The energy story

I recently attended a talk on the 'Future of India's Energy Security', and came out with a distinct impression that the Indo-US nuclear deal would not revolutionize the energy sector, and could be a high cost to pay for the proliferation regime. Though the speaker Parmit Pal Chaudhuri, Washington, DC correspondent for Hindustan Times did not say so explicitly, the facts and figures he quoted pointed in that direction.

Today India’s economy is growing at nine percent, whereas energy production has increased at only 5% over the last couple of years. To sustain its economic growth, energy production would have to increase five to seven fold over the next 25 years. According to Chaudhuri a transformation of market forces in the energy sector would be crucial for this. He touched upon the four major energy sectors, laying out the shortcomings in each and the areas that demand change. With the poorest track record and the biggest potential, the coal sector seemed to define the critical condition of the energy sector.

This sector is the most important sector contributing to more than half of India’s energy requirements, and the biggest contender for reform. Unless there is significant reform in the coal sector, other energy reforms would be meaningless. The coal sector is highly inefficient, overstaffed, with poor cost effectiveness and is referred to as the coal mafia in the prime coal producing states of Bihar and Jharkhand. Almost 40% of the coal mined is stolen in transit between the mine and the consumer. In spite of having the fourth largest coal reserves in the world, India is one of the net coal importers due to the inefficiency of the coal industry, and lack of new exploration efforts. There is an urgent need for large efforts at explorations and overall reforms in the culture of the coal industries.

Next in line is Oil. India imports 70% of its oil and it is expected to grow to almost 90% in the next 20 years. The biggest irony of the sector is that it is taxed at very stage and finally subsidized for the consumer. The subsidy burden is estimated to be around $10 billion. However, the huge import bills are partially offset by the export of processed petroleum products, particularly to Iran. Overseas equity purchases in oil are poor, as the nationalized oil companies cannot afford them after running losses due to the tax and subsidy policies.

A silver lining to this sorry state of affairs is the gas sector. It has the highest potential to change the energy profile of India. It is estimated to supply almost 20-25% of the energy in the next 20 years. The sector is witnessing the biggest market reforms, with a large number of private companies participating. It also has the least number of mass based interest groups involved that could dampen the reforms. 96% of India’s gas comes from Qatar alone. It is imported through the sea route, which would continue to be the main transport route as ships get bigger and the shipping costs decrease.

The growth in the nuclear sector is subject to increased fuel and capital inflow. The Indo-US nuclear deal would be instrumental in lifting restrictions on the fuel aspect. While the amendments to the Atomic Energy Act would allow private firms to enter the nuclear power industry and reducing the capital problem. However, Chaudhuri does not think that it would be a prominent contributor to the energy requirements in the near future. Through my readings so far I had gathered that the Indo-US nuclear deal, if successful, would considerably help the generation of electricity. Though I was not expecting any dramatic changes or a sudden reduction in dependence on oil, the strategic benefits of the treaty gave it a different appeal. The proliferation concerns seemed to take a backseat. However, listening once again to how the nuclear energy sector would not transform the energy sector brought me back to the reality of the proliferation risks it would pose. But that is a matter for another post.

Coming back to the talk, Chaudhuri emphasized the success of the wind power sector as a promising sign for renewable energy. Wind power is one of the largest renewable energy sectors in India, but has to depend upon subsidies for efficiency. It has shown the greatest potential so far with private players being active in the field. On the other hand the solar energy sector has a lot of potential but cannot be harnessed efficiently unless there is a technological breakthrough to reduce costs. Chaudhuri believes that biofuel as an option would end in a few years, due to its direct association with increasing food prices worldwide.

He was also very critical of the electricity distribution system and said that on an average an Indian company has to pay almost 80% more than what any company in China pays for electricity. Distribution is a politically sensitive issue and reforms are slow to come. Electricity theft is probably the single largest issue and needs to be addressed for any real reforms in the area. He also talked of how big hydroelectricity projects have taken a backseat after the Narmada project fiasco. Though smaller local projects mostly in Uttaranchal, Sikkim and other hilly areas continue to harness the hydroelectric potential. Private firms are entering the sector and have struck deals for projects in Nepal.

On the Carbon emission debate Chaudhuri was of the view that so long as carbon emissions and economic development are a zero sum game, developing countries cannot be expected to agree to reduce carbon emissions. It is also a politically infeasible option for them. In India the use of biomass as fuel is one of the important contributors to emissions. With poverty levels decreasing, the switch to LPG as a primary domestic fuel would decrease the emissions.

Overall the energy story came out looking rather dismal, and in urgent need of path breaking reforms to sustain India’s economic growth.