and supply mismatch reflects a fundamental challenge to India’s energy security. The share of energy imports in the total primary commercial energy supplied is estimated at 36.7 per cent in 2011-12 and the share of fossil energy in the total primary energy imports accounted for 99.8 per cent during the same period. The share of imports in the total availability of coal, crude oil & petroleum products and natural gas in 2011-12 is estimated at 19.6 per cent, 76.8 per cent and 22.7 per cent respectively. It is projected that the share of imports in the total availability of coal, crude oil & petroleum products and natural gas would increase to 22.6 per cent, 78.1 per cent and 24.6 per cent respectively in 2016-17 and 27.3 per cent, 81.9 per cent and 23.1 per cent respectively in 2021-22. This increasing import dependence exposes her to the volatile behaviour of the international energy markets and uncertainty owing to the geopolitics surrounding them, creates pressure on foreign exchange reserves causing balance of payments problem and vulnerable to the phenomenon of imported inflation.

Besides energy availability issues, policy makers face a daunting task with respect to other aspects of energy security in realising the faster, sustainable and more inclusive growth. Some of the key challenges in this regard are:

  1. Making access to modern energy services universal, reducing the dependence on the non-commercial unclean and unprocessed energy sources such as firewood, cow-dung cakes, crop residues etc., removing the disparity between penetration of electricity for lighting and liquefied petroleum gas for cooking in the rural versus urban areas, ensuring access to electricity in remote areas not connected to the grid.

  2. Transport sector is the leading consumer of petroleum products, which also accounts for a dominant share in its energy mix compared to the other energy consuming sectors. The non-substitutability of petroleum products among the different modes of transport (except railways) has been one of the important factors driving India’s demand for crude oil and consequently oil imports.

  3. The industrial, agricultural, commercial and public services consumes a significant proportion of electricity for meeting their demand for final energy. However, coal being a major throughput for power generation necessitates extensive development and deployment of low-carbon, carbon-neutral and carbon-free renewable alternatives for diversifying the energy mix.

Energy Policy: Vision, Actors and Initiatives

Against the above backdrop, the broad vision of the Indian energy policy as laid out in the report of the Expert Committee on Integrated Energy Policy “is to reliably meet the demand for energy services of all sectors including the lifeline energy needs of vulnerable households in all parts of the country with safe, clean and convenient energy at the least cost. This must be done in a technically efficient, economically viable and environmentally sustainable manner using different fuels and forms of energy, conventional and non-conventional, as well as new and emerging energy sources to ensure supply at all times with a prescribed confidence level considering the shocks and disruptions that can be reasonably expected”. The approach thus emphasised is to ensure that the energy policy framework should “create an enabling environment and provide incentives to decision makers, consumers, private firms, autonomous public corporations, government departments, to behave in ways that result in socially and economically desirable outcomes”.

In 991, the Indian economy had to confront the worst balance of payment (BoP) crisis and the country’s foreign reserves had dwindled to the extent that it could hardly finance her two weeks of imports. In response, the Gal undertook several systemic reforms and laid much greater emphasis on the private sector participation in the domestic economy. Subsequently, the Gal further intensified its efforts for attracting foreign capital in the E&P activities and developing hydrocarbon resources in the country. It, thus, announced the fourth exploration round offering 72 blocks (33 onshore and 39 offshore) for competitive bidding in 1991. It also adopted “a system of continuous round-the-year bidding with exploration blocks being offered every six months”. Against four exploration rounds offered during the period from 1979 to 1991, the GOI announced five successive rounds within a span of three years i.e. 1993-1995. In 1995, the GOI offered as many as 28 blocks in its ninth round and allowed the successful bidding company to form a joint venture with ONGC/OIL.

With the objective of increasing participation of both public and private companies in the development of domestic oil and gas reserves i.e. upstream activities, the government of India formulated a New Exploration Licensing Policy (NELP) during 1997-98. Under the NELP, the Government of India has carried out nine bidding rounds till date. The total number of blocks for which the production sharing contracts (PSCs) have been signed were 24 out of 48 blocks in the first round of NELP (or NELP-I), 23 blocks (out of 25) in NELP-II, 23 (out of 27) in NELP-III, 20 (out of 24) in NELP-IV, 20 (out of 20) in NELP- V, 52 (out of 55) in NELP- VI, 41 (out of 52) in NELP- VII, 31 (out of 70) in NELP- VIII and 13 (out of 34) in NELP-IX. Even though the NELP rounds have been able to attract private companies and in providing them a level playing field with the National Oil Companies, however, it is increasingly being felt that there is a need to review and carry out suitable changes in the PSCs in light of the several management/administrative, contractual and policy related issues being experienced by the Directorate General of Hydrocarbons (DGH), responsible for the implementation of such contracts.

The acquisition of energy assets abroad is also encouraged by the Indian government. The basic rationale behind such acquisitions is that the equity hydrocarbon assets held abroad can assure the supply of oil and gas in the case of any shock which otherwise can have adverse implications for domestic economic environment.

The grid-interactive, off-grid and decentralised renewable energy technologies (RETs) have significant potential that remains untapped and unexploited. During the 12th Five Year Plan period (2012-2017), the MNRE would undertake necessary policy initiatives to encourage investment in RETs. The deployment of such technologies would be crucial if India is to realise green growth and achieve universal access to modern energy services. It is further emphasised that during the period from 2008-09 to 20 12-13,the total CO2 emissions for all grid connected power stations with an installed capacity of more than 25 MW has increased from 548.6 million tonnes (Mt) to 696.3 Mt. The Indian power system can be broadly classified into two grids - (i) Northern, Eastern, Western and North Eastern (NEWNE) grid and (ii) Southern (SR) grid. The grid wise break-up of the total estimated CO2 emission for the period from 2008-09 to 2012-13 is shown in the Figure I. This observed increase in CO2 emissions is primarily due to the fact that the coal-based capacity installations dominated in the India’s total grid-connected power generation capacity added during the period under consideration.

Concluding Remarks

Indian policy makers have a difficult task of rebounding Indian economy along a higher growth path. Unless there are concerted efforts to stem the increasing energy import dependence and making the policy and business environment conducive to facilitate the Indian energy systems transformation and adaptation, the much needed macro-economic stability would remain a distant dream.

Energy, Environment and Sustainable Development

The world Commission on Environment and Development (Brundtland Commission) defines sustainable development as meeting the needs of the present generation without compromising the needs of future generations. It stresses inter-generational equity. The World Summit on Sustainable Development 2002 mentions the three components of sustainable development - economic development, social development and environmentally sustainable development, as interdependent and mutually reinforcing pillars. The UN Conference on Sustainable Development 2012 recognizes the importance of the evaluation of the range of social, environmental and economic factors and encourages, where national circumstances and conditions allow, their integration into decision-making. It also resolves to strengthen the institutional framework for sustainable development, which will, inter alia, promote the balanced integration of the three dimensions of sustainable development.

Energy is vital for economic development and also for human development. There are multiple sources of primary energy ranging from fossil fuels like coal, petroleum and natural gas, hydro, nuclear, solar and renewable energy and also non-commercial energy. There are also multiple goals in energy policy economic efficiency, access to clean energy to all at affordable prices, environmental sustainability and energy security. In case of fossil fuels, fuel extraction may cause natural resource degradation, conversion of fuel into useful energy causes environmental pollution, some local such as sulfur dioxide, nitrogen oxide and particulate matter and some global like carbon dioxide. In case of hydro power, conversion of forest land requires displacement and resettlement of the indigenous people and ecological disturbance. In case of nuclear power, safety has become a major policy issue. Use of a renewable resource like biomass may involve loss of agricultural output. Hence, the choice of an optimal energy mix for a country requires careful evaluation of the trade-offs among the alternatives, based on national circumstances, polity priorities, costs affordability.

Energy Conservation

The Energy Conservation Act, 2001 aims at providing efficient use of energy and its conversion. It established the Bureau of Energy Efficiency. India’s National Mission for Enhanced Energy Efficiency contains the following schemes:

The first scheme, the Perform, Achieve and Trade scheme, a market based mechanism, to enhance energy efficiency in the ‘Designated Consumers’ (large energy-intensive industries and facilities) includes the following project steps: (a) Setting a specific energy consumption (SEC) target for each plant and the target will specify by which percentage a plant has to improve its energy intensity from the base line value in a period of three years; (b) within a three-year period (2009-2012), the designated consumers try to reduce their energy intensity according to their target; and (c) those consumers who exceed their target SEC will be credited tradable energy permits which can be sold to designated consumers who failed to meet their target. Designated consumers who fail to achieve their target have to compensate this failure by buying permits. If they fail to do either of this, they may have to pay penalties.

Affordable Clean Energy for Poor

Access to clean energy to poor at affordable prices has been an important policy goal in India. The Rajiv Gandhi Grarneen Vidyutikaran Yojana Scheme for providing access of electricity to all rural households was launched in 2005. It provides capital subsidy of 90 per cent of the total project cost under the scheme and balance 10 per cent of the project cost are being provided by REC as loan.

Under Pricing: Energy Products

Under pricing of petroleum products like kerosene, LPG, diesel and naptha for fertilizer plants and electricity for agriculture and domestic use impose heavy financial burdens on governments, distort the price signals, cause leakages and encourage inefficient use. Anand et al (2013) compares the import parity prices with the regulated price for four items in November 2012.

This study concludes that the fuel subsidies are badly targeted with the richest 10 per cent of households receiving seven times more in benefits than the poorest 10 per cent.

An analysis of average revenue/average cost ratios for 28 State Power Utilities and Electricity Departments in 2011-12, available with Planning Commission (2012 b), shows that in agriculture this ratio was less than 0.25 in 53.4 per cent of the SPUs and EDs and above 0.50 only in 21 per cent of the SPUs and EDs. As for the domestic sector, this ratio was less than 0.5 in 36 per cent of SPUs and EDs and between 0.50 and 0.75 in 43 per cent of SPUs and EDs. The estimated commercial losses was Rs 37836 crore. The cumulative losses are estimated to be around Rs 1.65 lakh crore.

Energy and Climate Change

India’s National Action Plan on Climate Change highlighted the importance of the problem to Indian economy. It contains eight national missions, two of which-National Solar Mission and National Mission for Enhanced Energy Efficiency - deal with energy. In December 2009, India announced that it would aim to reduce the emissions intensity of its GDP by 20-25 per cent from 2005 levels by 2020. There are a few incentive schemes to promote renewable energy. In 2009, the government constituted an Expert Group on Low Carbon Strategies for Inclusive Growth under the Chairmanship of Prof Kirit Parikh. The interim report submitted in 2011 lists the policy options and sectoral strategies.

What needs to be done?

On order to ensure that the energy sector acts as a facilitator to achieve 8 per cent GDP growth, guarantees access to clean energy at affordable prices and achieve sustainable development, in all its three dimensions, the following actions are needed:

  • Commercialization of the enterprises imposing hard budget constraints.
  • The enterprises must be autonomous and accountable and report annually to Parliament/ State legislatures during the budget sessions.
  • Every effort should be made to measure the environmental costs of using alternative sources of energy and fix prices based on long run marginal social costs. The price revisions must be depoliticized and made automatic every year.

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