India's energy challenge

Policymakers identify the poor state of physical and human infrastructure as the biggest constraint to growth. Energy shortage is still rated as the worst bottleneck. In the summer of 2012, India’s power failure plunged 600 million people into darkness. Power failure is an implicit tax on growth, and this tax is estimated to be 7 per cent of GDP. Firms cope with frequent power failure by purchasing power generators to reduce output losses. India, the third largest energy consumer in the world, is not well endowed with energy resources. 

A lot has been achieved to address India’s energy challenge. Nearly 30 million more households with access to electricity are added every year. All villages have been electrified. The ministers of all states and Union Territories plan to electrify all households by December 31, 2018. India’s installed power capacity is the fifth-largest system in the world after China, the United States and Russia. India’s energy challenge has shifted from increasing access to energy to improving energy efficiency and reducing pollution levels. As a latecomer to development, India can leapfrog the energy challenge by making use of modern technology. Unfortunately, clean energy technology is not yet competitive enough to replace the dirty technology. In this transition from dirty to clean technology, improving energy efficiency is remains the cheapest source of energy for India. 

Energy efficiency

Very little is known about how structural and spatial transformation has impacted energy efficiency. Has India increased energy efficiency by producing more output with less energy inputs? Or has it worsened? We examined how energy efficiency has evolved in India in different industries and in 600 districts in India (see E. Ghani, A. Grover and W. Kerr, Spatial dynamics of electricity usage in India, World Bank). The conventional wisdom is that urbanization improves energy efficiency. It reduces the cost of electricity use per output level, due to denser customer bases, and more-efficient plant sizes for local energy producers. But India’s manufacturing sector is de-urbanising and has shifted from the urban to rural areas to remain competitive. The organized sector is migrating to rural areas, and locating in the rural sites along major transport corridors, like the Golden Quadrangle highway network. This has activated the medium-density intermediate cities to become important drivers of India’s manufacturing growth. But the intermediate cities and rural areas also face bigger energy challenge and suffer from intermittent power failures. The unorganized sector is moving into the urban areas in search of a better infrastructure and access to electricity. This makes it challenging to instinctively rank and order energy efficiency.

Hard evidence shows that India has improved energy efficiency, especially in the urban areas. In the rural areas, by contrast, the energy efficiency worsened in the formal enterprises until 2000, and it has improved since then. Beneath these aggregate trends, there is huge heterogeneity within India.

The usage of electricity per unit output is remarkably high in some states, and nearly twice as high as the national average in states like Madhya Pradesh and Odisha. By contrast, Delhi and Haryana display electricity consumption levels that are consistently lower than the national average. Overall, energy efficiency has improved in more developed states, although the de-urbanization of the manufacturing sector limits the strength of these conclusions.

The energy-intensive industries--steel, fertilizer, cement, aluminium, and pulp and paper--account for a bulk of energy consumed, and they have recorded greater energy efficiency improvements. Many factors account for this, including greater competition, rising energy prices, and the promotion of energy efficiency schemes. Nonetheless, many industries remain energy inefficient, and there potential for energy saving in industries, ranging from 46%-88% for textiles, 43%-94% for paper and pulp, to 51%-92% for iron and steel.

Energy usage is a key determinant of efficiency, and all else being equal, using less electricity to produce a level of output is more efficient. But one should not label every increase in electricity cost per unit of output as bad. Electricity consumption in India is still low, at 566 KWh per capita, compared to the world average of 2,782 KWh per capita. Increased usage levels can unlock better production techniques.

Energy prosperity  

India’s energy policy needs to be integrated at the national level, to improve energy efficiency spatially across urban and rural areas, and across industries. Business associations complain that many publicly owned power plants are paid cost plus prices by transmitters, which are then passed on to industry, whereas if there were a freer market, and barriers to entry were removed, many cheaper producers would emerge.

Government policies playing a growing role in driving private investments. Globally, more than 90% of power investments are being driven by regulation or contracts for remuneration, with a dwindling role for revenues from variable pricing in competitive wholesale markets. India has rolled out the world’s largest Public-Private Partnership program to maximize energy investments, but it is now threatened by the slowdown in investments. Global energy investments that totalled $1.7 trillion in 2017 is declining, and failing to keep up with needs for energy security.  India can address this challenge by improving the Public Private Partnership framework to reduce delays in land disputes and regulatory approvals, as well as improving management practices to reconcile intermittent power with baseload compulsions.

Also, incentives for renewable energy could be scaled up. Although India has introduced carbon taxes on coal and oil, there is room for adaptive and mitigating policies. Livelihoods are being challenged by the climate change, making some places too hot to be productive, while others experience productivity increases. These negative economic effects of climate change stem from frictions that prevent the free movement of goods and people. If these frictions are removed, climate change would be less of a worry. Mitigation through carbon tax should not be the sole focus of climate change. Adaptation is as important, and one should not overlook the age-old strategy of ‘movement’ as a way of adapting to climate change.  

Dirty technology is still more advanced than clean technology, and the transition to clean technology must climb several steps to catch up with dirty technology. It takes 2 gigawatts (GW) of solar or 1.4 GW of wind to replace the electricity generated from every 1 GW of coal-fired capacity. Recent political developments have threatened the progress towards clean energy. Global climate cooperation has collapsed, but the need for action has not disappeared.

India can be more pro-active in promoting clean energy policy. Promoting energy efficiency remains the cheapest source of energy, while advances in the clean technology aim to generate more cost-effective power from water, wind, and the sun than from burning coal. Energy efficiency can reduce about 40% of the greenhouse gas globally. It is an extremely attractive upfront investment that pays off for itself, while reducing carbon emissions and energy cost and increasing energy productivity. Energy efficiency will also reduce dependence on foreign energy suppliers.