Future Of Energy: Sustainable Energy Development

1. The Demand-side Problem

In broad strokes, the problem facing the power sector can be described as follows:

– To fulfil the necessary condition of end-use consumption of electricity to meet GDP targets.

– To minimise the requirement of such end-use consumption by making consumption of electricity more efficient, in turn –

—- By economising usage by consumption sectors such as Households, Commercial Establishments, Irrigation, Industry, and Others; and

—- By minimising losses in Transmission & Distribution.

– To make electricity generation more efficient

– To reduce GHG emissions per unit of electricity generated

– To move towards energy security, technological security and minimise the fuel import bill

To sustain India’s economic growth and improve the well-being of its people, a steady increase in the generation and consumption of electricity is a necessary condition.  As of 2014, about 960 billion kWh (or billion units – BUs) of electricity are consumed in India with present electricity generation capacity of about 255 Gigawatt (GW). This translates to around a thousand BUs of energy generation for 2015. By 2030, i.e. in the next 15 years, this needs to increase to 3400-3800 billion BUs , i.e. to about three and a half times the current level.

On the demand side, industry and households together account for more than 45% of total energy demand and their share is expected to rise even further, closer to 60% by 2030. About 23% of all energy generated is lost to Transmission & Distribution (T&D) losses. With the assumption of improvements in T&D, these losses would reduce to about 10% by 2030, putting the overall requirement estimate to about 3,300 BUs.

Table 1 : India’s Electricity Consumption Mix, Current and 2030 (P)

2. The Supply-side Challenge

About 60% of India’s generation capacity is coal based thermal. Conventional sources comprising Coal, Gas, Diesel, Nuclear and Hydro together comprise about 87.5% of all installed capacity. Renewables, though comprising 12.5% in terms of capacity, generate energy at about 5% of the energy mix.

While the total amount of electricity required and the year-on-year increases thereof can be reasonably estimated, the challenge is in estimating the actual source / technology mix. This mix is impacted by various factors such as energy security, technology changes, and climate change and other externalities among others.

It is generally accepted that global warming is one of the biggest risks and it is a result of carbon intensive activities. Studies indicate that India would be amongst the most affected by global warming and climate change. The Planning Commission’s Final Report of the Expert Group on Low Carbon Strategies for Inclusive Growth, published in April 2014 gives two possible scenarios for the fuel / technology mix to meet a generation requirement of about 3,400 BUs by 2030.

The first scenario is the Baseline Inclusive Growth (BIG) strategy, considering Gross Domestic Product (GDP) is to grow till 2030 at a Compounded Annual Growth Rate (CAGR) of about 7%.

The second one is the Low Carbon Inclusive Growth (LCIG) which keeps us within our carbon emission targets while marginally impacting growth (6.9% GDP growth). It is worth noting that in terms of generation from renewables the BIG scenario has already nearly been achieved as of 2014. LCIG scenario, though a stiff challenge to achieve, still seems within the realm of very real possibility given the right policy impetus.

Table 2 : India Power Generation Mix by 2030 – Scenarios

Conventional Generation

The power sector has been placing an increasing import bill on the country with domestic coal production not being able to meet the ever increasing demand. Coal based power is and will remain the primary source of power for us. Even if the share of its installed capacity goes down from the presently about 60% to about 46% by 2030, the major share of capacity addition of about 180MW is expected to come from it. Generation technology in India currently uses old sub-critical technology. The share of more efficient technologies like super critical, ultra-super critical and Integrated Gasification Combined Cycle (IGCC) technologies would be required for cleaner and more efficient power.

Figure 1 : Fuel / Technology-wise Power Generation Mix in GW; Current and 2030 (P)

Renewable Generation – Wind and Solar

The plan for generating 3400 BUs by 2030 should have a Wind and Solar share of about 16% as envisaged under the LCIG scenario. This would require about a third of the total installed capacity comprising of these two.

Of renewable power, wind and solar power are the largest two in terms of potential capacity, however there are other renewable technologies that are already at grid scale and could contribute significantly to the energy mix, such as, biomass power and gasification, bagasse cogeneration, waste to power and small hydro.

In LCIG scenario, installed capacities of wind and solar have to be increased to 118GW and 110GW, respectively, by 2030. The new Government, after it came into power in May 2014 set an even more ambitious target of 100GW by 2020 for solar, no official target has yet been set for wind. The current installed capacity is 2700MW for solar and 22,000MW for wind power.

Therefore to achieve 100GW by 2020 for solar will require around 19,500MW of additional capacity every year for the next 5 years. While 118GW by 2030 for wind, will require 6,500MW of additional capacity for the next 15 years. With the current trend of additional installed capacity of renewable energy at 1,000 – 1,500MW annually, it is clear that the Government has to do something drastic to attract enough investor, developer and manufacturing interest to make sure these targets are met.

Distributed Generation

Distributed generation can be implemented as a necessity, especially in rural areas which have been abandoned by the grid or in urban areas as an extra revenue stream and as an avenue for personal energy security.

Off-grid biomass and solar energy generation can play a vital role in addressing India’s increasing electricity demand especially in rural areas. Developers like Husk Power Systems are already attempting to harness this potential by implementing village level micro-grids connected to a biomass generator that uses local agricultural waste as feedstock. The feedstock required for biomass generators is variable and it is this that makes the model look so attractive. Notably, in Himalayan areas where grid connectivity is not economically feasible, these village level micro-grids can be installed to deliver power from pine needles and sawdust feedstock, which can be found abundantly in these areas.

In urban areas, idle residential or large industrial and commercial rooftops can now partake in solar heating or solar power generation, which through the net metering concept can provide additional income to its owners. Having the generators and load in such close proximity will not only reduce the burden on the grid but also improve transmission efficiency.

The only problem in this model is the financing aspect and this is where the Government needs to step in. Off-grid generators because of their low creditworthiness lack access to capital. Even solar rooftop requires a high upfront capital cost. The government already provides a capex subsidy for such investments, however, further assistance from public sector banks required in terms of access to capital for these projects to really take off.

Nuclear Energy

A grid can never depend fully or even substantially on renewable energy because the generation is very erratic and fluctuates greatly depending on time of day and season. Solar peaks generation is during the day while demand is highest at 7pm in the evening when solar and even wind generation are not at their highest generation outputs. 50%-60% of the units generated by a wind farm are during the monsoon months of May-September, while demand peaks in summer as well as winter high during the year.

The US and India had signed a Civil Nuclear Agreement which has been recently followed by India and Australia signing a Civil Nuclear Cooperation Agreement, that showcases the Government’s desire to promote nuclear power as a viable source of energy. Generation of nuclear power does not involve emission of GHGs, and since it provides a stable source of base load power, nuclear energy is attracting attention as a low carbon source of power.

Unfortunately, civil liability clauses and also the public safety concerns of nuclear power plants, heightened after the Fukushima disaster, have hampered the progress made in this area. To accelerate nuclear power development the Government needs to enact an appropriate civil liability framework and have awareness campaigns for the public to inform them of the relative safety of our nuclear plants in operation. This will require increased transparency and better communication on part of the Department of Atomic Energy and the Atomic Energy Regulatory Board.

3. The Required Renewable Impetus

For the government to meet the ambitious renewable energy capacity target that it has set for itself, a supportive environment for the industry is needed. Even though source of energy in renewables is free and unlimited over time, the overall financial cost of generation cannot compete with conventional power. This comparison, of course, does not account for the environmental impact and other externalities. Renewables also have an impact from the energy security perspective by reducing dependence on imported fossil fuels. All this calls for a government push for renewable power with a favourable policy framework.

Tax and other Government Incentives

Accelerated Depreciation (AD) for wind power plants was a major enablers to the rapid expansion of wind installations during the late nineties and early 2000s.  There was a sharp decline in Wind capacity additions in FY13 when AD was removed in 2012 (Figure 2). Therefore, it is imperative for the government to continue such incentives to the renewables sector.

Figure 2 : Solar and Wind capacity additions; Sharpe decline of additions in FY13 as compared to FY12

In addition, including a separate income tax exemption on renewable energy bonds could provide further investor stimulus to the sector. Renewable energy bonds qualified under the infrastructure umbrella which had an annual cap for investment. However the Government should permit a separate category to make eligible renewable energy bonds completely tax free without any upper limit. This will cause a flood of investment into renewable energy which will of course have to be managed to ensure that there is no misuse of the provision. However this private investment will go a long way to replace government spending especially on capex subsidies and the like.

An issue that does not get much headlines is minimum alternative tax (MAT). Although profits for a ten year period are exempt under Section 80I of the Income Tax Act, a renewable energy company still has to pay between 19%-21% of MAT. The cash flow impact of such a rule cannot be overstated. A MAT reduction of 20% to 10% alone can cause a 0.12 Rs/kwh drop in the cost of renewable energy. This will also free up cash that can be better utilised towards installing additional capacity or investing in R&D.

Feed-In-Tariff

Feed-In-Tariffs (FITs) set by State Electricity Regulatory Commissions (SERCs) for wind power vary widely between states. Many sites with good wind potential do not make the cut for viability because of lower tariff in respective state. On the other hand sites with lower potential get the investments as they provide the required returns to the investor. This is sub-optimal solution for the country as a whole. There is need for alignment of tariff regime of different states.

For Solar power, reverse bidding process is the usual process for tariff discovery in most states. Now that solar power is approaching grid parity, there is a school of thought that the reverse bidding process should be stopped as it only results in a race to the bottom, where IPPs bid over-aggressively to win capacity but compromise on quality of delivery in order to ensure their returns. The Government should move towards an FIT model for solar projects as well. This will drive growth in investments in solar power as investors will be get more comfort on the returns.

Renewable Purchase Obligations

The Govt. has very admirably created an extra incentive for IPPs by introducing Renewable Purchase Obligations (RPOs) for DISCOMs that can be traded through Renewable Energy Certificates (RECs) accredited to developers. However, these market based instruments have very low take up due to weak enforcement of commitments by the State DISCOMs. The penalty regime currently in place should be done away with and instead replaced with an incentivised program. In this scheme, State Electricity Regulatory Commissions (SERCs) will voluntarily set the State DISCOMS RPO target, and the Central Govt. can structure their allocation of central funds to the respective State Governments based on their adherence to their RPO commitments and the ambitiousness of their initial target given the renewable potential of the State.

It is envisaged that using the carrot of extra central funding will be a far more useful driver for demand of RECs than the stick of penalties which could end up being more expensive to enforce.

Renewable Energy Act and Central Procurement

India is the only country in the world with a separate Union Ministry for Renewable Energy, highlighting the importance government places on its development and promotion. However, India does not yet have an independent Renewable Energy Act. This needs to be implemented at the earliest and this will not only help rationalise the laws surrounding the industry but also boost investor confidence.

The Act can recommend central procurement of power at a CERC fixed tariff which will go a long way in promoting the bankability of each project due to the reduction of the DISCOM risk.

The Act will also allow the Government more flexibility in incentivising renewable energy projects through reduction of electricity duty, open access charges, wheeling and banking charges, thus making inter-state transactions feasible.

National Clean Energy Fund

The Government imposes a coal cess at the rate of Rs. 100 per tonne of coal produced or imported into the country which would collect an amount of almost Rs. 6,000 Cr in a year. This is routed to the National Clean Energy Fund (NCEF). This cess should not just be limited to coal but to all fossil fuels to truly reflect the impact they have on CO2 emissions. This can be an alternative to a cap and trade model which is difficult to enforce. Rolling the cess out to cover all fossil fuels will more than double the annual collection of the NCEF.

The funds of the NCEF can then be used for multiple purposes. For e.g., subsidies for renewables like generation based incentive, capex subsidies, interest subventions, hedging support etc. can be effectively funded from this route. Interest adds greatly to the cost of a power project. Reducing the rate of interest by even 2% can have a Rs. 0.20 – 0.30/kwh reduction in the cost of generating renewable power.

The budgetary requirement for India to develop a sustainable approach towards energy generation and consumption is far greater than what can be sourced from local funds. The government needs to encourage international investors to partake in the development model as well. With low international interest rates, the domestic market will ordinarily look very attractive for these external investors. However with extremely high hedging costs at around 5%-6% and the added regulatory hurdles, this presently is not such an attractive option for domestic borrowers. The NCEF can be used as a support fund which can subsidize the currency hedging cost.

4. Common Themes

All three steps in the energy value chain: generation, transmission (T&D) and consumption, throw up significant challenges, and opportunities to make the overall process more efficient. Interventions at each step are required to help us meet our energy needs. Each step also faces fundamental issues which impede growth.

Land acquisition, and evacuation issues

Like most other infrastructure projects land acquisition and right-of-way (RoW) disputes are the leading cause of delays and cost over runs of renewable energy projects. The other issue being lack of evacuation infrastructure provided by the state DISCOMS.

The new government is proposing a new Land Acquisition Act that will hopefully make it easier for infrastructure projects to acquire land thereby removing the single greatest hurdle to infrastructure development in our country. Some state governments grant deemed land conversion approval for renewable energy projects. This significantly reduces the paperwork required for each project and reduces delays. This should be implemented in all states.

State DISCOMs have to be supported by Central Agencies in terms of the development of transmission infrastructure otherwise all the good intentions of a Union Government pro renewable policy will fall flat.

If a simple process for an IPP is available, where all one needs to do is apply for evacuation approval, buy the land, develops the project and plug it into a Government substation, it would reduce the cost of such projects by at least 30%.

Reform of Power Retail

State DISCOMs are almost universally in bad financial health. Losses generated by these DISCOMs have had an adverse impact on state funds. Since power generation has been privatised, there is no reason as to why power retail cannot be privatised too. This will not only bring competition and innovation into the power retail space but also reduce theft though better management. The public sector can then fully concentrate on maintaining and expanding the transmission and distribution infrastructure.

General examples for this would be the growth and penetration brought about by the privatisation of telecoms and satellite dish TV. Specific examples are the success stories of Tata Power in Delhi and Reliance in Mumbai.

Privatisation of power retail distribution will benefit the end users through more choice over their power service providers. Private retailers should be able to have better pricing through economies of scale and professional modern management of the distribution network. Assuming permissibility of Inter-state sale, IPPs will benefit from having a greater range of clients for their products which will increase their negotiating power for tariff setting.

In any case there needs to be concerted effort to move away from the age old utility model, as it clearly not working and a fresh approach employed for the delivery of energy.

Grid and Transmission

A robust grid is required to absorb intermittent power from renewable power plants. In addition the technical losses from the grid are around 10% of generated units. These two issues necessitates an immediate up-gradation of the grid. Impressive efforts have been made to provide interconnectivity between all the regional grids to develop a truly national grid, however the interconnectivity still remains limited to certain points. Having an integrated grid will improve overall grid management as well as form a platform for the development of demand-supply management systems.

However, the fact that 100,000 villages still remain un-electrified points to the requirement for not just modern infrastructure but better penetration of the grid as well. Power is a big pre-cursor to growth and if it is not being provided universally then it defeats the whole basis of an inclusive growth model.

Green corridors are another option for the evacuation of renewable energy projects being explored by the government and should be expedited. The grid forms the skeleton of the power industry and once investors are convinced that this is strong there will be ample interest in the opportunities for both generation and retail.

Bank Capital

To make renewable energy more scalable, public sector banks have to be encouraged to add renewable energy projects under their priority lending sector.

Another issue to be addressed is the asset-liability mismatch in the tenor of loans offered by banks. Typically banks offer 12-13 year term loans while the average life of a wind farm or solar park is 20-25 years. Banks need to be encouraged to extend the tenor to match the working life of the asset.

There is also a need to provide or subsidise the currency risk hedging available today.

Promoting Local Manufacturing and need for R&D

The domestic manufacturing industry needs to be encouraged for complete energy security to be realised. While the wind sector has encouraged local manufacturing, the solar sector, which is poised to grow exponentially, faces many manufacturing challenges from global players, who have overcapacity, far lower interest costs and higher incentives / subsidies as compared to their Indian counterparts. Several solar equipment manufacturing industries in India are either operating at sub-optimal capacity and/or have shut down production. The solar manufacturing industry is in desperate need for a shot in the arm which would lead to increased investment, job creation, reduce foreign exchange outflow and sustain long term growth.

To support the domestic solar and wind manufacturing industry the Government has to create a capex support scheme for the as well as tax and duty rationalisation and exemptions.

India should recognize the importance of technological innovations required to make the growth of renewable energy viable. Companies are encouraged to incur R&D expense through a 200% tax deduction. However, companies still spend very little of their cash on R&D and even the R&D performed in academic institutions doesn’t seem to have a route to market. Amongst developing nations, India has one the lowest patent rates as well as a comparatively low R&D expense as a percentage of total expense. To change this mind-set requires a dual change. It requires stability of Government policy so as to encourage companies to invest in long term strategies (like R&D) and it requires better interconnectivity between India’s excellent academic class and India’s excellent business class possible through the route of specialist R&D venture capitalists.

There are several potential areas within renewable energy where further R&D is required to make them commercially viable. Some of these are algae induced biogas, bio-diesel, energy storage, small hydro, hydrogen fuel cells or waste to energy solutions. All of these have the potential to be game changers in their own right.

India has always in the past inherited established technologies from the rest of the world at high costs. However, with adequate Government support India can be an R&D hub which instead exports cutting edge technology to the rest of the world.

Energy Efficiency

India is rapidly urbanising with 600 million citizens forecasted to live in cities and towns by 2020. This necessitates a rapid growth in the construction of residential and commercial buildings. Since this combined segment would be the biggest of the energy consumption pie, it be becomes important to innovate in technologies which are efficient and economically viable. The Energy Conservation Building Code (ECBC) has already been made mandated by the Bureau of Energy Efficiency (BEE) and should be rolled out for all commercial buildings in all states.

Replacing incandescent bulbs with CFL/LED can make our consumption efficient, but the upfront cost is prohibitive from many. An approach to get over this hurdle can be for the DISCOM to sell the CFL or LED to the end user with an EMI to cover the cost is added to the monthly bill. Thus depending on usage, the monthly bill including the EMI, might come out to be lower than before due to the saving in energy consumption. If we assume that by 2031-32 all lamps are CFL or LED the savings in lighting will amount to 70-80%.

Demand side management through the promotion of energy efficiency is as, if not more, important as increasing generation capacity. Labelling and star rating has been found to be effective in promoting the use of more energy efficient appliances. We recommend that the Government make star rating compulsory for all appliances and industrial equipment. The Government can then encourage the production of more energy efficient plant and machinery through a capex subsidy for high star rated equipment and appliances. The rating system also should be periodically tightened to appropriately capture the benefits of technological improvements.

The issue with residential buildings, as also with some commercial property development, is that the builders, and eventual the end users (buyers or tenants) want low upfront cost. Therefore, there is little incentive to invest in a green building. One way to align the vision of the government, builders and end users is to quicken the process of approval for building plans and reducing the cost of obtaining permits. Ensuring that local authorities have the necessary mechanism in place to do so effectively is important. Incentives such as reduced property tax and stamp duty for green buildings or financial incentives for end users in terms of reduced interest on housing or commercial building loans for green buildings have been used in other parts of the world, and can be applied to the Indian context.

5. The Future

The future of energy will have two underlying themes. First is better integration of information systems and electricity to drive efficiency. Second is localisation of power management. While higher generational capacities and enhanced grid penetration will ensure that electricity is the prime provider of energy.

Better generational capacity and grid stability will encourage the use of mass transit for passenger and freight transport. Metro Rail intra-city and High Speed Rail inter-city are already being explored. With better grid infrastructure and cheaper energy, these will be rolled-out to all towns and cities with a population greater than one million. Many auto companies are coming up with electric cars and scooters which are expected to gain acceptability with better technology. Up-gradation of city infrastructure is required to make it pedestrian or two wheeler friendly as it is a cheaper, healthier and more sustainable form of transportation.

Hopefully, the R&D in other areas of renewable energy will pay off and bio-diesel and battery storage will help in further decreasing our dependency on fossil fuels. Pump storage is one alternative where low-cost off-peak electric power is used to pump water from lower elevation reservoir to a higher one. During periods of high electrical demand, the stored water is released through turbines to produce electric power.

The old utility model of treating consumers as load and will move towards more personalised solutions as is already happening around the world. Power companies of the future will be more like Google and Comcast, software and media companies that already vying for control over the home eco-space and will just make electricity integral of their offering. The advent of solar rooftop has made this transition easier for these companies. They will solar rooftop to power your house, technology to collect data on energy use and use automation to improve the efficiency of your energy use. The current utilities provide power to the meter but are not too concerned with what happens beyond that. These companies which will be smaller and more nimble in their responses to change will be better at managing power after the meter, throughout your home.

For consumers, the allure of these players will not simply be lower electricity bills and a choice of greener energy but the ability, through digitally controlled interfaces and gadgets offered for a fee by these vendors, to intricately control electricity use in ways impossible before.

Information systems will bring disruptions in many facets. Internet-of-things, big-data and analytics, which is touted to touch every part of our lives, might fundamentally change the way we produce and use energy. The move towards a smart grid, through the combination of the electric grid, advanced communications, automation and IT systems that can monitor and control power flows and match production and consumption in real time will greatly improve the efficiency of the grid management saving billions of dollars.

This piece was originally published as a White Paper during the India Ideas Conclave 2014, Goa.