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Making Sense of the Dark: A Primer on India’s Energy Crisis

By October 21, 2014 No Comments

In July 2012, two consecutive blackouts knocked down three of India’s five major power grids, leaving over 600 million people—more than half of the country—without electricity for two days.[1] The outage trapped miners, interrupted critical health services in hospitals, shut down airports and water treatment plants, and halted hundreds of passenger trains.[2] Often cited as the world’s worst power outage, this blackout brought to light India’s mounting struggle to meet its energy needs.

Life Without Power

Amid chaos that would have left North Americans reeling, Indians took the outage in stride. Commuters grumbled about delays, young activists cursed government policies, the elderly bemoaned the humidity, but for the most part, people remained calm. The reason for this is two-fold. First, daily, localized power cuts and rolling blackouts already frustrate the lives of people on the grid, lasting anywhere from an hour or two in cities, to up to twenty hours in rural areas. While big businesses and more affluent homes can switch on their roaring back-up generators, the rest of India must sit and wait. Second, a large minority of those in the blackout zone already belonged to the 400 million Indians—or 32% of the population—who live entirely without electricity.[3] Comprising 45% of rural areas and 7% of urban areas, un-electrified India has been forced to build a lifestyle around the use of firewood, candles, kerosene lamps, and gas stoves.[4]

As resilient as they may be, however, Indians are nonetheless challenged by chronic electricity shortages. Outages may result in anything from a nuisance, such as interrupted television or computer use, to a rise in the number of deaths, due to the absence of air-conditioning in 40°C heat.[5] Repeated long-term exposure to burning wood, animal dung, and crop residue in poorly-ventilated kitchens may also lead to serious respiratory illnesses.[6] In addition to these social consequences, power cuts have an economic impact. The agricultural industry, which employs about 60% of the population, faces lower crop yields and incomes, as voltage fluctuations impair the efficiency of electric pumps, preventing farmers from irrigating crops at critical times.[7] Meanwhile, according to the Federation of Indian Chambers of Commerce and Industry (FICCI), about 61% of firms suffer an average 10% shortfall in production due to unreliable electricity.[8] For those that own expensive diesel-powered generators, the cost of maintenance and repair can range anywhere from US$18.70 per day to a staggering US$749 per day.[9] Overall, FICCI reports that India lost US$68 billion in 2013 due to electricity shortages.[10] India must seriously address its energy crisis in order to regain the 6–8% gross domestic product (GDP) growth needed to alleviate poverty, achieve human development goals, and improve quality of life for Indians.

The Energy Deficit

While India is the world’s seventh largest energy producer, it is also the fifth largest consumer, and has one of the lowest per capita energy consumption rates (one sixth that of China’s).[11] Over the past several years, rapid economic growth and a rising middle class have fuelled demand, which has grown at a compound annual growth rate (CAGR) of 4% between 1990 and 2009.[12] In the same period, energy supply has grown only 2.9%.[13] According to the World Bank, the demand-supply gap now stands at 10–12%, with demand set to double by 2025.[14]

Portrait of a Sector: A History of Shortages and Reforms

Soon after India’s independence in 1947, Prime Minister Jawaharlal Nehru chose to build the power sector on the same socialist principles that characterized the economy: self-sufficiency, non-interference, and inclusive development. As such, the government nationalized electricity generation, transmission, and distribution, closed the sector to private participation and foreign investment, and lowered the price of power to ensure access for all.[15] Much like India’s economy at the time, however, its power sector was small—only 1,362 megawatts (MWs).[16] Infrastructure was extremely underdeveloped, excluding rural India entirely from the grid, and blackouts were common in cities. By 1990, generation capacity had grown to 69,000 MWs, but a 16% power deficit plagued the sector with losses amounting to US$850 million.[17]

In 1991, a debilitating foreign exchange crisis wreaked havoc on India’s faltering economy, leading to widespread economic reforms and the partial liberalization of the power sector. The government, intent on boosting generation capacity, used financial incentives to encourage private participation and foreign investment into generation. Companies were permitted to enter the market as independent power producers, signing long-term supply contracts with India’s state-owned transmission and distribution utilities.[18] In 1995, India sought to accelerate investment in utilities contracts by creating the Mega Power Policy, which offered tax exemptions to power plants above 1,000 MWs.[19] By 1998, it allowed restricted investment in electricity transmission and distribution.[20] Despite the reforms, the sector continued to struggle. Losses reached US$6 billion by the year 2000.[21]

In 2003, another set of reforms were implemented, spurred by a nationwide blackout that underlined the continued fragility of India’s power sector. The Electricity Act of 2003 (EA 2003) constituted a single, progressive, market-oriented framework, which aimed to move the sector toward enhanced competition, accountability, transparency, and commercial viability.[22] The Act also sought to improve electricity access, affordability and service quality, as well as promote renewable resources as a serious alternative to hydrocarbons.[23] Subsequent policies, including the Rural Electrification Policy (2006), the Integrated Energy Policy (2008), and the National Action Plan on Climate Change (2008), reaffirmed and refined EA objectives.[24]

Overall, the two sets of reforms have done much to revitalize India’s power sector. As villages and cities joined the grid, the share of biomass in India’s energy consumption mix fell from 46% in 1990 to 22% in 2012.[25] During the same period, private participation increased from 3% to 29%, helping to triple generation capacity, which now stands at 214 gigawatts (GW).[26] Recent capacity additions in 2007–2012 have been the highest in the country’s history.[27]

Sector-Wide Challenges

Despite astounding progress, however, India has missed—and continues to miss—every single one of its domestic energy output targets since independence.The reason for this, in large part, is that the government remains accountable for about 71% [28] of energy production in India, leaving intact fundamental aspects of the power sector that promote inefficiency and financial losses.

First, poor coordination between government agencies leads to policies that get implemented partially, inconsistently, or not at all. Indeed, responsibility for India’s energy sector lies with a multitude of players, many of which have conflicting interests or unclear and overlapping responsibilities. While the central government’s Planning Commission formulates policies, for example, it is up to India’s 29 state governments and seven union territories to actually implement them. As a result, most states have completed only half of the reforms envisaged by the EA, usually related to electricity access, affordability, and service quality.[29] Progress in efficiency and competitiveness remains comparatively minimal. In 2000, the central government obliged states to adopt an availability-based tariff (ABT)—a pricing mechanism designed to encourage grid discipline. While ABTs were intended to come into nationwide force by 2006, only eight states have begun implementation.[30]

Second, a cumbersome bureaucracy delays approval for projects already underway. The Ministry of Environment and Forests (MOEF), responsible for issuing environmental clearances, must sometimes cooperate with more than 15 agencies in order to approve coal projects.[31] While the official timeframe to obtain environmental clearances is 150–210 days, in practice, the process takes anywhere from two to six years.[32] Indeed, in 2012, the approval of 180 coal projects was delayed due to clearance delays from MOEF.[33]

Third, subsidized energy burdens government budgets, limiting the scope for investment in new infrastructure and technology. For instance, State Electricity Boards (SEBs), largely responsible for transmission and distribution, buy power from producers at market prices and sell to consumers at discounted rates. With huge losses incurred, SEBs struggle to invest in much needed infrastructural improvements. According to the International Energy Agency (IEA), India would require an average annual investment of US$92 billion to upkeep its overall energy supply infrastructure.[34] Given that the Indian government’s total capital expenditure in 2014–2015 is estimated to be only about US$41 billion, technical losses are inevitable.[35] To compound the problem, revenue collected from consumers for SEBs is often inadequate due to non-payment by customers, electricity theft, or negligence in accounting and metering.[36] Unsurprisingly, then, India’s aggregate technical and commercial (AT&C) losses tend to be high, reaching 31% in 2010–2011.[37]

Critics have argued against subsidies, asserting that they promote wasteful electricity use and prevent impoverished SEBs from financing rural India’s electrification. Considerable resistance exists to reforming subsidies, however, since farmers, landowners, and middle class urbanites benefit from them the most. Poorer Indians on the grid also benefit, making the abolition of subsidies a highly controversial issue. Unless reforms are adopted, however, energy sector finances and infrastructure will likely continue to deteriorate.

Resource-Specific Challenges

Within the context of these overarching issues, each of India’s natural resource sectors experiences unique challenges, hindering India’s ability to provide adequate domestic energy supply.

Coal

Coal remains India’s primary energy source, representing 59% of total installed power generation capacity.[38] As of 2011, India was the world’s third largest coal producer and consumer, and is expected to become the world’s second largest coal consumer by 2025.[39]

Despite the relative abundance of coal, however, domestic coal production has stagnated in recent years. In 2011–2012, production shortages forced India to lower its output target from 680 million tons to 554 million tons, only for production to fall short of the reduced target by 21%.[40] Indeed, India’s coal sector is the country’s most inefficient energy sector. It is almost entirely government-controlled, with two state-owned enterprises accounting for 90% of production.[41] Coal India Limited (CIL)—the world’s largest coal producer—represents 80%.[42]

Unlike a private corporation, CIL does not face many accountability pressures, and can thus decide not to follow protocols and best practices, which often results in the reduction of the quality and quantity of coal. India’s coal is already of low caliber; when fed to reactors, 30–50% of it turns to fly ash—a residue that gradually wears down generators and pollutes the environment.[43] While coal beneficiation improves quality, little of India’s coal is actually washed. In 2010–2011, therefore, India lost 35% of expected coal-based power generation due to unwashed coal.[44] Furthermore, CIL is unable to exploit the entirety of India’s reserves since it must use outdated mining technology, which limits exploration to a depth of less than 300m.[45] Roughly 40% of India’s reserves, however, are found beyond this depth.[46]

To compound the usual problems, a major corruption scandal, popularly referred to as “Coalgate,” now threatens the existence of coal production facilities worth about $33 billion.[47] On September 23, 2014, India’s Supreme Court cancelled 214 of the 218 government coalmine licenses allocated to public and private companies between 1993 and 2010.[48] The Court concluded that the licenses were granted illegally, in the absence of a competitive bidding system, and has ordered that the firms relinquish the mines by March 2015.[49] Since India is currently facing an acute coal shortage, the Court’s decision will likely exacerbate the crisis. Already this summer, several coal-based power plants were operating with reserves set to last only six days, as opposed to the 21-day requirement.[50] Plants have shut down, causing blackouts and provoking small-scale, localized riots in some cities.[51]

In an effort to boost the output, efficiency, and financial viability of the coal sector, the government recently announced plans to gradually divest from CIL, starting with the sale of a 10% stake.[52] Should the government choose to divest further and faster, a more severe coal crisis might be avoided.

Oil and Gas

India’s oil and gas reserves are relatively modest in size, and represent only 1% and 9%, respectively, of total installed power generation capacity.[53] In order to better exploit them, India introduced the New Exploration Licensing Policy (NELP) in 1999, permitting up to 100% foreign direct investment (FDI) into crucial parts of the sector.[54] Since then, major domestic and international private corporations—including Reliance Industries, Essar Oil, BP, and Royal Dutch Shell—have entered the market, making discoveries in Rajasthan and the offshore Krishna-Godavari basin.[55] As a result, explored sedimentary areas have increased from 59% of the total area in 1999 to 88% in 2010, largely due to newfound gas reserves.[56]

Though initially successful, the NELP scheme was later modified through the introduction of regulatory and tax amendments, which have discouraged and even reduced investment in recent years. Despite promises of market-based pricing, for example, the government has only partially deregulated diesel.[57] Furthermore, in 2008, India abolished a seven-year tax holiday previously enjoyed by owners of NELP blocks.[58] As a result, the number of international private corporations involved in NELP bidding rounds has steadily decreased from 21 in 2008, to 10 in 2009, to 8 in 2011.[59] State-owned Oil and Natural Gas Corporation (ONGC) continues to account for the majority of oil production, representing 69% of output in 2012.[60] Much like CIL, ONGC must rely on outdated equipment, such as aging deep-water rigs and pipelines, for its operations. As such, it is limited to the exploration of mature fields in and around Mumbai High basin, which has been experiencing production declines.[61]

To revitalize the sector, the government has started to further deregulate the price of diesel—a move intended to attract greater private participation and enhance FDI.[62] Should the government continue to add incentives and remove obstacles to investment, a greater influx of new technology will likely occur, making it easier for India to exploit its deep-water, offshore reserves. Until then, demand for oil and gas will continue to outstrip domestic supply.

Nuclear Power

Nuclear power is a source of pride and hope for the Indian government. By the 1970s, India was one of the first few countries to master the nuclear fuel cycle—from uranium exploration, mining, fuel fabrication and electricity generation, to reprocessing and waste management.[63] In more recent times, nuclear power has been touted as the harbinger of energy independence and a sustainable carbon-free future. As such, India’s plans are ambitious: nuclear capacity is to reach 20 GWs by 2020 and nuclear power is to supply 25% of electricity by 2050.[64]

Though expectations run high, India’s nuclear sector remains small, comprising 20 reactors, operating at a mere 4.8 GWs.[65] Nuclear energy thus accounts for only 2% of India’s total installed generation capacity.[66] In large part, the sector’s stunted growth owes itself to India’s refusal to sign the Nuclear Non-Proliferation Treaty (NPT) in 1970. As punishment, the Nuclear Suppliers Group (NSG)—tasked with isolating non-signatories—banned India from the global nuclear market for decades.[67] With limited access to equipment and fuel, India found it increasingly difficult to build and operate reactors. In addition, its small uranium reserves, usually of poor quality, had lowered the efficiency of existing power plants.[68] Only after India agreed to place its nuclear facilities under International Atomic Energy Agency (IAEA) safeguards, did the NSG grant a waiver, allowing India to pursue a civil nuclear cooperation agreement with the United States in 2008.[69] Since then, India has managed to secure other agreements with France, Russia, the United Kingdom, and Australia.

While increased trade has provided India’s nuclear sector with the opportunity to flourish, generation capacity has expanded by only 1% since 2009, and will likely continue growing slowly.[70] The Civil Liability for Nuclear Damage Act (2010) discourages foreign investment by holding suppliers of reactor parts liable in the event of a nuclear accident.[71] This is a sharp deviation from international norms, wherein the operators are held accountable.[72] Furthermore, an increasing number of nationwide anti-nuclear public protests have caused delays in plant construction. Following the March 2011 nuclear incident in Fukushima, Japan, the People’s Movement Against Nuclear Energy (PMANE) led hundreds of local residents in peaceful demonstrations against the construction of the Kudankulam plant in Tamil Nadu.[73] The civil movement has been ongoing for over three years, and has earned the support of both domestic and international health researchers and environmentalists. As a result, the project’s commissioning has been delayed six years after the scheduled date, and twelve years after its construction began.[74]

Despite the obstacles, India will continue to invest in nuclear plants. As of April 2014, six additional reactors with a combined 4.3 GW of capacity have been under construction and are expected to come online by 2017.[75] India also continues to experiment with its plentiful thorium reserves, planning to construct a 300MW thorium-based prototype reactor by 2016.[76] Given the complex technological process required to convert thorium into fissile material, however, it will be quite some time before India is able to use thorium in commercial plants.

Hydropower

As the world’s third top builder of dams, India has a long history of investing in hydroelectricity.[77] Between 1947 and 2000, India increased the number of its dams from about 300 to 4,000.[78] In 2003, the central government decided to accelerate construction by pledging to build hundreds of new dams—enough to double India’s total energy output.[79] In Kashmir alone, India currently has about 20 projects at various levels of completion, including the 450-megawatt Baglihar dam and the 330-megawatt Kishanganga dam.[80]

While the number of hydro projects has increased throughout the years, India has been able to exploit only a small fraction of their installed capacity. Often, the need for environmental clearances and assessments can delay the project approval process, leaving dams inoperable or functioning below capacity. In some cases, it can even lead to cancellations of existing projects. In a report submitted to MOEF in 2014, for example, a panel of 11 experts recommended the cancellation of 23 out of 24 proposed power projects in Uttarakhand, after a number of badly managed dams in the area exacerbated heavy flooding in 2013.[81] The floods killed 900 people, displaced 5,700 others, and damaged hundreds of roads, buildings, and bridges.[82] After reviewing the assessment, India’s Supreme Court ordered the cancellation of all 24 dams.[83]

Meanwhile, in disputed Kashmir, India’s rivalry with Pakistan over river-use has led to complications in project execution. Brokered by the World Bank in 1960, the Indus Water Treaty (IWT) regulates interstate water use between India and Pakistan. Despite the overall willingness of the parties to uphold the general provisions of the IWT, disagreements over legal and technical details of specific dams have intensified in recent years. As India builds more dams in the region, Pakistan fears it might use them to constrict water supply in times of conflict.[84] Though Pakistan’s complaints have not been able to halt the construction of any one dam, they have pressured India to modify several of its designs and even stall progress on key projects.

For these reasons, the share of hydropower in total energy generation capacity has actually been shrinking, falling from 44% in 1970, to 19% in 2012, to 16% in 2014.[85] Reforms in the policy implementation framework for hydropower development are currently underway, in an attempt to enhance private sector participation, and thereby efficiency.[86] Until new regulations are implemented, however, projects may multiply, but generation capacity will only inch forward.

Renewables

As India’s fastest growing energy sector, renewables represent 13% of power generating capacity.[87] Between 1990 and 2013, capacity has grown from a mere 18 MWs to 25,856 MWs.[88] Wind is the largest contributor, followed by small hydro, bagasse cogeneration, and solar power.[89] In 2011, India had the world’s fifth-largest capacity for wind energy.[90] Though solar power contributes the least energy, its share has been expanding quickly since India launched its National Solar Mission in 2010, aimed at installing 20 GW of grid-connected solar power by 2022.[91]

Private sector participation and FDI have fuelled the expansion of India’s renewable energy sector. Financial incentives, such as tax exemptions, have attracted investors like the International Finance Corporation (IFC). In 2010, the IFC funneled US$10 million into Azure Power Private Ltd.—an independent solar power producer, which developed India’s first utility-scale solar power plant.[92] Since then, Tata Power Solar, India’s largest solar company, has installed solar micro grids across several remote and inaccessible villages, helping to electrify rural India.[93] Though investment in India’s wind industry had abated for a time, it is picking up again, with General Electric Co. pledging to invest US$200 million into a single wind turbine-manufacturing unit.[94]

Though renewable capacity will keep expanding, it will likely continue to represent only a fraction of India’s generation mix—at least in the near future. Solar panels and wind turbines remain costly to develop, and projects can become easily delayed due to the need for land acquisition permits. Furthermore, India’s 100% domestic content law—requiring solar power developers to use only Indian-manufactured cells and modules—helps to dissuade foreign investment, denying India access to high quality equipment at competitive rates.[95] Lastly, solar and wind generation remains highly localized, without a viable transmission and distribution network to export power to other regions. As of 2012, Gujarat and Rajasthan represented 83% of India’s total solar capacity, while wind turbines figured prominently in only a handful of states, including Tamil Nadu, Maharashtra, and Karnataka.[96]

Increasing Imports & Rising Costs

Given that India has been unable to satisfy its energy needs with domestic supply, it has been steadily increasing fuel imports. Between 1990 and 2009, India’s import dependence increased from 11% of total energy demand to 35%, with crude oil accounting for 70% of that increase.[97] Likewise, coal imports have more than doubled in the past five years, and India became the world’s fourth-largest liquid natural gas (LNG) importer in 2013.[98] India is also investing in the US$10-12 billion Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, in order to increase natural gas supply.[99]

Since imports are costlier than domestic resources, the added expenditure can often strain the national budget and leave India vulnerable to global price hikes. During 2012-13, for example, India’s net import of oil rose to US$109.03 billion—a number so large it represented more than half of the country’s US$191.9 billion trade deficit, compounding losses and reducing savings and investment.[100]

Implications for India’s Energy Security and National Security

India’s reliance on fossil fuels and its scramble to secure foreign energy assets can have negative consequences for both its energy security and its national security.

In terms of energy security, there are both domestic and international consequences. First, most of India’s coalmines are located in the central and eastern portions of the country—the same regions that are occupied by a virulent Maoist insurgency. Reserves are often difficult to extract, and militants have been known to take fuel from government depots.[101] Furthermore, many of India’s overseas assets are located in volatile regions, increasing the chances of supply disruptions. Nigeria, Egypt, and Yemen represent India’s largest short-term LNG suppliers.[102] In 2010, India’s largest crude oil suppliers were Saudi Arabia, Iran, Nigeria, and Kuwait.[103]

Regarding national security, India’s race for energy assets brings it into close competition with rivals such as China and Pakistan. India and China are currently competing for oil and gas reserves in the Indian Ocean Region (IOR). China has been accumulating assets aggressively, securing hydrocarbons worth nearly US$47 billion between 2010 and 2011, compared to India’s secured assets of US$8.3 billion.[104] India often fears that China is using its presence in the IOR to encircle India from East Africa to Burma and the Bay of Bengal.[105] This serves to strain bilateral relations. Meanwhile, Pakistani militant group, Lashkar-e-Taiba (LeT), routinely accuses India of stealing Pakistan’s river waters in Kashmir, and has threatened to destroy Indian dams.[106] In 2009, Hafiz Sayeed, leader of the LeT, organized thousands of Punjabi farmers to protest India’s dams under the slogan: “Water Flows or Blood.”[107] While war over this issue remains unlikely at present, the incidents raise tensions between the two nuclear-armed rivals.

Concluding Remarks

India’s power sector has had a long history of energy shortage—a deficit that has intensified in recent years through the growth of India’s economy and rising middle class. Though reforms have done much to boost generation capacity, they have left unchanged many fundamental aspects of the sector that have contributed to its inefficiency and crippling financial losses. These include: a lack of policy coordination between government agencies, slow project implementation, distorted pricing, and a deficiency of investment in new technology and infrastructure. Within the context of these issues, each of India’s natural resource sectors experiences unique challenges, hindering fuel extraction and production, as well as project development and completion. All of the above interferes with India’s ability to provide adequate domestic energy supply.

Given the multifaceted nature of the supply-side problem, there exists no simple solution. Targeted reforms, such as the deregulation of diesel, are helpful and necessary in the short-term. Unless they are accompanied by deep, widespread, structural reforms, however, the success of India’s power sector will remain precarious, and the crisis may likely worsen. Blackouts would become more frequent or prolonged. Greater reliance on imports and international assets would increase the chances of energy supply disruptions, and likely exacerbate tensions with India’s regional rivals.

While there may be much about which to despair, however, many Indians remain hopeful. On May 26, 2014, Gujarat’s former Chief Minister, Narendra Modi, assumed office as India’s 15th Prime Minister.[108] Having managed to transform electricity-scarce Gujarat into a power-surplus state, Modi approaches his new role with great ambition. Among his many proposed initiatives, Modi has pledged to create a comprehensive National Energy Policy, enhance sector-wide efficiency, and improve the quality of energy infrastructure and technology.[109] It remains to be seen how far he will be able to push reforms, but he appears to be determined to lead his people into a brighter future.