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Are We Serious about Our Energy Security?

There is an insuffi cient understanding of the seriousness of India's energy security problem and the impact this is having on the country's development. This has led to various crises in the energy sector, which, in turn, have prompted ad hoc emergency responses that do not address the underlying fundamentals.

COMMENTARY

Are We Serious about Our Energy Security?

Ashok Sreenivas, Shantanu Dixit

in 2016-17 (Figure 1, p 11). That is, the country’s energy imports would nearly triple in just over a decade from 2006.

Such a rapid increase in imports also implies a signifi cant financial burden on the economy. At current prices, the total energy import bill for 2011-12 is likely to

There is an insuffi cient understanding of the seriousness of India’s energy security problem and the impact this is having on the country’s development. This has led to various crises in the energy sector, which, in turn, have prompted ad hoc emergency responses that do not address the underlying fundamentals.

The authors wish to thank E A S Sarma and Prabir Purkayastha for their inputs, though they remain solely responsible for any errors in the paper.

Ashok Sreenivas (ashok.sreenivas@gmail.com), Shantanu Dixit (shantanu@prayaspune.org) are with the Prayas Energy Group, Pune.

I
n his New Year message, Prime Minister Manmohan Singh outlined energy security as one of the fi ve key challenges facing the country. While this is indeed true, unfortunately, the government response to this challenge has been very weak and inadequate. Fuel price reforms and enhancing nuclear capacity are the most discussed options to address the energy security challenge. Though merits and demerits of these options could and should be d ebated, there are several other options which have been languishing for want of any firm actions. This short article fi rst presents the magnitude and importance of the challenge, and then narrates how inadequately the government has responded to it.

India’s Energy Security

We expand the definition of energy s ecurity as given in India’s Integrated Energy Policy (Planning Commission 2006) to not only include the ability to reliably access requisite quantity of e nergy at a reasonable cost and provide clean, modern energy access to the entire population,1 but also that the production and end-use of energy should have minimal health and safety hazards. In this article, we focus on the threat to energy security from very high external dependence as it increases uncertainties of price and availability of energy, particularly in view of increasing resource nationalism around the world.

India’s net2 imports of energy (petroleum, coal and gas) increased from 129 mtoe (million tonnes oil equivalent) in 2006 to 191 mtoe in 2010 representing a growth of 10% per annum. This is likely to increase to about 227 mtoe in 2011-12. Supply and demand projections for the Twelfth Five-Year Plan indicate that imports will further grow to about 366 mtoe

may 19, 2012

be about Rs 5.4 lakh crore ($108 billion)

– approximately equal to the state gross domestic product (GDP) of Gujarat. In other words, India currently writes a cheque of about for Rs 1,480 crore every day for its energy imports.

Real prices of petroleum, coal and l iquefied natural gas (LNG) increased at 5% (in spite of the recession), 12% and 7% per annum respectively between 2000 and 2010 and the reference scenario of the International Energy Agency's (IEA) international energy outlook assumes that real oil prices would increase at 5% per year until 2020 (BP 2011; PPAC 2012; IEA 2011). Though IEA oil price projections are known to be conservative (Miller 2011), even if one assumes that real prices of all fuels increase at only 5% per year during the Twelfth Five-Year Plan, the t otal import bill would increase from $108 billion to $196 billion (constant) by 2016-17 – an annual increase of 13% per year. This implies that energy imports would go up from about 6% of GDP in 2011-12 to about 7% in 2016-17, even if GDP grows at 9% per year (Figure 2, p 11).3

International Comparison

India’s energy imports form a considerably higher proportion of its GDP compared to many other countries (Figure 3, p 11). In 2008, India spent 7.3% of its GDP on energy imports, while Germany and J apan – whose energy import dependence is about 75% and 95% respectively, as against only 33% for India – spent only 3.3% and 4.4% of their GDP respectively.

India’s high level of energy imports also contributes significantly to its trade deficit: net energy imports are responsible for over 60% of the country’s trade deficit, and gross energy imports contribute to about a third of the total import bill. All other countries studied, except USA, run trade surpluses and hence energy imports do not impact

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COMMENTARY

Figure 1: India’s Energy Imports in Million Tonnes Oil Equivalent4 followed by improving supply-side effi

ciencies. Unfortunately, the govern-ment’s response has been weak on both these counts. (1) Weak Institutional Response: The prime minister set up an energy c oordination committee to deal with e nergy security and other energy sector issues as far back as 2005 (PIB 2005). Though this committee was constituted good intentions such as formulating “a 400 350 300 250 200 150 100 50 0 Oil Coal Gas

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: (EIA 2012; PPAC 2012) and Prayas calculations.

their trade balance too adversely, while they form only 40% of even USA’s trade defi cit (ITC 2012).

Implications

Such high expenditure on energy imports has many negative implications on the country’s development:

• Energy Access to the Poor: High d ependence on imports leads to higher energy costs. Higher costs, compounded

Figure 2: Financial Impact of Projected Energy Imports

i nclude oil price increases due to rising tensions around Iran and the intense d ebate surrounding the increase in imported coal prices due to regulatory changes in Indonesia and Australia.

• Lower GDP Growth: High imports are a drain on the country’s foreign exchange and impact domestic growth. For example, if India could reduce energy imports to about 5% of GDP in 2016-17 and invest the 2% saved domestically, it could result in an additional GDP growth of about 0.5%.7

coordinated policy response cutting across ministries so as to improve the overall energy scenario in the country while addressing energy security concerns”, there has been no visible action from this committee even as the energy crisis has gradually worsened, as indicated by stagnating coal production, falling domestic production of gas, sharply rising imports and deterioration in the fi nancial health of power distribution companies.

(2) Robust and Reliable Data: This must be the bedrock of any policy formulation. However, there have been discrepancies in

• Exchange Rate: Fuel imports form the data from multiple official sources, such as

largest item in the country’s import bas-discrepancy between oil usage and trans

250 8 7 6

% of GDP (right axis) Gas (LNG)
27 36
Coal 6
15 133
Petroleum 86

Billion (constant) $

200

150

100

5 ket and contribute to more than half the port activity data, and about 15% discrep

4

(%)

country’s trade deficit. This not only affects ancy in coal usage data (Planning Com

3

the country’s balance of payments but also mission 2011). The lack of a responsible

2

1 weakens the rupee against other curren-agency for basic tasks such as reliable data

0

cies, making imports even more costly. collection and reconciliation is another

2011-12 2016-17

Source: (BP 2011; PPAC 2012) and Prayas calculations.

by an inefficient subsidy delivery mechanism, make it hard to provide modern, clean energy access to the country’s poor.

• Increased Vulnerability: India would be more vulnerable to geopolitical tensions and domestic policy changes in e xporting countries. Recent examples

Figure 3: Net Energy Imports as Share of GDP 5, 6

Government Response

It is clear that energy security is a serious challenge faced by the country, with severe developmental and fi nancial im pacts. There could be many responses to this challenge, with demand-side measures to improve end-use efficiency and curb unproductive demand as the fi rst prio rity indicator of weak institutional response.

  • (3) Insufficient Attention to Burgeoning Oil Consumption: Petroleum imports contribute to about 80% of the energy import bill (Rs 4.3 lakh crore in 2011-12) and about half the petroleum consumption in the country is for transport. Therefore, demand-side measures in transport should have been a key measure to tackle the country’s energy security. However, there has been very little proactive action on this, though automobile sales in the country have been increasing at a rate of about 12% per annum, and consumption of petrol and diesel have been increasing at a rate of about 8% per annum (SIAM 2012; PPAC 2012).
  • (4) Vehicle Fuel Effi ciency Norms: None have been notified though the
  • 12 10 8 6 4 2 0 (%) China Germany India Japan Korea, South United States 2001 2002 2003 2004 2005 2006 2007 2008

    i ssue has been debated and disputed for

    Source: (EIA 2012; World Bank 2012; BP 2011) and Prayas calculations.

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    COMMENTARY

    over four years now (Sethi 2012). Though public and non-motorised transport are more efficient than private transport and the National Urban Transport Policy prioritises them, the government’s own JNNURM programme has sanctioned about six times more projects for roads, flyovers, etc, than public transport, despite the fact that the former primarily benefits private transport (JNNURM 2012).8 Similarly, though railways are considerably more energyefficient than road or air-based transport, the National Highway programme has been aggressively pursued while railway programmes such as the Dedicated Freight Corridor and high speed rail corridors continue to languish.

    (5) Inadequate Assessment of Wind Energy Potential: Renewable energy sources will have to play a big role in s ecuring India’s energy future, and an important step in this process is to obtain a realistic estimate of the potential from different sources. Though the government set up the Centre for Wind Energy Technology (CWET), there has been no urgency or initiative to comprehensively assess and update the country’s wind energy potential. CWET’s original estimate of Indian wind energy potential was 45 GW, which was upgraded to about 100 GW only after three independent reports upgraded India’s wind energy potential by an order of magnitude (Figure 4).

    Coal India Ltd (CIL), replacing loose linkages with formal contracts, and setting up a coal regulator (Ministry of Coal 2005, 2007). None of these recommendations have been implemented even as domestic pro duc tion has stalled and coal import dependence has reached 20% though the country is supposed to be rich in it. Instead, quick-fi x solutions such as asking CIL to enter into legally binding contracts with power suppliers have been suggested (PIB 2012) without sufficient clarity about its implications (Krishnan 2012; Chand 2012).

    (7) Ineffi ciencies in the Gas Sector: The share of gas in the fuel basket is growing around the world and in India. However, many inefficiencies in the sector have remained unaddressed. The government response to the controversies surrounding the KG D6 basin, such as falling gas production, adverse report from the Comptroller and Auditor General (CAG) and alleged non-compliance of contractual obligations by the operator, has been indecisive. The gas utilisation policy c ontinues to focus on sectoral priorities rather than on efficiency of end use and promoting applications such as distributed combined heating and power. On the supply side, the progress of proposed international pipelines such as the Trans-Afghanistan pipeline (from Turkmenistan, via Afghanistan and Pakistan to India) has been very slow, and the roll-out of

    Figure 4: Different Wind Energy Potential Estimates for India

    2,500 2,000 1,500 1,000 500 0 49 102 700-1,000 ~ 1,400 > 2,000

    CWET old CWET revised Phadke A et al Xi Lu et al Hossain et al (2012) (2011) (2009) (2011) Source: (Phadke, Bharvirkar and Khangura 2011; Lu, McElroy and Kiviluoma 2009; Hossain, Sinha and Kishore 2011).

    (6) Neglect of the Coal Sector: More than five years ago, a government appointed expert committee gave many recommendations to improve the coal sector such as detailed mapping of the country’s reserves using latest techniques, restructuring city gas distribution (CGD) networks is well behind schedule. Though over 100 CGD networks were to roll out by 2013, only 19 have been authorised thus far, and progress of even these is suspect (Business Standard 2008; P NGRB 2012).

    may 19, 2012

    Conclusions

    The above discussion highlights the insufficient appreciation and understanding of the seriousness of the energy s ecurity problem and its impact on the country’s development. It also shows how the government response to the challenge has been highly inadequate with actions falling far short of intentions.

    This has led to various crises in the energy sector, which in turn, prompt ad hoc emergency responses without addressing the underlying fundamentals. In contrast, dealing with this problem requires a holistic and long-term approach backed by institutional and policy responses. It should also be a continuous and ongoing process, rather than a onetime response. In the absence of such a systematic approach, the country’s f uture may literally be dark.

    Notes

    1 This is particularly important in a country like India where about 300 million people still do not have access to electricity and over 50% of the population uses firewood and chips for cooking (NSSO 2008).

    2 India and other countries are often both importers and exporters of fuels. Unless otherwise mentioned, all figures in this article refer to net energy or fuel imports, i e, after deducting exports from imports.

    3 Going beyond 2016-17, both import quantities and prices may move in either direction. For example, increasing climate change-induced pressure and falling reserves may result in higher prices for fossil fuels, though falling prices of renewables may reduce demand for conventional fuels. Similarly, India’s energy intensity may come down when its infrastructure building plateaus out – though that may be 15 or more years into the future.

    4 The shaded bars represent future projections. Though future projections are for fi nancial years, they are shown as calendar years in the graph for simplicity.

    5 We use nominal GDP figures because imports are paid for at actual prevailing exchange rates and our focus is on macroeconomic impacts such as growth and balance of payments.

    6 The import percentage for 2008 is higher than 2011-12 due to the steep spike in energy prices in 2008 which resulted in higher energy import cost for all countries.

    7 Data from the Ministry of Finance for 2009-10 indicate that the Incremental Capital Output Ratio for India is over 4. So, approximately 4 units of investment lead to 1 unit of output.

    8 This is without considering other demand-side policies such as road pricing and limiting automobile licences that have been implemented in cities such as Singapore, London and Shanghai.

    References

    BP (2011): Statistical Review.

    Business Standard (2008): “City Gas Distribution Phase-1 to Cover 100 Cities in 5 Years”, Business Standard, 10 September.

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    Chand, S (2012): “From Coal India to Air India”, F inancial Express, 23 February.

    DGCA (2012): Air Transport Statistics, retrieved 9 March 2012, from Directorate General of C ivil Aviation: http://dgca.nic.in/pub/pub-ind. htm#yearly

    EIA (2012): “International Energy Statistics”, retrieved 16 February 2012, from http://www. eia.gov/cfapps/ipdbproject/IEDIndex3.cfm

    Hossain, J, V Sinha and V Kishore (2011): “A GIS Based Assessment of Potential for Windfarms in India”, Renewable Energy.

    IEA (2011): International Energy Outlook.

    ITC (2012): International Trade Data, Provided by the UNCTAD/WTO International Trade Centre, retrieved 16 February 2012, from http://www. trademap.org

    JNNURM (2012): Approved Project Data, retrieved 9 March 2012, from Jawaharlal Nehru National Urban Renewal Mission: http://jnnurm.nic.in/

    Krishnan, R (2012): “PMO’S Solution for Power Producers May Not Solve Real Problems”, Mint, 15 February.

    Lu, X, M B McElroy and J Kiviluoma (2009): “Global Potential for Wind-Generated Electricity”,

    Proceedings of the National Academy of Sciences, 29 April.

    Miller, R G (2011): “Future Oil Supply: The Changing Stance of the International Energy Agency”, Energy Policy, 39, 1569-74.

    Ministry of Coal (2005): “Report of the Expert Committee on Road Map for Coal Sector R eforms”, Part I.

    – (2007): “Report of the Expert Committee on Road Map for Coal Sector Reforms”, Part II. MoRTH (2009): Road Transport Year Book 2006-07, Ministry of Road Transport and Highways.

    NSSO (2008): “Household Consumer Expenditure in India, NSS 64th Round”, National Sample Survey Organisation, Ministry of Statistics and Programme Implementation, Government of India.

    Phadke, A, R Bharvirkar and J Khangura (2011): Reassessing Wind Potential Estimates for India: Economic and Policy Implications.

    PIB (2005): “PM Constitutes Energy Coordination Committee”, press release from the prime minister’s offi ce, 13 July.

    – (2012): “PM Initiates Action to Address Issues of Coal Supply for Power Projects”, press release from the prime minister’s offi ce, 15 February.

    Planning Commission (2006): Integrated Energy Policy.

  • (2011): “Interim Report of the Expert Group on Low Carbon Strategies for Inclusive Growth”.
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  • PNGRB (2012): “CGD Network: Authorisations”, r etrieved 2 April 2012, from PNGRB: http://pngrb.gov.in/newsite/CGD-network-govt_authorization.html

    PPAC (2012): “Indian Petroleum and Natural Gas statistics”, retrieved 16 February 2012, from http://ppac.org.in

    Sethi, N (2012): “PMO to Take Call on Fuel Effi ciency Norms”, Times of India, 5 March.

    SIAM (2012): “Vehicle Sales Data from Society of Indian Automobile Manufacturers”, retrieved 8 March 2012, from http://www.siamindia. com/scripts/domestic-sales-trend.aspx

    World Bank (2012): Economic and Development I ndicators, retrieved 16 February 2012, from http://data.worldbank.org/indicator

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