international analysis and commentary

India’s energy dilemmas and opportunities

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Thanks to the economic liberalization of the 1990s, India is experiencing consistent economic growth, making it one of the most important players in the information and technology industries. And together with China it is becoming one of the fastest growing major economies in the world. This strong economic development has drastically raised Indian energy consumptions, decreasing the country’s energy security and pushing New Delhi to evaluate the current energy mix – which is still strongly reliant on fossil fuels. Energy efficiency measures, the upgrade of the power grid and the proper development of renewables could reduce India’s concerns over its energy situation.

Currently India is the fifth largest primary energy consumer in the world, consuming more than 500 million tons of oil equivalent (Mtoe – the amount of energy released by burning one million tons of crude oil ) per year. Analysts expect consumptions to surpass 1500 Mtoe by 2030 and currently the country’s energy mix is dominated by conventional energy sources such as coal (39%), solid biomass (29%), oil (24%) and gas (5.4%). The lack of widespread gas and oil fields on its territory associated to the poor quality of India’s available coal leads the country to import a vast quantity of fossil fuels. Experts estimate that the number of coal and gas imports in the energy mix will respectively increase by 16% and 10% by 2030.

The skyrocketing consumption of oil, which is the lifeblood of the booming transportation sector, forced the Indian government to reconsider its oil diplomacy. Currently the country imports more than 60% of its oil, mainly from the Middle East, and analysts believe this amount will increase to 90% by 2025. The state-owned Oil and National Gas Corporation (ONGC), incumbent and de facto monopolist in the oil market, has been very active in the past by signing supply contracts and obtaining exploration and drilling rights. In particular, in the Caspian basin, ONGC successfully bid for the Tengiz, Kashaugan, Kurmangazy and Darkhan exploration sites in Kazakhstan. At the same time, the Indian government acquired shares in oil exploration ventures in Indonesia, Libya and Nigeria, and directly invested in Sudan and the Ivory Coast. The decision to cooperate with countries such as Libya, Sudan and, in the past, Iran irritated the US, but it did not impede the signature of the US-India civilian nuclear cooperation agreement under the Bush administration. This agreement, strongly desired by Delhi, provides India with the US know-how to properly develop a nuclear power plant in the country. However it will be very difficult for India to finance the development of nuclear energy in the medium term, forcing the country to continue its dependence on fossil fuels.

Subsidies and grid connections are the most critical aspects of the whole energy industry. Although over the last decade power supply increased by 7.2% per year – thanks to investments in the upgrade of old thermal power plants – almost 44% of Indians do not have access to electricity and still rely on noncommercial energy (which is produced either from agriculture or industrial process residuals or from individual renewable installations not connected to the grid). The system of massive energy subsidies that the government established has led to high power demand, caused by low tariffs, and it is encouraging wasteful consumption in those areas properly connected to the grid. At the same time the power network loses almost 40% of the power generated daily, reflecting the insufficient investments in the management and maintenance of transmission and distribution system. These cause a yearly 8% – 10% gap between demand and supply of energy. Despite these problems, over the last 5 years India has been able to raise its GDP by 8% each year, consequently devoting a part of its enormous yearly export revenues to the upgrade of the grid. However these efforts have been clearly insufficient as a large part of Indians are still unconnected to the grid.

Even though the country’s energy intensity (0.69 Mtope/k$) is lower than that of the Chinese (0.78 Mtoe/k$), it is still far higher than Europe’s (0.13 Mtoe/k$) leading the country to be the fourth largest emitter in the world. This is the result of low energy efficiency policies and high subsidies for coal and oil used in the transportation and power sectors. Furthermore the lack of a proper power grid, connecting rural areas to the national network, and the scarce development of renewable energy sources, lead to the wide use of noncommercial energy sources which create a high amount of greenhouse gas emissions. Consequently rural electrification is the most important challenge for the country’s energy sector. Providing larger areas of the country with power access would drastically decrease electricity generation from noncommercial energy sources, and thus reduce C02 emissions.

At the same time, a revision of the current subsidy mechanism, redirecting funds from fossil fuels to renewable sources and energy efficiency measures would reduce both wasteful use of energy and CO2 emissions. In particular, due to the current low development rate, renewable energies have an enormous potential to match the future energy demand. Currently India has the fourth-largest installed wind power capacity, amounting to six gigawatts, while biomass is poorly exploited even though it could provide gas, power and industrial heat in coming years. However the current government looks at such strategic sources as a last resort solution to providing access to power,. Indeed, Indian power plants are not really  efficient, being on average 7-10% less efficient than those of Europe, thus causing a wasteful use of fuels. The upward pressure on energy commodities, due to the global rally between different countries to obtain energy fields, is becoming time after time a matter of concern for New Delhi. Indeed the high amount of fossil fuels imported each year and their high price volatility can strongly affect Indian economic growth.

New Delhi definitely needs to develop an energy agenda for the coming years which aims to reconsider its subsidy scheme and provide capitals for low carbon technologies and energy efficiency measures. Such a green revolution could be useful even to the country’s economy which is practically dominated by the services sector. Indeed investing heavily in the development of energy efficiency and renewable sources industries could diversify its economic structure and potentially improve its economic growth rate. A more efficient and renewable-based energy mix, as well as a switch from coal to gas power generation, would be a powerful and useful policy even to properly face climate change implications for its territory.

Yet if New Delhi shies away from directly investing in a greener future, it could lose a strategic opportunity to upgrade its energy industry at a relatively reasonable price, while raising its economic potential and the country’s energy security.