India needs lots of energy for its economy to grow. Due to our drive to replace non-commercial energy with more convenient fuels, which are usually commercial ones, our elasticity of energy demand to GDP-a common measure of how energy demand responds to economic growth- is high. Nearly 25% of our total energy demand is met by non-commercial energy (mainly biomass). As we do not burn the latter efficiently, it has adverse health implications. It is also inconvenient to gather and use as a fuel. No wonder, the Government has plans to provide 5 crore new LPG connections to rural residents (we already have about 19 crore connections). So, we are happy, when our commercial energy consumption grows as it indicates buoyancy in the economy. In FY15 and FY16, our overall energy consumption grew by 9% and 5%, respectively. The above two years are also marked by high GDP growth, which was fuelled by the above supplies of energy.
But, which fuels are driving the overall growth? In the previous year (FY16), our petroleum consumption grew by a historic high of 11%, while our power consumption grew by over 5%. But, then our energy imports also grew, and reached the highest share ever in total energy. We imported 46% of our total primary energy (commercial) in 2015-16 (numbers are tentative), which has alarmingly been rising steadily. It was 38% in 2011-12 (at the end of the Eleventh Five Year Plan), and has risen every year since then. The creeping growth of the share of imported energy in our demand, threatens our energy security. So, we need to reflect on how to spur economic growth without de-stabilizing energy security. A simplistic answer lies in enhancing domestic energy production, and raising energy efficiency. There are other issues too. The above dilemma calls for a careful consideration.
Undeniably, energy consumption must grow. Our per capita energy consumption—both, all energy sources and electricity—are pitiably low, and energy uptake must rise. But, then, if rising imports reduce our sense of security, is domestic production the only salvation? Yes, and more. The falling production of gas, and static production of oil are much to blame for the concern. Against the above, coal comes out as a knight in shining armor. During 2015-16, its production rose by 11%, which contained imports. We have still imported 22% of our coal demand against 25% in the previous year (tentative numbers). So, as we import all three fossil fuels (oil, gas and coal), raising domestic production is definitely an imperative.
Now, we come to the ‘more’ part of the debate. Can we not slow down our rate of growth of energy demand, even when we strive to serve the energy related objectives of our people? The answer lies in efficient use of energy, which is already a high priority for the Government as evident in the campaign of distributing LED bulbs, driving Perform-Achieve-Trade (PAT) in industries, conserving energy in buildings through envelope optimization, and improving vehicular fuel efficiency. As per an energy modeling exercise done by NITI Aayog (IESS, 2047), by adoption of such measures, India’s energy consumption can be brought down in the future, from what it would otherwise be, by nearly a quarter. Energy efficiency is a mix of technology, behavioral change and fuel switching. The above measures reduce energy intensity and ease the pressure on domestic energy resources. But, efficient technology often comes at a high price, putting off consumers. However, when life cycle costs are considered, then they prove to be cheaper. In comparison, behavioral changes come at no-cost and are ideal–but difficult to internalize by consumers. How do we change the habit of keeping room temperature in summer adjusted to 24oC in our air conditioners, when two degrees higher would be comfortable, too, and also reduce the electricity consumption by nearly a quarter? By fuel switching, we mean given the devices we use, adopting those fuels which burn better and consequently, give more heat per unit of fuel (more value for money). For example, as compared to biomass, LPG releases a greater percentage of its heat when burnt, and electricity does even better. Some manufacturing processes are more efficient due to the above reason, but there are more complexities involved in the above engineering. Energy efficiency ought to be an area of prime focus for us to meet our energy related objectives in a less intensive manner.
Another important aspect of this discussion is, whether high energy imports are worrisome because they raise our energy bill and make our economy un-competitive? Without getting into the issue of adverse impact on our exchange rate via large outgo of foreign exchange on energy imports, there are other impacts, too. Unlike imported ones, prices of domestic energy supplies can be better calibrated through taxes, policy instruments etc. No wonder, due to export curbs on gas leading to low domestic gas price, the American economy has a large advantage over EU, which gets higher price imported piped supplies from Russia, and as LNG from the Gulf. Also, in the case of gas, there are savings in domestic supplies, because there are no liquefaction/regasification expenses which LNG suffers.
Fuel switching also works due to differences in cost of fuels for equivalent calorific value. Natural gas is cheaper than oil when compared on the basis of the energy packed in them. Let us say, if India were to theoretically (it is possible over time) replace all its oil with gas, there would be roughly 16% saving over the oil bill (assuming oil price at $50/barrel and gas at $7/mmbtu). This is not an insignificant number as our net oil bill is over $60 billion. Shifting to coal could be yet cheaper, but then coal cannot substitute oil across all consuming sectors, the way gas can. But, unfortunately, our share of oil is going up and that of gas is coming down. The share of oil is steady at 31%, while that of gas has come down from 11% to 7% in the recent years. So, while we may import, let us make the correct fuel choices. There can be other nuances, too. Fuel choices have to be made on the basis of air quality concerns, consumer choices, ease of availability and downstream costs (of the energy using asset such as car, stove, industrial equipment etc.).
Raise domestic production we must. There can be no doubt about reducing our energy intensity, either. And, even fuel choices have to be made consciously. The common denominator in all the above strategies is that they are measures that can only be implemented over a medium term. The necessity of internalizing the above in a national policy cannot be over-emphasized. This is precisely the ambition of the National Energy Policy, which is under making in NITI Aayog. The steadily rising energy import dependence is a cause for concern. With a target of sustained above 8% annual growth rate in GDP, India’s energy imports may rise rapidly and impair our energy security. Presently, international commodity prices are low and energy import bill is not worrisome. But, oil prices are up by nearly 60% from their recent lows. Energy is good for India, but there are several flip sides of the coin.
Disclaimer: NITI blogs do not represent the views of either the Government of India or NITI Aayog. They are intended to stimulate healthy debate and deliberation.