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Energy Security: Energy Intensity, efficiency and reforms

 

 


Energy Intensity of an Economy and Energy efficiency

Energy intensity is a measure of Output of an economy in relation to per unit consumption of power. This will tell us about energy efficiency of an economy. It is known that energy needs of an economy is proportional to its size. So normally higher the size of economy, higher the energy consumption.

It is obvious that it’s better to keep energy consumption at minimum by adopting energy efficient technologies. This is inherent part of good economics as it calls for maximum output by consuming minimum resources. This will reduce electricity bills of households, industry and of government too. This in turn will result in higher disposable Incomes, increased savings, capital formation and higher demand. It will save disproportionate investment of capital in power sector, which could be used for other more appropriate ends.

Energy, as we know, has huge environmental costs. So not saving energy where we can is dangerous. Saving energy results in avoiding emissions of millions of tons of greenhouse gasses annually. If this is not enough, then finally fact that conventional resources are depleting fast leaves no room for complacency over this issue.

Different countries have different Energy Intensity and it depends upon wide range of factors such as technology, share of particular sector in Economy, Government’s investment in power infrastructure.

If share of service sector is more in GDP, then energy intensity will be lower. Governments all over the world intervene in this issue by making policies toward efficiency. It is hence, hard to compare energy intensity of two economies as determinants are different. But still there are always lessons that can be learnt and energy efficiency Policy and technology can be imported and replicated in domestic economies. In this context India has borrowed heavily from western countries like USA and Germany.

To lower energy intensity a comprehensive approach which addresses issues beginning from Generation of power, transmission, distribution and finally collection of real costs from the consumers is imperative.

India’s energy intensity has come down rapidly in past couple of decades and this fall continues. This is mainly because of following reasons –

 

  1. LPG reforms in 1991 made private sector the dominant player in the economy. In pre LPG era there was widespread inefficiency and power sector was no exception. Private sector have to compete and continuously innovate/improve itself to lower the costs to remain competitive. This is true even more for international competition for e.g. when we say Indian products are expensive than Chinese products, then high power costs in India is one of the major factor.

    Indians buy one of the most expensive power globally and this is even truer if we compare per capita income with per capita energy costs. This too has forced consumers to keep their consumption low, be it industry or households. And consequently per capita consumption in India is extremely low.

     

  2. Another reason for India’s energy intensity is high GDP growth on back of services. In manufacturing sector energy input is higher because of processes involved which are dominantly energy consuming.

But most contentious issue in decreasing energy intensity is of affordability. Energy efficiency options are expensive and it is hard to convince a user of traditional energy methods to switch over to new one. This is possible only if he is made understand benefits which will accrue to him on the investment.

 

 

However, increase in demand is unavoidable. Still significant proportion of Indians doesn’t have access to electricity. Universal electrification is major part of Inclusive growth which aims to provide decent standard of living to all. Hence, increase in investment in energy is obviously desirable and unavoidable.

In this backdrop, we know energy resources are limited and this is big challenge and opportunity simultaneously. It is opportunity in sense that vast amount of infrastructure is yet to be built. This provides us opportunity to adapt to new challenges. 70 % of all buildings which will be there by 2030 are yet to be built. So, new commercial and civil buildings should be more energy efficient. In contrast developed countries have already conventional infrastructure in place and they need to modify it, which is bigger challenge.

Having said this, it is extremely hard to seize this opportunity as energy efficiency is costly for e.g. CFLs are expensive and so are energy efficient air conditioners and refrigerators. This matters across households and industries.

More specifically for industries, it is hard to adapt to new technology. This adaptation disrupts the ongoing production and consequently costs involved are higher. Costs in addition to expensive equipments include losses of production foregone. So industry needs to be provided with existing examples of successful and beneficial application of new technologies.

Another issue is of split incentives. Costs and benefits of adopting energy efficiency accrue to different people. A builder for example, if spends more money on energy efficiency, then there is no guarantee that customer will pay him more price compared to non-energy efficient building.

Energy efficiency policy of government tries to overcome these problems by intervention and support. Energy efficiency scenario is quite dynamic and developments are fast. Then key decision is choice of technology which is main medium of intervention and support.

This problem was conceived by government and Energy Conservation Act was passed in 2001.

 

  1. It introduced standards and labels.

    Labeling program in India was developed in consultation with US experts who have similar program in their country. This program is aimed to let consumer take more informed decision while purchasing any energy consuming appliance. Under this program star ratings are done on equipments such as fans, motors, geysers, bulbs, ACs , refrigerators, transformers etc.( 12 appliances were recommended). Initially this was kept voluntary and companies started labeling to project their product better than others. Over time people started relying on these ratings and appliances with good ratings attracted more customers and fetched higher prices and finally energy ratings became brands in them self.

    This came out as signal to manufacturers that consumers are willing to pay for energy efficiency and started investing to improve energy efficiency. This is determined by ‘payback period’ which means in how many years incremental costs of energy efficient products will be recovered by additional savings. Products which are of shorter payback period are more in demand. (High electricity prices helped a lot in this).

    Latter in 2010 government made labeling of 4 products compulsory. These are ACs, Tube lights, Frost free refrigerators and Distribution Transformers.

    India recently took another step in the quest towards energy efficiency with the launch of three landmark energy-saving initiatives i.e.

a) Design Guidelines for Energy- Efficient Multi-Story Residential Buildings

b) Star Ratings for diesel gensets and

 

c) Star ratings for hospital buildings.

 

1st government building to get 5 star rating is ‘International Centre for Environment audit & sustainable Development’ near Jaipur. This was setup by CAG last year and seeks to establish global center for excellence to improve accountability and governance in area of environment & sustainable development.

  1. Concept of designated Consumers was introduced

    Industries have most of the time limited finance and while pursuing energy efficient options, remain in dilemma that – Whether it is better to invest this amount in capacity addition?

    In any industry in India there is ‘energy variation’ which means that some units are quite energy efficient and some are quite inefficient in same industry (say cement sector). Difference between two extremes (Efficiency vis a vis inefficiency) is due to factors such labor based production or capital based production, up gradation of technology, new vs old plants etc.

    It is big challenge to bring inefficient units at par with efficient ones as this transformation will be costly and might force them to shut down, which is undesirable.

    Bureau of Energy Efficiency attempts to address this problem. It designates energy inefficient/intensive units as ‘ Designated Consumers’ and these units are required to follow ‘energy norms’.

    Under this a target of reduction of Energy Intensity for an industry is fixed. This target is percentage
    reduction in power consumption of a unit in relation to output. For inefficient firms target is higher than efficient firms. Any inability achieve target will attract some penalty.

    Under Energy Conservation Act it is mandatory for a ‘designated consumer’ to appoint an ‘Accredited Energy Auditor’ and ‘Energy Manager’

    This received further impetus with introduction of ‘National Enhanced Mission of Energy Efficiency’ under NAPCC which introduced concept of ‘Perform, Achieve and Trade'(PAT). Under this initiative ‘Energy Saving Certificates’ are issued to those units which achieve more target than what is mandated. These certificates are tradable and can be brought by units who were unable to achieve their targets. On getting sufficient certificates, they are deemed to have achieved their targets. This creates incentives for reduction beyond targets while letting other units to escape burden, also reducing targets to levels fixed by government.

  2. Demand side management
    a) Agriculture demand side management

    Agricultural pumps are most inefficient and widely used electrical equipments in India. Here 36 % of overall energy saving potential in India is available. So BEE initiated program of ‘market based intervention’, by supplying energy efficient pumps based on PPP model. This replacement will also unlock huge market for industry.

    b) Municipal Demand Side Management

    Here BEE supports urban local bodies to adapt to energy efficient and clean technologies in areas like drinking water supply and street lightning.

  3. Energy Efficiency Building Code
    a) Code sets minimum energy standards for ‘new’ Commercial buildings which have connected load of more than 100 KW.
    b) Also there is (star) labeling program initiated for three categories of commercial buildings – Day use office buildings, BPOs, Shopping Malls. Efficient buildings are expected to fetch premium prices in comparison to normal buildings (as it happened in electrical appliances).

    Energy efficiency in buildings is ensured by special architecture designs which take into cognizance windows, ventilation, wall configurations etc. For this government took lead by first making many of its own buildings efficient. Also government supports training of architects for their capacity building in the field.

    These measure of government address new buildings, but what about existing buildings? For existing buildings government is promoting ‘Energy Performance Contracting’.

    What is Energy Performance Contracting?

     

    Suppose you own a building and are interested in renovating it for energy efficiency. This need money for investment that you don’t have or even if you have money you don’t want to take risk. You can overcome this problem by contracting out this job to an agency, who will invest all the money without charging you. When renovation (or installation of new equipments) is complete, they will get a portion of energy cost saved by their investment for a certain period.

     

    Such agencies are known as ‘Energy Service companies’.

    Again as already stated that existing building owner will ask for successful examples before taking this step. So government is pursuing this in its own building and 1st such project was completed in ‘Rashtrapati bhavan’ which resulted in saving of 22-23% of energy and this fact can be used as marketing card by such companies. But this concept has yet not picked up in India

     

  4. Bachat lamp Yojna

    This Yojna aims to provide CFL bulb at price of Incandescent bulb i.e. Rs 15. It targets replacement of about 400 million incandescent bulbs in use in the country, leading to a possible reduction of 4000 MW of electricity demand, and a reduction of about 24 million tons of CO2 emissions every year.

    Difference in costs and price will be provided to by ‘carbon credits’ which will be internationally tradable under ‘Clean Development Mechanism’ of UNFCCC. BEE has registered pan- India ‘program of activity’ so that each firm trading in carbon credit need not register itself individually. This is largest CDM project in the world. 

  5. Strengthening Institutional capacity

    ‘State Designated Agencies’ are established in every state to implement Energy Conservation Act by overseeing regulatory, facilitative and enforcement functions of the act. These agencies also have to prepare an ‘Energy Conservation Action Plan’ and implement it with yearly deliverables.

  6. For Small industry policy of government needs to be unique as they have almost no engineering capability and there is knowledge deficit in addition to financial constraints.

    For this policy targets whole cluster of industrial units (geographically located + similar technologically + competing and learning from each other). These clusters have remarkable capacity to adopt what works good and save costs. So government intervention is in form of

    mandating Small industry development banks to consider this energy efficiency matters in loans with more weightage. Also by targeting local vendors and solution providers govt. can reach individual small units.

    Apart from this some companies are mandated to file Annual Energy Reports, there are Energy efficiency awards given by BEE and Energy efficiency is included in NCERT books for students.

     

    Also there is ‘State Energy Conservation Fund’ in place.

To achieve rapid progress in this field it is essential that choice availability, Information, financial capacity – all should be there to make a choice in favor of energy efficiency at micro level. Any new innovation is made popular by 1st few successful transactions and here government attempts to handle the situation by various policy. Thereafter, examples of these transaction and their benefits attract more and more users.

Power Sector Reforms

Power sector reforms begun in 1991 with LPG reforms when private investment was allowed. That time installed capacity in India was 70000 MW which now stands at 254000 MW and growing. Currently 29% of power is being generated by private sector. On back of Rajiv Gandhi Grameen Vidyutikaran Yojna, electrification rose from 59 % in 2000 to 74 % in 2010. Share of renewable energy in 1990 was only 18 MW which rose to about current 42000 MW.

But time and again transmission and distribution sector has underperformed. There are recurring losses which are then bailed out by government (2001 bailout totaled 1.5 % of GDP). In pre liberalization era, recovery from customers was quite lower than costs. This got improved after reforms but still there are widespread power theft and transmission & distribution losses.

Central Electricity Authority

Formed in 1948, it now derives its powers from Electricity Act, 2003. It has central role in formulation of policies and programs for development, planning and coordinating the electricity sector. It makes regulations and standards for construction of power plants, power lines, and connectivity to grids, Installation and operation of the meters, concurrence of hydroelectric schemes

Electricity Act, 2003

This act delicensed power generation and freely permits captive production of power. Further, it attempts to streamline transmission and distribution of the power. Transmission, however, it solely keeps for government companies.

Other reforms under the act are: mandatory metering of electricity supplied, stringent provisions to avoid power theft, permits standalone (offgrid) systems for generation and distribution in remote areas etc.

Appellate Tribunal

This board was constituted in 2004 with HQ at New Delhi to hear appeals against orders of regulatory commissions.

Mega Power Policy

The Mega Power Policy was introduced in November 1995 for providing impetus to development of large size power projects in the country. For a thermal power project to be awarded the status of a mega power project it has to have a generation capacity of at least 1,000MW, In the case of hydropower projects, the threshold capacity is 500MW.

Mega power policy allows a tax holiday for 10 years and waiver from paying customs duty on equipment imports to mega projects. In 2009 the policy was been revised as New Mega power policy to make investments more attractive and make it easier for the government to achieve its target.

It mandated power ‘distribution’ reforms for states by privatizing this function in cities having population more than 1 million.

Latter Ministry realized that in order to promote self-sufficiency in domestic equipments manufacturing, custom duties on Imports needs to be imposed. So sow new plants has to pay custom duty on imports and this policy stands withdrawn for new projects.

 

Ultra Mega Power Project

 

GOI in 11th FYP came out with the policy of power to all. This was to be achieved by Installation of 14 UMPPs with capacity of 4000 Mw each. This is too allowed through bids with 25 year ‘power supply agreement’. Plants will either have captive coal mines or Captive coal import terminal.
Their maximum Debt equity ratio of investment can be 70:30. So far only 4 projects have been sanctioned – Mudra – Gujrat (Coal Import Terminal), Sasan – MP, Tillaya – Jharkhand, Krishnapattanam – Andhra Pradesh Power finance corporation ltd will make ‘Special purpose vehicle’ for each project . SPV will then secure clearances, acquire land etc. on behalf of owner. It will also select developer on the basis of ‘competitive bidding’.

These will be based on ‘supercritical technology’ which consumes less coal than normal thermal plants.

 

FDI in Power sector

100 % FDI through automatic route is allowed in Power Generation, Transmission and Distribution. Trading in power is also allowed.

Power Grid Corporation of India Ltd.

Power grid is ‘navaratna’ PSU charge with responsibility of Interstate transmission of electricity. It overseas, manages and maintains all the 5 grids of the country. Late last year, southern grid was synchronized with rest of India which will enable transmission of surplus power. All other regional grids were already synchronous. Inter-regional transmission capacity is currently around 32 GW which will be enhanced to 66 GW by end of 12th five year plan. For this there are plans for ‘High capacity Power Transmission Corridors’ with investment of Rs 10000 crore over the plan period.

PGCIL is also present in telecom sector and owns Broadband Telecom Network of about 30000 Km which connects major cities. It also took up responsibility to build prestigious ‘National Knowledge Network’ which will connect Knowledge centers like IITs, IISs all over the country. It is also participant in ‘Nation Optical Fiber network’.

Company also is dominant player in building SAARC GRID. Present connections are there with Nepal, Bhutan and Bangladesh. Feasibility studies are going for underwater Indo- Sri Lanka grid connection. Indo Pak connection is also under discussion. It provides consultancy to various other domestic clients and International Clients from 14 countries.

It has leadership role in developing smart grid in India so that all segments (renewable with conventional) of power generation will be integrated in National Grid.
The project is under implementation and interim Smart Grid Control Centre at Puducherry has already been established with provision of advanced metering Infrastructure (AMI) solution and other functionalities like Outage Management System, Demand Response, Micro grid etc. are being taken up in a progressive manner.

Rural Electrification

A Village is considered to be electrified if –

  1. The basic infrastructure, such as distribution transformer and or distribution lines is made available in the inhabited locality within the revenue boundary of the village including at least one hamlet/Dalit Basti as applicable and
  2. Any of the public places like Schools, Panchayat Office, Health Centers, Dispensaries, Community centers etc. avail power supply on demand and
  3. The ratings of distribution transformer and LT lines to be provided in the village would be finalized as per the anticipated number of connections decided in consultation with the Panchayat/Zila Parishad/District Administration who will also issue the necessary certificate of village electrification on completion of the works.
  4. The number of household electrified should be minimum 10% for villages which are unelectrified, before the village is declared electrified. The revision of definition would be prospective.

To achieve universal electrification ‘Rajiv Gandhi Grameen Vidyutikaran Yojna’ was launched in 2005 under which 90% capital subsidy will be provided for electrification Infrastructure in the village. ‘Rural Electrification Corporation’ is nodal agency for the program. REC also provides balance 10 % requirements on soft Loans and form BPL households capital subsidy is of 100 %.

Transmission & Distribution Losses

 

What are T&D losses?

T&D losses are the power losses that are caused in the process of transmission of electricity from the generation end to the consumers. A large part of the losses are technical in nature, however, faulty meters and power thefts have also resulted in commercial losses. Together, the losses have been termed as Aggregate Technical and Commercial (AT&C) losses. AT&C losses provide a realistic picture of the actual energy loss at the distribution end.

The technical losses depend on the type of conductors used, transformer capacity, and other equipments used for transmission and distribution of electricity. These losses are intrinsic to power transmission system and all the countries report some percentage of technical losses. The Commercial losses are caused due to illegal consumption of electricity. These are caused due to discrepancy in meter reading, faulty meters, and power theft and collection inefficiency.

 

To control AT&C losses GOI initiated ‘Accelerated power development and Reform program’ in 2001. It is to be done by strengthening Transmission and Distribution Infrastructure and substations. Its aim is to reduce AT & C losses at sub 15 % levels. But so far no substantial progress is there as losses are still as high as 29 %. In north AT&C losses are higher than north. Further they are disturbingly high in political sensitive area (constituencies of Political bigshots). In developed countries these losses remain around 4-5%. They are 7% in china.

The main reason for the high rate of T&D losses in India is insufficient investment made in the transmission and distribution sector. The investments have been particularly low in sub-transmission and distribution. While the investment in generation has increased steadily, transmission has not kept up with it. This led to mismatch in the generation and supporting transmission system. Without the strengthening of the existing grids and development of new systems, the load on the transmission systems have increased resulting in increased T&D losses. About 75 per cent of the total technical loss and almost entire commercial loss occurs at the distribution stage.

As per the provisions of the Electricity Act, 2003, Special Courts to deal exclusively with cases of electricity theft have been set up in 23 states

As result of these losses, financial health of some state distributing utilizes is a big concern. subsidy dependence for the state-owned distribution utilities for Year 2014-15 is estimated in the range of Rs 7,20,000 crore. To make distribution free from political interference and in order to make possible recovery of reasonable electricity prices from consumers PPP model is being followed. Under this franchisee model is followed and Private companies are given this function and are allowed to recover market based prices. This model is there in big cities and states increasingly are adopting this model. Most of the private companies got success in bringing down AT&C in their areas.

Further Smart Grids are expected to bring more efficiency by their Real time monitoring and controlling capabilities and Also smart meters enable real time communication, information storage and energy loss calculation. It also consists of anti-tampering mechanism. Discoms have undertaken replacement of conventional meters with smart meters.

 



 

Reducing energy intensity is primary way to achieve efficiency and it calls for power sector reforms. Apart from these issues, there is need to promote awareness among public. India is big country and energy saved by each Indian can sum up to give power equal to what is being produced by numerous polluting thermal power plants. It is clear that in near future we can’t consume resources as developed countries do, but if we compare upper strata (say 1% of rich Indians) we’ll find their energy consumption similar to western countries. On the other hand about 25 % of India doesn’t have access to electricity. Hence, to narrow difference between two extreme is a formidable challenge and dream of ‘inclusive growth’ lies only here.