<b>Laveesh Bhandari:</b> The new world of energy

Good policies are mixed with poor mechanisms, and proactive efforts with regressive subsidies

Amazing developments are occurring in the energy and environment space. As more and more global investment is flowing into environmentally more benign sources of energy, new technologies are coming up rapidly; the cost of energy is falling steadily, and new players are entering this space in the hundreds at the global level. Consequently, the business model of more than a hundred past years of resource-owning extractive large firms is changing to a more dynamic, leaner and competitive sector.

In effect, it is a completely new sector that is opening up in the clean energy sector. This is not simply a change in technology but an overhaul of the way energy is being produced, stored, moved and used; it is a paradigm shift. The older resource-extractive larger players and the slow lobby-driven ecosystem they created will need to yield to leaner, competitive and quicker entities globally, and so will India’s public sector. As always happens in the early days of a new paradigm, there are multiple models, multiple players, multiple standards, and also multiple failures; a truly exciting phase is starting.

Where is this new technology? Will it scale up in India too? There are three parts to the answer.

The first is that these are very early days but it is not too early either. Historically it takes a few decades, if not years, for new technologies to enter India, but this time India has not been a laggard, but is already among the top wind and solar energy producing countries. Gas is waiting for pipelines, geothermal is on the anvil and it is only a matter of time for it to take off. Wind energy, given the right conditions, can be got at less than Rs 3 a unit, solar power is not as cheap but its costs continue to fall dramatically. However, the great benefits related to inclusion, environment and economic growth of new energy will percolate rapidly into India, changing India in many ways.

The second has to do with the force of technology change and their spread. Technology changes typically occur in spurts, a new change in one area creates opportunities in many other areas for change. Wind and solar technologies available in India would at best be only a couple of years behind those in the West. As these sources become more viable, it accelerates investment in battery technologies, for their dependence on power storage. Improved battery technologies have their own impact, in the form of electric vehicles. Tesla is not just a product of great entrepreneurship, it is also the result of a multitude of changes across multiple domains, each simultaneously feeding off each other. And once these changes happen, they will spread globally.

 

The third has to do with clarity on the way forward. There exists a confusion driven by well-meaning intentions and a cacophony of interests groups. Together good policies are mixed with poor mechanisms, proactive efforts with regressive subsidies. This will need to change for India to fully ride the clean energy wave.

What should the government support? How should it choose winners and losers among people, organisations, firms or technologies? How should it discipline its own people so that a coherent environmentally and financially sustainable ecosystem is created?

The most important aspect of any policy document has to be laying out the objectives — is India’s objective to reduce climate change or meet international climate change norms? Within this should it focus more where such actions foster inclusive growth? Should it use the public or private sector to achieve these means? My answer is none of these are the critical issues. They are all outcome-based, we need to focus on the processes governing these outcomes.

India’s environmental policy objective is to incentivise individuals and organisations, public and private sectors to enter the clean energy space and the many opportunities it provides. At the same time, policy that is agnostic on technology, players and standards makes life much easier for all and enables the growth of a dynamic ecosystem.

The first step, therefore, will need to be to define clean energy. Coal creates a large mess on land and in the air; petroleum products also pollute both at refining and consumption stages but typically less so, wind and solar are almost entirely non-polluting, and biomass “consumes” pollution but can also create some if not disposed of well. A net emission-based classification mechanism that is continuously improved upon is the natural recommendation.

The second is the form of support. When technology change is rapid, recurrent support harms more than helps. Why? Because it enables the lower quality older technologies to continue, and consequently reduces the pace of technology change. In other words, if at all a tax relief or subsidy is given, it should be at the set-up stage and should not be based on recurring production, revenues or costs. Moreover, once a recurrent subsidy becomes entrenched political economic factors make it very difficult to change.

The third point is that the government is India’s largest energy producer, energy mover, and energy consumer as well. And, the government of India is also India’s largest polluter. So, how should the government incentivise itself? Till now a few change-makers within the government mandate to public sector entities or the states — Use five per cent ethanol, buy five per cent of all your energy from renewable sources, etc. Can we do better? There are many different ways, where rather than forcing managers and having to deal with their opposition the government incentivises them.

For instance, ploughing back profits from renewable sources, towards employee benefits is one example. At the same time the mandates are fine for a little while, but such mandates end up harming more if they are continued for too long. Another possibility is related to diversification. Take the coal-based power plants that together account for more than 60 per cent of India’s power. This is highly polluting, highly harmful to including the managers of such firms and their families. It will take a few decades for India to move out of coal and the public sector will be the biggest loser. Who will therefore oppose the movement away from coal the most? The solution lies in changing the objectives of public sector managers — for instance change NTPC to National Renewable Power Corporation with a mandate to completely eliminate dependence on coal over a 20-30 year period.

Finally, clean energy is a great sector, it could totally overhaul India’s economy if individual enterprise is unleashed in this space.  Simple interventions are all that is required to enable such energies.

The writer is director of Indicus Foundation