Energy efficiency and fuel substitution

The production and use of modern energy in India generated 115 million tonnes of carbon in 1985, or 10 per cent of all carbon emissions emanating from the developing world. From a global perspective, India will account for 21 per cent of the increase in carbon emissions produced from energy use in developing countries between 1985 and 2025.

Figure 8.1 CO₂ emissions from India, 1950- 1989

Table 8.2 Scenarios for India of future carbon dioxide emissions (million ions of carbon)

Sources: a Pachauri, R K, Suri, V and Gupta, 5 (1991). CO₂ Emissions from Developing Countries: Better Understanding the Role of Energy in the Long Term. Volume 3: China, India, Indonesia and South Korea. July. LBL Report 30060.
b Ravindranath, N H. Somashekhar, B S and Gadgil, M (1992). forests: Case Studies from Seven Developing Countries Volume 3: India and China. August. LBL Report 32759.

Figure 8.2 Primary energy per GDP, lndia, 1970-2025 (HE scenario excluding biomass)

Between 1970 and 1990, the intensity of India's primary modern energy use increased by 38 per cent (Figure 8.2). In various sectors of the Indian economy, the intensity of energy use per unit of value added exceeds that found in most industrialized and many developing nations. The increasing intensity in India reflects a replacement of human and animal draught power by mechanical and electrical devices. In particular, agricultural electricity use is increasing much faster (at almost 20 per cent annually) than the value added derived from this sector. The high intensities also reflect the underlying inefficiency of energy use in industry, transport and power generation. For example, energy intensities of cement production for wet, dry and the wet-dry processes were as much as 20 per cent and, in some cases, 50 per cent above international norms. Similar figures have been documented for steel, aluminum and other major energy intensive industries.

A recent study has shown that direct and indirect carbon emissions may be higher from construction activity than any other component of India's final demand. Energy-intensive materials such as glass, cement, bricks, steel, aluminum, and asphalt constitute the bulk of the components of a building or any other type of structure. Thus, emissions associated with construction are large. Reducing construction activity to decrease emissions is not a viable solution since a growing infrastructure is necessary to maintain the pace of economic development in India. Using materials more productively through improved designs of buildings and other infrastructure would be the better approach.

India's opportunities for curtailing emissions of carbon include rectifying its currently uneconomic allocation of fuels and inefficient energy-use patterns. Abundant but carbon-intensive coal resources satisfy almost 50 per cent of India's modern energy demand. In recent years, the costs of coal production and transportation have risen primarily because of changes in technology and low productivity. Arguably, more efficient fuel options (primarily oil, natural gas and renewables) could serve as economically viable substitutes for coal in the future.

Determining which alternatives provide the most cost-effective means for India to restrain the growth of CO₂ entails a thorough economic evaluation of the available options. In the industrialized countries, economic evaluations of reducing carbon emissions have focused on taxation policies. However, in most developing countries where fiscal and technological resources are scarce, any effective emissions abatement strategy must go beyond evaluating the impact of changes in domestic taxes on levels of carbon emissions. Carbon conservation efforts must identify the types of energy-supply and energy-use technologies needed to restrain the growth of carbon. They must also assess the capital investment and foreign exchange requirements needed to acquire less carbon-intensive technologies and fuels.

Through the 1980s, imports of crude oil and petroleum products constituted the largest single commodity group in India's import bill. In Table 8.3, we show the share of oil imports in total imports in each year between 1980-81 and 1990-91. It also relates oil imports in this period to export earnings. Although we find no secular trend in Table 8.3, we can discern a clear pattern in which oil imports were linked to the growth in consumption of petroleum products and the trends in the domestic production of crude oil. The higher international oil price in 1980-81 boosted India's oil import bill. In response, India accelerated the exploitation of the offshore Bombay High Reserves. Thus, production of Indian crude tripled to 28.9 million tons in 1984-85.

The consumption rate accelerated in the second half of the 1980s. Consumption increased at an annual average rate of 5.5 per cent during the Sixth Plan (1980-85), but it increased at 6.8 per cent per year during the Seventh Five-Year Plan. As Bombay High was exploited fully in the mid1980s and no new discoveries on the same scale as in the mid-1970s were made, oil imports rose inexorably. Crude oil imports, therefore, increased in 1985-86, and petroleum product imports followed suit in 1987-88. As we show later, the nexus between oil demand and import payments has an important bearing on India's capacity to reduce emissions.

Table 8.3 Petroleum imports (products and crude) as proportions of all imports and of export earnings

Source Reddy C R. D'Sa, A and Reddy, A K N (1992). 'The Debt-Energy Nexus A Case Study of India', Economic and Political Weekly, July 4.

Generation, transmission and distribution of electricity are the most capital intensive of all energy activities. In the growing Indian economy, demand for electricity has increased faster than that for other forms of energy. Driven by this growth, demand for capital to finance the supply of electricity has also increased commensurately. Much of the capital to finance the energy sector is derived from the government budget. In the past, the government devoted an ever-increasing share of its budget to the energy sector. During the Sixth (1980-85) Five-Year Plan, for example, the government allocated 27.2 per cent of its plan outlay to the energy sector. This share increased to 30.6 per cent during the Seventh Plan. Even this increased share was insufficient to provide adequate power to the growing Indian economy. Power shortages are now common throughout the economy end 'brown-guts' in many cities during peak periods are the norm. The government is pursuing private sector power generation to alleviate power shortages. But the government has not yet set priorities in selection of technologies. Moreover, the management and operation of the power sector itself must be improved prior to seeking additional financing.

A recent analysis of the growth of carbon emissions and the economics of abating emissions from modern energy use in India highlights the relationship between abatement strategy on the one hand and capital investment and foreign exchange or hard currency requirements on the other (Table 8.4).

Table 8.4 Economic implications of reducing carbon emissions

Scen.1 Efficiency frozen at 1985 levels
Scen.2 Includes efficiency improvements
Scen.3 Lowest carbon emissions
Case 1 Lowest carbon emissions through greater fuel switching and fuel efficiency
Case 2 Lowest carbon emissions through increased reliance on renewables, e.g., solar, wind, hydro and biomass
Source: Mongia, N. et al. (1991), endnote 12.

The analysis assumes annual average rates for GDP and population growth. A linear programming model couples these rates to energy demand growth by sector and end-use. The model minimizes the cost of providing energy services to the Indian economy. Energy service may be provided by new energy supply or higher efficiency of supply and/or use. The model computes the investment and foreign exchange requirement for meeting the estimated demand for energy. Table 8.4 shows the foreign exchange requirement for fuel imports only.

In Scenario 1, energy intensity is frozen at 1985 levels. Energy sector investment as a proportion of GDP increases to 7.0 per cent by 2005. Foreign exchange requirements increase from 1.9 per cent in 1985 to 4.4 per cent by 2005. In each case, the sharp increase will require that financial resources be transferred to the energy sector from other sectors which will also demand more capital and foreign exchange.

Reducing the intensity of energy use as illustrated in Scenario 2, restrains the growth of carbon emissions to 340 million tonnes. Since this reduction is achieved primarily through cost-effective efficiency improvement, the cost of abatement is negative. The Indian economy benefits from restraining carbon emissions growth. The scenario captures the many opportunities available to use electricity more efficiently, which reduces investment requirement. However, the opportunities for reducing petroleum products demand are limited, and more difficult to implement, and this is reflected in the 4.2 per cent foreign exchange to GDP ratio, which changes little from Scenario 1.

Switching to less carbon-intensive fuels (Scenario 3) can reduce emissions further than in Scenario 2. This result is achieved through either the import of natural gas as illustrated in Case 1 or through the use of renewables as illustrated in Case 2. Renewables include the use of wind, solar, hydro and biomass resources. Natural gas imports increase the ratio of foreign exchange to GDP to 4.8 per cent while reducing the investment needs. Increased use of renewables drives up the investment requirement sharply to 6.2 per cent of GDP. Restraining emissions beyond what might be achieved through efficient fuel allocation and use would increase either capital investment or hard currency requirements.

The unit cost of conserved carbon rises from Scenario 1 to Scenario 3 as more expensive approaches are used to curtail carbon emissions (Table 8.5). By conducting alternate runs of Scenario 2 and placing progressively tighter constraints on carbon emissions, the cost of conserving carbon at levels between those in Scenarios 2 and 3 were determined. For example, the cost of conserved carbon is US$0.02 per kilogram when emissions are reduced from 340 million to 300 million tonnes.

Table 8.5 Unit cost of conserved carbon, India

The Scenario 3 costs of restraining carbon emissions are lower than those for Scenario 1. This implies that India can reduce carbon emissions at a net benefit to the economy, and the energy sector would therefore not require any new resources to reduce emissions. Scenario 3 costs compared to Scenario 2 are between 1 and 11 billion dollars higher. Many energy efficiency improvements are embedded in Scenario 2. Thus, if India's energy sector were to become more efficient, this analysis implies that it would need additional resources to reduce emissions. Which of the two paths (Scenarios 1 or 2) India takes to provide energy services will determine whether resources need to be transferred to or away from the energy sector, and consequently whether the nation would be justified in seeking resources from the world.

Restraining emissions from energy use in India will require that fuel allocation and energy efficiency be improved to their maximum potential. The scenario analysis shown in Table 8.4 includes many opportunities for improving efficiency of electricity use and supply. Additional measures to improve oil use efficiency would have further reduced the FE/GDP ratios shown in Table 8.4. What approaches might have yielded a more efficient use of oil in India? Four important shifts in strategy could be implemented:

1 a shift in long-haul freight movement from road to rail in order to reflect the economic cost of transportation for each mode;
2 a shift in cooking fuel from kerosene to LPG to encourage the use of more efficient stoves;
3 electrification of non-electrified households which would reduce kerosene consumed for lighting;
4 replacement of diesel pumpsets with electric pumpsets.

These four strategies would have reduced demand for oil in the scenarios between 1980 and 1990 by 14.4 per cent. More importantly these steps would have reduced by 5 million tons the demand for kerosene and diesel, the two critical middle-distillates which are imported. The result of four strategies would be a reduction of the 1985 FE/GDP ratio of 1.9 per cent in Table 8.4 to 1.3 per cent. If we assume that similar improvement may be achieved by 2005, then the ratio for Scenario 2 would fall to 2.9 per cent from 4.2 per cent. A lower share of GDP allocated to importing oil would make the fuel import payment more manageable.

Strategies 3 and 4 would increase demand for electricity which would add to investment requirements shown in Table 8.4 for 2005. As we pointed out above, there are many options to improve efficiency of electricity use that are easily implementable. The options for improving efficiency of oil use involve a diverse set of actors which make them difficult to implement. For some end uses, such as lighting, electricity use is more efficient than oil use. Shifting to electricity in such selected end-uses would improve a nation's energy efficiency. Further, since improving system efficiency for electricity may be easier than for oil, increased electricity demand from strategies 3 and 4 could be better controlled.

In light of the cost, capital investment and foreign exchange parameters, to what extent can India restrain carbon emissions from modern energy use? Stabilization of emissions or limiting their increase to 20 per cent over a 20year period has been discussed for the industrialized countries. Analyses show that this goal could be achieved without a net loss of GDP in some of the countries. The Energy Modelling Forum-12 in its deliberations on scenarios assumed that restraining emissions growth to a 50 per cent increase over a 20year period was plausible for the developing countries.

In contrast, Scenario 3 in Table 8.4 shows that, at best, emissions for 2005 could be held to 155 per cent (280 compared to 110 million tonnes) above the 1985 level. Further reduction in emissions would reduce annual GDP growth from the 4.9 per cent assumed in Table 8.4. Indeed, we estimate that to achieve the 50 per cent limit suggested by EMF-12 would require that the current pattern of unsatisfied energy demand continue in the future and that India's annual GDP growth be limited to 3 per cent. Most probably, these requirements would be unacceptable to India.