India by no means is an energy secure country and in order to grow and mature into a developed nation we need to ensure that safe and affordable energy is available to all citizens for all times to come.
Currently coal is the most important fuel source in the country satisfying c.55% of our energy needs. While India houses the world’s fourth largest coal reserves, these are low thermal grade reserves which will deplete within forty years at the current rate of consumption. Oil and gas on the other hand are not available domestically[1] making the country reliant on foreign supplies and susceptible to external shocks. In addition to limited resources, traditional energy in India is largely State owned[2] leading to inefficiencies and low productivity. There needs to be increased privatisation of these industries in order to support the desired pace of economic growth. The government also needs to encourage Indian ownership of foreign fuel supply assets, which however, could potentially threaten national security and international alliances[3], making the task slow progressing and costly.
In the short run largely it is fossil fuels that will satisfy the country’s huge energy appetite. Thus privatisation and relieving bottlenecks of fuel supply should be tackled with urgency. Albeit with global oil, gas and coal costs at almost all time highs and in the absence of timely action in the past, this will be a costly proposition for the country. In the long haul, however, conventional energy is neither sustainable nor viable. There has to be diversity in the energy mix and an increased contribution from renewable energy. India is in a unique position to that extent.
The country has the potential to generate 150,000 MW of hydro power. India has in excess of 200 clear sunny days annually which can potentially translate into 5,000 trillion kilowatt hours of power. In 2007, it is estimated that the country had 8,000 MW of installed wind energy capacity; which can be further scaled to c. 65,000MW. Annual agricultural residue and surplus biomass could further generate 17,000 MW of power. And if all that was not sufficient our coastline of c. 7,600 km can potentially secure 9,000 MW of power using tidal energy. These staggering numbers indicate that in renewable energy India can find energy security and if exploited efficiently and timely, it could be a great investment opportunity. In fact the planning commission’s eleventh five year plan suggests that the Indian renewable energy sector is a USD 125bn prospect for the domestic and international investor community in the next four years[4].
The biggest gain from this investment would be for corporate India (not just for companies investing in the sector) as it is the highest consumer of power in India accounting for almost 45% of the consumption. India Inc is heavily reliant either on setting up captive capacity or self-generation back up options (60% of Indian firms resort to these means) for smooth operations. Easily available affordable power would mean that while setting up manufacturing units an additional component would be taken care of (i.e. setting up power source), freeing capital and man hours. Further, the average industrial power tariff in the country in 2007 was INR 4.50 while domestic tariff was as low as INR 1.14 in certain states. These low and unsustainable domestic tariffs led to a drain on the resources of power companies. With additional cost effective capacity coming on stream the tariff disparity could reduce and also stabilise profit margins for power producers.
Renewables offer solutions to a number of problems; however, these are not uniform across all segments. There is a cost, potential and policy trade off involved in every subdivision. The numbers below highlight this fact
Currently coal is the most important fuel source in the country satisfying c.55% of our energy needs. While India houses the world’s fourth largest coal reserves, these are low thermal grade reserves which will deplete within forty years at the current rate of consumption. Oil and gas on the other hand are not available domestically[1] making the country reliant on foreign supplies and susceptible to external shocks. In addition to limited resources, traditional energy in India is largely State owned[2] leading to inefficiencies and low productivity. There needs to be increased privatisation of these industries in order to support the desired pace of economic growth. The government also needs to encourage Indian ownership of foreign fuel supply assets, which however, could potentially threaten national security and international alliances[3], making the task slow progressing and costly.
In the short run largely it is fossil fuels that will satisfy the country’s huge energy appetite. Thus privatisation and relieving bottlenecks of fuel supply should be tackled with urgency. Albeit with global oil, gas and coal costs at almost all time highs and in the absence of timely action in the past, this will be a costly proposition for the country. In the long haul, however, conventional energy is neither sustainable nor viable. There has to be diversity in the energy mix and an increased contribution from renewable energy. India is in a unique position to that extent.
The country has the potential to generate 150,000 MW of hydro power. India has in excess of 200 clear sunny days annually which can potentially translate into 5,000 trillion kilowatt hours of power. In 2007, it is estimated that the country had 8,000 MW of installed wind energy capacity; which can be further scaled to c. 65,000MW. Annual agricultural residue and surplus biomass could further generate 17,000 MW of power. And if all that was not sufficient our coastline of c. 7,600 km can potentially secure 9,000 MW of power using tidal energy. These staggering numbers indicate that in renewable energy India can find energy security and if exploited efficiently and timely, it could be a great investment opportunity. In fact the planning commission’s eleventh five year plan suggests that the Indian renewable energy sector is a USD 125bn prospect for the domestic and international investor community in the next four years[4].
The biggest gain from this investment would be for corporate India (not just for companies investing in the sector) as it is the highest consumer of power in India accounting for almost 45% of the consumption. India Inc is heavily reliant either on setting up captive capacity or self-generation back up options (60% of Indian firms resort to these means) for smooth operations. Easily available affordable power would mean that while setting up manufacturing units an additional component would be taken care of (i.e. setting up power source), freeing capital and man hours. Further, the average industrial power tariff in the country in 2007 was INR 4.50 while domestic tariff was as low as INR 1.14 in certain states. These low and unsustainable domestic tariffs led to a drain on the resources of power companies. With additional cost effective capacity coming on stream the tariff disparity could reduce and also stabilise profit margins for power producers.
Renewables offer solutions to a number of problems; however, these are not uniform across all segments. There is a cost, potential and policy trade off involved in every subdivision. The numbers below highlight this fact
Source: MNES[6], New and Renewable Energy Policy Statement 2005While hydro, wind and biomass seems to be efficient sources; solar photovoltaic energy can be extremely expensive. The payback period for solar photovoltaic technology is also debatable with some experts citing times as long as 8 to 11 years for a system with a life of 30 years. If one considers the disposal of acid used by solar cells, then this not a truly “environmental friendly” medium. Despite this data and knowledge it is surprising that solar energy is the only renewable energy form to be a part of National Action Plan for Climate Change unveiled by the Indian prime minister on 30th June 2008.
Wind energy is amongst the cheapest and most scalable of renewable energy forms. Not only is there installed capacity in India but there are also global wind energy experts such as Suzlon present in India. In fact India is a global hub for wind energy equipment manufacturing. This means that there is an opportunity to gain from exporting certain renewable technology as well. Thus it is baffling why wind energy has not been included in the National Action Plan. The attention being given to nuclear energy also becomes contentious in the light of the capacity potential and low capital costs of some of the renewable energy forms.
There are further challenges for India in providing a regulatory and policy framework that will encourage investments and channel funds towards projects that will increase the country’s energy efficiency. For one India still does not have a renewable energy law. A draft exists; however, it could be a little too aggressive[7] and is far from being implemented. Next, there is no uniform policy across the states ranging from tariff decisions to duration of PPAs[8]. Foreign investors have little faith in the Indian financial and legal systems upholding contracts and contractual obligations under times of stress and added to that currently only joint ventures are permissible with 100% FDI under the automatic route still being under consideration. With foreign technological and financial assistance key to the development of this sector, it is key for the government and regulators to address these issues.
Every economic downturn seems to be followed by a bubble. The 1998 crisis emerged into a technology bubble. When that burst, the real estate bubble began to build and while we are still trying to come out of the real estate ruins, there is another bubble surfacing – the renewable energy bubble[9]. If India wants to be the early bird and ride the high tide of this bubble then we ought to begin now. Else we will once again be in a position that the current traditional energy industry is in – a little too much but a little too late.
[1] India has 0.4% of the world’s proven oil reserves and 0.5% of the proven global gas reserves
[2] c.35% of NIFTY index is the energy sector of which more than 50% is government owned
[3] The Iran-Pakistan-India gas pipeline is a good example of international tensions rising due to domestic energy constraints
[4] c.60% of this investment is required for generation and the remaining 40% for transmission and distribution
[5] A range of price indications provided by a number of states as available on www.newenergyindia.org
[6] Ministry of Non-conventional Energy Sources (MNRE as it was called until 2006)
[7] The draft aims at 10% of power generation being sourced from renewables by 2010 i.e. 2 years
[8] PPA = Power purchase agreement
[9] A bubble can be defined as a phenomenon where a large pool of money is chasing the same asset class. At some point this demand supply imbalance leads to overpricing of the asset class disturbing the sustainable equilibrium
