INDEX

S. No Topic Page No
Week 1
1 1A Energy Flow Diagram 1
2 1B Global Trends in Energy Use 10
3 1C Energy Use in India Some Calculations 22
4 2A Energy and Environment 35
5 2B The Kaya Identity 59
6 2C Emission Factor 65
Week 2
7 Energy and Quality of Life 73
8 Energy Inequality 102
9 Energy Security 116
10 Introduction to Country Energy Balance assignment 129
11 Energy balance of Japan 134
12 Energy balance of Australia 141
13 Energy balance of Mexico 149
Week 3
14 Energy Economics - Part 1 154
15 Energy Economics - Part 2 175
16 Energy Economics - Part 3 191
17 Energy Economics - Tutorial 210
Week 4
18 Energy resources- Part 1 227
19 Energy resources- Part 2 241
20 Renewable Energy Sources- Part 1 273
21 Renewable Energy Sources- Part 2 297
Week 5
22 Materials for Energy 328
23 Non Renewable Resource Economics Part-1 344
24 Non Renewable Resource Economics Part-2 358
25 Non Renewable Resource Economics Part-3 373
Week 6
26 Preferences and Utility 387
27 Utility and Social Choice - Part 1 395
28 Utility and Social Choice - Part 2 405
29 Utility and Social Choice - Part 3 415
30 Utility and Social Choice - Part 4 428
31 Revision Paper-1 (Part 1) 436
Week 7
32 Public and Private Good/Bads 437
33 Aggregation of Demand Curves 450
34 Externalities 469
35 Revision Paper-1 (Part 2) 493
Week 8
36 Revision paper-1 (Part 3) 518
37 Energy Project Financing - Part 1 528
38 Energy Project Financing - Part 2 544
39 Energy Project Financing - Tutorial 574
Week 9
40 Input Output Analysis - Part 1 595
41 Input Output Analysis - Part 2 610
42 Input Output Analysis - Part 3 627
43 Input Output Analysis - Tutorial 645
Week 10
44 Primary Energy Analysis- Part 1 658
45 Primary Energy Analysis- Part 2 676
46 Net Energy Analysis-Part 1 697
47 Net Energy Analysis-Part 2 713
Week 11
48 Net Energy Analysis-Part 3 732
49 Net Energy Analysis- Part 4 747
50 Energy Policy- Part 1 765
51 Energy Policy-Part 2 779
52 Energy Policy Examples-Part 1 801
Week 12
53 Energy Policy Examples-Part 2 832
54 Revision Paper-2 (Part 1) 850
55 Revision Paper-2 (Part 2) 864
56 Future Energy Systems 880
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay.
Lecture -1 P1
Energy Flow Diagram

(Refer Slide Time: 00:19)

Welcome to the semester long course on Energy Resources, Economics and Environment.
My name is Rangan Banerjee and today we will start with looking at the basics of the energy
flow diagram. So, let us start with an energy flow diagram.

(Refer Slide Time: 00:31)

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What is an energy flow diagram? When we think in terms of any human activity, any human
activity needs energy. So, if you are looking at the screen that you see, the screen has to be
illuminated, if you are looking at the comfort conditions when we think in terms of air
conditioning or the cooling that also needs energy.

So, that energy comes through a whole sequence of steps. We have at the energy that is
available in nature is primary energy. This is the energy source is like coal, oil, solar, natural
gas, wind. The energy that is available in nature is not directly something that we can use. We
take that energy; we convert it in an energy conversion facility.

So, we first take the coal, convert it, we mine it, we wash it, we transfer it to a power plant
and then we get the secondary energy. So, secondary energy is the electricity that we get from
the power plant which is burning coal. That secondary energy itself goes through a whole
network, a transmission and distribution system.

And then it reaches your house or it reaches the campus, the final energy that we buy from
the distribution company and that is then use that electricity then goes and it is used in your
air conditioners, in the fans, in the lights to give you useful energy or the end-use activities.
So, whenever we think in terms of different energy systems we need to look at all these
terms: primary energy, secondary energy, final energy, useful energy.

We are interested in the energy services, in order to provide those energy services we need to
have primary energy extracted, that primary energy needs to be converted in a conversion
facility to give secondary energy. That secondary energy is distributed till it reaches the final

2
end user which is and that is the energy that we buy the electricity, the oil, natural gas that is
used in the equipment to give the useful energy.

So, when you talk about each of these conversion steps, each conversion step needs a certain
amount of energy for the conversion and so when if you need 1 unit of energy useful energy,
we would probably need 2 units or 3 units of primary energy. So, whenever we do a
comparison and when we do a calculation, we can think about whether we are talking of
primary energy, secondary energy, final energy or useful energy.

(Refer Slide Time: 03:30)

So, let us move on. When we talk about all the end users that we need, so we think of all the
things that you do in your daily life. When we look at cooking the energy service is the food
cooked. So, you have the Chullah or you have the stove or the microwave oven that is where
energy is being used to give you the processed food.

If you talk of lighting the energy service is illumination, you have different kinds of bulbs,
you have the traditional incandescent bulbs, then we have the fluorescent, then you have this
compact fluorescent, and now you have the LED. When we talk about transport we are
looking at travelling, distance travelling.

So, passengers being transported or goods being transported and then you have a whole host
of cycle, cars, train, motorcycle, bus, aircraft and each one of them is an energy system and
has a conversion and an efficiency. In the factories we have a large numbers of motors which
are being used to create some shaft work and the devices the motors. Cooling we are looking

3
at space cooling, we have fans, ceiling fans and we have air conditioners, we have
refrigerators.

In the industrial processes we have heating that is provided that is fluid is being heated so the
devices are boilers or geysers and in each of these cases we can look at what is the energy
input, what is the output, what is the energy service and do this kind of analysis.

(Refer Slide Time: 05:05)

So, just to give you an example let us look at a situation where we are using an agricultural
pump, a farmer is using a pump to pump water, the pump output is the useful energy, the
useful service energy service that is required. The pump is providing the energy in from the
motor drives the pump and the pump is transferring the energy into the water which is then
allowing it go to the storage or to the filed directly.

Each of these has certain efficiency. The farmer buys electricity from the distribution
company. That electricity is coming through a transmission and distribution system. That
electricity is being generated in a power plant which is using coal. That coal is being mined
and transported and then you have primary energy.

So, if you look at typical efficiencies of all of these the numbers that we have put, the mining
efficiency may be of the order of 90%, power plant has an efficiency of about 30%,
transmission and distribution about 78% efficiency and the motor pump depending on actual
operating may be of the order motor may be of the order of 70% pump of the order of 60%
the best efficiency is may be 88%, 75%.

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So, if you multiply all of these you will see that the overall efficiency that we get from the
coal to the final pumping that efficiency is actually relatively low and that gives us an
incentive to try and see can we reduce some of these steps. So, whenever we look at different
kinds of energy systems it is always useful to try and look at it draw, the energy flow diagram
and look at it from the context of primary energy to the final energy service.

(Refer Slide Time: 06:56)

So, let us look at what are the terms that we have study? We studied the terms primary
energy, secondary energy, final energy or the delivered energy, useful energy, energy service.
And then we can also classify it into different kinds of end uses. So, end uses will be like, one
end use is lighting, end use of heating, end use of cooling, end use of cooking, end use of
transport and then the sector.

When we talk about sector, we are talking of residential, industrial, commercial. Whenever
we talk in terms of a, we want to get an idea of an energy system we have to decide what is
the level of aggregation and dis-aggregation. What is aggregation and dis-aggregation? When
I put things together that is aggregation when I separate them out that are dis-aggregation.

So, we may want to calculate for the city of Mumbai what is the overall energy used, or for
the state of Maharashtra what is the overall energy used, for the country for India what is the
overall energy used, for the world what is the overall? So, that is an aggregate calculation.
We want to dis-aggregate it by in each house hold by each end use how much is the energy
used, so that is the dis-aggregated. So, in any of these cases we can always calculate and do
an energy balance and try to see how the energy is being used and what is the quantification.

5
(Refer Slide Time: 08:21)

When we move forward with this in order to do this is quantification we have different kinds
of units. So, traditionally we used to use calorie and the British thermal unit and the Quad,
now in the SI system we use joules and we use kilo watt hours. We also need to differentiate
between energy and power.

When we are talking of power if you are talking of watt or kilo watt or megawatt that is the
rate at which the energy is being supplied and that power aggregated over a period of time
will give you the energy. So, watt and horsepower these are units of power. When you take 1
watt and you run it for an hour you get 1 watt hour, or the kilo watt hour is 1 kilo watt
running continuously for an hour.

So, we need to be able to convert between different units and for this you can look at any
source on the web or you can look at the energy basics in the global energy assessment which
I will put at the end of the references. We also have different prefixes like Kilo 10 3, Mega
106, Giga 109, Tera 1012 , Peta 1015 , Exa 1018 and depending on the kind of calculation we are
doing.

So, if you are doing the calculation for the world, you will be talking in terms of Exa joules,
if you are talking of a country may be Exa joule or Peta joules if you are looking at a smaller
thing it may be kilo joules or mega joules or Giga joules. There is also these are all in terms
of energy units, earlier we could also calculate in physical units.

6
So, we can talk in terms of million tons of coal, million tons of oil. So, there is an energy unit
where all if you talk of coal, oil, natural gas, we convert them all into equivalent oil. So,
million tons of oil equivalent and you will see if you look at the BP side or you look at many
of this sides the energy balance is are given in terms of Mtoe.

Which is million tons of oil equivalent, the coal is also converted into oil equivalent and
million tons of coal equivalent kilo tons of coal equivalent. So, these you should be familiar
with the units and you should be able to make conversions between the units and some in
some of the tutorials that we provide you will have some examples where you can do this.

(Refer Slide Time: 10:59)

So, here is this exercise which will give you an order of magnitude of the different kinds of
units and the idea is that you see for different kinds of activities, I want you to think about it
and insert in order of decreasing energy with the highest energy being on top and then the
lowest.

So, the different items that we have put energy use of an average US detached house, burning
a candle, the world energy use annually, the Boeing 747 going from Tokyo to Frankfurt and
back to Tokyo, 1 litre of gasoline or petrol, energy use of an Indian village typically of 500
people, New York City annual energy is used, solar energy reaching the earth in an hour, a
power plant of 700 megawatt annual electricity production and the daily metabolism of an
adult.

7
So, take a minute and just put down your sequence the highest energy to the lowest energy,
and if you see compare this sequence with the results that we have here.

(Refer Slide Time: 12:15)

The world energy use annually is about 500 EJ, solar energy reaching the earth is an hour is
about 445 EJ. So, that means we have abundance solar energy right, in 1 hour we have
enough which is equal to the amount which the world is using annually. New York City
annual energy use 0.8 EJ, Power plant 15.5 PJ and 747 Tokyo Frankfurt to 9 TJ a lowest is
the burning the candle daily metabolism of an adult is somewhere in between and this just
gives you a sense of the relative magnitudes of things.

8
(Refer Slide Time: 12:53)

So, you can look at this on this axis this is from the global energy assessment you can see
this, this axis talks about different activities and in different units and you have a scale which
goes from 10 raise to 1 to 10 raise to 23 and you can see the in terms of the starting from
joule to ZT and going up to EJ and you can see the relative magnitudes of some of this you
know this gives you an idea of the relative magnitudes of the energy use. So, this is very
similar to the exercise at we just now did.

9
 Energy Resource, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering,
Indian Institute of Technology, Bombay.
Lecture 1 P2
Global Trends in Energy Used

(Refer Slide Time: 00:15)

So, now let us look at the question what is the total amount of primary energy used by the
world. And let us try and also see what is the trend or variation of this energy used over the
years. We will look at the world we will also look at the energy used in India and we will see
how to create and make these kinds of energy balances from the data that is available in the
public domain. So, let us look at the global energy use.

So, we will talk in terms of, when we talk about energy use we are talking about the primary
energy use by the world. Remember we talk about the energy that we have available in nature
and then that goes into different sources, going to secondary and to the final energy use and
giving the energy service. And then we would like to see how this energy use has been
changing over the years, what factors affect the change of this energy use.

10
(Refer Slide Time: 01:21)

Ok so, there are many different sources and couple of sources that I would I think you can
look at is the international energy agency has details statistics for almost every country in the
world and the US DOE also has statistics. Many of these companies like the British
Petroleum provides the statistical review of all day energy.

For every country there are also energy statistics, so in India there is an energy statistics
released by the ministry of statistics and program implementation and that is an annual kind
of statistic. Each of our supply like the ministry of power provides statistics related to
electricity, ministry of petroleum, natural gas and these are compiled and provided in these
overall international statistics.

11
(Refer Slide Time: 02:30)

So, if we look at what is the history of the world primary energy use, you can see this is a
figure which shows you that the, we had a very significant increase in the energy use. You
can also see the different colours represent the different sources of energy. So, in the initial
period it was all traditional energy.

If you look at the 1800 we are looking at biomass, wind, water and slowly then with the
steam engine and with the use of coal we had the coal coming in and we had the electricity,
we have the Edison’s first grid and then we started using the next invention which changed
the energy sector is the gasoline engine and the growth in the automobiles and then of course,
we had aircraft and television and nuclear energy, the micro cheap and the internet.

And you can see it started off with mostly all renewables then went on to coal and then oil
started coming in. You see the red which is the oil and oil became the predominant source of
energy, then we had natural gas coming in and now again we are moving back. So, it has
gone to a situation where it is become predominantly fossil, we are now moving back and we
want to go with modern renewables. So, that is the transition that we are looking at in the
future.

12
(Refer Slide Time: 03:47)

When we look at this, this is an example of the total energy use, I think this is for 2010 and
you can see of the almost 500 Exa joules that is being used that gets converted to about 350
Exa joules of secondary, 330 Exa joules of final and the useful energy is only 169 Exa joules,
out of this and then you have a significant amount of waste and rejected energy.

(Refer Slide Time: 04:17)

These are the, this is the balance, energy balance which is there and it shows you, this
diagram is called the Sankey diagram on an energy balance diagram. Each of the block which
is shown there is proportional to the energy use and it shows you the flows from crude oil,
coal, natural gas and to the different sectors.

13
So, if you look at the transportation and you have industry, residential and commercial. It also
shows you how much is going in to the electricity generation sector and this helps you get an
overall picture of the energy use pattern in the worlds. Similarly, you, one can actually do the
same thing for any country in the world.

And one of the things that I would like you to attempt on your own is take a particular
country and use that data and create this kind of a diagram, then see what are the mixes in
terms of, so we can do the mixes in terms of either primary, if you look at this segment or you
can look at it in terms of the final energy or you can look at the secondary which is in
between, and so this is a Sankey diagram or an energy balance diagram for the entire world as
a whole.

(Refer Slide Time: 05:46)

And if you look at 2016 you will find that predominantly we are looking at oil and followed
by the natural gas and coal as the major chunks and there is a significant amount of bioenergy
and some other renewables and nuclear and it is expected that in future we are going to the
share of renewables is going to increase. This is from the world energy outlook, of course,
these are all different scenarios. Whenever we talk of the future we know that there will be
differences in the energy system and we are going to have more renewables in the future.

14
(Refer Slide Time: 06:29)

So, the question we need to ask is what does the energy use of a region depend on, wherever
it is a country or a state or the city, what will it depend on? And to, what are the parameters
affecting the energy use.

15
(Refer Slide Time: 06:52)

You see whenever we look at the population of a country that is one of the important
parameters which will affect the energy use. So, if I have more people there will be a
demands for more energy, the level of effluents or the level of industry, the level activity,
level of services also will matter. When we talk about population by its very nature the rate of
change of population or dP by t will be proportional to P and to the existing population.

(Refer Slide Time: 07:42)

So, that there will be an overall exponential growth rate so that we call this is as a, we can
call this as an compound annual growth rate and we can write, we can essentially write that

16
If you take it in the P zero is in the initial years and this is the compound annual growth rate
between this years. Now, we can compare this growth rates and we can see so this is like an
exponential growth and when we talk about energy we can look at what is the energy used
per person and then multiply that by the population and then you get the total energy use.

(Refer Slide Time: 08:22)

So, when you look at some of the trends, what would you think when we look at the trends of
energy and population growth what do you think, think about it trend of world population
versus time for the last 2000 year which show significant crest and troughs corresponding to
period of global stability and recession, monotonic linear growth, monotonic exponential
growth, monotonic growth of the form PT is equal to A plus BT plus CT square, none of the
above.

17
(Refer Slide Time: 08:53)

And you will that in general this has been monotonic exponential growth, and that is been the
way in which this happen and you can see this, this is population statistics are all available in
the public domain. You can take the data and plot it and you can see that this has been
growing exponentially. And following this many of the things which are used by humans will
also follow these kinds of exponential growth patterns.

(Refer Slide Time: 09:20)

So, this is from the global energy assessment and you can see there are different things that
we have project shown here. This is the population, this is the total real GDP which means
this is the total sum of all the output of the world, and then you have the foreign direct

18
investment, damming of rivers, water use, fertilizer consumption, urban population, paper
consumption, even Macdonald restaurants, you can see exponential growth patterns, transport
motor vehicles, telephones, international tourism.

So, all of this follows the exponential growth of population and what does this mean is this
something that is sustainable, this is basically unbounded growth, so if you look at now, take
the area under the curve you will find that this going to be infinite. So, if we are talking of a
finite resource and we will be talking about energy resources in another lecture.

You will see that if you are going for exponential growth the resource will get depleted,
resource will get depleted, so it is not obvious that an exponential growth can be sustained
indefinitely in to the future and that is point to keep in mind.

(Refer Slide Time: 10:44)

And now let us think about we talked about the population growth we also talked about world
energy growth. So, the world energy trend for the last 2000 years would show: do you think it
will show an exponential growth similar to the population growth, exponential growth with a
growth rate less than the population growth, monotonic growth that initially follows the
population growth but a reversal of growth seen after seventies, exponential growth with the
growth rate higher than the population growth, or none of the above.

And the answer to this is actually 4 which is exponential growth with a growth rate higher
than the population growth. The energy use per person has been increasing over time and this
is because we have use more and more of appliances to make our lives more comfortable and

19
so the history of human development is characterised by an increasing use energy per person,
this of course may not be sustainable into the future and so there would plateauing out over
all. But as of now this the kind of trend that you can see.

(Refer Slide Time: 11:53)

So, just to give you an idea. This is a paper from Grubler in 2004. He compares the north, the
developed courtiers with the south which is the developing countries and you can see that the
population share of the south is the developing countries is significant in the total, but the
primary energy, if you look at this with south has 78 percent of the world’s population but
has only 34 percent of the modern energy used. So, obviously there is a disparity in terms of
the energy use.

20
(Refer Slide Time: 12:31)

And this disparity is plotted by Grubler in the, there are two curves you can see this is the
industrialised curve the per capita energy used for the industrialised nation, you can see how
it is been growing and you can see for the developing nations this there are two completely
different kinds of slopes or two different kinds of growth rate and this is how the average is
going.

And so with the result that if everyone aspires to have the life of the industrialised countries,
the energy demand of the world will grow at much much faster rates then our currently
sustainable.

21
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture-1 P3
Energy Use in India: Some Calculations

(Refer Slide Time: 00:18)

Now, we talked about the energy flow diagram and we talked about the overall global energy
use. Now we would like to see how India compares with the world and what are the expected
growth rates in the Indian context.

(Refer Slide Time: 00:35)

22
So, what I would I suggested to you that you should actually look at different countries and
try to do the energy balance we can do the same thing for India, you we have a table which
gives you the indigenous what is the amount of production of coal, oil, natural gas what kind
of what are the imports, exports and the stock changes and then you can get the primary
commodities.

Some of them are being transformed into secondary commodities for instance coal is being
transformed to electricity and even in electricity we are importing and exporting, we are
importing electricity from Nepal and we may be exporting again to some of our neighbours
then may be stock changes and then there is a final use.

So, this is what is that there, there is a in the international energy agency there is a energy
statistics manual and with that you can look at the data base and you can actually work out
this for any country that you want and that will give you also a sense of the calculation a
sense of these energy flow diagrams and a relatives sense of magnitudes is how important is
hydro, how important is coal.

How much of the energy is imported for that country and I will encourage you to do this on
your own so that you get a sense of the overall energy. So, when we talk about the energy
balance you will find for instance if you are trying to do this for India we would like to see in
a year how much coal are we using, how much oil, tons of oil, tons of coal or barrels of oils.

(Refer Slide Time: 02:17)

23
And then in the case of the natural gas its often expressed as normal meter cube, the standard
meter cube, electricity will be in kilo watt hour or million units and then for a physical for a
certain amount of coal will measure the energy content by either the gross calorific value or
higher rating value or the net calorific value. Based on the fuel composition and then we can
convert it also into coal equivalent, oil equivalent that kind of thing.

(Refer Slide Time: 02:46)

So, typically when you look at an Indian balance we take Indian coal has an average energy
content which is lower than that of international South African or Australian coal and it is
right now the average may be of the order of little less than 5000 kcal/kg, 4500 you multiply
that by 4.18 kJ and you get 18.8 MJ/kg.

And oil it has a greater calorific value per kg so about 41.8 mega joules per kg and natural
gas is of that same order of magnitude. In the case of nuclear and hydro it is very difficult to
talk about the amount of flow of water but what we know is we know the generation from
hydro plants and we work backwards using the efficiency. So, a hydro efficiency, plant
efficiency is of the order of 85 % nuclear of 25 % and then you can get what is the energy
content.

24
(Refer Slide Time: 03:47)

So, some of the terms that we may want to look at when we do this overall balances one is
the plant load factor, plant load factor of a plant is the actual generation of a plant over a
period which may be a day or a month or year divided by the maximum possible generation if
it is operated continuously at the rated or the design value.

So, typically what happen in these plants is that the plant would like to operate at high plan
load factor, why is that that is because whatever investment you have you would like to
recover it over a larger number of units. So, your electricity would be cheaper if you have
higher plant load factors but the plant load factor will be dictated by the fact that you know
you cannot just supply electricity to regret.

There has to be a demand for that electricity. So, that supply demand matching is one of the
factors when you look at the electricity system but so plant load factor is one of the things in
every power plant there is an auxiliary consumption, that means in a coal base power plant
you will find that there are fans and there are pumps and these consumes electricity.

So, off the electricity which is being generated some part is being used internally inside the
plant itself that is the auxiliary consumption and so what we often do is we can specify the
output of a power plant in terms of the gross power output or the net power output. In the
Indian power system we specify it usually by the gross power output.

25
In the Europeans and US often talk about it in terms of net power output and then the gross
power output minus whatever is being used internally becomes the net power. So, the
auxiliary consumption percentage is the auxiliary consumption into 100 divided by the net
power output.

(Refer Slide Time: 05:49)

So, if you look at this term let us do a simple calculation. So, if we look at a thermal power
plant which is rated at 500 MW gross it has 9% auxiliary consumption and has an annual PLF
of 80 %. So, we want to calculate the annual generation in MWh and in MU and in GJ.

And the next part of the question is, if the plant has an efficiency of 38 percent calculate the
input energy supplied to the plant we can do this in terms of mega joules, peta joules, tera
joules in joules basically. And if the input energy used is coal calculate the amount of coal
use.

26
(Refer Slide Time: 06:38)

27
(Refer Slide Time: 11:28)

Now, let us look at this was the gross generation, we were talking in terms of the auxiliary
consumption. So, if we look at a power plant we have an input and we have gross generation
this gross generation is 3504 MUs out of which we have an auxiliary consumption ‘A’ being
used and this net which we get is 3504 minus ‘A’. So, let us calculate, we are told that 9% is
the auxiliary consumption, which means

28
(Refer Slide Time: 14:23)

We will come back to this when we talk about the environment and others, other things but
here this was to just show you one simple calculation when we think in terms of energy and
power and we look at a power plant.

29
(Refer Slide Time: 16:19)

Let us go back to our main topic and we using this we can actually billed up a total the energy
balance equation, do you remember we were talking in terms of for in EJ for the for India you
will find that the largest chunk of our energy supply comes from coal and we get a reasonable
amount of coal in terms of imports, in terms of oil also is a major chunk of our energy supply.

In the oil, the bulk of the oil is coming from imports. So, if you look at the total primary
energy supply of 47 EJ you will find that this then goes and we can see a large chunk of the
energy is going to the power sector and then in the power sector there are conversion loses
and transmission and distribution and auxiliary loses.

And then you have the electricity which is going to different sectors, you know one of the
major sectors is the industrial sector for electricity and then is the residential sector and then
the commercial and we have a reasonable amount of biomass which is being used in our
energy supply.

A most of it is being used in the traditionally in the residential sector for cooking with very
low efficiency, so this is like a Sankey diagram which gives you an sort of overall idea of the
energy situation in the country.

30
(Refer Slide Time: 17:49)

Let us also do a simple calculation of India verses the world. We are a population, we have a
population of about 1.3 billion as compared to the worlds 7.4 billion and we are one of the
largest countries in the world. You will see that on a per person basis the GDP is about little
less than half of the world average and this is done on a purchasing power priority basis, later
on in this course we will talk about marketing change rate and purchasing power priority.

If we look at the energy inputs, we can see the primary energy used is 36 EJ and for the world
it is about 576 EJ. The energy use per person again we on an average the energy use per
person is significantly lower than the world average.

May be about a third of the average and similarly if we look at the electricity use 920
kWh/per person/year as compared to 3000. This obviously means that on a per capita basis
are CO2 emissions are significantly lower than the world average. CO 2 per unit of GDP is of
course slightly higher and we will come back to this when we talk about the Kaya identity
and other factors.

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(Refer Slide Time: 19:13)

So, when we look at different energy systems there are many different pathways for end
users. So, we, you can look at, we talked about the energy flow diagram and when we talk
about the energy flow diagram we are looking at different primary energy sources whether it
is solar, biomass, wind, small hydro, geothermal, grid electricity and this many of these can
come into creating electricity and then that goes into the different kinds of end users like
space cooling, space heating, water heating, cooking, lighting. And there are many different
ways in which we can configure energy systems.

(Refer Slide Time: 20:04)

32
So, with this if we look at the overall summing up of what we have discussed today we talked
about an energy flow diagram and we saw how we move from primary to secondary and to
the final energy to the energy end use, we then took that concept to create an energy balanced
diagram for a region, we looked at what factors affect the overall energy use, we looked at
different units of power and energy and their conversion, we talked about a 500 megawatt
power plant and did a simple calculation.

If we use to look at the energy use pattern we are talking of exponential unbounded growth
and that it may not be sustainable and that is the issue that we will talk about when we talk
about energy and environment. There is a disparity between develop and developing
countries and this again is something which we will touch up on in the course when we talk
in terms of inequality, measures of inequality and see how to aggregate and look at inequality
and their impacts. Both in terms of income as well in terms of energy.

Drawing up aggregate energy balances we talked about level of aggregation which is

basically for the country as a whole or the world as a whole and you talking of physical and
energy units. The goal with what we have done today and with the references you can
develop an energy balance for a region and we would encourage you to look at one country
and look at an energy balance and look at the trend of that energy balance in that country.

And this will help you get some insights on the energy systems for that country. So, the
question that we that I leave you with is what are the drivers for energy systems. So, we saw
that population is a driver, the income and the increase the effluents is a driver for energy
systems. In addition to this there are other drivers and we will see that the environment is one
of the major drivers for energy systems.

And that will be the next theme that we talk about. In this course we will look at the energy
systems we will look at the resources for energy supply, we will look at how to allocate and
them optimally and we will look at economics and we will look at environment. So, we will
basically blend energy resources economics and environment to get a complete perspective
and give you the tools and techniques for you to be able to analyse different decisions in the
energy sector.

33
(Refer Slide Time: 23:04)

These are some of the references which we have used and I would encourage you to look at
the global energy assessment. The first chapter provides the basics and that will be, those will
give you a lot of the inputs that will be required later on in the course. There are also many
different sources and that is the international energy agency and the world energy outlook
where you will have a large number of numbers and scenarios. But we would like you to be
able to go behind these numbers and to be able to do the analysis so that you can understand
what is happening in the system. So, with this we will conclude this lecture.

34
 Energy Resources, economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 02 P1
Energy and environment

Welcome to the second lecture in the course on energy resources, economics and
environment. In this class we will be focusing on energy and environment and the
environmental impacts of energy systems.

(Refer Slide Time: 0:30)

In the last lecture we looked at the energy flow diagram and we saw how, whenever we want
to use energy the final energy that we use in terms of the energy service or the end use
activity, in order to get that we have the primary energy, the energy that is available in nature
which goes through a sequence of conversion steps before we get the final energy service. So
at each of these steps, some amount of energy is used and in using that energy there is also
some adverse impact and there is an environmental impact.

35
(Refer Slide Time: 1:16)

So we are going to try and look at this We also saw in the last lecture we looked at the whole
phenomena of growth and we looked at the world having a tendency to grow, we have
everything in terms of the population grows exponentially and all other parameters follow
that exponential pattern. So when we look in terms of the water use or the energy use we said
that there would be exponential or unbounded growth.

When we look at unbounded growth, the area under the curve when we take it to infinity is
infinite. So when we think in terms of a finite resource situation or the finite ability of the
world to maintain and to look at the ways that becomes a problem. So the whole issue is
when we design energy systems and these energy systems grow, what are the kind of impacts
that happen to the environment and are these impact going to be sustainable into the future.

36
(Refer Slide Time: 2:18)

So the issues that we are going to discuss in section related to the environment, the first one is
why is the environment important? How do the energy systems impact the environment? Is
there a trade-off between environment and economic development? What are the major
impacts and causes? How do we quantify these impacts and how do we ensure a sustainable
future? So, we will take a quick snapshot of why the environment is important to us? What is
the impact of the energy systems on the environment? And how do we do this quantification?

(Refer Slide Time: 2:53)

So if you look at this figure, is from the book by Tester on sustainable energy. When we look
at an energy system, we are talking of either exploration or production or conversion or

37
utilization and in doing that we are using some natural resources, we are using some human
resources and in the process we are then generating, we have the useful effect that we want
which is for instance cooling or heating or the transport.

So, there are useful goods and services, but in producing that there are unintended impacts
that we cannot avoid and these impacts, some of these are listed here, so you have solids,
liquid and gases, effluents or pollutants which go out into the atmosphere into the air, into the
land, into the water and each of these depending on the concentration, depending on how you
treat it, how you send it out will have different kinds of impacts either on humans or on the
ecosystem.

Then there is ionizing radiation, the electromagnetic radiation, aesthetics in manty cases for
instances when you have large wind turbines and you look at these wind turbines in the
landscape it affects the patterns of birds and its effects the aesthetics some several local
communities are not necessarily in favour of this and so this also can create problems.

Many of this situation when we use a certain amount of energy we also reject some heat
which is a waste heat and this causes for instance when you have cities and you have a
concentration, you have an urban heat island effect where some portions of the cities would
have a much hotter temperatures and then there are ways in which we try to mitigate this.

Sound for instance if you look at a large compressor or you look at a power plant these would
be a sound and that also has an impact on humans staying in the vicinity, electromagnetic
radiations. So these are all these unintended impact and these are the impacts that we need to
quantify.

Typically, the way this happens is that we start with using the energy system and we start
using more and more energy to make our life’s more comfortable. Many of these problems
then get into a, they accelerate and it gets to a level where the problem is seen as a problem
that needs solution and then we try to modify the energy system, so this is the way in which it
happens.

38
(Refer Slide Time: 5:51)

So for instance if we look at typically when we look at all the energy that is being consumed,
if you are looking at fossil fuels which is today the present mode of energy consumption,
whether it is coal, oil, natural gas the bulk of our energy use today is still from fossil fuels
and if you look at the use of these fossil fuels, we have the pollutants or the we let out these
gases into the atmosphere and for instance there are sulphur dioxide this happens through
industrial processes.

This sulphur dioxide also comes in the power plants, nitric oxide again from power plants in
industry, carbon monoxide from vehicles as well as from industrial processes, solid
particulate matter and in this particulate matter it is also important to see what is the size
range, so we talk of PM 2.5, PM 5 the smaller the particle size the larger the impact in terms
of health and so we monitor some of these and this is one of the things which is contributing
to air pollution and urban air quality and respiratory health impacts.

Carbon dioxide in chlorofluorocarbons and we will talk about these, these are global
pollutants. So all of these have different kinds of impact, so one is its modifying the
atmospheric properties or processes in the case of sulphur dioxide and SOx, it combines and
then it can cause precipitation, acidity which is called acid rain and that can corrode variety
of equipment, there can be smog photochemical smog, it can affect visibilities.

So for instance on days when you have a navy day and you are trying to see out into the
ocean often there are restrictions in terms of vehicle movements so that the visibility can get

39
improved and corrosion potential, radiation balance alteration, this is will talk about this little
more in detail in CO2 and ultraviolet energy absorption. So the impacts can be at the local
regional or the global scale and these are just some examples of air pollutants which have an
impact on the environment.

(Refer Slide Time: 8:22)

So the adverse health impacts can be going from mainly based on local and we can go from
local perturbations to global disruptions as the human energy use increase. In the early 80’s
Professor John Holdren of Harvard University proposed an index called “The human
disruption index” and this was to look at what is the disruption at a global scale of a particular
pollutant. This is defined very simply as the ratio of the human generated flow of a given
pollutant to the natural or the baseline flow.

So the idea is that, in case the human generated flow of a pollutant is orders of magnitude less
than the natural of baseline flow then nature has the ability to manage it and nature will have
the system it will not show up as a problem, but the moment it becomes of the same order of
magnitude as natural or baseline flow, then there are problems because in the human impact
is something which nature is not able to regenerate or absorb.

40
(Refer Slide Time: 9:42)

And so if you look at these ratios, these were the human disruption index which were
tabulated by John Holdren and you will see the disruption index lead emission, oil to oceans,
cadmium emission, sulphur emissions all are greater than 1 and you will also see on this side
that a large percentage of this is because of the energy sector and energy use.

(Refer Slide Time: 10:29)

So energy and its impact the current way in which we are using energy has an adverse impact
on the environment and this is why we need to change the way look at efficiency, look at
ways to mitigate, nitrogen fixation again if you see Di mercury emissions, nitric oxides,

41
particulate emission, carbon dioxide and you can see all of these are showing up as problems
because the human disruption index is greater than 1.

(Refer Slide Time: 10:38)

So we go forward in this in that if you look at the energy flow diagram that we discussed, at
each element of that energy flow wherever there is a conversion they will be associated with
it some emissions. So if you look at some electricity which is being used in the household, in
order to get that electricity we start with the mind, if it is coming from coal, it is the coal that
we are mining.

So at the mine itself there are some emissions which are going into the land and the water
there are emissions which are there in the air pollution, then that mine goes to a cold bay
there is a transport and that has some emissions, then it goes to a facility where you are
beneficiating the coal again at that point there are some emissions, the transportation has
associated with some emissions, then you have the power plant which has the bulk of the
major emissions and then we take it to the transmission to the household.

So you can see that we have to calculate the emissions over the entire cycle of use, entire fuel
cycle. So just like we looked at the total energy used, we can look at the total emission.

42
(Refer Slide Time: 11:56)

So now the question which arises is – what is safe for humanity? What kind of regime is safe
for humanity? And a group of researchers lead by Professor Rockstrom worked on this and
there is a paper in nature which I would urge you to read which is published in 2009 it is
called the safe operating space for humanity.

So what the researchers did is they looked at a large number of different parameters and they
looked at what were the natural equilibrium for these parameters before we started industrial
activity and then based on that they also identified through some models that how much, what
is the limit for that criteria. So with that they identified a set of 9 different criteria which were
critical for humanity to operate within a certain safe regime and in those 9 criteria they
identified 3 where we had already exceeded the limits.

43
(Refer Slide Time: 13:16)

So, I will suggest that you look at this the papers starts off by saying that the history of
human development has had a number of different eras and if you look at the history of the
world on large time, large time scale means we are looking at thousand, hundred thousand
years so that axis which is there on this graph is starting from here 0 to 20,000 40,000,
60,000, 80,000, 100,000 years before and in this year trying to see what is stable environment
for the earth as far as we know the earth is the only planet where there is life and this is
because we have the atmosphere which maintains the temperature constant at a particular
value.

Seen here is an isotope of oxygen which is a proxy for the average temperature and if you
look at this you will see that in nature we have had different kinds of eras and in all of these
eras there has been a significant fluctuation in the temperature and the climate. It is only in
the last 3, 4 thousand years where we had we have enjoyed the relatively stable environment
and this is the period where actually life evolves and the civilizations evolve. This is called
the Holocene and this is the period where we had significant growth and we have had
significant development and improvement in human kind.

This is now threatened by human activity and the geologist have coined a term where this is
called now we are now going into the Anthropocene. Anthropocene mean this is an era where
it is human activity that is dictating the changes which are happening on the earth and on the
earth’s climate and this Anthropocene it has been shown that is not something that it is going

44
to be sustainable into the future unless we make some changes in the way we develop and
operate our energy systems.

(Refer Slide Time: 15:49)

So in this paper they looked at a number of processes at a planetary scale and three of these
processes are climate change, ocean acidification, the stratospheric ozone and there are also
aggregated processes from the local and regional scale that means chemical pollution,
biodiversity loss, land use change, freshwater use, atmospheric aerosol loading, global
phosphorus and nitrogen cycles.

(Refer Slide Time: 16:14)

45
And in all the cycles, you can look at the paper for details there is a proposed boundary, there
is a current status and then there is a pre-industrial value. So for instance for climate change
the pre-industrial value is 280 parts per million by volume of CO2 and the proposed 350 parts
per million by volume and current status has gone up.

(Refer Slide Time: 16:41)

And in this if we look at it this shows you where we are exceeding the limits and you can see
that we have exceeded the limit on the rate of biodiversity loss, the nitrogen cycle and the
climate change cycle and we will discuss the climate change cycle in a little more detail.

(Refer Slide Time: 16:57)

46
So in the case of CO2 as I mentioned to you earlier as we know the only planet where there is
life is the earth and the reason for that is a thin layer which is the atmosphere and in the
atmosphere we have the main constituents are nitrogen and oxygen, carbon dioxide is
actually at a relatively lower concentration but carbon dioxide has an important parameter
which is radiative forcing.

So carbon dioxide actually permits the incoming radiation to come in but traps the outgoing
with the result that it increases the overall temperature and the radiative balance created by
this CO2 concentration results in an average temperature of land and water of 15.5 degrees. If
you look at a greenhouse, you will find that in a greenhouse the, because the greenhouse traps
the outgoing radiation and does not permit it to go out, the temperatures are higher and this
improves the growth of the plants.

So in a similar fashion if this CO2 concentration is increased, we will have a temperature rise
on the surface of the earth and this will affect the climate patterns. You can look the
evidence, of course there is a natural variability as we saw when we looked at the thousands
of year time horizon, you can look at the evidence that this there on the IPCC.

There is a inter government panel on climate change, www.ipcc.ch, you can look at that site
there are reports on the science and technology option and on climate change and that will
give you all the evidence. Now, if you look at this graph, you can see that CO2 is a critical
gas in terms of radiative forcing the others are CH4, nitric oxide and then there are other
effects of aerosol in moisture.

47
(Refer Slide Time: 19:27)

So we are basically going to focus on CO2 this graph shows you the time series evolution of
carbon dioxide in the atmosphere. Now this is for a thousand year time horizon, the first
question that should may come to your mind is that was this a problem over the last thousand
years and how we have been tracking it. So the earliest initial mention of this problem of
carbon dioxide and climate change problem happened in 1950’s and only since the 70’s there
has been serious efforts in the IPCC.

So when we look at a thousand year time horizon, this record is something that is actually
available to us in nature. So, if you see on this graphs on this side you have this image we
have these expeditions to the arctic and the Antarctic where scientist actually go to the ice
cores so typically when you look at in the ice which has been formed at depth that ice has
been formed at a different periods of time and based on the isotope of carbon one can actually
identify what is the age of the ice based on the depth.

Once you look at the age of the ice and you have the ice core, the air which is trap at a
particular is the air which was there when that ice was formed, so we have the year and we
have the air, we can look at the composition of the air and that will give us a frozen record of
what was the CO2 at the time when that ice was formed. So you will find if you just Google
you will find many different expeditions and all of them have a similar kind of plot.

So if you look at this plot on the X-axis it is the age of the air, so we start from, let us say
2000 and going back a thousand when thousand AD when the ice was formed. So, at different

48
depth this will be at a higher depth and on the Y-axis is the carbon dioxide mixing ratio what
is the percentage of carbon parts per million by volume of CO2, so that gives you the CO2
concentration in the air.

And if you look at the first from 1000 to about 1800, around 800 years you will see if we get,
got this kind of data in a laboratory experiment you would say that this is more or less
constant it is process under control, there is some variation but it is within plus minus 5 ppm.
So you see this level the straight line that we draw here is at 280 parts per million by volume
and this is the pre-industrial equilibrium of CO2 and this is what the earth can take.

Then what happens? You will see that it is almost like the second curve which I have shown
here, this curve is has a different trend completely, this curve represents the trend that we had
seen in all these other cases where we have population growing exponentially anything that
humans are consuming growing exponentially.

So this has an exponential growth rate, so clearly there is a diversion from the equilibrium
and what happens here, so this is the point where we had the industrial revolution we had
James Watt in the steam engine and we had the use of coal to use to develop industry, to
create mines, to have power and this is where we started using more and more coal and more
and more oil and natural gas.

And so we have two things we have the fact that CO2 has a radiative forcing component and
that all life on the earth depends on the equilibrium temperature, radiative component with an
increase in the CO2 concentration would imply and increases in the global temperature and
this is what is called global warming and this is would result in climate change.

There are large scale models operating where you can try and figure out what will be the
impact there are uncertainty of course in the model but what is reasonably certain is that in
any case this is a disruptive effect which we need to mitigate, which we need to we cannot
continue with this kind of exponential growth of the CO2.

49
(Refer Slide Time: 24:32)

Now, to look at this in more detail there is been, from the 70’s there has been a trend of actual
measurements an observatory Mauna Loa in Hawaii in the U.S and you can see this on this
graph and you can see and you will see when you look at this graph you can see very clearly
that it goes to ups and downs. Now when you observe this carefully, you will see that one
crest that is the peak and one turf happens every year and this is how but overall there is a
sort of exponential growth but it goes through a turf and then a crest and so this is this peak.

Now the question is why do we have this seasonal kind of variation we have a number of
reason which you can think about is it because the CO2 concentrations show an increase over
several years but fluctuate randomly within the year or the seasonal fluctuation in the CO2
constructions is due to seasonal fluctuation in the energy pattern. Seasonal fluctuation is due
to local fluctuations in Hawaii, seasonal fluctuations are due to ice melting in summer or
none of the above.

So if you think about it you will find that well this fluctuation is not random, there is clearly
an increase in trend and clearly there is an annual pattern, so it is not the first one which is
true. The second one which you think of seasonal fluctuation in the CO2 concentration is due
to seasonal fluctuations in the energy pattern.

If you want to check whether this is true look at annual energy used over the globe and see
whether that changes over the seasons and you will see that there is a trend of increase of the
years but there is no clear cut seasonal pattern, so this also is not true, this is a CO2 is a

50
global pollutant this is not due to local fluctuations in Hawaii, if you did this in some other
place also you would get the same effect.

And ice melting is summer does not create enough of an impact to be able to show this, so the
answer actually is none of the above. The reason for this is because of the trend in the growth
of vegetation and there are deciduous trees which will grow and grow in a particular season
so that the CO2 sync increases in a particular season and decreases when there is a fall and
because of that growth and CO2 absorption capacity vary we see this kind of trend.

(Refer Slide Time: 27:30)

So, let us move on, there is a website you can look at that and I looked at this number in
recently in the month of June 2019, but you go to CO2 now and you can see the CO2
concentration, so we said to 280 parts per million by volume was the pre-industrial we are
already on this particular day the average is about 415 parts per million much above the norm
that we have set in terms of 350 parts per million. And so this is the problem that we need to
mitigate. We have a situation where we have an energy system which is having these kind of
CO2 emissions.

51
(Refer Slide Time: 28:05)

Now, when we look at we talked about the 280 parts per million by volume as a natural
process and something which is coming through an equilibrium. So we can look at the carbon
balance. There is this paper in the annual review of annual research of earth planetary earth
and in these annual reviews can see that there is the carbon balance, there is already carbon in
the fossil fuels, there is carbon in the ocean and there are flows.

And in the flows that we are talking of there is an equilibrium in the atmosphere and then
there is a flow which is coming in true, because of decomposition there is respiration and
then there is human generated activity. So, in this carbon dioxide can carbon balance, it is the
human activity which is causing the imbalance which is then related to the change in the
concentration and this is something that we need to try to mitigate.

52
(Refer Slide Time: 29:18)

So the indicators of the human influence of the atmosphere again this is from the IPCC report
you can see we talked about CO2 but we can see that similar kinds of things are visible when
you look at methane, nitrous oxides, look at sulphate aerosols, so these are all human
generated impacts and these are things where as we design energy systems we have the
option of redesigning the energy system or we have the option of mitigating, trapping it,
capturing it. So these are some of the things that we.

(Refer Slide Time: 29:59)

And we talked about the radiative this is another from the IPCC another figure which shows
you the kind of radiative forcing components.

53
(Refer Slide Time: 30:01)

Different pollutants that we talked of have different lifetime in the atmosphere, so it is not
just about today’s pollution if you are looking at CO2, it lasts in the atmosphere for about a
100 years, so it is a cumulative effect that we need to calculate and that is this is captured in
the form of a global warming potential. CO2 is considered to be one and the equivalent value
for all the other gases is converted and these are the numbers.

So what happens is that some of these like SF6 and the chlorofluorocarbons have significant
global warming potential, so even though they may be at much smaller or trace levels they
may have a greater impact. So everything which is calculated in the case of global warming is
usually done with the CO2 as a baseline. So when we talk about CO2 we also talk about CO2
equivalent and we take all the other gases and convert them into CO2 equivalent.

So whenever we talk in the course, we will be mainly talking about CO2 but please
remember this means CO2 plus the equivalent of CO2 from other gases which are also
creating global warming.

54
(Refer Slide Time: 31:33)

So now let us look at any pollutant we would like to see what happens when you we have a
fuel and that fuel is being used in a device, that device gives your useful energy and then we
have some emissions. So if we look at a vehicle, these emissions will go in the place where
the vehicle is moving. If we look at a power plant these emissions will be, there in the
location of that power plant. These emission now this is one device in that area there will be
other devices, D2, D3, Dn, there are different things.

So, all of these emissions will come together and then you would basically get a
concentration. So, if you look at for instance in the city of Delhi, you look at a number of
vehicles at a traffic signal, each one is emitting some particulate matter. We will take all
particulate matter which is there. Now depending on the air velocity some of it will defuse
and move out, some of it will remain there and you will have a concentration.

Now in that place, if there is a human and that human is you are in that place for a certain
amount of time then you will get a dose of how much of that gets absorbed that will go to
your lungs and then that will have a health impact. So you see the change, it is about what
kind of fuel we are using, what is the composition? As we use it for useful energy there are
some adverse impact that emissions of course if it is in an area where it gets diffused out then
it will not result in too much of a concentration.

We can have a norm in terms of emissions cannot be more than this, we can also have a norm
in terms of trying to see what is the concentration for instance in the case of Agra because of

55
the Taj Mahal and the kind of discoloration which was happening to the Taj Mahal, several
industries were asked to close down and not use fossil fuels in the location, so that you could
reduce the emissions and do that.

So we can look at concentration and concentration norms and if you see you will find that
these norms are monitored by environmental stations at different locations, so that will be a
function of location. Then if you have people who are there depending on the amount of time
you will have an intake and based on that intake then you can look at the impact which is
there on respiration, it will have a health impact.

(Refer Slide Time: 34:49)

So, if you look at this on this slide you will see that this is illustrated in this his is in from the
energy after Rio, so you have the fuel, you have the emission then you have concentration
that concentration results in exposure and that exposure is dependent on how many people
and how much time that results in a particular dose and then that dose results in an impact
and that impact could be as there could be fatal or could be resulting in a other health impact.

56
(Refer Slide Time: 35:14)

Now depending on the percentage of the emissions which are taken in. So for instance active
smoking is something where all the emissions are going in, so it is like one ton, per ton of
pollutant almost all 100 percent is going in. If you look at second hand smoke, if you are near
a smoker then you will take much less, in stove which is vented indoor you have this is
indoor air pollution in a boiler, in a vehicle in a coal based power plant. So we can look at
this and then we can see the impact and use it in our models to quantify safe levels, to
quantify health impact.

(Refer Slide Time: 36:00)

57
The World Health Organisation has created a parameter called the disability adjusted lost
years. So this is in order to, suppose we look at different kinds of impacts of different
pollutants and what is the effect and why do we want to do that? Because we want to quantify
and see where we would like to put interventions, where we would like to put money, what
kind of norms we need to have.

So what is this is defined as disability adjusted lost year is thought of as one lost year of
healthy life and then some of these DALYs across the population or the burden of disease is
thought of as a measurement of the gap between a current health status and an ideal health
situation, ideal health situation where the entire population lives to an advanced stage free of
disease and disability.

So when we want to make this calculation, this is calculated as a sum of two factors, the year
of lost life. So for instance if due to pollution or if due to let us say tobacco, there is some
person dies of cancer at a particular age, we have an expected age which the person would
have lived to and the number of years that is lost is then computed into the number of deaths
and this is summed up.

And in a case where it is not fatal but because of that people have disability or they are
unhealthy and they lose a number of days of healthy life and number of years so this is how it
is added. This is then added by different categories and summed up and then this is one way
in which you can compare for instance, indoor air pollution from stubs versus vehicle, impact
of outdoor air pollution in vehicles versus diseases like tuberculosis or malaria and all of this
can be used to see the impact and to then see what kind of norms we should do and then look
at it.

So, otherwise in many cases for instance if you look at smoke coming from chulas this the
effect is seen over a long period of time, so people may not immediately appreciate the
reason or the motivation to go for smokeless chulhas. So, this is a whole impact of energy
and health and this is something which one needs to compute when you look at different
kinds of policies and different kind of interventions

58
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 05
The Kaya Identity

We would like to now look at the, we will focus on the CO2 in more detail. So a Japanese
scientist Kaya proposed a simple identity to try and see what are options are with respect to
CO2.

(Refer Slide Time: 0:33)

The way this is done is you take the total amount of CO2 either in the world or depending on
the, if you are talking about a country, let us look at either a country or the world as a whole.
If you look at the total amount of CO2 emitted in the year we can write this as CO2 per unit
of energy into energy per unit of GDP into GDP per population into population, this is called
the Kaya identity based on the Japanese scientist who proposed it.

Energy intensity KAYA IDENTITY Carbon intensity

of Economy of the energy
sector

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Now the advantage of this is if you look at this, this is called, this is the carbon dioxide per
unit of energy is the carbon intensity, intensity of the energy sector. So, for instance, if I have
a state like Karnataka or Kerala which has a large part of its electricity coming from hydro,
the carbon intensity of electricity for that state would be lower than that of let us say
Maharashtra which is predominantly having a large part of its electricity from coal.

So this is the carbon intensity of the energy sector and the other factor this energy per unit
GDP is called the energy intensity of the economy. So the question we need to see is that
when we want to, if we want to stabilize the CO2 emissions. Now we have limited amount of
things that we can do in terms of population stabilization. GDP per population is usually a
measure of how we would like the affluence we would like the services and the goods the
quality of life typically increases with GDP, so we do not want to reduce GDP population.

So if you look at this and this, these two are things which are sort of outside our control we
basically will focus on reducing the energy intensity of the economy or reducing the carbon
intensity of the energy sector and these are the two things that we can focus on as we go
ahead. So as we said this is the CO2 carbon intensity and the energy intensity.

(Refer Slide Time: 3:55)

Now the question we can ask ourselves is does a country that has a lower energy intensity per
unit GDP implied that it is more efficient? Think about it, the two countries, let us say India
and Singapore and India's energy use per unit of GDP is higher than the energy use in
Singapore, does that mean that India is more inefficient in terms of energy used than
Singapore.

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So the answer to this is that it is not necessary, energy intensity depends on if you look at
GDP, GDP is the total value add of the goods and services produced by the economy. So, if
you look at the economy, different economies have different kinds of output, so we look at
and in economy which has a large amount of agriculture, economy may have a large amount
industry and economy may have large amount of services.

Now industry by its very nature and if you look at heavy industry is energy intensive, so if
you want to produce steel, you want to produce cement you will need a minimum amount of
energy to do that, white if there is a country which is only importing steel and cement and is
mainly focusing only on the service sector it will have a lower energy intensity.

(Refer Slide Time: 5:33)

So if we look at this graph this is a graph from the energy after Rio in the 80. You will see
that as overtime if you look at the energy intensity of GDP, if you look at US, initially there
is been a rapid decline and this is because the country develops from traditional energy use
sources which were very-very inefficient to modern energy use and then it again keeps on
declining. A lot of this some of this decline is because over a period of time it does not
require money of the energy intensive material, so steel, cement it saturates.

The demand for steel, cement and energy intensive material saturate and most of the growth
and the GDP then starts coming from the service sector which requires much less energy.
And of course, there is another trend where basically industry has moved out from US and
Europe and it is predominantly now in China, little bit in India, little bit in Brazil and other
developing countries but China has taken the brunt of all of this.

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(Refer Slide Time: 6:49)

So if you look at the energy intensity, Giga joules instead of the energy intensity if we look
the energy used per percent and we look at the GDP per percent you will see that beyond a
point with increasing GDP per percent the energy use per percent stabilizes because beyond a
point there is no additional amount of energy that you need and so this kind of there is a
growth and there is a stabilization.

(Refer Slide Time: 7:18)

And this trend also if you look at energy improvements this is a more recent graph, you can
see that all countries are going through reasonably rapid improvements in energy intensity
and energy intensity per capita also going in that fashion. But just to reemphasize the

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question the reduction in energy intensity has two components, one is because of efficiency
and second is because of the structure of the economic.

So, if the economy changes where more of the GDP starts coming from the services sector
this will result in a energy intensity deduction, there are methods by which using
decomposition analysis we can see the effect of both these parameters.

(Refer Slide Time: 8:11)

So just to give you a snapshot in time 1985 and 2010 we can see over the 70’s and 2000 you
can see that agricultural share in our GDP have been declining rapidly service share has been
increasing and industry share more or less is being remaining sort of constant and so this
services with the result that we have had a significant decrease in the energy intensity we
have also had significant improvements in efficiency.

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(Refer Slide Time: 8:44)

So if you see this, this is a tri plot which shows agriculture is 0 here and agriculture 0 to 100
is on this side, industry 0 to 100 is on this side and services 0 to 100 is on this side. So, if you
see different countries you will see that China has grown where its increase its industry share
and in Indian context the industries share has been more or less constant but we have actually
we have the option of wither going high services or a high industrial growth and this will
have an impact in terms of the kind of energy used that is there.

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 Energy Resources, economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 2P3
Emission Factor
(Refer Slide Time: 0:16)

When we talked about the Kaya identity, one of the factors that we need to look at is what is
the emission factor? So and this is something that we can do from first principle. So,
whenever we look at, we are looking at a useful energy or a useful output that is being
produced, for instance, tons of steel, kilowatt hour electricity how much electricity we are
getting in a power plant.

So we would like to see as we do that how much is the carbon dioxide emission. So this will
depend on the composition of the input or the fuel, the efficiency and the characteristics of
the conversion device, similar calculations instead of CO2 can be also done for SOx
particulate matter and this methodology is the same for all pollutants. The calculations are all
possible from a basic stoichiometry and understanding of the process.

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(Refer Slide Time: 1:22)

So, we will take an example. The same example that we took in the last class when we talked
about in the previous lecture we talked about thermal power plant degraded at 500 megawatts
and using coal and we calculated how much coal and how much energy is used.

(Refer Slide Time: 1:32)

So, let us just recast that question – If this thermal power plant has an efficiency of 38 %
calculate the emission factor of the plant. So the input energy used is coal with net calorific
value of 4500 kcal/kg and the percentage of carbon in the coal is 50 % by weight.

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(Refer Slide Time: 2:02)

So, let us start this calculation.

1 kwh = 1 kW joules/sec x 60 x 60
1kWh = 3600 kJ

1 mole of carbon = 12 kg
1 mole of oxygen = 32 kg

So ,

12 44

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Now what you could do is you can see there is a Central Electricity Authorities – CEA, it
gives norms of CO2 emission factors for different power plants in the country, I think you
will have probably 2016 data is the latest which you can get, you can look at it and you will
see many of these plants are in this kind of range. So this is something that you can calculate.
Just like we have done this we can do a similar thing for a vehicle, we can do a similar thing
for an industrial process, for any place where you are doing this you can get the emission
factor.

Emission factor into the activity level will give you the total emissions, sum it up overall all
these and you get the cumulative, so this is a simple calculation and something that you
should be able to do on your own, please remember on the web you will find different
emission factors for let us say power plants, they maybe for Australian coal in Australia, they
maybe for European coal, the calorific value is different, the efficiencies are different so do
not use emission factors from other context, for your context do the calculation yourself.

(Refer Slide Time: 7:28)

If you look at the different fuels when we will looked at coal, if you look at oil or natural gas
you will see that the net calorific value is different, the percentage of carbon is different, you
will find that all fuels have either have combinations of carbon and hydrogen and natural gas
has more of hydrogen content so that on a per unit basis when we look at it the CO2 emission
factors are lower.

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So this table shows you the kind of norms of emission CO2 per gram CO2 gram equivalent
per kilowatt hour and you can see that for coal you have a whole range going up the average
being of the around 0.9 to 1 kg. You can see that for natural gas it is about half that number.
And when you look at renewables you see here all the renewables are in the range of 20 to 50
grams less than a hundred and almost since some cases biomass is neutral all of this is
including the entire life cycle. So for instance if you look at a wind turbine it will be the steel
which is there and what is been the CO2 emissions to produce that steel.

(Refer Slide Time: 8:35)

So, when we think in terms of managing the CO2, the options that we have are increased the
sinks or reduce the sources, increase the sinks means we can do afforestation, in reducing the
sources we can look at the fuel mix, changing from coal to oil to natural gas, we can look at
the energy efficiency, we can look at renewables, we can look at nuclear, we can also look at
carbon capture and storage and which technology will use depends on the kind of scale,
depends on technology development, depends on cost.

So in a sense as we go forward, we have the choices between mitigation, adaptation and

suffering and the decisions that we take today will decide the combination of this. So, either
we can mitigate, if we do not mitigate and then there is some temperature rise and climate
change we need to be able to adapt and we need to look at when that changes happen what
will we do, and if you cannot adapt or mitigate then we will suffer. So this is a problem
which is a global problem and this is a problem which needs all countries to get together and
come up with solutions.

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(Refer Slide Time: 10:15)

You can do as homework, you can look at check the IEA statistics for India for 2 years, I am
suggesting 2005 and 2015, calculate the terms of the Kaya identity for both these years and
see and think how this factors can change in another 10 years or another 20 years. What are
the possible futures scenarios, what interventions can we make to reduce the carbon intensity.

As we go along in this course and we look at economics and policies towards the end we will
discuss some of these. We will also have a recording of some of the country studies where
some of our students will present some of the countries and what are they doing in terms of
the Kaya identity and the policies. In Paris we had the Paris agreement a couple of years back
essentially where all countries got together and in the IPCC meetings there was the problem
in this is that it is difficult to get a consensus.

There are countries which are emitting much-much more than their global share but they are
also highly develop, they do not want to change their trajectory. So even to decide whether
we should have an emission norm which is CO2 per person and give a right to emit which is
on a per capita basis was not agreed upon.

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(Refer Slide Time: 11:30)

Several countries which have developed more want that CO2 emission to be based on
historical numbers one that CO2 emission to be on a per GDP basis so that the increase level
of GDP is taken care of. However, developing countries are not willing to do this and hence
there could not be any binding mandatory agreements. Finally, what was decided was every
country decided that this is a problem that we would like to tackle. So, there was a process by
which there were voluntary commitments made by different countries and these was then
ratified into the national commitments.

In the case of India the commitments that we have made are: reducing the emissions intensity
of GDP by about one third of the 2005 level in 2030, we are planning to create 40 % of
cumulative non-fossil power bi installed capacity by 2030 and we expect that would get some
finance from the International Green Climate Fund for this. We also plan to create an
additional carbon sink of 2.5 to 3 billion tons of CO2 equivalent through additional tree cover
and forest.

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(Refer Slide Time: 12:57)

So we will discuss some of this and the economics of this and in the future lectures. In this
lecture we have looked at the environment. We found that it is a key driver for future energy
systems. We concluded that the existing patterns are not sustainable into the future and we
have a real problem in terms of climate change. We also problems in terms of local emissions
and urban air quality. We looked at the quantification through the Kaya identity and the
emission factors. In future classes we will explore the interaction between energy economics
and environment and carry on with same thread. Thank you. These are some of the
references.

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 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 3 P1
Energy and Quality of Life.

Today we are going to look at Energy and Quality of Life, we have already seen for a
country and for the world as a whole, what is the overall energy balance? What are the
issues related to energy and environment? So, if we think in terms of what do we mean
by quality of life?

(Refer Slide Time: 0:42)

So, when we look at quality of life, we think in terms of the general well being of
individuals and society.

So, what are the parameters? If you look at your own day-to-day life, what do you think
affects your quality of life. You may also want to think about, if you had a choice, where
would you like to live? In India, would you like to live in a city, would you like to live in
a village? Which city would you like to live, and why would you like to live in that city?
And if not in India, anywhere in the world, if you had the option, what would be your
choice?

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So, looking at this, we visualize what aspects of life that we would like to see this, we
would like to see how these factors, the parameters that affect the quality of life are
linked with the energy use. So, there are many different indices that people have
proposed for quality of life.

(Refer Slide Time: 1:52)

If we look at for instance, this is a graphic, one of the indicators that is used commonly is
the Gross Domestic Product and we try to see what is the gross domestic product per
person. So, in general if you look at the GDP, if you look at any country, a country is
producing steel, cement, mobile phones in all of these if we see what is the value addition
that has been provided, and we add that up that gives us the gross domestic product.

So, typically a country that is more affluent will have more of an income per person. And
we generally tend to see that income per person is one of the parameters that affects and
shows how well of a particular country or community is, and if you see this, you will see
that in the different a per capita income of Indian states and different countries, different
states within the country we have a number of, we have a wide variation in terms of
income.

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(Refer Slide Time: 3:03)

And if you look at this map, this is a map which was given in The Times of India, it was
you try to compare different regions of the country in terms of their income per capita
and compared it with other countries of the world. So, some parts of the country are
underdeveloped and have low income and in other parts are well off and can compare
with high-income countries.

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(Refer Slide Time: 3:33)

So, for instance, this metric shows that different states, some states have income equal to
some of the medium developed and developed countries, some are poor and comparable
with some of the less developed countries.

(Refer Slide Time: 3:55)

So, this is the variation in the GDP per capita, and there are the income per capita is one
metric, but that is not necessarily the best metric. So, the United Nations created a metric

76
called the Human Development Index. There are also many other metrics which have
been proposed by different researchers for instance, David Morris provided an index
called the Physical Quality of Life Index.

So, typically what happens is if you would like that, there is a good quality of life you
would like that all the people are educated, there is literacy, the health is good and then
infant mortality that means number of infants who are dying per thousand is small, life
expectancy is good at birth. So, these are some physical quality of life indices.

And there are also other indices called the Happy Planet Index, The Popsicle Index is a
an interesting index, which has been proposed, which is a an index of safety and it just
says that if you ask people, what percentage of the children can go in a 10 you know, go
out and buy a popsicle and come back safely, and what percentage thinks that the country
is safe enough for people to go and that, that if that percentage is high, it means that there
is a intrinsic safety and the quality of life is high.

Gross National Happiness, this has been proposed by country like Bhutan, of course, it is
difficult to quantify again there are different kinds of metrics, you will find that there is
an index called the Livability Index, which has been used for different cities and it tells
you based on the kind of services which are there in the city, the kind of expenditure and
the kind of costs there are also many Gender related Development indices and Multi
Dimensional Poverty indices and Gender Inequality index.

77
(Refer Slide Time: 6:25)

So, we will look at the Human Development Index in more detail, in the Human
Development Index, there are essentially three different parameters, one is the Gross
Domestic Product, the GDP per capita the other is in terms of the education or the
illiteracy.

So, typically if you look at the percentage of the population, adult population who was
not literate, who cannot read or write and you will find that when you plot this, this plot,
which you see here is a plot of 127 countries and the groups of 10 countries with the best,
the ones which are using the lowest energy per capita to the highest energy per capita and
you can clearly see that the countries that have a higher energy use per capita, typically
are better off in terms of the literacy or have a lower illiteracy rate.

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(Refer Slide Time: 7:27)

Similarly, the life expectancy versus energy use, you will see that, beyond the point you
know, when you look at two tons of oil equivalent per capita per year, as you go ahead
beyond that most of these countries, the countries which have higher energy use per
capita also are the countries with higher life expectancy in terms of number of years at
birth. And this is again another metric which is used in many of the quality of life indices.

(Refer Slide Time: 7:44)

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So, infant mortality, that means number of deaths of infants of age up to 5 years per
thousand births, and you see that those countries where there is a significant where the
energy use is relatively high, when we talk of 3 to 4 tons of oil equivalent per person per
year, you find that the number of infant mortality has also declined and this is better
quality of life.

So, we can see very clearly that typically, a certain amount of energy use or energy
service which is provided per person if that increases, all of these indices whether you
talk of literacy, whether you talk of the life expectancy, infant mortality, all of them tend
to do better.

(Refer Slide Time: 8:39)

So, the Human Development index which is proposed by the UNDP has the combination
of three dimensions. The first is we the life expectancy at birth, long and healthy life. So,
there is a Health Index, there is a knowledge in terms of both the means years of
schooling and the expected years of schooling, which gives you an Education index, and
the third one is a decent standard of living, which is given either in GDP per capita or
recently it has been in terms of the Gross National Income per capita on the purchasing
power parity basis, and this gives us the in Income index.

80
So, in all of these three indices, we have basically three indices, the Health Index, the
Education index, and the Income index. For this Human Development Index, all of these
indicators are then normalized to go from zero to one, and then based on this, the average
of these three, either earlier it used to be taken as a arithmetic average, now it is taken as
a geometric average, is taken to give the Human Development Index.

So any country, all the countries are ranked with one being the best and zero being the
worst, so, you have a score between zero and one, and the closer you are to one in the
Human Development Index is preferred.

(Refer Slide Time: 10:12)

So, the energy is generally needed for development and for improved quality of life.
These factors that we were talking of, the life expectancy at birth, education, literacy,
infant mortality and income, these are all put in terms of this Human Development index.

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(Refer Slide Time: 10:31)

ACTUAL− MINIMUM
INDEX =
MAXIMUM − MINIMUM

0¿1

For each of these indicators, the index actually calculates, the index is calculated in terms
of, you have an index, which is actual minus minimum divided by maximum minus

82
minimum with the idea that for each of these parameters, one of the countries has the
maximum possible value and then you have a minimum possible value.

So, basically this index ranges from zero to one and in all of these, we calculate each of
the indicators and then take the average of this.

(Refer Slide Time: 11:36)

For instance, in the case of Germany and China you find that, we find the life expectancy
indicator 0.87, education 0.954, GDP 0.895 and this the average of these three gives you
the overall Human Dimension Index HDI for Germany, HDI for China.

(Refer Slide Time: 11:58)

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This is calculated by taking values of minimum and maximum as we did, and you can see
for life expectancy the lowest life expectancy is 25 years for one of the countries,
maximum is 85 years and this was for a particular year, and then if you see Germany is
77 and China 69.8 while adult literacy going from the minimum is zero and maximum is
hundred, Germany is pretty much near hundred where you get 99, and then similarly, the
Enrollment Ratio and GDP per capita.

(Refer Slide Time: 12:35)

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Based on this, we get these calculations, each of these indices when you take the actual
minus minimum divided by maximum minus minimum you get these values and this is
how this is done, in for another year that was for the previous year.

In 2013, if you see the life expectancy, the maximum was taken as a life expectancy in
Japan which was 83.6 and the minimum was 20. And then similarly, you have the GNI
per capita, the maximum was for Qatar, which was some at 87,500 dollars, US dollars,
minimum was 100 dollars per capita.

(Refer Slide Time: 13:24)

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And when we take all of this, in the case of let us look at what are the numbers for India,
in 2013, our rank on the Human Development index was 135, and the HDI value was 0.5,
around 0.59, life expectancy at birth was 66, and the GNI was about, this was in 2013.
The Gross National Income was about 5,000 dollars per person per year.

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(Refer Slide Time: 14:02)

This has improved compared to previous years, and we are on the trend of increase.
Recently UNDP modified this where they are now taking the indicators in terms of the
geometric average. So, that means you take each of the indicators and take the cube root
of that, and then multiply all these three to get the final value.

(Refer Slide Time: 14:21)

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And to give you an example for Ghana, you can do the calculation yourself, the values
we had already given the minimum and maximum values, and if you look at the life
expectancy at birth 64.6 and the GNI per capita and based on this if you see these were
the minimum and maximum as we said and be using these values in the technical notes of
all these Human Development reports.

You will find the values of calculation, we did it in a similar fashion just like we had
done the actual minus the minimum by the maximum minus the minimum you get the
kind of indicator values, and then the geometric mean of all of this gives you the Ghana
HDI of 0.558. Slightly lower than that of India and similar.

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(Refer Slide Time: 15:13)

You can see on this plot, the link between the energy use and the energy consumption
and the HDI and you can see that typically the ones with the high HDI, high energy
consumption often have an improvement in the HDI.

(Refer Slide Time: 15:40)

You can look at, if you look at the UNDP data, you will get all the data for all the
different countries and you can make these calculations yourself.

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(Refer Slide Time: 15:47)

You can also see this is for India over a period of time, the Human Development
indicator has been increasing and now it is of the order, it is a little more than 0.6 and we
are of course moving forward in that.

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(Refer Slide Time: 16:04)

Within this you can also look at the Human Development indicator for different states
and we have not had every year this is not published, but there for previous years if you
look at it, Kerala, Delhi, Punjab all seem to be doing well in terms of the Human
Development indicators. If you look at the Uttar Pradesh, Bihar, Orissa they are relatively
still poor in terms of the quality of life and as we look at the development and the energy
use, the HDI can improve.

(Refer Slide Time: 16:41)

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There is a lot of this data, there are other indicators also, apart from this is that you may
have an overall good quality of life, but you may have a problem in terms of hunger. So,
there are indices in terms of what proportion of the population do not get the required
nutrition and there is this index called the Hunger index, which again is something which
you may want to look at.

(Refer Slide Time: 17:14)

Within a state, some states there are studies where you we computed the Human
Development Index and this is showing you a plot of the HDI for various districts in
Maharashtra. And this is another thing where you can try and see how the energy use and
the HDI combines.

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(Refer Slide Time: 17:31)

Now, this plot which I am showing you here, is a plot where we talk about each country
is shown as a on the x axis is the annual electricity consumption, kilowatt hour per capita
and on the y axis is the Human Development Index, HDI going from zero to one. And if
you look at this, you will find that this is the plot for India, you can see that India has
over a period of time has improved in terms of the HDI and the electricity use per capita
and the corresponding period has also been increasing, we currently use about a little less
than 900 kwh/person/year.

And you can see that that is much lower than the world average, as we go from this 0.6 or
0.65 and we want to go to the region of 0.8 or 0.9, we will need to increase our electricity
consumption by a factor of two or three. And you will also see in this case that there is a
trend in general there is a scatter.

So, for the same level of electricity consumption you can find countries with different
ranges of HDI, so there are countries which are more efficient and those energy services
they have a better quality of life for the same amount of electricity use. You can also see
that beyond there is a minimum amount of electricity requirement for having a particular
quality of life, but beyond that, there is the curve sort of becomes flat.

93
So, that beyond the point then this electricity use does not necessarily result in
improvement of quality of life and this could be, for instance, if you see US, Australia,
some of the Saudi Arabia and others you will find that they have not clearly increased the
quality of the, that electricity use has not necessarily contributed to improvement in
quality of life.

So, essentially what happens is, when we think in terms of what is the implication of this,
when we think in terms of a country like India, where we are at a particular point and we
want to improve the quality of life, we will need to increase the electricity services, the
energy services, and so we have a target and then the per capita energy use will need to
increase and we need to design our energy systems to go for this.

(Refer Slide Time: 20:06)

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The other issues related to this are also, we can also look at what are the issues, impacts
in terms of the employment and this is a plot which shows I told you about the
Maharashtra situation, this is showing you the Human Development indicators for
Maharashtra and it shows you a plot of the different types of HDI.

(Refer Slide Time: 20:28)

We talked about countries as they develop, you can see this is a time trajectory of the
HDI versus the Primary Energy Supply, you can see that all the countries have been
moving in a path where the HDI has increased, and correspondingly the primary energy

95
users also increased, which means that there is a link though which is decoupled as we
said that beyond the point there is a plateau and you can see that also in this kind of
projection, where you see beyond a point when you start using energy more than a certain
amount, this is not reflected in any improvement in the quality of life.

So, it means that up to a point, we do need a certain basic energy services which is
required for provision of the kind of services which are required for improving the quality
of life but beyond that it sort of stagnates and stabilizes and then does not really result in
any improvement.

(Refer Slide Time: 21:29)

Similar kinds of plots have been done in terms of carbon emissions. So, you can, of
course, see that, as we saw last time that the same amount of energy services can be
provided. And depending on the fuel mix, you can have different kinds of carbon
requirement for that energy, but historically, if you see the different countries and you see
the HDI versus the CO2 emissions, you see a sort of trend in terms of the usage. As we go
forward, if we de-carbonize our energy sector, this trend can be decoupled and we could
really have improvement in quality of life without increasing our carbon footprint.

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(Refer Slide Time: 22:10)

And most of the countries if you see over a period of time, they have been improving
their HDI. And this is what development is about and this is where we need to think in
terms of increasing the energy services and improving our energy system.

(Refer Slide Time: 22:24)

There are other indicators which are also important from an overall point of view and one
of the indicators where you look at developed country, we also want to see that there is

97
less inequality between genders. And in terms of this, there are different kinds of Gender
Inequality indices very similar to the indices that we do for the HDI. And these indicators
can be in terms of health, empowerment and labour market. In each of these cases, what
is done is, we compare the average kind of services and the average kind of health for
men and women and then we use this in the form of an index, we look at, if men and
women are doing a particular job, are they getting the same amount of pay?

(Refer Slide Time: 23:22)

What is the proportion of the women who are in the labour force? And these are some of
the indicators on which we identify the gender gap in terms of economic participation and
opportunity, the educational attainment, health and survival, and the political
empowerment, what percentage of the MPs are women? What percentage of the leaders
in the cabinet are women and so on.

98
(Refer Slide Time: 23:41)

And if you see in the Indian context, ranking of about 149, we do not seem to be doing
too well in terms of the gender gap, but we are still on a path of improvement and if you
look at compared to some of the Scandinavian countries were relatively they are much
better off in terms of relative gender equality, you can see that this is, so when we talk in
terms of overall development and quality of life, equality in gender is also one of the
parameters.

(Refer Slide Time: 24:23)

99
You can also see that within the country there are different. So, this was a study by
Amartya Sen the Nobel laureate in economics, and this study showed that you compare
Kerala with different parts of the world and compared with US, China, and you find that
in terms of health, Kerala seems to be doing better than China and in some parts of the
US.

(Refer Slide Time: 24:43)

And similar things in terms of the women health and survival rate by age.

(Refer Slide Time: 24:53)

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So, all of this, what we have done so far is, we have looked at the different kinds of
indicators for the quality of life, we focused on one particular indicator which is the
Human Development Index and the HDI as proposed by the UNDP, we saw that all the
countries are rated and this is non-dimensionalized from a factor of zero to one.

We saw also that, the HDI varies with the energy used and the electricity use, we said
that, in order to improve the quality of life, we need to increase the energy services, but
beyond a point, then there is a saturation and this will be useful to us when we think in
terms of making projections of what kind of future development we should have and how
our energy systems should work.

101
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 3 P2
Energy Inequality

So, we saw in the last class the link between Energy and Quality of Life, we talked about
the Human Development Indicator. Today we are going to look at the inequality, how to
measure inequality and what do we understand, what is energy inequality?

(Refer Slide Time: 0:41)

So, the two questions that we need to ask are how do we measure inequality? Why is it
important? And any society or any development that we have, we would like to see that
the benefits of that development go uniformly as far as possible to the entire population.
And if you have a society which has more inequality, then of course, that is not
necessarily from a long term that is not necessarily sustainable.

102
(Refer Slide Time: 1:17)

So, if you look around us, you will find that in general inequality we talk about inequality
in terms of inequality of income. So, for instance if you see, if you look at this is from an
inequality report, you will find that the top 10% of the population, what percentage of the
income do they own, and you will find that, in India top 10% accounts for about 55% of
the total income of the GNP. And similarly, you find Europe is relatively less unequal the
because the top 10% owns about 37%.

(Refer Slide Time: 2:12)

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So, this gives you one possible way to look at inequality, see how much the top 10% own
in terms of the income, we may also look at how the share has been changing over a
period of time. So, if you look at this data, this plot shows you over a period of time from
1980 onwards, how these numbers are changing, and you will find that in, in most of the
cases, the top 10 %, the share of their income has actually been increasing at a faster rate
than the rest of it.

So, that means that the rich are getting richer and of course, this means, in many cases
that the inequality has sort of increased and you can see in the Indian case if you look at
this plot, you can see how this has been going up and then it is sort of plateaued at this
point this is the kind of shape.

(Refer Slide Time: 2:59)

If you look at in this is, again from the inequality report, you find that, if you look at the
total inequality and the income growth in terms of the different income groups, you find
that the richest have been growing at the fastest rate. And so it means that of course, this
is not sort of surprising, but it is quite striking in terms of the top 1% captured top 1%
captured 27 % of the total growth, if you look at from 1980 to 2016.

So, this is in terms of inequality, if we want to measure this, and we would like to look at
inequality in income, we would also like to look at what is the inequality in electricity use

104
or energy use. So, one of the matrix that we can do is we can actually take the entire
population and arrange the population in terms of lowest to highest. So, if we talk in
terms of income, we take the lowest x% lowest 1%, then 2%, cumulatively, how much of
the population if you take the lowest 10%, how much of the income does the lowest 10%
have, and so on.

(Refer Slide Time: 4:35)

So, we have a plot and that plot is called the Lorenz Curve on the x axis, go to 0 to 1, or
to 100 % and on the y axis also go to 0 to 1. The x axis shows the percentage, cumulative
percentage, the lowest x percent, lowest percent, and the y axis shows the cumulative
share, cumulative share of income, energy whatever we are income or if we want to plot
energy and so, if we make this here.

Now if we had a real, if we had equality, complete equality, if we take any point here as
x, the minimum x% of, if you take the fraction x, x going from 0 to 1, and we want to
know what percentage of the income, if you had a complete equality, then the 5, if you
take 5 % of the population, it would account for 5 % of the income. If you take 20 %, it
would account for 20 %.

So, the line that we would have would be y is equal to x, this is where you have a
complete, it is a 45o line and this is when you have complete equality. On the other hand,

105
if we had a set of different individuals, where everyone had 0 income, and only one
individual had all the income, then you would have a curve, which would go something
like this, and then go here, in actual practice, we would have something like this and so,
this deviation that we have from the 45o line shows us the amount of inequality in the
system.

(Refer Slide Time: 7:17)

And so, this curve that we have is called, this is called the Lorenz Curve and Lorenz
Curve if we see, Lx is the proportion of the income earned by the lowest x proportion of
the population. So, obviously by definition L0 will be 0, 0 percentage of the population
will have 0 percentage of the income and L1 means 100 percent of the population will
have 100 percent of the income.

And since by definition this is a cumulative increase and the cumulative amount, this will
be an increasing function. The extreme case is where Lx is equal to x, this is complete,
absolute equality, all earn the same and absolute inequality is where Lx is equal to 0, for
0 less than equal to x less than 1 and that one individual earns the all the income.

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(Refer Slide Time: 8:13)

So, in between this is what you will have the curve, and this is how the curve would look.
So, in this what we have is we define a coefficient called the Gini coefficient.

(Refer Slide Time: 8:21)

A
GINI COEFFICIENT =
A+ B

0 ≤ G ≤1

And the Gini coefficient is defined as, the ratio of these areas, the area A divided by A
plus B. So, as you can see, this Gini coefficient will be between 0 and 1 with 0
representing absolute equality. And 1 representing absolute inequality, anything in
between the lower the Gini coefficient, the more equal is the society.

And so let us look at some of these numbers, how do we compute this?

(Refer Slide Time: 9:15)

107
 A
GINI COEFFICIENT =
A+ B

0 ≤ G ≤1

G=2∫ ( x−L( x) ) d x

If we use we can approximate it if they are points, and we use the trapezoidal rule, you
can also show very easily that this is equal to if you have points Xi and Yi, we can write
this as the area in this form. And so, given a set of data, you can calculate what is the
Gini coefficient.

108
(Refer Slide Time: 10:17)

Now, just to show you some of the Lorenz curves, and you can see that the kind of
different cumulative proportion of the, you can see that these are different, obviously, if
you compare this curve with this, you will find that this one shows more inequality as
compared to this, this will have a higher value of the Gini coefficient.

109
(Refer Slide Time: 10:47)

We have plots and you can, if you just Google you will find maps which will show you
different kinds of Gini coefficient for different countries. And so of course, some regions
are have relatively more equality. For instance, if you look at Europe and if you look at
the Scandinavian countries, and then there are other regions which are relatively more in
unequal.

(Refer Slide Time: 11:12)

110
So, just to give you an example, if you take this data this is from a paper for the US
electricity, US household electricity consumption and this gives you the cumulative
proportion of population and the cumulative proportion of the electricity consumption,
one can take this plot, one can take this and plot it and draw the Lorenz curve and you
can also from this get the Gini coefficient for this.

(Refer Slide Time: 11:41)

If you look at for the world, this was done in the global energy assessment, and you can
see that the final energy and the electricity use you can see that there it is a fairly
significant inequality. So, for instance, if you look at from this side, if you look at the
poorest 10 %, if you look at the richest 10 %, you will find that the richest 10 % consume
more than 40 % of the world's electricity and the final energy while if you look at the
poorest 50%, you will find that the poorest 50% consume less than 10% of the total
cumulative energy.

So, when we talk in terms of the overall energy scenario, there is a very significant
inequality and distribution in terms of the access to energy in terms of the electricity and
as we develop these inequalities, the plan is to try and reduce these inequalities.

111
(Refer Slide Time: 13:02)

So, for instance now, this is from a paper by Jacobsen in Energy Policy, and you can see
that the electricity, cumulative electricity consumption, residential electricity
consumption, you will find that relatively if you see Norway as Gini Coefficient of 0.19,
much more equal, then when you see Kenya, large proportions do not have access to
electricity, Gini coefficient is 0.87, and it is only this which is, and similar kinds of things
you can see.

(Refer Slide Time: 13:36)

112
We had developed similar kinds of using the data from the NSSO, we try to develop
Lorenz curves for India and you can see that over a period of time, the inequality in terms
of electricity use has been declining. And this has been due to our efforts in terms of
providing access and providing electricity and often providing subsidized electricity for
low income users.

And you will see that in the case of urban, it is even better in terms of the Lorenz curves
and so this shows you the way in which we can map the inequality in terms of the Lorenz
curves and from this, we can then calculate what are the Gini coefficient.

(Refer Slide Time: 14:25)

And there are papers where the overall inequality in the carbon has been also mapped and
this is called the Carbon Gini. In doing this in this paper in Teng et al, they have actually
taken not just in a particular year, but they have taken the cumulative share of the
historical emissions.

And you can see very clearly that the emission trajectory is such that it is the richest 10,
15% which has actually been contributing for a significant proportion of the cumulative
CO2 emissions, of course, please remember in all of these calculations, we take every
country as an average, there is an inequality within the country.

113
But these inequalities, when we talk in terms of an overall problem, in terms of Co2
emission reduction, and we are trying to get the entire world to come to some agreement,
these are the issues which come in when we look at how to get an agreement, how to
reduce the CO2 emissions, and to have.

And so that is why we have gone in for instead of having a mandatory sort of a emission,
every country has come up with a voluntary declaration of what they can do and that is
how we have made an agreement in Paris and we are moving forward with that.

(Refer Slide Time: 16:01)

These are again different kinds of countries on that Carbon Gini, and this gives you some
kind of.

114
(Refer Slide Time: 16:08)

So, these are some of the references where you can find more details, what we have done
today is we have looked at the metrics for measuring equality or inequality, we talked
about the Lorenz curve, and we also looked at the Gini coefficient, in the tutorial we will
give you some examples of equations and how you can make some calculations, so that
you can calculate the Gini coefficient in terms of income in terms of energy.

And this is something which we can use when we talk in terms of different development
strategies and decide on what kind of energy requirements are required to remove the
inequalities.

115
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 3 P3
Energy Security

We have looked at various dimensions of energy, we have talked about energy and
environment, energy and development, energy and quality of life, and in the last class we
also talked about energy and equality. The last dimension that we need to cover before
we go into the subject of energy economics is Energy Security. You must have read in
the newspapers, many different issues related to energy security. So, let us try and find
out what do we understand by energy security.

(Refer Slide Time: 0:58)

What is energy security? What are the parameters that affect energy security? What are
the options to enhance energy security and we can look at energy security from the point
of view of a country or of a state or a city or a region, normally we always talk about this
at a country level or a national level.

116
(Refer Slide Time: 1:23)

So, let us define what is energy security? This is a graphic which shows different
dimensions of energy security and we will talk about this in part by part.

(Refer Slide Time: 1:36)

So, when we talk of the energy security, the parameters that could, we could look at the
security in terms of the induce sectors. That means the different kinds of demands that we
have, the national electricity system, we can also look at what is the mix of the national

117
energy use, the domestic or the fuels that we have, we can have imported fuels, we can
use hydro, we can look at the nuclear fuel cycle and then we can have globally traded
fuels. So, all of these dimensions need to be thought of.

(Refer Slide Time: 2:15)

When we talk of a definition of energy security, a simple definition is that we would like
to see that, we have uninterrupted provision of the vital energy services. And this is of
course, a priority for every country. So, we would like to make sure that we, whatever
energy we need for all our activities, we have access to that and that there is no
interruption in that. There are different dimensions of this, this has been classified into
three different parameters. One is the robustness, the second is the sovereignty and the
third one is the resilience, let us discuss each one.

118
(Refer Slide Time: 2:59)

Robustness involves the sufficiency of resources, reliability of the infrastructure and

stable and affordable prices. So, in the case of robustness that means, if there are some
fluctuations, if some changes are there, we should still be able to provide the energy.
Sovereignty means that the country has control over the energy use.

So, we need to have protection from potential threats from external agents. And
Resilience means the ability to withstand diverse disruptions. So, in the case of
sovereignty, if all of us, if the country is highly dependent on oil imports, and those
imports are all coming from a particular region, if there is some problem which happens
within that region and our oil supply is affected, then we have a problem in terms of
security.

So, we have various strategies in which we can try to enhance and increase the
sovereignty and the in the case of resilience, recently there have been a large number of
different kinds of disruptions, like floods, we have different kinds of you have a tornado
you have some extreme event in which the energy infrastructure gets affected.

And resilience means that how quickly can we bounce back, do we have a diversity in
terms of things.

119
(Refer Slide Time: 4:39)

So, in all of this, if you look at this graph, this chart it shows us the kind of different
possibilities. So, in the case of robustness, we can try to minimize the risks and we can
have a diversity in terms of the different kinds of supply, we can also try and see that
whether we can manage and have flexibility within the demand, in the case of
sovereignty, one of the things that we can do is we can try and axe, we can diversify the
supply.

So, if we are getting imported oil, we can make sure that we are getting this oil from
different regions of the world, we can have long-term contracts, we can also see in this
case, we have a situation where ONGC through its wing has been actually buying
different resources and mines in different parts of the world.

So, one of the things is you can acquire facilities in different parts of the world. And so,
these are some of the kind of specific responses that we have. In the case of resilience, we
can try to see we can have redundancy, that means we can have more sources of supply,
we can try and see that we can modify some of the demands and so there are a whole host
of different things that we can do.

If we want to talk about the energy security of any particular country, one of the
indicators that we can do is we can understand and see what percentage of our supply

120
comes from comes from outside. So, whether we can have domestic supply and so we
can look at the percentage of our, if you look at India, and we look at oil, a significant
proportion of our energy use is based on oil and our oil production has more or less
stagnated between 30 to 40 million tons per year.

Most of the growth which is there in oil is coming from imports. And if you look at the
percentage of energy that is imported as a proportion of our total primary energy supply,
you plot that over time and I will show you that plot, you will find that our dependence
on energy sources outside has actually been increasing and this is not a very good
situation.

So, we need to think in terms of substitutes, we have been looking at the possibility of
using biofuels, we are looking at renewables, we are looking at domestic fuels, and this
and so, this is the other thing that has been when we talk of energy security globally there
is this whole, if you look at oil and oil prices, many of the developing countries have
actually been affected by the fluctuation in oil prices.

Until recently, oil prices have only been increasing, in the last decade or so, we have seen
drops in the oil prices.

(Refer Slide Time: 7:52)

121
Now, if you look at this plot, this plot shows the trend in oil prices with time and you can
see there is no, there are no very clear cut patterns, but if you look at all of these arrows,
which are there, these arrows all relate to actual political events.

(Refer Slide Time: 8:14)

And those events have an implication, there are some particular blockage, there are wars
and these have always had an impact in terms of oil prices, sudden spurts in the prices
result in adverse impacts to economies which are dependent on imports. So, when we
think in terms of any strategy for energy security, we need to make sure that our country
is sort of immune to some of these and this is the these are the kind of things that we look
at this.

122
(Refer Slide Time: 8:51)

On a shorter time frame, on a longer time frame, if you see these are the kind of oil price
variations which are there and you can see oil price variation. Many of them get linked to
political events, and you can see that this automatically has an impact on the economy.

123
(Refer Slide Time: 9:05)

124
And you can look at some of these trends in more detail, I leave that to you, but basically
what you will find is that when we think in terms of this, we talked about these three
pillars the robustness, the sovereignty and the resilience. And in looking at this, you can
see what kind of supply do we have, what proportion, a large proportion of the fuel, oil
and gas is globally traded and this obviously will contribute to the problems of security
for many of the other countries, for many of these countries, in the case of nuclear also in
many cases, we are dependent on imports for the nuclear fuel.

And in the case of hydro also there may be issues in terms of water availability and in
renewables, of course, the variability of renewables. So when we think in terms of in a
regional context, when you look at a context where there is a disruption and the
resilience, we have to see what proportion of our energy supply is coming from near the
region, because in case the centralized infrastructure is cut off, how do we provide that?
So, these are some dimensions that we can analyze when we think in terms of looking at
different aspects of the energy system.

125
(Refer Slide Time: 10:39)

I talked to you earlier about this import share and you can see that over the last from the
1990’s onward, if you look at the percentage share of imports in our overall energy
supply, you can see that this is sort of monotonically increasing and this is not a very nice
trend. This is something that we need to see how do we get substitutes for oil and we are
recently we have been also importing some proportion of coal.

One of the things that we may also see that even in the case of one of the strategies that
we have adopted is where we have gone for renewables, but even in the case of
renewables when we look at the kind of solar photovoltaics that we are, we are actually
installing, a significant proportion almost 90 percent of this cells and modules that we are
installing are coming from imports and this also can have implications in terms of energy
security.

126
(Refer Slide Time: 11:37)

We are in a interconnected world, and if you see this is showing you sort of is the, this
shows the trade in oil and oil production and you can see very clearly the magnitude of
these arrows shows the volumes and you can see that almost all the oil is coming from
the Middle East.

And you find that the of course, there are geopolitical issues related to this because of
this, this is a region which is under in turmoil often when there are problems, this affects
the availability of oil, it affects the prices, and it affects the economies in many parts of
the world. So, as we plan our energy systems for the future, we would like to shelter from
these kind of impacts and we would like to see a what are the kind of options that we
could not do.

So, we have looked at the dimension of energy security, and we said that every country
would like to have a strategy where you would like to have robust, sovereign and resilient
energy infrastructure so that we can provide uninterrupted supply of energy for the
nation's development.

So, with this we cover all the different dimensions and the linkages between energy and
the rest of the economy. In the next class, we will start with talking about energy

127
economics and looking at how we can assess different projects in terms of the economic
viewpoint. Thank you.

128
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 4 P1
Introduction to Country Energy Balance assignment

Hello, I am Santnam Bakshi, a teaching assistant of the Energy Economics Resources and
Environment course, I am going to walk you through the Country Energy Balance given
to the students. The objective of this assignment was for students to construct an energy
balance for different countries, to see the flow of energy from the primary sources such as
coal and oil to secondary sources like electricity to the final end uses.

(Refer Slide Time: 0:46)

As you can see in this slide, we asked them to construct a table, which shows the
different sources that are there. The students were asked to collect data for different
countries of their primary energy uses, and the amount of energy that goes into secondary
sources like electricity, there uses in different sectors like residential, industrial and
transport and their break up into different end uses like lighting, air conditioning, extra.

129
A lot of this information can be found on the website of the International Energy
Administration, as well as the United States Energy Information Agency.

(Refer Slide Time: 1:19)

So, moreover we asked the students to construct a Sankey diagram with this information,
The Sankey diagram is a very good way to represent the flow of energy from primary
sources to secondary energy all the way to end uses and in different sectors. As you can
see in this particular diagram, it is very clear where the losses are and what the
magnitudes of different things are.

130
(Refer Slide Time: 1:37)

After this, we also asked the students to construct a PECSS diagram which stands for
Primary Energy Consumption by Source and Sector. So, this gives a very clear
understanding of what the different primary energy sources are, what are their
contributions to the energy requirements of that particular country and what their
different breakups are in terms of the usage.

131
(Refer Slide Time: 1:57)

The students were asked to construct these diagrams for two different periods of time,
2000 as well as 2015. This was to illustrate the changes in the energy flow of a country
over time, as newer technologies are developed. After this, they were asked to collect
data on the different energy related metrics for a country.

We had them collecting the carbon intensity, which is the CO2 emissions per unit energy
produced, the energy intensity, which is the energy required per unit GDP, as well as the
GDP per capita. In the assignment, our class was divided into different countries, there
was a large variation in the countries ranging from the developed countries like the
OECD countries, as well as the underdeveloped countries like some of the African
nations. The idea behind this was for the students to understand how the variations in
energy flow happens across the wealth of different countries.

132
(Refer Slide Time: 2:52)

The students were further asked to collect information about the energy imports of a
country and its implications on the energy security of the country. Students were also
requested to collect information on the policies of individual countries, that they had
committed to, to meet the Paris Climate Agreement. We also asked the students to find
out what are the bottlenecks that these countries face in implementation of these policies.

We now have three different countries presenting to you. They are Mexico, Australia, and
Japan, you can get an understanding of the information that the students found about
these three different countries, and what their scenarios are. Thank you.

133
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 4 P2
Energy Balance of Japan
(Refer Slide Time: 0:18)

Hello everyone, I am Nitin, I along with my group member Mohammad Hafiz Niral will be
presenting our assignment on the salient features of energy balance for the country Japan.
Before going ahead, let first understand what are the issues that Japan is facing in terms of
energy.

If you look at Japan, the country as such has a very low self-sufficiency ratio in energy. Low
self-sufficiency ratio means that a country has a strong dependence on the energy imports. As
per 2015 statistics the self-sufficiency ratio of Japan was about 7.4 %which is very low when
compared to the other OECD countries. For example, the Denmark which has the highest
self-sufficiency ratio is at 702 percent. The Britain is at about 65 percent.

The another issue that the Japan is facing is, the availability of the stable power supply. Other
issues is the rise in the increase of CO 2 emissions after the Fukushima accident since the
dependence on the fossil fuel based energy sources as increased from 81 %to 89 %since 2010
to 2017.

134
(Refer Slide Time: 2:04)

So, some of the key issues that is faced by the Japan is as flashed on the screen. So, the 90
%of the dependence for the primary energy supply input is, is from the coal, oil or from the
natural gas. About 86 %of the crude oil is imported from Middle East. As far as the natural
gas is concerned, it is distributed amongst the countries. The major supplier being Australia
which supplies about 27 %followed by Malaysia which supplies about 18.5 percent.

So here, the Japan has tried to diversify its primary energy supply sources which will ensure
that it has a good energy security in case one of the countries fails to meet the required
amount of export. So, to ensure this Japan has also got a very strong diplomatic relations with
these countries.

Now, let us look how and how the energy sector of Japan has changed before and after the
earthquake in 2011.

135
(Refer Slide Time: 3:18)

Prior to the earthquake, Japan has a dependency of 11.9 %share by the nuclear power energy
which reduced to about 0.8 %in the year 2016. Consequently to cater for this excess demand
that is left unmet the share of increase of LNG has significantly increased. So, you can see
from the slide that the share of the LNG has increased and it has peaked in the year 2014.
This was the year when the tariff for the electricity in Japan has increased by 25 %from the
rates what was there in 2010.

(Refer Slide Time: 4:11)

The greenhouse on the other hand, the greenhouse gas emissions has also peaked since, as
also peaked after 2011 incident and it peaked in 2003 there was a total increase of 4
%greenhouse emission gases from the Japan. Why does Japan need the nuclear power? Japan

136
need to nuclear power to have stable supply. It needed the nuclear power to reduce the
electricity cost. It also helped in reducing the CO2 emissions from the country. So, as flashed
on the screen, we can see those are the important points that why nuclear power was
important to Japan. Now restarting the existing nuclear plants will meet, will require
conforming to the new military standard that was given by the National Regulatory Agency.

As per 2017, there were 5 plants which were operational. There were 17 which were
undergoing the inspection and in case if the policy depends with the policy basis itself to have
more energy from the nuclear supply, we can see that the nuclear power plants may again be
restarted by 2020 or subsequently more plants will be restarted. At present, the pathway to
the Japan’s energy is not very sure whether they will be going totally, total dependence on the
nuclear power plant as earlier before this Fukushima incident or it will be totally out of the
dependence on the nuclear power energy.

(Refer Slide Time: 6:11)

There are some of the key developments that has taken place in the energy sector. Japan has
been progressively pursuing the R and D on, R and D of methane hydrate as nonconventional
domestic source. The methane hydrates can act as energy source to meet the growing
demands of the Japan and as well as to reduce the CO2 emissions.

Hydrogen is being seen as the another major energy source to meet the growing demands,
growing energy demands of the Japan. Japan has been actively pursuing the hydrogen in the
transportation sectors and in the power generation for the residential areas. The fuel, fuel cell-
based vehicular application has received a lot of impetus in the Japan and for the coming up

137
2020 Tokyo Olympics Japan is going to use hydro, fuel cell-based vehicles as the main
transportation unit during this Olympics. Further, a large amount of electricity in the
residential areas is also going to come from the fuel cells that will play, that will be used in
each of the residential areas.

(Refer Slide Time: 07:38)

So, as flashed on the screen the hydrogen energy or the hydrogen economy is expected to
play a pivotal role. Another important measure that the Japan has taken continuously is
enhancing its energy efficiency. The energy efficiency of the Japan has increased, we can say
that from 2000 to 2015, the GDP of the Japan grew by 1.12 % and the energy consumption at
the same time decreased by 0.83 times. This only goes to show that Japan has been adopting
new and new energy efficient measures.

The sector of renewable energy has also received a significant boost. New laws such as feed
in tariff system as ensured that the renewal energy has grown by at an annual growth rate of
26 since 2010. The feed in tariff system eases by which the renewable energy will be
installed in the country.

138
(Refer Slide Time: 8:50)

As of 2015, the renewable energy ratio in generation electric power has increased up to 14.5
percent. So, as we can see from the screen there have been a significant rise from 2003 to
2016 in the share of the renewable energy and this has also been attributable to the new laws
such as feed in tariff scheme where the energy that is generated from the renewable sources it
directly purchased by the electric supply companies and the taxes are there after levied on the
customers.

(Refer Slide Time: 9:35)

Now, the future of the Japan in terms of its energy security, it seems that it is, it will be a mix
from the renewable energy and the dependence of, on the fossil fuel based energy sources it
is going to decrease as Japan has also promised the INDC of the Paris Agreement to reduce

139
the CO2 emissions significantly. So, this is what is the expected composition of the power
resources, in case if Japan’s policymakers decide to have a dependence on the nuclear
resources of the energy.

This is with my presentation about the energy analysis of the Japan, thank you very much.

140
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 4 P3
Energy Balance of Australia

(Refer Slide Time: 0:17)

Hello everyone, my name is Ashogan. My team members are Mr. Nawaf and Miss. Mamni
Farida. We are going to discuss about an analysis of energy balance for Australia. Australia is
the sixth biggest country in the world. They are having the population of 2.5 crore, out of this
30% people are youngsters those who are contributing more in their GDP.

(Refer Slide Time: 0:48)

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Life expectancy of Australia men is 75 and woman it is 80. The literacy rate of Australia is
99%. The GDP comes from Australia is most of them from service sectors, then industrial
sectors then agriculture.

(Refer Slide Time: 01:08)

We will talk about the energy 40%of energy consumed from coal and 29%comes from
natural gases, but the amount of renewable energy is very very less. The sector wise,
transportation sectors and industrial sectors consume more energy.

(Refer Slide Time: 1:25)

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From the Sankey diagram, it is clear that the coal productions having the line share and next
we have natural gases. It observe that, 63%of electricity comes from coal alone and there is
no significant contribution from any renewable energy sources.

(Refer Slide Time: 1:46)

This is primary energy consumption by source and sector diagram. The source are coal,
natural gas, oil, renewable etc. The sectors are residential, industrial, transport, etc. The
transportation and industrial sector consume more energy in Australia.

(Refer Slide Time: 2:08)

From the Kaya identity, it is very clear that the carbon intensity is higher in Australia. What
is carbon intensity? The CO2 emission for generating particular amount of energy.

143
(Refer Slide Time: 2:25)

As well as, the energy intensity means it is measured as unit of energy per unit of GDP. So
here, the energy intensity is, Australia is higher than India.

(Refer Slide Time: 2:37)

Cumulative annual growth rate for various indicators given here. It shows that the net energy
inputs each and every year it is increasing. As well as the CO 2 emission is higher compared to
India for Australia, but the per capita energy consumption is very good compare to India in
the case of Australia.

144
(Refer Slide Time: 3:01)

Regarding significant policies, Australia has the target to reduce 26 to 28% of CO 2 emissions
by 2030. And Australia having the target like large-scale renewable energy target and small
scale renewable energy scheme. The large-scale renewable energy target, it says that those
who are using more energy for their industry operations, some particular amount of energy
they should use from renewable energy.

The small-scale renewable energy scheme it suppose that people those who are using
renewable energy sources by providing subsidy. Also clean energy finance corporation and
Australian Renewable Energy Agency providing fund to the agencies or industry those who
are working on renewable energy sources. Regarding energy security of Australia because of
rising energy price as well as tightening gas market on the East Coast as well as numerous
power outages slightly they are having lower side of energy security. However, it can be
improved by using renewable energy sources in further days.

145
(Refer Slide Time: 4:18)

The energy bottlenecks for Australia is infrastructure mainly, that is they have to invest more
and more money for the electricity transmission as well as storage of energy. Structured
electricity infrastructure framework definitely in need for them and working on reforms of
electricity market is compulsory for Australia to develop. The main bottleneck is, when the
CO2 emission is reduced, the coal plant supposed to be stopped or reduced.

So, that time the employee of coal plant will, may loss the job it will spoil your livelihood.
For India, the development of life cycle is, lifestyle is very important for India. The reason is
per capita for India energy consumption is less compared to Australia, it shows that the life
quality we supposed to be improved. And the investment for the renewable energy generation
supposed to be improved as Australia is improving day by day.

The electricity loss in India is 25%, whereas in Australia just 5%. It shows that we have to
give more concentration to save the electricity. For Australia per capita CO 2 is huge in
Australia. So, diversification of fuels also they should take care of.

146
(Refer Slide Time: 5:41)

In India we have national energy policy it providing or it, it is intended to provide affordable
energy with good energy security and improving energy security for their systems. Australia
should have the structured long-term policy plan like India is having as well as India’s NDCs
about to reduce 33 to 35% of CO 2 in the nearby future the same kind of plans Australia
should take care.

Say example, India is installing 175GW of renewable energy by 2020 that is our target. As
well as Australia should go ahead with the renewable energy in the fast manner.

For the conclusion, Australia having lot of CO 2 emissions per capita CO2 emission is very
high.

(Refer Slide Time: 6:36)

147
They are having a lot of uranium energy as well as sunlight, so they can make use of uranium
and sunlight they can start the renewable energy source like solar and uranium. So, that the
CO2 emission will be reduced, as well as diversification of fuel is very very important for
Australia as the energy security can be improved because of that. The energy bottleneck
should be taken care of Australia to take a further step for the renewable energy sources,
thank you.

148
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 4 P4
Energy Balance of Mexico
(Refer Slide Time: 0:17)

Hello everyone, I am Ravi Kumar along with my group members Neha Durga and Vijay
Shankar. Today, we are representing Mexico. Mexico is just more than Burrito and tortilla.
However, its food is its face in the world.

(Refer Slide Time: 0:40)

149
We share our border with US in North and Pacific Ocean in South. We are the 13 th largest
state in the world with two million square kilometer area and about 129 million people. Our
population density is about 66 per kilometer square. We are a young country with 50% of
population below 30 years. The per capita GDP is about 9 to 9 US dollars, and we fall under
the middle income category by World Bank.

(Refer Slide Time: 1:19)

Our primary sectors are agriculture, industry and service sector but its service sector which
provide livelihood to about 63% of people and add around 60% to GDP. Our HDI rank is 74
which is good as compared with the world, but not good as compared to our neighbour US.
So, we aim to increase this in coming decades. We are shifting from oil-based economy to
gas-based economy by importing natural gas from US and Canada and exporting the crude oil
to them, and it clearly depicts in decrease in emission per capita and carbon intensity.

Mexico was the seventh largest producer of crude oil as of 2007. However, the share of crude
oil has straightaway declined since 2005.

150
(Refer Slide Time: 2:20)

This is because of increasing share of natural gas in total energy mix. This shows our concern
towards climate change issue. The coal NG is less polluted as compared to oil and coal.

Hi friends, in continuation to Mexico which was elaborated by my group member Ravi, I will
discuss about the energy intensity of the economy. If we see the energy intensity of the
economy has gradually, first it has gradually decreased but in the last 5 years it has decreased
significantly from 85 to 78, this is primarily because of shift in economy from manufacturing
base to more towards services and export.

151
(Refer Slide Time: 3:08)

In fact, 90% of the export of the Mexican economy is under free trade agreement and, and
this trade is with more than 40 countries including countries in USA, Asia and other Middle
East countries.

(Refer Slide Time: 3:26)

Now, if we see the carbon intensity of energy mix. So, carbon intensity first increase in 3
years have been shown here, 2000, 2010 and 2015, between 2000 and 2010 the, if you see in
the slide the carbon intensity of the energy mix has first increased then it has decreased since
2010 when the concern towards the climate change became more aggressive in Mexico and
that is why as it was highlighted by my group member, Ravi that the share of the import of
natural gas has increased and this is because the energy production is more by means of

152
natural gas in Mexico because natural gas as we know is a cleaner source of energy compared
to oil and coal.

And now, if we talk about the, climate issues which has been discussed by Mexico. Mexico
has been very aggressive in terms of dealing with climate issues.

(Refer Slide Time: 4:45)

If I show you this slide, we see that Mexico adopted what is called general law on climate
change in 2012. Following were the targets which were highlighted under this and these are
in fact quantified targets, these are three-point targets. The targets are minimum 35% of
electricity would be from clean energy source by 2024. Reducing emissions by 30% by the
year 2020 and 50% reduction in emission by 2015 and this is with the reference to the base
year 2000.

And the third very important point in, in order to meet the climate change issues by 2030
Mexico will reduce total greenhouse gas emission by 22% and will reduce its carbon
emission by 51% compared with a 2000 baseline. So, this was all about Mexico. Thank you.

153
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 5 P1
Energy Economics
Today we are going to talk about energy economics.

(Refer Slide Time: 0:23)

We are going to talk in terms of looking at a viability of an energy efficiency or a renewable

project. And the subject that we are covering is also going to be amenable for any project,
any project whether it deals with energy or not, the principles will remain the same, but we
are going to focus basically on energy related projects.

154
(Refer Slide Time: 0:47)

So, what are the types of decisions that one takes? If you are in an industry or you are in a
company, we want to decide there are two types of decisions. One is, you can think in terms
of a Yes, No kind of decision. So, for instance, there is a boiler or a furnace in an industry
and from the exhaust gases which are going out, they are going out at some temperature. So,
we may decide, should we have a waste heat recovery system where we recover the energy
from that boiler.

We have a pump where we are looking at pumping water, should we have a controller or a
variable speed drive. So, it is a yes no kind of decision, a particular option whether we should
go for it or not go for it. There could also be another type of decision for instance, you are
looking at a remote village or you are looking at an island and you want to electrify that
island you are looking at let us say Elephanta Island you can, you have an option where you
can connect from the mainland you can have a pipe electricity supply going under the water
and then you have a grid based supply coming from the mainland.

You could also think in terms of a diesel engine, or a solar photovoltaic, or a biomass gasifier
engine. And so there are a whole host of options and we may want to look at out of all these
options, which is the best possible option. So, we want to rank or choose between the
different possible options. So, whether it's a yes no decision or a decision where we are
choosing between a number of options, the basis and the economic calculations are the same.

155
In this lecture, we will assume that all technical feasible options have been included and they
are all equivalent in terms of their performance. So, whenever we look at different options,
there are multiple criteria on which we can be compared. One is there could be the cost
criteria, which could be the initial cost or the operating costs. We can think in terms of the
reliability, we can think in terms of emissions, in terms of the operational flexibility or the
convenience.

So, usually whenever we take decisions, it is a combination of a variety of things, but for this
lecture, we will presume that there are many different options which are being considered all
these options have equivalent performance and we are only making the comparison based on
the economics.

(Refer Slide Time: 3:26)

So, let us look at the factors which determine the cost effectiveness of an additional
investment we are looking at something where we are putting in a waste heat recovery boiler
or a variable speed drive and energy efficient equipment on what basis should we decide
whether it is cost effective. So, there are many different parameters which we will consider.

156
(Refer Slide Time: 3:52)

One of the parameters which affects the decision is what is the amount of investment so, if
we have to invest more, then we would expect that we, we may need to look at what kind of
savings are obtained. The other parameter is the amount of energy saving and most of the
cases we are looking at fossil fuels being replaced by renewable or fossil fuels being saved.
So, how much is the amount of energy saving?

What is the price of the energy? So, that the amount of energy saving into the price of energy
will give you the annual savings and then you compare the investment with the savings, there
is also in these, the life of the equipment or the project will be involved. And then the time
value of money. The time value of money is a concept that we need to understand and based
on that concept, everything else in this lecture we can then calculate the parameters. So, we
will first start with the kind of different indices. So, we said, the amount of investment, the
amount of energy saving, the price of energy, life of equipment, all of these affect the
decision and then there is the time value of money.

Typically, when we think in terms of renewables, usually they are higher initial costs, and
they have lower operating costs. So, of course, now the costs are coming down, but in general
as compared to fossil, fossil will have an operating costs renewables almost as a zero
operating costs, but they have an higher initial cost and we usually make this kind of trade
off.

157
(Refer Slide Time: 5:29)

So, we have different indicators that we compute when we calculate the economic criteria.
Some of the indicators are mentioned here. The indicators that you see the simple payback
period, the we will define that this is the one which is the pay back simple payback period,
very commonly used, and based on its simplicity, ease of calculation, then we have these
three indicators the net present value, the benefit by cost ratio and the internal rate of return.

All these three indicators use the time value of money. Most companies use one or more of
these measures the NPV, the B by C ratio or the internal rate of return. So we will first talk
about the simple payback period, then we will introduce the concept of the time value of
money and the discount rate. And then we will define these three indices, the NPV, the B by
C ratio, and internal rate of return.

After doing that, for many large projects, societal projects and government projects, we also
look at life cycle costing, and where we will look at life cycle cost, or the annualized life
cycle costs. So, these are all the different criteria and we will see how we derive these
criteria, we will then take some examples and calculate these criteria and use it to make our
decisions.

158
(Refer Slide Time: 6:51)

So, let us start with the first index, which I am sure most of you are already familiar with.
This is the simple payback period. The simple payback period, as the name suggests, is an
index which just reflects the number of years in which the investment will pay back for itself.
So, in terms of a definition, it will be the initial investment by the annual savings. So, very
straight forward calculation, we just look at whatever is the initial investment divided by the
annual savings and we will get the payback period.

(Refer Slide Time: 7:50)

So let us take an example, let us consider an example when an energy auditor has done an
audit of a boiler, and that auditor has found that there is some insulation which can be

159
improved and by doing this insulation you are, on an annual basis based on the way the boiler
operates, we get a saving of five kilo litres or 5000 litres of light diesel oil. The price of light
diesel oil is 50 rupees per litre. So, we want to calculate what is the simple payback period for
this energy conservation opportunity. You can do this, this is very straight forward.

(Refer Slide Time: 8:02)

Co
SPP=
AS
300 , 000
5 × 1000 × 50
1.2YEARS (1YEAR 3 MONTHS)
SPP<SPP acceptable

We can just take simple payback period is the initial investment by the annual saving, initial
investment here is 3 lakhs and the annual saving is we have 5 kilo litres, five into 1000 one
kilo litre is thousand litres and we are paying 50 rupees per litre. So, we get an annual savings
is 2.5 lakhs. And simple payback period is simply 3 lakhs divided by 2.5 which is nothing but
1.2 years or roughly 1 year 3 months.

Now, we have calculated the index the simple payback period, how do we use this for making
a decision? The first thing is the simple payback period must be less than the life of the
equipment of the project. So, in this case, the installation is going to last for 10 years or 20
years. The second thing is the company which is making that investment will decide what is
the maximum acceptable simple payback period.

So, for instance, if the company says any project, which has a payback of less than two years,
it is willing to accept then we compare this 1.2 with two and we find that the simple, the
payback period is less than the minimum or the maximum acceptable payback hence, we can
go ahead and invest. So, this SPP must be less than SPP acceptable. And the company who is
making the investment will decide what is an acceptable payback.

So for instance, if you have a project where there is a payback of three years, and the
company wants paybacks only less than two years the company will not go for it even if the

160
project will give benefits for more than 10 years. So, we have to, the decision will be taken
by the company which is making the investment. So, this is what we look at in terms of the
simple payback period.

(Refer Slide Time: 10:48)

Now, let us talk about what are the limitations of this simple payback period. For doing this,
let us take a simple example. We have these two options, Option A and option B for the same
application in the case of A, there is an investment of one lakh and the saving of 50,000. So,
if we look at this if we just divide one lakh by 50,000 we will get a simple payback period of
two years for A. So, SPP A is two years and in the case of B investment is higher which is 1.2
lakhs and the saving is lower which is 40,000.
So, the simple payback period for B is three years.

161
(Refer Slide Time: 11:39)
LIFE

SPP A =2 YEARS 3 YEARS

SPPB =3 YEARS 8 YEARS

So, if you write this we will see that SPP A is 2 years and SPPB is 3 years. And if the company
has any project which is less than equal to three years it is willing to go, when you compare
these two it looks like the project with the lower simple payback period is the one that we
should opt for. So, we should opt for A but if we are told that for instance the life of A is 3
years and the life of B is 8 years, then immediately you will see that the decision changes.

And it is more rational to go for B because we are getting payback for a long, we are getting
the savings for a longer period of time. So, one of the limitations of the simple payback
period is that is does not cash consider the cash flows after the payback is achieved. The
second limitation is it considers all cash flows as equivalent. So, that means, whether the
return cash flow is in this year or it is in the next year all of them are considered equivalent.
There is no concept of time value of money.

Despite these limitations, the simple payback period is an index that is widely used because
of its simplicity and specially if it is, for any project which has relatively low investments,
and it has the, it has quick paybacks. So, if you are calculating something where you are
getting a payback of six months or a year, simple payback period may be sufficient for you to
make the decision.

However, if you are looking at a large power project, which has significant investments, and
you are talking of payback periods of 4 years or more, you we need to look at the time value
of money and other issues and then some other criteria would be more suitable. So, as I told
you earlier, the main concept that we need to understand is the time value of money and to
look at the concept of the time value of money we have to understand that individuals,
companies, industries, we all prefer money today compared to money in the future.

What is the reason for that? The reason for that is mainly because anything associated with
the future is uncertain. There is a risk associated with the future. And because of that, all

162
individuals prefer to have the money today compared to money in the future. This preference
that individuals and companies have for money today as compared to money in the future, is
something that we would like to understand and incorporate in our calculations.

In order to do that, we introduce a concept called the discount rate.

(Refer Slide Time: 15:00)

And the discount rate is a basis by which we compare investments today with the expected
future benefits let me just show you.

163
(Refer Slide Time: 15:06)

So, for instance, what we will do is that if you have in different years.

(Refer Slide Time: 15:14)

We are talking of 2019, 2020, 2019 plus k, if we had the value in the year and the present
value. So, if we have one unit, one rupee, 1000 rupees, one lakh that in 2019 that is the same
unit in 2019. If we talk about one unit one rupee in 2020 that has less value for us today. So,
that would be reduced by a factor which is one by one plus d, where d is the discount rate.

It is a positive number discount rate and you can, we can put it as a percentage also or as a
fraction. And so, this is we are discounting the future we are reducing any future cash flow to

164
bring it into equivalent value with equivalent present value. So, suppose we had it in the kth
here, then this will be one by one plus d raise to k, okay, so, this just means that we take any
future cash flow and we bring it into its equivalent present value by dividing by this one plus
d we are discounting it or reducing it to bring it into the present value.

Now, we can look at this as let us try to understand what does this value of discount rate
mean?

(Refer Slide Time: 17:24)

So, typically what happens is that suppose consider a company which has many different
projects, which it can invest in and each of these projects has a rate of return on the project
and it has an investment which is there. So, suppose we have these different investments and
we arrange these projects in terms of, from the highest rate of return to the lowest rate of
return.

So, that means there is a project which is giving us the highest rate of return, we would like to
go for it first and for that we would have to.

165
(Refer Slide Time: 18:08)

So, let us make it so that r1 c1, r2, c2 and so on to rn , cn we arrange it so that r1 greater than r2
greater than and so on to rn. So, the idea is that we arrange these projects in terms of the
amount of return that we are getting. So, we will first invest in the project which gives the
highest rate of return in that process we will use up c 1 then we will use up c2 we can keep on
doing this till our entire budget gets used up.

166
(Refer Slide Time: 18:58)

So, suppose we have this rate of return here. This one is r 1 and we have put c1, then r2 c2, r3 ,
c3 and so on. Till the time that the total amount that we are investing sigma c i will be equal to
the C total or the total amount of money that I have to invest. So, that means this value of rate
of return any project which has a rate of return greater than or equal to this is what I am going
to invest in. So, this value then becomes my discount rate.

So, that this will mean that suppose the company had half that amount of money instead of C T
which we have here, if it had half the amount of money what will happen is, this point will
shift here and your discount rate will be higher. If it had more money, then the discount rate
would be low. So, the discount rate really reflects the scarcity of capital. In another sense, if
we look at it, suppose you were thinking in terms of investing hundred rupees in a bank or an
institution that you have faith in what is the minimum amount of annual return that you
expect before you make that investment.

So, if you think about it, you can put down a value and you will see that, that value suppose
you say that value is 20 rupees, that means that you will make an investment of hundred
rupees if and only if you are getting 20 rupees or more every year, your principal is gone, but
every year you get a fixed amount of return. That value 20 is actually your discount rate.

167
(Refer Slide Time: 20:52)

So, typically what happens is, if we go back the discount rate represents how money today is
worth more than money in the future, there is no theoretically correct value it reflects the
scarcity value of capital it also reflects how people what kind of, how do you treat future risks
and what is the key, what is your risk aversion, the lower bound will of course be the bank
interest rates so you will expect at least a minimum which will be the bank interest rate that
you get. But in societies where capital is scarce in developing countries you usually have
higher discount rate.

168
(Refer Slide Time: 21:38)

So, in the, in typically if you see, we will look at a discount rate of 10 to 12% which will be
like a society discount rate. And if you look at 15 to 20% are the discount rate for the public
sector companies. Also, the companies which are investing in the infrastructure sector have
this kind of and 20 to 30% of the private companies, private industry, these are the kind of
discount rate. These are typically the discount rates for in Indian context.

If you look at households and you look at low income households you may find that the
discount rates are quite high 40%, 50% 60%. So, now that we have looked at this concept of
the discount rate, let us see how we can use this to look at the decision where you are making
an investment today and you are getting the benefits in the future.

169
(Refer Slide Time: 22:51)

So, we would like to now look at a situation where we are looking at, you are making an
upfront investment Co and we are getting benefits over the life of 30 equipment in different
years A1, A2, Ak to An where n is the life of the equipment or the project. Now, the question is
how do we put this all together? So, let us look at a way in which we can take all of these
cash flows and bring them up into a present value, equivalent present value.

(Refer Slide Time: 23:49)

So, when we would like to do that, let us take this and we will derive that we have a present
value we want to replace all of these A1, A2, An. So we will try to, we will see that.

170
(Refer Slide Time: 23:56)
n
Ak
P=∑
k=1 (1+d )k
A1 A2 Ak An
¿ + +… +…
1+d (1+d )2
( 1+d ) k
( 1+d ) n

A k =constant= A

Now, there can be a special case in many situations where we have Ak is equal to constant.
Constant in terms of this is the constant cash flows, which is A and this is often the case
because what we are doing is we are making a calculation today about the future, we are
looking at a project where you are going to get a same amount of electricity generated or a
same amount of energy generated, if we do all the calculation based on today's prices, then
you could have constant annual cash flows.

171
(Refer Slide Time: 25:37)

So, when we have constant annual cash flows, this will reduce we can see this, this becomes a
geometric progression, this becomes P is equal to A by 1 plus d plus A by 1 plus d square k
plus A by 1 plus d raise to n. So, we can take this and we can divide this by 1 plus d and we'll
get a by 1 plus d squared plus and so on a by 1 plus d raise to n plus 1.

So, you can now subtract 1 and 2, if we just subtract 1 minus 2 we get p minus p by 1 plus d
is equal to A by 1 plus d minus A by 1 plus d raise to n plus 1. So, you get this you can
simplify it 1 minus 1 plus d take A by 1 plus d common here and you get 1 minus 1 plus d
raise to n we took 1 plus d common.

172
(Refer Slide Time: 27:15)

So, when we simplify this further, we can write this as P into 1 plus d minus 1 by 1 plus d
equal to A by 1 plus d and I can take 1 plus d raise to n common, this becomes 1 plus d raise
to n minus 1. Now, 1 plus d is not equal to 0. So, I can cancel out these two terms, and then I
get P into d is A into 1 plus d raise to n minus 1 and 1 plus d raise to n, so P is equal to A into
1 plus d raise to n minus 1 divided by d into 1 plus d raise to n. This factor which we have is
called the uniform present value factor.

This factor is what we multiply the annual cash flow stream to get it into the equivalent
upfront present value. This is called the uniform present value factor, and we will use the
inverse of this the uniform present value factor.

173
(Refer Slide Time: 29:23)

P
UNIFORM PV FACTOR=
A
n
A d (1+d )
CAPITAL RECOVERY FACTOR (CRF) = =
P (1+d )n −1

CRF(d, n)

So, uniform present value factor as we said in uniform present value factor is uniform PV
factor is equal to P by A. And the inverse of this is the capital recovery factor, then that is the
factor that we will be using in most of our calculations. Capital recovery factor also known as
CRF in a short form is A by P, which is d 1 plus d raise to n by one plus d raise to n minus 1.

And so, this is a factor of two variables, discount rate and life and if you see this, this is what
we are talking of d into 1 plus d raise to n by 1 plus d raise to n minus 1.

(Refer Slide Time: 30:24)

P
UNIFORM PV FACTOR=
A
n
A d (1+d )
CAPITAL RECOVERY FACTOR (CRF) = =
P (1+d )n −1

CRF(d, n)

And this gives us the way to calculate the annualized investment corresponding to a particular
investment. So, if you have an initial investment, we can convert that into what does it mean
in terms of an annualized investment. Let us take an example.

[Continued in next lecture]

174
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 5 P2
Energy Economics – Part 2
(Refer Slide Time: 00:23)

CRF ( 0.12 ,10 )

d (1+d)n
¿
(1+d)n −1

0.12(1.12)10
(1.12)10 −1

¿ 0.177

175
So, consider an investment in an equipment with a life of 10 years and a real discount rate of 12
percent.

So, question is what does this signify, what is this 0.177? So, this is to give you an idea let us
think in terms of investing a 1000 rupees in an equipment or a project which has a life of 10
years and the company, or the individual making the investment has a real discount rate of 12
percent.

This will mean that, that thousand rupees is equivalent to an annualized the investment of 177
rupees each year over the life of the equipment, that is what this 0.177 means, which means that
if in this project if I am getting a benefit of 200 rupees every year, then it is worthwhile to go for
it. So, I can compare this annualized investment with the actual benefit that we are getting. So,
this is the significance of the capital recovery factor.

(Refer Slide Time: 2:10)

CRF ( 0.12 ,10 )

d (1+d)n
¿
(1+d)n −1

0.12(1.12)10
(1.12)10 −1

176
¿ 0.177

CRF ( 0.3 , 10 ) =0.323

And this implies as we said, this implies that an investment of rupees 1000 today is equivalent to
annual investments of 177 rupees, if the life, over the lifetime of the equipment. What happens if
the discount rate is higher? If the discount rate for instance increases to 30 percent you can plug
in the values, you will find that now the capital recovery factor increases.

So, that in this case when you say CRF 0.3 or 30 percent and 10 years you will find that that
comes out to be 0.323, same investment 1000 rupees, same life n 10 years but discount rate is 30
percent. Which means that the same investment looks more costly because now the annualized
investment is 323 rupees.

So, then in that case where if you are getting a benefit of 200 rupees per year, you will not make
that investment because your capital is more scarce and you expect a higher return, you discount
the future with the higher value and that is why this is. So, this is the, this is one parameter. The
second thing is what happens if the life increases? If the life increases then obviously the capital
recovery factor will decrease and because so that it gets distributed over a smaller point of time.

So, you can see that the capital recovery factor depends on the discount rate and the life of the
equipment. So, now we are we have understood the concept of the discount rate we are now
ready to look at the different indicators that we talked off, then we will start with these all these
three indicators are coming from the same equation.

177
(Refer Slide Time: 4:11)

NPV =PV of BENEFITS−PV of COSTS

n
Ak
¿∑ −C 0
k =1 (1+d)k

NPV >0

A
NPV =∑ −¿ C 0 ¿
(1+d )k

A
¿ −C 0
CRF (d , n)

The first indicator is the net present value, net present value is the present value of benefits
minus the present value of cost, and this will be in money terms, in rupees, dollars, whatever is
your currency. So, in the case where we had an upfront investments C0 and we had benefit
stream which is AK this becomes sigma AK by 1 plus d, K is equal to 1 to N minus C0 and what
is the criteria?

The criteria is that net present value should be positive, benefits must exceed cost, NPV greater
than 0 is our criteria, if we now had a situation where the special case where A K is constant then
NPV will be equal to sigma A by 1 plus d raise to K minus C0 which will be A by CRF dn minus
C0.

So, this is the net present value and this is commonly used by many of the companies for the
decision making, and so if you looked at these two examples that we talked of the way where we
had A and B and A had a life of 3 years, and B had a life of 8 years, you will find that when we
calculate the NPV, we find that the NPV of B is greater than A, of course it will depend on the
discount rate but you can meet that calculation, have an example and you can do this yourself
where you can do this calculation.

178
(Refer Slide Time: 6:34)

B PV of BENEFITS
=
C PV of COSTS

B
=1
C

n
Ak

B
∑
k=1 (1+d )
k
=
C C0

A
C 0 CRF ( d ,n)

Another possibility instead of looking at in the case of net present value it is B minus present
value of benefit minus present value of cost, instead of that some companies use the indicator
called the B by C ratio which is NP is the present value of benefits divided by present value of
cost and the criteria is B by C must be greater than 1, benefits must exceed cost.

So, this B by C ratio will be nothing but AK by 1 plus d, K is equal to 1 to N divided by C 0 and
in the case of constant cash flows, then this will become A by C 0 CRF d, n. So, these are the
two indicators net present value, and benefit by cost ratio.

179
(Refer Slide Time: 7:37)

There is a third indicator which comes from the same equation but slightly different. So, in the
case of net present value or benefit by cost ratio we have to take what is the discount rate of the
company, or the individual who is making the decision and based on that then we make the
calculation based on that discount rate and find out what is the net present value of the project, or
the benefit by cost ratio, then we check if that net present value is positive or the B by C is
greater than 1 and use that to take a decision on a yes, no kind of decision.

(Refer Slide Time: 8:41)

n
Ak
NPV =0= ∑ −C 0
k =1 (1+r )k

A [ ( 1+r )n −1]
0= −C 0
r (1+r )n

In the case of the internal rate of return we do not make an assumption of a discount rate, we
look at that equation of the cash flows which are coming from the project and we say what is if
we take that equation and we solve for the rate of return that means we set NPV is equal to zero
and solve for.

180
So, if you see this, instead of taking the discount rate we make this as an unknown, we set NPV
is equal to zero and we solve for r, the r value that we get is called the internal rate of return, and
then we compare this internal rate of return to the minimum return which the company expects
on the projects which is equivalent to its discount rate, it is also called the hurdle rate.

So, in effect IRR should give you the same result as the NPV or the B by C ratio, but the
calculation is different, this is a polynomial equation. So, if you see, now we can simplify this in
the case suppose we take the special case where AK is constant that means this is now A by if we
write down the equation it is r into 1 plus r raise to n 1 plus r raised to n minus 1 minus C0.

(Refer Slide Time: 10:12)

A 1
C 0=
r [
1−
(1+r )n ]
A 1
r j+1
C0 [
1−
( 1+r j )
n
]
|r j +1−r j|≤ TOL

Now, we can simplify this by putting this as C0 is A by r, I can divide this and I can get this as.
So, now I can solve this equation is a polynomial equation in r, we can do it one of the simplest
ways, of course you can use bisection method, you can find many ways in which you can solve
this through but one of the simplest method is I can take this as r and put this as r is equal to A by
C0, 1 minus 1 by plus r raise to n.

So, we can start with this equation and start with an assumed value of r, so let us take rj and then
update it to get the new value of rj plus 1 and keep iteratively solving this till the modulus of this
difference is less than or equal to sum tolerance value. So, this is one way in which we can solve
and get the internal rate of return.

Of course in many of you know you have the IRR even in your excels, there is an IRR function,
you can actually calculate and see that it brackets the roots and do this but this is a simple way of

181
doing this. So, we have seen now the three methods the net present value, benefit by cost ratio,
and internal rate of return, and now let us do one example.

(Refer Slide Time: 12:00)

So, this is a I had already told you about the other case where suppose we said A and B which we
talked about the life of 3 years, and 8 years and we could calculate the CRF values, use the CRF
values and you can find that this is the B by C ratio for B and the net present value for B comes
out to be higher, you can cross check these numbers.

182
Before we do an example let us now talks about sometimes people confuse the discount rate with
inflation. So, the point is that there are situations even if your prices remain constant we still
discount the future, so even if there was no inflation, we generally prefer money today compared
to money in the future. So, this whole concept of discounting is independent of inflation but let
us touch upon what we understand by inflation.

183
(Refer Slide Time: 13:02)

So, an inflation is a change in the general level of prices and the inflation could be inflation
means increase in the general levels of prices and we have a term called deflation which is a
decrease in the general level of prices. In the context of India we have been fortunate to have
always prices have always been increasing. So, we have only seen inflation but there are other
countries where prices fluctuate and you keep having inflation and deflation and in which case
the decision making becomes very difficult.

So, typically the way in which we characterize inflation is we look at a basket of goods and
services and we see that for that basket of goods and services in a particular year if you were to
buy the goods and services, how much would it cost and you take the last if you take 2019 it
costs a certain amount, in 2018 it costs another value, the ratio of these two prices will give you
the inflation rate.

184
(Refer Slide Time: 14:17)

2019 P1

2018 P2

P1
=(1+i)
P2

So, basically what will happen is if you say in 2019 the price is P1 and for the same set of goods
and prices in 2018 if it was P2 then P1 by P2 will be 1 plus i, where i is the inflation rate between
2018, and 2019 and in typically. So, typically what happens is this is called the inflation rate.

The inflation rate as you can understand this is the prices fluctuate in different regions, prices
fluctuate in different seasons, and the prices and inflation are sensitive issues. They are political
issues and you sometimes want to show that it is the inflation is less or more and, so typically
what happens is if you look at the Reserve Bank of India, or the International Monetary Fund, go
to their website you will find that these are indexed.

They are indexed usually to a base year when the prices are relatively stable. In that base year
that price is kept as, that base year price is taken as 100 and compared to that other prices, other
years are index in terms of that 100. So, we have two indices one is called wholesale price index,
and the second is the consumer price index, the wholesale price index is important for companies
who are buying electricity, urea.

So, you see what are the things that companies buy and what have the prices, how of those prices
change. Consumer price index is a prices that are seen by individuals in households and so we
are talking of electricity, we are talking of some fuels, you talk of food items in each of these
cases the there is a definition of the basket of goods in terms of how many kgs of what and then
what are the weightages, we then make this calculation and you will see tables like this.

(Refer Slide Time: 16:28)

185
If you see these are the components of the consumer price index and you see in all of these there
are food products, there are some electricity, there are other things and each of these has some
amounts and then you can see in different locations what have been those prices.

(Refer Slide Time: 16:47)

In the case of wholesale price index, you can see that the quantities and the commodities are
different again their weightages. So, these are things which are reasonably transparent, you can
go to this website, see how these wholesale price indices are calculated and then we can use this
and calculate.

186
(Refer Slide Time: 17:07)

So, as I told you in our country we had essentially we had a inflation which has been there and
constantly prices have increased. There is only one year where prices decrease and this was
between 1975 to 1976 and that was the year in which there was a emergency had been declared
and that has resulted in this decrease in prices, but in general overall this is how this is computed.

187
(Refer Slide Time: 17:38)

So, let us now look at a simple, so based on this there are weightages, which are given and these
weightages can be used to make this.

(Refer Slide Time: 17:43)

Let us take a simple example of, in a state the consumer price index in 1995 was 140 with 1990
as the base year, in 1990 an investment was made in a fixed deposit account which has the
interest rate of 10 percent. So, we want to find out what is the real interest rate obtained on the
investment.

188
Because from 1990 to 95 the prices have increase, the value of that money has gone down and
because the value has gone down, we want to know what is the actual amount of interest that you
are getting.

(Refer Slide Time: 18:22)

140 1995

100 1990

140
¿(1+i)5
100

i 7 %(0.07)

( 1+0.1 )= ( 1+0.07 ) (1+r )

r 2.8 %(0.028)

So, what we can do in this case is that we can take 140 is in 1995, the base year is 1990 by
definition in the base year it will be 100. So, essentially what we do is we take 140 by 100 is the
compound inflation rate raise to 5 and then you will find that i approximately 7 percent or 0.07,
if you look at the interest that we are getting, we are getting 10 percent.

So, 1 plus 0.1 will be equal to 1 plus 0.07 that is the inflation and 1 plus the real rate of return
and you find the real rate of return is approximately 2.8 percent, 0.028. So, in a similar fashion
when we talk about the discount rate we are, we can think in terms of two discount rates, one is
the nominal discount rate which you take based on the actual prices in that particular year and
the real discount rate if you have adjusted for inflation.

189
(Refer Slide Time: 19:48)

So, we say that 1 plus d nominal, typically what happens is that the when we make a calculation
today for a project which is going for 20 years, 25 years, we do everything based on today's
prices. So, often it is better to do the calculations in constant money terms, don’t bother about
inflation and talk about the real discount rate.

So, unless otherwise specified we have whatever we have be discussing have been on the real
discount rate. In some situations where you have different commodities with in different kinds of
inflation and you can have a projection of what will be the inflation and cash flows in the future
we could use the nominal discount rate. But unless otherwise stated what we are talking of is the
real discount rate.

The nominal discount rate will fluctuate based on the way in which the economy varies and the
inflation happens, the real discount rate is more relatively more stable and reflects the scarcity
value of capital.

190
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 6 P1
Energy Economics – Part 3
(Refer Slide Time: 0:26)

So, now let me do one thing, let me, let us take an example problem, where we do the
calculations for all the concepts that we have learnt so far. So, let us look at this problem, this
problem is from the tutorial sheet that we have, we are talking of a motor in an industry and that
motor is a 100 horsepower motor it is being used to run a pump in a process and this motor can
be retrofitted with a variable speed drive that cost 8 lakhs, the motor runs for 7000 hours
annually of which 3000 hours it transit part load.

Now, what happens in the case of the variable speed drive is when we are running it at part load
it is running inefficiently, if you have a variable speed drive instead of throttling the pump we
will run the motor at a different speed and we get savings. Now, we told that the full load
efficiency is 90 % and during part load operation if we put a variable speed drive we get an
average saving of 30 % of the full load consumption.

And the life of the VSD is given the electricity price is ₹ 5 per kwh, the discount rate is given to
you as 30% we want to calculate the simple payback period, net present value, benefit by cost
ratio, and internal rate of return.

191
(Refer Slide Time: 1:53)

So, let us start by looking at if you are talking of 100 horsepower that will be 100 you can is
0.746 that is 74.6 kW is the full load rating of the motor, the efficiency of the motor is 90%. So,
the input power that is required at full load is 74.6 by 0.9 which comes out to be, this is you can
calculate this as 82.9 kW.

Now, when we are operating with the VSD variables speed drive at part load we get a saving of
30 % to a saving is 0.3 into this input power which is 0.3 into 82.9 which is 24.9 kW. We are
operating the pump annually at 3000 hours with separating at part load, we are getting savings
only during those 3,000 hours. So, annual savings is going to be, annual savings is 3000 into 24.9
and the units are kwh. So, this turns out to be 74,700 kwh. Now, we have told that electricity
price is rupees 5 per kWh.

192
(Refer Slide Time: 4:06)

So, the annual savings, annual savings, annual savings are just multiply the total that we have
which is 74,700 into 5 rupees and this turns out to be you can do this, you will get 3.7 lakhs, we
were told that the investment is 8 lakhs. So, the simple payback period is nothing but 8 by 3.7
which comes to about 2.2 years that was a first thing that we have to calculate.

Now, let us calculate the net present value, so the when we talk about the net present value we
will like to calculate the this is going to be NPV is let us do this in lakhs. So, this is minus 8
lakhs plus 3.7 divided by capital recovery factor, discount rate is 30 % point 0.3 and the life is
given to you as 10 years. So, CRF 0.3, 10 let us calculate that is 0.3 1.3 raise to 10, 1.3 raise to
10 minus 1, it comes out to be 0.323.

193
(Refer Slide Time: 6:04)

So, then this becomes NPV the benefits stream is now going to be 3.7 by 0.323 which is 11.46
lakhs. So, the net present value is minus 8 plus 11.46 is plus 3.46 lakhs, net present value is
positive. So, the company should go for this, if you look at the benefit by cost ratio this is going
to be 11.46 divided by 8 which comes out to be 1.43 B by C greater than 1. So, we can go for it.

Now, let us look at calculating the internal rate of return, what do you expect the internal rate of
return to be, is it going to be less than 30 %, or more than 30 %. So, it is obvious that with a
discount rate of 30 %, we got in net present value to be positive. So, the rate of return is going to
be more than 30 %.

194
(Refer Slide Time: 7:26)

So, we can use this formula which says, which we derived that is rj plus 1 is A by C0 1 minus 1
by rj raise to n and if you do that you will find that if we look at this formula this will come to
3.73 by 8, 1 minus in this case if we take 1.3 raise to 10 and then calculate and you will find that
you, we get in two or three iterations it will quickly convert and you get the value which is I
think something like 43.43, 43 % rate of return.

So, we have seen how to calculate the simple payback period, net present value, benefit by cost
ratio and internal rate of return, and as we saw all of these give essentially the similar kinds,
similar result. So, let us move forward and now let us look at the next concept which is the
concept of the life cycle cost.

195
(Refer Slide Time: 8:48)

In the case of life cycle cost, we are looking at what is the way in which we can get the life cycle
cost is we are taking here the upfront cost C0 and then every year, we have associated with it an
annual cost. So, there will be an annual cost AC1, AC2, and ACk, ACn this cost the ACk in the
kth will have the annual fuel cost, annual operation and maintenance cost, and any other labor
and other cost, which can be also taken in, so each of these will in each of these cases.

So, what we can do is we can take the total sum of all the cost, the life cycle cost will be C0 plus
sigma ACk 1 plus d raise to n, k is equal to 1 to n, and that gives us the life cycle cost, the cost of
owning and operating that equipment over its life time and you can then look at the relative
magnitudes of different things.

196
(Refer Slide Time: 10:26)

If the annual, if the annual cost are constant then this can be simplified to C0 plus AC by CRF, d,
n. Now, there is a situation, when you if you are annual cost which are constant and if we are
looking at we can instead of taking the life cycle cost, where we took the what we did was we to
this and we took all of these annual cost and we replace all of these by an equivalent upfront cost
and we added these two, instead of doing that we could do the situation where we took an annual
cost which is constant take the C0 and replace it by an equivalent annual cost.

So, then this case we are now doing this as this is called the annualized life cycle cost. So, either
we take the annual cost which are there and bring them upfront to an upfront life cycle cost, or
we take the initial cost annualize it added to the annual cost, and that becomes the annualize life
cycle cost. This is convenient way often in the case of annualized life cycle cost specially why,
because it helps you to tackle equipment and projects with different kinds of lives.

197
(Refer Slide Time: 12:02)

So, the ALCC typically would then mean that you just take this will be for this you will take C0
and annualize it plus then the annual cost of fuel, annual cost of O & M and so on. So, this
annual lives life cycle cost is the annual cost of owning and operating the equipment.

This is very convenient because for instance if you look at a power plant or you will looking at
let say a solar photovoltaic plant where you have photovoltaic modules which have a certain life
and then you have the battery which has a different life you can take all of these, annualize it get
the annual cost, get the annual generation and we can then convert it into a ₹ per kWh. So, this is
that is one of the ways in which we can look at this.

198
(Refer Slide Time: 13:03)

So, let us there is this other concept where we talk about the cost of saved energy which is very
similar to this concept, the cost of saved energy is a concept where we take the annualized
investment divide it by the annual energy saving. So, many cases what happens is that when we
talk of a new generating plant, we talk of ₹ per kWh and when we talk about savings we want to
compare it with generation. So, the cost of saved energy can and calculated for an energy
efficiency option by taking an investment, annualizing it, dividing it by the annual energy saving
and this will mean that.

199
(Refer Slide Time: 13:44)

This annual cost of saved energy will be C0 into CRF dn divided by the amount of energy saving
and the units then will be in terms of rupees per the energy unit, rupees per kwh, rupees per
kilojoule, rupees per kg of coal, rupees per liter of oil, you can then compare it with the price at
which you are getting the electricity, or the fuel, and if it is low, this price is lower than the price
at which you have purchasing then it will make sense for us to go ahead.

So, just to give you an example let us take an example where we take other cost of a standard
refrigerator is 10000 rupees and the expected electricity consumption per year is 450 kilowatt
hour, cost of an energy efficient refrigerator of the same capacity is 10,500 rupees for the same
load annual electricity consumption is expected to be 400 kilowatt hour. So, what is the cost of
the saved energy?

Now, this cost of the saved energy will be depend on the discount rate and typically what
happens here is that your incremental investment is ₹500. So, 500 into the capital recovery
factor, this is the annual amount in terms of rupees that we are paying, in terms of the annualized
investment, this divided by the saving which is 50 kilowatt hour will give you the rupees per
kilowatt hour.

Now, if we took a discount rate of 0.3 and this is all we said CRF 0.3, 10 then this will be 0.323
we had calculated it earlier. So, you get 500 into 0.323 by 50 and then this the cost of saved

200
energy turns out to be rupees 3.23 per kilowatt hour, if your discount rate is lower than this cost
of saved energy would be lower. So, we can see this I have shown you this plot.

(Refer Slide Time: 16:17)

So, this gives the example which shows you how as the discount rate increases the cost of saved
energy would then increase because the effectively that initial investment that we are making is
now equivalent in terms of higher annualized investment. This one concept, additional concept
that we need to understand which often gets confused in the process whenever we are doing this
calculations is about depreciation. So, we must understand the depreciation is an accounting
concept, it is concept wear if you look at an asset, we adjust the value of the asset and we
depreciate it over its lifetime.

201
(Refer Slide Time: 17:26)

So, typically what happens is that we considered an annual depreciation and one of the ways in
which you do that is we take a straight line depreciation, we say that if you have the C0 and at
the end of its life if you have a salvage value S, the book value of this asset is adjusted. So, that
every year we reduce this by a straight line depreciation, which is C0 minus S where S is the
salvage value at the end of the life. There are situations where if you take S is equal to 0 then the
depreciation is taken as every year C0 by n.

Now, in general since we have already taken this C0 as an upfront cost and we are using that in
the calculations it would not make, it does not make sense to again add up the depreciation then
will be double counting the cost.

202
(Refer Slide Time: 18:56)

However, there is a benefit that we get from the depreciation in the sense that if there is a
company which is a profit making company, then the company after we will have a set of gross
profits. And from the gross profits we are allowed to subtract the depreciation to get the net
profits and the company is tax based on the net profit.

So, essentially if you look at a company today the tax rate maybe of the order of 30 % or 33 %
the saving each year is T into AD, the tax rate into the AD. Now, in a sense will not make too
much of a difference and we can neglect the effect of the tax on the depreciation because the
value of the book, value of the asset get depreciated.

However, there are situations for instance in the case of renewable where the government
provides a policy of accelerated depreciation, accelerated depreciation for instance, for instance
for till sometime back we had 100 % depreciation for some of the energy, renewable energy
equipment like wind farms.

So, for instance if a company has made an investment of 50 crores in an wind farm, in the first
year itself it was allowed to depreciate this 50 crores.

203
(Refer Slide Time: 20:44)

So, that suppose the company had a profit of let us say 400 crores and the tax rate is say 33 %.
So, it would have been paying 0.33 into 400 as the tax, which is 13.2 crores would have been the
tax that is paid, sorry. So, this is, this would be 132 crores would have been the tax.

So, in the case of suppose we have made an investment of 50 crores in a wind farm and there is a
100 % depreciation, it will mean that that company is now going to be taxed only on 350 crores.
So, the net saving is 50 into the tax rate 0.33 is 16.5 crore tax saving at the end of 1 year.

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So, in terms of the benefits stream that we have after wind farm, where we have C0 and you have
these annual cash flow streams we are getting at the end of 1 year an additional tax saving stream
which will be 16.5 divided by 1 plus D with the result that all the indicators that we talk of the
net present value, benefit by cost ratio, the internal rate of return, all of these would improve with
this.

In any situation when we do the economic calculations there are when we look at a project there
are a large number of parameters which are outside our control, there a number of variables and
assumptions that we make and it will be worthwhile in all these cases to try and show some of
these parameters.

(Refer Slide Time: 23:17)

For instance, this is the cost of generation from a solar thermal power plant and you can see that
when you look at it we are talking about the field, the efficiency, technical parameters, the plant
output which will depend on the insulation solar field cause, capital cost, storage cost, annualized
cost, replacement cost, discount rate.

So, all these parameters and we can see in many of these cases if there are ranges of values we
can do a sensitivity and do the calculation for this.

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(Refer Slide Time: 24:00)

We would like to just, I would like to just talk to you about using the concepts that we have
learnt so far to calculate for the marginal abatement cost curve. So, when we talk in terms of we
introduce this concept of energy and environment and the issue of climate change and when we
look at climate change, we are looking at for different options we see what is the impact in terms
of the greenhouse gas emissions, or this CO2 emissions.

So, one of the curves which has been introduced and this was introduced by McKinsey is called
McKinsey cost curve on the X axis is the amount of annuals CO 2 savings from a particular
method, annual GHG reduction potential. So, what happens is we start with a base year and we
see what is the kind of emissions in that base year.

If we take the base year and continue with the same kind of growth in the future we will have a
business as usual scenario, till a future year let say 2020 if we wanted to have more investments
in renewables that would involve a certain cost that cost is expressed in terms of the rupees, or
dollars, or euros per ton of CO2 saved on the Y axis and on the X axis we have the annual CO 2
savings. So, with this, this is a marginal abatement curve and with this kind of curve we can then
compare all these options. So, that we go for the ones which are cheaper.

Now, you will find that there are some which are negative, some options which are negative in
terms of cost and that is because even if you do not consider the CO 2 savings they are cost

206
effectives. So, these are energy efficiency options mostly and so the idea is that in overall if we
want to have a fixed amount of CO 2 saving that we target, we should go in this order and look at
all these options. So, we can take and we will do an example where we will see how to calculate.

(Refer Slide Time: 26:16)

So, essentially what happens is if we look at a, we can look at the ALCC for the option that we
have minus the ALCC for the base case, or the business as usual case and then we can have the
CO2, annual CO2 emissions, annual CO2 emissions with the option that we have. So, you get a
CO2 savings, annual CO2 savings, we have the annualized and then we can get this incomes of
rupees per ton of CO2 saved.

You can find these curves in terms of you will see dollars per ton of CO 2 and then they can be
compared and then we can see which of these options does a wind firm, is a wind firm cheaper
than energy efficiency option, is it cheaper than a biomass option, is it cheaper than doing carbon
capture and storage, and we can do some of these calculation.

So, will do an example where we can take this, so, we have seen how to do the annualized life
cycle cost, we have also seen in a previous lecture how we can calculate what are the CO 2
emissions from first principles and then we can take this and get the marginal abatement curve.

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(Refer Slide Time: 27:59)

So, similar fashion this is showing you the McKinsey curve for the world and you can see that
there are many these options mostly the energy efficiency options, and then depending on where
we want to stabilize we are already today at more than 400 parts per million in terms of this CO 2
emissions. If you want to stabilize at 450 PPM or 500 PPM the more the stabilization then will
go for all the costlier options.

(Refer Slide Time: 28:33)

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So, today we have looked at the economic criteria which are used as a basis for decisions, we
looked at the simple payback period and we said the simple payback period is a good index to
use for projects which are relatively low cost but we are not taking in that the effect of the time
value of money with the time value of money, we looked at net present value, benefit by cost
ratio, and internal rate of return, all three come from the same equation but there is a slight
differences in how it can be calculated.

We then look at also what is the concept of inflation and how it affects the decisions in terms of
we said we can always look at we do not need to adjust for inflation though everything in terms
of constant money terms and look at the real discount rate, or if you have inflation and the
nominal values, we can take the nominal discount rate, discount rate is the critical concept that
we need to understand which reflects the scarcity of capital and typically if companies are more
capitals scares they would rather prefer options which have lower investments initially.

We then talked about the concept of life cycle costing and annualized life cycle costing and
briefly introduced the marginal cost of carbon save all of this we saw the effect of taxes and
depreciation, and the taxes government policies all of this can affect the viability of a
technology, or a system when we are doing a calculation and we have multiple sets of
parameters, we can also look at the sensitivity and look at the impact of variables on this. With
this, we will conclude this session on energy economics. We will take up one or two examples in
detail, where we can illustrate some of these concepts in a later class.

209
 Energy Resources< Economics and Environment
Professor. Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 6 Part 2
Energy Economics- Tutorial

So, today we were going to revise the concepts that we have already discussed in the energy
economics course, we will apply these to an example.

(Refer Slide Time: 00:35)

So we have already discussed the cost of saved carbon and the cost of saved carbon, we said that
when we look at a renewable option, we will take the incremental annualized lifecycle costs.
That means that annualized lifecycle cost of the project minus the annualized lifecycle costs of
the base case.

Also, we will calculate the annual carbon dioxide savings, which will be the CO 2, which will be
there in the base case. If you did not have any intervention and in the project we have some CO 2
savings. So, the incremental annualized lifecycle cost, divided by the annual carbon dioxide
savings will be the cost of saved carbon. So let us take an example and calculate this for this
example.

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(Refer Slide Time: 01:25)

So we all across the country, we have a large number of telecom towers and the cell phones and
mobile phones are available in all areas, including several remote areas. Amongst these telecom
towers, there are many locations where the electricity supply is not there. There is no electricity
grid or even if the electricity grid is there, there are many disruptions or there is load shedding,
so several of the telecom towers have a provision for backup power.

So this is slightly old number, like about five or six years back, we had about 425000 towers,
which made a which in which we had 16.5 billion kilowatt hours of electricity and 5 billion liters
of diesel being used. These numbers would have increased. But just to give you a sense that this
is an important induce where a reasonable amount of electricity and for the backup power, diesel
is being used.

So we will try and take an example of particular telecom tower with a peak requirement of 5 kW
and an average requirement of 2 kW. Average requirement of 2 kW means throughout the day if
we look at the average it will be a power rating will be 2 kW and we are looking at continuous
operation of the telecom tower.

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(Refer Slide Time: 02:55)

We want to consider the economics of two options. The first one is where we have a diesel
engine generator and the second one is where do we have a P.V. battery system. In both these
cases, we will presume that there is no grid supply and this is a standalone supply where it is
going to meet the requirement. So this will be designed to meet the requirement of an average
amount of 2 kW. Now we are given the following data for both these options.

(Refer Slide Time: 03:32)

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Option A, if you have a diesel engine with a rating of 5 kW, the capital cost is ₹ 1.7 lakhs; this is
there in your tutorial sheet, problem number 4. The life is 10 years, efficiency is 35% and the
diesel price today is about 70 ₹/kg, we have the net calorific value of diesel roughly around 40
mega joules, 42 mega joules per kg and the composition of diesel has 86% carbon by weight.

So, all of this we will use and then there is a operational and maintenance cost in addition to the
fuel cost which is a non-fuel O and M cost which is 30 paisa per kWh generated. So we will
again use this in terms of making the calculation this is for option A, which is diesel engine
generator and so the engine generator will be using diesel and depending on the load, it will be
operating at a particular rating.

(Refer Slide Time: 04:36)

And the second option is where we have a PV battery system, so we have a PV system and
please note here that the peak rating of the PV system is 12 kW when we actually need an
average of 2 kW. Please remember that we are using 2 kW on an average for 24 hours. The for
the solar the solar energy and the generation is going to be only available during the sunshine
hours so that is why you have this kind of a rating.

The cost of twelve kilowatts of modules at present prices is of the order of about 6.5 lakhs. We
will take the module life at 25 years. We have also planned to have in order to provide the
requirement of the telecom towers throughout the day, we are going to provide our batteries and
we have said that 2 kW in to 24 hours means 48 kWh.

213
So we planned for one day autonomy, that means for one day if there is no sunshine and no
generation, the battery should be able to provide the requirement. So we are looking at a battery
rating of about 50 kilowatt hour and an average cost of about 4.5 lakhs with a life of 5 years. We
also have a balance of system and that balance of system is this, this will be like your maximum
power point tracker, your power electronics and your controllers, and the balance of system life
is typically of the order of about 10 years.

We are taking a cost of about rupees 2.5 lakhs and the O & M cost for the PV. system and there
is no fuel cost for PV because the solar is free, solar installation is available and we are looking
at an O & M cost of about 25 paisa per kilowatt hour, slightly lower than the non-fuel O & M for
the diesel, but almost of a similar nature.

So for this, what has been asked is we are supposed to first calculate, what is the simple payback
period for the incremental investment in B and then using a discount rate of 30% compute the
cost of electricity generated in both cases.

(Refer Slide Time: 07:06)

Which one would we prefer? Would the PV project be eligible for carbon credits and then
compute the amount of annual carbon dioxide saved? What is the cost of saved carbon for B
compared to A? And if the discount rate is instead of 30%, if it is 10%, how does it affect the
results?

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(Refer Slide Time: 07:36)

So, let us start with this problem. Let us start with option A. Option A is a diesel engine
generator, DG., and it is given to you that the capital cost is, capital cost is ₹ 1.7 lakhs. So, the
capital cost is 1.7 lakhs for the diesel engine generator as compared to this. Let us look at the
capital cost for option B.

So option B has three components. There are the PV modules with a capital cost of ₹ 6.5 lakhs.
We have the battery and in most of the PV battery systems, you will find lead acid batteries,
some of the recent ones, you may find that we are using lithium ion batteries. So in the case of
batteries, we are talking of rupee's 4.5 lakhs for the batteries.

And the balance of system, all the power electronics we are seeing, this is rupees 3 lakhs. So, let
us just add this up. This is coming to rupees 14 lakhs. So you should note that the capital cost in
case B is 14 lakhs as compared to 1.7 lakhs for the case A. So what is the difference? What is the
incremental investment, incremental capital cost? Incremental capital cost, this is going to be
rupees 14 minus 1.7 lakhs and that is nothing but 12.3 lakhs. So, keep this in mind and let us now
calculate what is the difference in the annual cost?

215
(Refer Slide Time: 10:02)

So in the case of A for the DG system, let us first find out for both these cases what is the kind of
annual generation? So, annual generation is 2 kw/hour that means in an hour, 2 kilowatt hour
into 24 hours in a day into 365, since this is the average and this is nothing but 2 into 8760 is
17520 kWh.

Now in order to meet 17520 kWh in the case of the diesel engine, we are using diesel. We are
firing diesel in the engine. We want to find out how much diesel are we using. So the output that
we have is 17520 kWh. 1 kWh is one kilowatt is kilo joules per second into 60 seconds per
minute into 60 minutes per hour, which means in to 3600. That is 3600 kJ. This is the required
output in kilojoules; divide this by the efficiency of the diesel engine which is given to us as
35%, so 0.35.

Now this is the energy input in kilojoules. Remember every kg of diesel that we are talking of
has a net calorific value of 42 mega joules, 42 mega joules means 42 in to 10 raise to 3, 42000
kilojoules. So now this is in kg of diesel. You can calculate this and you will find that this turns
out to be 4291 kg of diesel per year. So, once we get this, now we know how much we have
given that the price of diesel is 70 rupees, so we just take the annual fuel cost is 70 in to 4291
approximately equal to rupees, 3 lakhs. So, if we now look at this in terms of the in the case of
what was the annual O and M cost?

216
(Refer Slide Time: 13:33)

We said the annual O and M, non-fuel O and M is 30 paisa per kilowatt water. So this is 0.3 in to
total of 17520 kWh, which is generated. And this turns out to be ₹ 5250. So it is actually very
small. The total annual cost, annual fuel plus O and M, total annual cost is just instead of 3 lakhs
now it becomes rupees 3.05 lakhs.

In the case of in the second case, where we are looking at the PV, what is the fuel cost? The fuel
cost is zero because we do not have to pay for the solar insolation. So that entire annual fuel cost
is saved. There is an annual O & M cost in case of B and that we can calculate annual O & M
cost is nothing but 0.25 rupees per kilowatt hour in to 17520 and this turns out to be rupees 4380.

So the annual savings, which we have if we opt for P.V battery, is the difference in this two cost.
That is difference between 3.05 lakhs and this is 0.04 lakhs. So, the annual savings is rupees 3.01
lakhs. So now we can calculate straight away, what is the simple payback period and this is just
going to be the incremental investment which was 12.3 lakhs divided by 3.01 lakhs, which turns
out to be approximately 4.1 year.

Now, depending on the company, as we had said, if you look at the company which has a
payback period of 3 years or so, then this is not viable. Of course, in such a case, we will not just
look at the simple payback period. We will look at the other indices. We have also been asked to
now calculate what is the cost of electricity generated in both the cases. So let us for this cost of
the electricity generated we will use the annualized lifecycle cost.

217
(Refer Slide Time: 16:11)

So when we look at annualized lifecycle cost, let us first calculate annualized lifecycle cost for
option A, we are given that discount rate is 30 percent. So let us first see what is the annualized
capital cost for the diesel engine, this is going to be 1.7 into CRF, discount rate is 30 percent, life
is 10 years. So this is 1.7 as per the formula that we had, 1.3 raise to 10 minus 1, 1.7 in to 0.323,
this comes out to be rupees 0.549 lakhs.

This is the annualized capital cost, and we have already calculated what is the annual fuel cost,
and annual O & M cost that turns out to be 3.05. So, the total annualized lifecycle cost is 0.549
plus 3, we had seen this one it was 3.0 plus 0.05. So you see these components, you can see the
relative magnitude. This is the annualized capital cost. This is the annualized, this is the
annualized fuel cost. This is the annual fuel cost. This is the non-fuel O & M cost.

And this is the annualized capital cost, so you can see in the case of the diesel engine, it is the
fuel cost, the diesel cost which is predominating, the capital is relatively low and overall we are
looking at the total cost that we are now looking at is 3.6 lakhs. This is the annualized life
lifecycle cost.

218
(Refer Slide Time: 19:02)

Now the cost of generated electricity that we have will be taking cost of generating electricity.
We take the annualized lifecycle cost ALCCA by the annual electricity generation. Electricity
generated per year. So, this is going to be 3.6 lakhs. 3.6 into 10 raise to 5 divided by 17520 and
what will be the units? This is going to be rupees per kilowatt hour. When you put this and
calculate, you will find that this is ₹ 20.54 /kWh, this is the cost that we are getting for
generating electricity from diesel. Now, is this reasonable? We can try and see.

This is higher than the price at which we get electricity from the grid, which is reasonable,
because otherwise, instead of your power plant, we would actually just have diesel engines and
we have a rating of a diesel engine, the diesel prices high. So this is higher than the price at
which you get grid electricity. And that is why you prefer greed electricity to diesel power. But if
you have no other option and you have an isolated system, then this is a system which has low
capital cost but high running costs because of the diesel price. So now let us keep this in mind
and go ahead and calculate for case B.

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(Refer Slide Time: 20:47)

In case B, we have when we talk about the ALCC, again this ALCC will have here two
components annualized capital cost plus annual O&M cost. There is no fuel cost here. So, in the
case of annualized capital cost, we have three components here and remember, these three
components have different lives. So because of that, when we take the capital and annualize it,
they will have different capital recovery factors that we are going to use.

So this will be equal to CPV, which is the capital cost for the PV into capital recovery factor,
discount rate is 0.3 and the P.V module life is 25 years. So this is this plus C battery CRF 0.3 but
battery life is less than the life of the panel or the life of the power electronics. So this is B,
5years. And see this is the advantage that we have when we use an annualized lifecycle cost
method because we can actually just simply add up the annualized capital costs for different
components which have different lives.

And then it just means that the capital recovery factors we use are going to be different and then
the third component, which is C balance of system in to capital recovery factor, 0.3 and 10. So,
now let us calculate these capital recovery factors. CRF 0.3, 25 is 0.3 into 1.3 raise to 25 divided
by 1.3 raise to 25 minus 1 and this turns out to be approximately 0.3. Then CRF 0.35, this is
going to be the highest value, this is going to be 0.3 into 1.3 raise to 5 divided by 1.3 raise to 5
minus 1 and that turns out to be 0.41.

220
And CRF 0.3, 10 is something we have already calculated in the earlier examples. This is 0.323
So you see the lowest value is where the life is highest, 0.3 in 10 years is 0.323 it is only 5 years,
it means the capital recovery factor is higher. Now let us use these and plug in the values to get
the final value of the annualized capital cost.

(Refer Slide Time: 24:04)

So, the annualized capital cost, annualized capital cost is going to be calculates, calculate this in
lakhs 6.5 lakhs in to 0.3 plus 4.5 lakhs in to 0.41 plus 3 lakhs in to 0.323. Ok So, this comes out
to be 1.95 plus 1. you can check these numbers. There may be some rounding of this 0.97. And
this turns out to be 4.769 lakhs. To this, so when we look at the ALCC we will add 4.769 plus
what we had calculated, which was 4400 something of that sort, 4380 but we can just take it as
0.044. So it comes out to be 4.81 rupees lakhs. That is the ALCC. Now let us calculate the cost
of generated electricity.

So just similar to cost of generated electricity for of case B generated electricity. Let us calculate
this will be 4.81 in to 10 raise to 5 because it is lakhs divided by 17520 and the units, as we said,
was rupees per kilowatt hour. When we do this, we get ₹ 27.47 /kWh. ALCC B turns out to be
greater than ALCCA , cost of electricity for B turns out to be greater than that for A. So with a
discount rate of 30 percent, this means that the company will not opt for solar PV.

Now let us calculate what happens when we look at, if we have, do we get it? Do we get carbon
dioxide savings? And if we get carbon dioxide savings, would it be eligible for carbon credits?

221
So generally what happens is in the case of PV there is some CO 2 emissions because of the
embodied materials. If you look at the silicon or you look at the glass and you look at the kind of
energy used and the kind of CO2 which has come in, in making that material, we can make that
calculation.

But typically these values are relatively less. So it turns out to be 20, 30 grams per kilowatt hour
for our purpose, for our calculation. We can neglect it and say that all the CO 2 there is, it is like
negligible. And we will just take whatever is the CO 2 that is being saved because we are not
using diesel is the kind of CO2 saving which is obtained. So, let us calculate now how much CO 2
we are saving.

(Refer Slide Time: 27:44)

So, we have we want to calculate what is the annual CO 2 emissions in A. In case A, case A uses
diesel, and we have calculated already the amount of diesel that we are using, we are using 4291
kg of diesel per year. Ok So, this will involve we know also that 4291 kg, each kg of diesel has
86 percent carbon. So this is point A into 0.86.

You get 3690 kg of carbon annually are being burnt. Now we know that see the basic
psychometric, C plus O2 giving us CO2, which means 12 kg gives 44 kg. So if you want to
calculate how much CO2 we are getting by annually from the diesel, we can see that this will be
3690 into 44 by 12 is the, CO2 emission annually in option A. So this turns out to be if we do the

222
calculation, you will find that, this is 13531 kg’s of CO 2. In option B, we are saving this much
amount of CO2.

(Refer Slide Time: 29:46)

So the incremental costs that we have now if we are looking at the cost of saved carbon. If you
remember, we talked of that as the ALCC with the project that means ALCC of B minus ALCC
of A divided by the CO2 emissions of A minus CO2 emissions of B. We will presume that the
CO2 emission of B is negligible. If we have that value, we can add it up.

This would be typically of the order of 20, 30 grams per kilowatt hour. So it is relatively small.
So, this is going to be now 4.81 minus 3.05 that is the incremental capital cost into 10 raise to 5
divided by 13531. And what are units? This is rupees per kg of CO 2 saved. That is why it is
called the cost of saved carbon. And if you see this, this comes out to be 1.76 lakhs is
incremental divided by 13531 and that comes to rupees 13 per kg of CO2.

Often when we talk in terms of carbon savings and carbon, the cost of saved carbon, we usually
talk in terms of certified emission reduction. One certified emission reduction or CER is one ton
of CO2 saved. So let us calculate we can just take this, this is per kg. We can make it per ton. It
will be 13000 ₹/ton of CO2 saved annually and if you convert this to US. dollars, that is, divided
by 70 you will get this as about 186 $/ton.

223
And you can compare that with the carbon credits or the carbon price. You find the carbon price
is actually much, much lower. This is a relatively high value. So this gives us an idea that at
these costs with the cost number that we said, if the company has a discount rate of 30%, it
would not be viable. It would not prefer to go for the PV option. Of course, if it has an incentive
in terms of a carbon credit and that carbon credit is priced. Then it might happen.

And let us also do we had also said that what if the, it is a public sector company or it has an
access to fund, green fund where the interest rate is lower and we can look at it as a situation
where we are talking of a discount rate, not of 30 %, but a much lower discount rate of 10 %. So
if the discount rate is 10 %, case A economics remains the case A also, the economics will
change.

(Refer Slide Time: 33:30)

But let us look at what will happen in terms of case B. Case B will have the CRF, will change
CRF 0.125 is, you can calculate this and this will turn out to be 0.1 in to 1.1 raise to 25 by 1.1 is
to 25 minus 1. This is just about 0.11 CRF 0.15. Again, in a similar fashion we can make, the
calculation is 0.1, 1.1 raise to 5 minus 1 if you calculate to get to this 0.264, CRF 0.10 and this
comes out to be 0.1627.

So, now you are ALCC for B turns out to be 6.5 in to 0.11 plus 4.5 in to 0.264 plus 3 into 0.1627
and this turns out to be 2.39 lakhs and to add to that, the O and M of, which is 0.44 so we are
talking of 2.43 lakhs. The cost of generated electricity now is 2.43 in to 10 raise to 5 by 17520

224
and this turns out to be 13.87 ₹/kwh. This is, of course, much cheaper than the option B when we
calculated for 30 %.

It also happens to be cheaper than option A, but of course, please remember that option A
economics also changes because now the discount rate is 10 %. So, the capital costs that we had
calculated earlier for the diesel engine that will also change.

(Refer Slide Time: 35:55)

So now the ALCC for option A will become 1.7 in to CRF 0.110, which is 0.1627 plus the other
values that we had 3 plus 0.05. So, instead the value here, we will get a lower value but even
then, this ALCC now, ALCCB turns out to be less than ALCCA. So the interesting thing is that
now in this particular case, PV is more viable than the diesel engine generator and this is because
we have a lower cost of capital. We have a lower discount rate and so this.

So with this, we can sum up. We have looked at the way in which we can do the economic
calculations and we have then also taken an example by which we have shown how we can
calculate the annualized lifecycle cost and the effect we can compare both the options and select
that option, which has a lower ALCC.

This decision for the telecom towers. We found that at a discount rate of 30 %, it is preferable to
go for diesel engine generators and that is why you see mostly diesel engine generators across
the country, relatively low in terms of capital, convenient in terms of usage, but not good in

225
terms of emissions. We then also calculated what are the CO 2 emissions which are coming based
on that option and then seen the difference in that cost divided it by the emissions and calculated
the cost of saved carbon.

So with this, we can actually get the curve that we showed for different options. How much what
is the cost per ton of CO2 that we are saving. We also saw that if the discount rate is lower, then
it is possible the company would be interested in making that additional investment and it is
viable to go for the PV battery systems.

So you can try out the other tutorial problems and see that you can use the different kinds of
indices when you have different components in a system with different lives, annualized
lifecycle cost is a convenient way of doing the calculation. Thank you.

226
 Energy Resources< Economics and Environment
Professor. Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 7 Part 1
Energy Resources- Part 1

So, we have seen the overall energy scenario. We have also looked at different ways in which we
can do the energy economics calculations for projects. Now we are going to look at energy
resources.

(Refer Slide Time: 00:34)

So, when we talk about energy resources, there are some questions which you may want to think
about. We have heard you might have heard the term peak oil. So, what is this peak oil? Do we
believe in peak oil, peak coal, peak natural gas? We all know and we have seen in our overall
energy balance where we look at India or we look at the world.

That predominantly today our energy use is based on fossil fuels. So, the question that we want
to ask is, are fossil fuels depletable, will their consumption decline? How soon will they decline?
How long will the fuel fossil fuels last? And so, this is some of the things that we will consider.
We will when we talk about resources, resources can be energy resources can be stocks or flows.

227
And in the initial part, we are going to talk about resources, which are stocks. Stocks mean that
they will be, they can be stored, they can be transported. And then you have an estimate of how
much we have, how much we have in terms of the resource and how long how much are we
using annually. So, we want to get an estimate of how long that fuels would last.

(Refer Slide Time: 01:58)

So, if you see, there is this interesting quote from the Saudi Arabian oil minister who said that
the Stone Age did not end for lack of stone and the oil age will end long before the world runs
out of oil. So, the estimation, the earlier calculations were where we would try to see how much
stock is there.

At what rate are we using that stock and estimate how much time it will take and what has been
said here is that it is all about dynamics, prices, substitutes, and it is not necessarily about these
estimates. However, it is still worthwhile to see. Traditionally, we have this concept of the
geological resources and reserves. How do we characterize it? How do we estimate how much
time it will last if we have a certain consumption rate?

228
(Refer Slide Time: 02:45)

So, we have this is the McKelvey diagram. This is the diagram which was used and this is
shows, this is the basics by which we classify the resources. So typically what happens is when
we talk about fossil fuels or we are looking at materials which are stocks, we look at some areas
where we have done some extractions and we know that these are the we have the in the case of
oil, you will have a oil well dug and you will find that there is this percentage of concentration
and it is viable to take the oil out.

So that would be something where you have actually conducted explorations. And we know that
this is the kind of in this situation, we have the reserves. That means the reserves are known
quantities and this could be which have been already measured. So, this is called proven. And
then there is a second portion where you have done some sample wells and you know that; whole
area has similar kinds of rock formations. So those will be called indicated and the third one is in
similar areas, in similar formulations we expect that though we have not done any exploration,
we think that it could be inferred that these will also help.

229
(Refer Slide Time: 04:27)

So, whenever we have these estimates, it is given in terms of proven, indicated and inferred. And
the probability of occurrence is highest in the case of proven, we have actually measured and
quantified, so we are quite sure that this is existing indicated with some lower probability and
inferred with a, with even a lower probability.

(Refer Slide Time: 05:07)

So, this is in terms of the resource, now there are also other undiscovered, there is this whole set
where there are other undiscovered resources and which are hypothetical, speculative. And also,
in these there are two axis. One axis is in terms of the probability, and the second one is in terms

230
of the economic. So, reserves which are easily extractable with higher concentrations, the cost of
extraction would be much lower.

So, they may be currently economic. As the technologies change, things which were not
economic earlier can become economic. So, this, the between reserves there is this concept of
reserves and resources, resources maybe known occurrences, but they are currently not economic
to extract. So, resources is a slightly larger term which has a larger value and resources.

(Refer Slide Time: 06:03)

So, this concept of resources and reserves is shown in this classification, which is the McKelvey
diagram and this is how it is plotted with the kind of increase as you go down, as you go up. It is
the more economic the costs are lower and here this is the highest probability and lowest cost.
And then you go for lower probabilities in this, on this side and you have higher costs going in
this direction.

231
(Refer Slide Time: 06:28)

So, there are two kinds of beliefs about resources. One is that if we look at a finite amount of
reserves, which is there in the ground and if we look at a finite amount of reserve and we know
that we have a particular kind of extraction pattern, we can estimate then how much time that
extraction will occur. So, if we have a finite reserve and we are talking of a stock.

(Refer Slide Time: 7:00)

If we have a production in a particular year and we have t as a time and we have P and we say
that, let the production be constant at the rate at which it is being consumed, then if we look at
this area under the curve, this becomes a, the static we define a static R by P ratio or the R by P

232
ratio, which is simply divide the total amount of known reserves and divide it by the production
in a particular year, assuming that it is constant.

This will give us the number of years at which the resource will last at the current level at which
we are consuming it. In many cases as we know where the population grows exponentially and
the requirement for many of the fossil fuels, coal or natural gas, has been growing exponentially.

(Refer Slide Time: 08:27)

1970 70 MILLION TONNES

2012 557 MILLION TONNES

For instance, if you take the example numbers, if you look at in India 1970, we use about 70
million tons of coal and in 2012, we used 557 million tons of coal. So, you can see very clearly
that there is a exponential growth.

(Refer Slide Time: 08:45)

So, we are going to look at the following models. We will start with the static R by P ratio,
which I have already discussed. We will look at the exponential growth model and then we will
look at the logistic growth curve and where we take the fact that the area under the curve is
bounded and yet there is a finite resource and then we look at Adelman’s model.

233
(Refer Slide Time: 09:06)

Again, this is the definition of the Geological Survey. The identified accumulation that can be
extracted profitably under present economic conditions, that is the result and resources are the
reserves, plus all accumulations that may eventually become available. They are, they may be
today undiscovered but discovered but currently not technically or economically viable.

(Refer Slide Time: 09:34)

234
1970 70 MILLION TONNES

2012 557 MILLION TONNES

557
=(1+g )42
70

g 5 % (0.05)

6−7 % / year

So, resource is greater than the reserve and if you see, this is you, I told you that we are going for
an exponential growth rate for coal. It is been growing exponentially and if you see from the
early years and this is the kind of growth, just to give you an example, as we said, if you take
1970 and 2012, we can find out what is the growth rate. We can just take 557 divided by 70 and
calculate the compound annual growth rate, now 70 to 2012 is 42 years.

And you will find that this G corresponds to roughly 5% or 0.05. In the recent past, you will find
that coal has been growing at 6 to 7% per year. So, the question is that if we think in terms of an
exponential growth, then obviously that static R instead of the static R by P ratio, the number of
years for which the coal will last would be much lower and we can do that calculation.

(Refer Slide Time: 10:51)

235
Just to give you a sense of it, if you look at the coal mines and the coal resources, you find that
most of our coal little bit in the central area and significant proportion in the east. These are
where the coal mines are there, there are some in the north east, there are some lignite here in
Tamil Nadu and some other. But this is where the distribution of the coal is.

(Refer Slide Time: 11:16)

Also, from the integrated energy policy document, this gives us a sense of what were the reserves
which was there in 2003-4. You can see that the reserves were talking of 34000 million tons and
the production was 414. If you divide these two, you get the R by P ratio of about 80. If we took
proven plus indicated that R by P ratio goes up to 140.

236
That means that at the, at that level of production, this will last for about 140 years and similar
things can be done for oil and natural gas. If you update these numbers, you can see that this is
the number that you have in 2013-14 and we can calculate the R by P ratio for this.

(Refer Slide Time: 12:06)

From the GSI if you look at it, you will find that over the years the proven reserves also keep
increasing and today, if you see in 2018 values, I think it is of the order of about 148000 million
tons. So, if we took 148000 million tons and if you look at this number of 148000 million tons

237
and you divide that by the annual production, 148000 million tons of coal annual production
roughly about 600 million tons of coal.

The number that we get static R by P ratio is about 200 years. So, we have a reasonable amount
of coal, though, it is low grade coal. And of course, as we have seen, there is a problem in terms
of the CO2 emissions and so people we are talking about not using the coal. So, we would like to
see now if we have an exponential growth rate, how do we make this calculation. So that means
we are talking of let us say that this is growing at 5%.

Then what will happen is in the first year we use P, next year we use P into 1 plus G and so on.
The P into 1 plus G raise to n. We want to find out n, the number of years in which the resource
will get depleted. So that means here instead of that static we have P, and this is Pt by T. So, of
course, you know that, you know, area under the curve for an exponential curve is not bounded.

But if we have a finite reserve then, this is R and we want to find out, what is the time, when this
gets sort of cutoff. So, we have already calculated if it was a static, then it lasts for much longer.
This is 246 years is what we had calculated. We want to now calculate what is this value.

(Refer Slide Time: 15:05)

So, in order to do that calculation, we will take total reserve will be P, P 1 plus G raise to n so we
can multiply this R into 1 plus g. The simple actually this is just a geometric progression. 1 plus
g raise to n plus 1, we can take 2 minus 1 and we get R one plus g minus R is equal to P 1 plus g

238
raise to n plus 1 minus P and this is nothing but R g is equal to P into 1 plus g raise to n plus 1
minus 1. So, R by P is equal to 1 plus g raise to n plus 1 minus 1 by g, if you look at this, we
want to calculate n, this is what we want to calculate. We want to calculate n, we know R by P
and we know g.

(Refer Slide Time: 16:35)

g ( RP )=(1+ g) N +1
−1

(1+g)N +1 =1+ g ( RP )
R
[ ( )]
( N +1 ) [ ln ⁡(1+g) ] =ln 1+g
P

N +1=
P[ ( )]
ln 1+g

⁡ln (1+g)

(Refer Slide Time: 17:51)

We calculated for India for coal that R by P ratio was about was 246. And we said that let us
consider the growth rate of 5%. We can of course take a higher growth rate so we can, suppose
we take 5% then

ln ( 1+0.05× 246 )
N +1=
ln ⁡(1.05)

2.59
¿ =53
0.049
N 52
6 % N 47 YEARS

239
So, we of course, if we see the time, which we are talking of in this, is going to be lower than the
time which we had calculated for the static R by P ratio. If we instead of 5%, if this is for 6 %,
then you will find that the life will n will decrease and n turns out to be 47 years. So, remember
we talked about a static R by P ratio and we also talked about the ratio if we are going at an
exponential growth rate. Now, in actual practice, what will happen is we expect that the pattern
will not be exponential and suddenly coming to 0.

(Refer Slide Time: 19:26)

So, we expect this is similar to what Adelman had done but we have also this has been also done
by Hubbert who was a geologist and he proposed the method, it is called the Hubbert model.

240
 Energy Resources< Economics and Environment
Professor. Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 7 Part 2
Energy Resources- Part 2

(Refer Slide Time: 00:24)

Let us look at the critic of the finite resource constraint and this is the critic which is given by an
economics Adelman, he says the total mineral in the earth is an irrelevant non-binding constraint
if expected, finding minus development costs exceed the expected net revenues, investment dries
up and the industry disappears. Whatever is left in the ground is unknown, probably unknowable,
but surely unimportant geological fact of no economic interest.

So, it is not just, the reserves that we are talking of, only when it is economic and if it is viable
then only it will be extractable. So, this whole calculation of the, this is a critic which says that
the calculation of the reserves should not be necessarily then it depends on the costs and we will
define that.

241
(Refer Slide Time: 01:10)

But just historically when we look at it, the static R by P ratio, the exponential ratio is something
which is interesting to see. In the McKelvey’s paper, he talks about two different models of any
resource and you have a close market where initially because of the economies of scale, the
prices can go down and then and depletion results in higher prices and as a result of this the
demand rises while prices fall and then as the depletion goes up and then the production rate
goes down. So, we expect a curve which will go through a maximum and come down and similar
kind of thing is expected even in a case of an open market.

242
(Refer Slide Time: 02:06)

So, in all the cases, what we expect is that, we will have a bell-shaped curve Pt versus t, we will
start from 0. Go to an oximum and come down and this is similar, this is essentially similar to the
initial analysis which was done by M. King Hubbert, M. King Hubbert way back in the 1950s,
1960s was a geologist with the Geological Survey. This was a time when there was no concept of
finite resources, and we were talking of coal and oil and gas being the main source where we are
going to have a lot of innovation and development and growth and but he was the first person
who talked in terms of a limit and a reserve and looked at this kind of a shape of curve.

243
(Refer Slide Time: 03:08)

So, let us look at, we will upload for you the original paper and you can take a look at that. But
his analysis showed, he made these kinds of plots with this was. So, if you see the plots, these
plots all follow. This was the trend which was there in the till the 60s. We were looking at an
exponential growth in all the resources. So, where we look at this is the world production of coal
and you can see it start from a small amount and then it is been growing is fluctuation, but it is
been growing exponentially.

(Refer Slide Time: 03:40)

244
Similarly, the world production of oil, US production of crude oil and he postulated that the
overall production trend for any exhaustible resource will follow this kind of a curve and then he
said that let us take the total amount of reserves which is there which is called as skew infinity.

245
(Refer Slide Time: 04:10)

And if we take 0 to infinity of pt dt. This will give us the total amount of cumulative amount of
reserves that we have and the production rate at any point of time pt will be dQ, dQp by dt. This
is the Qp is the cumulative production from time t is equal to 0, t is equal to 0, to some time t.

So, it is the cumulative production and that cumulative production. When we look at that
cumulative production the rate of the dQp by dt will be the production in the dt here. And what
he did was this was in the period when we did not have the computers and the modelling
capability.

246
(Refer Slide Time: 05:22)

247
And so, he took essentially looked at these world fossil fuel reserves and he plotted the
production and used it on a graph paper where the area under the curve would be the reserve and
he estimated, based on the recoverable reserves estimate with this production fitted a curve of
this type. And this is this is what he had done for world coal. And he had done this for US and he
had done this for the world coal, world oil production. Interestingly, he projected the year in
which the US. oil will peak.

And this is the whole concept, the beginning of this peak oil. And we projected it as happening in
a particular year. And it actually happened within a few years of that. So, this is where his
analysis in future showed that this is the kind of things. But this represents one of the earliest
analysis where you have this limit. And today we can use this and we can plot a curve and we
will do this. We will take this analysis, we will derive a curve for this and this will be like a
logistic curve and we will see what is the year in which the peak occurs.

248
(Refer Slide Time: 06:50)

When we talk about oil, you will see that oil that we have is. Some of it is offshore and about
half is onshore and we have certain needs distributed in certain areas. We of course, have
relatively less amount of oil and production only met a small proportion of our total.

So, the R by P ratio, if you take the R by P ratio or the R by C where if you take the oil
consumption, the R by C ratio, if you see it is really, really small and we do we really do not
have oil for even more than a decade. If we are to meet the total consumption from the Indian
resources. But of course, most of our oil comes in terms of imports.

249
(Refer Slide Time: 07:36)

250
251
252
253
Similarly, in the case of oil supply also you can see globally oil supply has been increasing. We
can just take a look at some of the trends in prices of some of these fossil fuels. So, we look at
the coal price trend. In UK, you can see the price variations in Germany, price variations in
natural gas. So, there are fluctuations in these and then not showing much trend there. Of course,
some of them have increased and decreased and we will now try and replicate the analysis which
the, which was done by Hubbert and we will try and do this in terms of the logistic growth curve.

(Refer Slide Time: 08:25)

254
So, the we talked about Qp, being the cumulative production from time t is equal to 0 to T. That
means 0 to T pt, dt. Now this Qp. Rate of change of Qp, dQp by dt. Is nothing but Pt. The rate of
change up is proportional dQp dt is proportional to Qp. That means the demand for coal will be
proportional to the cumulative amount of coal that has been used because that would result in
more usage and people's see and as we go towards the limit then this if we are going towards Q
infinity, that dQp by dt is constrained by the fact that we are near the limit. So, if we take this,
we have a model which gives us dQp by dt is equal to B into Qp into Q infinity minus Qp. So, as
we go towards the rate of change of the cumulative production, cumulative production Qp, which
is the production in a particular year, in the initial case, it is exponential as we go towards the
limit that decreases because we have this limiting term which is Q infinity minus Qp.

(Refer Slide Time: 10:20)

If we take this, we can then derive and we will get dQp by Qp, Q infinity minus Qp is equal to B
dt. And you can show by integration that Qp is Q infinity by 1 plus AE raise to minus Q infinity
dt. This is called an, S shape logistic curve. It is also called the Pearl curve, after the statistician
Raymond Pearl, who initially proposed this as a curve which was used to show the growth in
organisms in terms of height and the height and weight and this has been used in a whole host of
applications.

255
(Refer Slide Time: 11:21)

The way this works is that use. Start from here and then you go and it goes asymptotically to the
limit. So, in this case this is Q Infinity this is Qp, this is t. And this is what is known as the S
shaped curve. So, how do we get this curve? And I will give you a tutorial where we can look at
the actual data for India and you can make this calculation. We have done this and based on this
corresponding to this, then you get the production going to a maximum and coming down and
this is the kind of thing that this is what was done for petroleum.

(Refer Slide Time: 12:14)

256
So, typically what happens in this is that we can take this curve Qp Q infinity by 1 plus A e raise
to minus BQ infinity. We need to find these coefficients A and B. Q Infinity, we should be able
to get an estimate from the Geological Survey, the Geological Survey of India.

If we are looking at Indian context, whatever estimate we have of the reserves we use as Q
infinity and we can calculate we can modify this and see we can write this as 1 plus A e raise to
minus B Q infinity t will be Q infinity by QP. So, Q Infinity by Qp minus 1 is A e raise to minus
B Q infinity t.

(Refer Slide Time: 13:24)

257
Now for this I can take ln on both sides and I will get a line of Q infinity by Qp minus 1 is ln A
minus b t where B is equal to BQ infinity. Now, if you look at this, this is of the form. Y is equal
to C1 plus C2t and this is amenable to linear regression. All that we can do is we can take. We
can start with the time series data that we have of production and we can take a particular year in
which we can get the initial value of Qp at starting ts.

And then for each year, we can just add on the production so that we can get the Qp from that
starting year till the recent years, as a obtain the estimate of Q infinity from the resource and then
we can get ln, Q infinity by Qp minus 1 and get that as y and then get these coefficients ln and B
from a regression. So, we can take this and make the calculations and get the coefficients A and
B.

So, I would urge you to try this with the dataset that we have for India for Indian coal, and you
can try and get the coefficient A and B and compare it with the results. Then once we have that,
we can use it to find what is the year of peaking. So, we can. This is something that we can
calculate. What is the year of peaking that we will have based on the fact that the peak
production will happen in that year.

258
(Refer Slide Time: 15:33)

So, if we see the equation that we have Qp is Q infinity by 1 plus A e raise to minus BQ, infinity
t. We want to find out the time when the production is maximum. When the production is
maximum it will be a stationary point where dp by dt will be equal to 0. Now dp by dt is equal to
0 means that we are going to have dQp by, dpp is equal to dQp by dt. So, we will like to find the
point of inflection when this will be maximum, where d square Qp by dt squared is equal to 0.

So, let us take this equation and differentiate it. You get d square Qp by dt square. We can take
the equation where we have, let us start from the other point. Let us start from the point where
we have p is B Qp Q infinity minus Qp. This is the starting point, so we can take this as dQp by
dt which is going to be B dp by dt set it equal to 0 is going to be B dQp by dt into Q infinity
minus Qp plus B Qp and differentiate Q infinity minus Qp, which is minus dQp by dt is equal to
0.

B is not equal to 0. Also, tQp by dt is not equal to 0 because that is the production. That is the
maximum production so we can divide by these and what we will get then is Q infinity minus Qp
minus Qp is equal to 0. Which means Qp is equal to Q infinity by 2. This is the point at which
we will get a peak production, and this will happen at the point of inflection. It will happen at the
midpoint of the cumulative production curve.

(Refer Slide Time: 18:32)

259
So, now we can calculate, we can substitute, we can say Q infinity by 2 is equal to Q infinity by
1 plus A e raise to minus B Q infinity t. We can then say 2 is equal to 1 plus A e raise to minus B
Q Infinity Tm. Let us say Tm and then this becomes 1 is equal to A e raise to minus B Q Infinity
Tm and then you get Tm is ln A by B Q Infinity. So, what are we calculated? We have calculated
the time at which the peak will occur and this is in terms of these coefficients, A, B and Q
Infinity, which we have derived. So, this is the year of peaking.

We can also find out instead of this we can find out the T 90 percent time at which 90 percent of
the resources used up. So, we can take QP by Q Infinities point nine substituted and get the value
of T. So unlike in the other case where it abruptly ends. In this case, if we have the S shaped
curve where it goes asymptotically to the limit and so this can give you an estimate and you will
find that this Tm will be in between.

You have the static R by P ratio, which is the highest and this will, you will have the Hubbert
model or Tm. And the, this will be in between this and the exponential. T for the exponential
growth model, which will be the smallest so it will be somewhere in between and this is one of
the ways in which we can do this. This curve which we have is symmetric about the point of
inflection.

260
(Refer Slide Time: 20:57)

Instead of this, we can also have other curves, other logistic curves, not commonly used but there
could be the Gompert’s curve for instance and you can try this out. This is where Qp is Q infinity
e raise to minus b, e rest to minus kt. So, we have Q infinity and you have these two coefficients
b and k you have to take log twice and then you can you can get these coefficients by linear
regression substituted here. The curve is not symmetric about the point of inflection. So, we have
choices in and it has it. It has a different kind of characteristics.

So, we looked at the Hubbert’s model and we just saw that we can calculate this point of
inflection. We, this model has been used to estimate this is where the world oil when it will peak
and in many of these estimations, what has happened is that technologies have changed and the
reserve estimates have changed. So, sometimes this whole concept of peak oil has been
questioned.

261
(Refer Slide Time: 22:27)

The cumulative production proven reserves and if you see some of these so you can also express
this model in terms of this expression which has a cost component which is very similar to the
model that we are talked of.

(Refer Slide Time: 22:40)

There also these models which have been used for different countries where you have a multi-
Hubbert model which means that you start with one particular peak. And then if we find reserves

262
for instance you use shale oil or you use some other things weather technology has changed you
are going for the second peak.

(Refer Slide Time: 22:55)

And there have been modifications of this. So, this has been sort of the history, historical
production, cumulative production, but we have extended beyond conventional oil and gone into
the unconventional and this is because in previous years we had certain technologies where
which involved a certain amount of certain type of drilling. We now have the possibility of cost
effective even horizontal drilling. And we have this concept of fracking where now we are using
shale oil, unconventional resources.

263
(Refer Slide Time: 23:33)

So, it is this paper which has shown in Brazil you had these multi, you had this first cut where we
have a production and it goes down and then it goes to the next level and so basically, we have
these kinds of multi Hubbert curve, you go to one peak. Then because of the technology
improvement go to the next peak and so on. So, these are ways in which we try to understand
how the technology and reserves consist. And there are many different studies where they are
done this kind of Hubbert curve analysis.

264
(Refer Slide Time: 24:08)

This is a news article which talks about the different kinds of oil drilling technologies over the
years and you can see very clearly that there have been a lot of improvements in technology. So,
essentially what happens is that earlier there were, there were resources which would not be
considered economically economical as sources of oil, but today they will be considered as
something which is economical and this is why we have different kinds of production.

(Refer Slide Time: 24:55)

265
There are if you look at the global energy assessment you will find that there are these estimates
for conventional, unconventional oil, coal and you have the reserves and resources and you find
that we have significant amount of stock if you add up the resources and reserves. And so that is
not currently a constraint based on the present thing. But of course, there is the problem in terms
of the carbon dioxide which makes it problematic to use the fossil fuels.

(Refer Slide Time: 25:19)

And you can see clearly that the oil resources also over time if you plotted you see that there has
been an increase. And this shows this is an interesting sort of image which shows the kind of

266
discoveries and production. And you can see that oil discoveries have been now declining.
Production of course is increasing.

(Refer Slide Time: 25:38)

And you can have details of this in terms of different regions what are the production reserves
and you can if you are interested in you can look at this global energy assessment the resources
chapter and you can look at some of these details.

(Refer Slide Time: 25:53)

267
The other approach which is the approach which has been proposed by Adelman and others is
where they were talking in terms of not a static estimate of reserves. So, the idea is that based on
what is known technology you can have different kinds of and the prices at which one can get
one can get different kinds of supply. So, as technology improves you can have the increase in
the resources and reserves and on the other hand there is a resource depletion. So, there is these
two kinds of trade-off.

(Refer Slide Time: 26:32)

So, there is this approach which is now call the supply curve approach, where we estimate at
with different kinds of technologies what kind of reserves are available. So, this is the kind of
this is showing for conventional oil enhance oil recovery, tar sands and others and so on. So, one
can have essentially different element of it, which relates to price and supply and for each of
these, when we talk about stocks, we talk about a supply curve at different price levels and the
kind of costs which are available.

268
(Refer Slide Time: 27:06)

269
And similar things are done for fossil and uranium for instance in the case of uranium there is
there could be a certain amount of reserves similar things for natural gas. You can have this for a
gas supply curve, you can see different amounts at different kinds of prices.

So, that adds a different dimension and you can see the sources and put the kind of values which
are there. So, this is this is the different approach. Unlike the, we have seen this static R by P
ratio, the exponential and then the Hubbert curve the logistic growth and then we have the supply
curve option. In the supply curve option, we are basically saying that it is not a static amount the,
it is not a fixed finite resource but there is a resource which is a function of technology and costs

270
and a different cost there will be different amounts of supply. So, this is one of the ways in which
you can do this.

(Refer Slide Time: 28:06)

You can look at details of this through some of these references, the global energy assessment
and some of the papers Adelman’s paper and the peak oil concept. So, what we have done is we
have looked at essentially resources, which are stocks and which are considered to be non-
renewable or depleted, we should remember that in all of these cases coal, oil, natural gas is also
renewed.

They are formed over natural processes where vegetation is comes under pressure and it comes
under some sets of changes and over thousands of years, you have these resources and reserves
formed. However, the rate at which we depleted is at much faster rate than the rate at which it is
renewed. So, for all practical purposes, these are known as depleted, in the case of these
resources which we are considering as stocks, there are different ways in which we can classify
based on the probability of occurrence, based on the economics of it and we talked about the
Mckelvy diagram.

We then said that given a certain estimate we can have different estimates of the time for which
it would loss. We looked at the static R by P ratio. We looked at the exponential and we looked
at the logistic growth curve or the Hubbert curve model. We also said that there are limits, there

271
are problems with these kinds of approaches and may be what we can look at supply curve at
different kind of prices. So, this is all in terms of stocks. There are also whole set of resources
which are renewable resources which are going to be flows and that is the next thing that we will
take. Thank you

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 Energy Resources< Economics and Environment
Professor. Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 8 Part 1
Renewable Energy Sources- Part 1

We are carrying on with the course on energy resources, economics and environment. We have
been looking at energy resources in the previous lecture. We looked at, the fossil fuels and the
depletable resources. So, in the characteristic of those resources were that there were stocks and
that means that you can have if you talk about coal or you talk about oil or you talk about natural
gas you can store it. There is a fixed amount of reserve that is there and we saw methods by
which we can quantify, how much time that resource will be lost. We now want to look at a
different set of resources and these are renewable resources.

So, as we discussed earlier even fossil fuels are also renewable in the sense that they have been
formed by natural processes which occurred over thousands of years. But the rate at which we
are using them is much faster than the rate at which it gets renewed. So, for all practical purposes
they are depletable.

We now look at another category of resources which are renewable which means that the rate at
which they are being renewed is much faster than the rate at which we are using them and so for
all practical purposes they are inexhaustible and renewable and in such cases the rules or the way
in which we analyse these resources will be different because unlike the earlier case most of
these are actually flows not stocks.

Of course, in the case of biomass there are flows which have been converted into stocks. So,
biomass is a little different. But for all other resources that we are considering renewables these
are actually flows. So, then there will be different ways in which we will characterize them. So,
for this you may look at the Global Energy Assessment which was done by IIASA and published
by the Cambridge University Press. It is available in the public domain. So, Chapter 7 of that has
the listing of different kinds of energy resources and the potential and we will cover some of
those things from that chapter.

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(Refer Slide Time: 2:46)

So, if you look at it first is if you look at the different kinds of options that we have, we have a
whole set of primary energy options and from the primary energy options as we saw there is a
there are different kinds of conversion steps with to get our final end use. And in all of this
electricity is one of the major roots.

So, we take electricity either it could be from, we talked about earlier about fossil fuels. But even
if you look at renewables we can look at solar giving us electricity, we can look at wind, we can
look at hydro, we can look at ocean, we can look at bio energy are could be nuclear and that
electricity then can go and the used in different end uses.

We can also look at directly hydro giving us kinetic energy or hydro giving us electricity and in
the case of fossil one of the intermediate step is thermal heat which gives you power and then
that power is being used, in some cases you are using heat directly for cooking or we are using
heat directly in the industrial processes. So, let us take a look at the in the global energy use.
What is the current share of renewables?

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(Refer Slide Time: 04:12)

So, if we look at this figure this is from the renewable energy update of 2019. This dataset is for
the year 2017. You find that almost 80% of the primary of the final energy use is actually
coming from fossil fuels, off the remaining its traditional biomass which accounts for a large part
and nuclear, traditional biomass almost 7.5% and nuclear about 2%. Of the 10% or 11% which is
coming from renewables a reasonably large amount is from hydro power and some coming from
modern renewables which is accounts for about 2%. 1% is biofuels for transport.

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(Refer Slide Time: 05:13)

If we look at this a little more in detail by the sectors and the end uses, if you look at the end uses
and transport is about one third of the total and in transport we have 3.3% just from renewables
of which 3% comes from biofuels. So, currently the penetration of renewables in the transport
sector is relatively low.

In the power sector we have 26% of renewable energy of which large hydro is also considered
and then we have wind which is the largest chunk. And then you have solar PV and bio. In the
heating and cooling there is a lot of 9.8% coming from renewable energy and some of it most of
it is from traditional biomass and some of it coming from renewables.

So, as we see overall the renewables account for a relatively small percentage but we expect this
to grow. So, we would like to first of all see what is the potential? What is the technical and
economic potential for renewables and the how is that potential distributed amongst the different
sources?

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(Refer Slide Time: 06:29)

So, this figure is a global energy source of renewables, which is for the year 2008. And this is
from IPCC special report on renewables. You may want to look at this and download this. This
gives you overview of all the renewables either status of that in 2008. It is a slightly old but the
relative magnitudes remain the same.

So, if you look at this figure you can clearly see that the largest chunk continues to be biomass a
most of it is still being traditionally used. Most of it is being used in the domestic and cooking
sector. For all of the other renewables and largest chunk goes into electricity, CHP and combined
heat and power and geothermal both use for electricity as well as directly.

And solar thermals small percentage. A large hydro is a very large percentage and the total. If we
see this total we are looking at something of the order of fifth, of the order of 50 EJ. And if you
look at this in terms of the global, we talked of 450 to 500 EJ. So, it is a relatively small
percentage but it is already sort of getting into the main stream and it also has significant amount
of growth and it is growing at a faster rate than the fossil. So, we expect future energy mixes to
be much more renewable.

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(Refer Slide Time: 08:10)

So, if we look at the electricity sector, as we as I told you the renewables in the electricity sector
the largest chunk for electricity is coal, followed by natural gas and then hydro and some amount
of nuclear. Nuclear globally is a reasonable amount. It is about 13, 14 % and then, as we said,
this is the renewables of which wind is the largest chunk and then bioenergy is also reasonably
high.

(Refer Slide Time: 08:56)

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Solar photovoltaics growing relatively small but growing fast and you can see this growth in
terms of these numbers. And you can we can see in this case if you look at the graph at the
bottom you see that solar PV starting from a small base but growing at a much, much faster rate
and overall if you see its wind and PV and renewable which is growing at a reasonably fast rate
and that is the a that is the signal that is there that the renewables is growing at a much faster rate
than fossil and the share of renewables in our mix is going to be higher in the future. So, now let
us look at each one of these in terms of the potential.

(Refer Slide Time: 09:43)

Let us look at first hydro. So hydro for a long time we have been having these large hydro power
plants. And if we look at this assessment, this is from the global energy assessment you will find
that if you look at solar power which is evaporating the water and causing the flows of hydro and
the energy in the water cycle you find that this is a very large percentage.

We are talking of 504,000 EJ/year which is orders of magnitude higher than what is required in
terms of energy, theoretical potential, if we look at from this, what percentages, what is a
potential which can be actually taken off in terms of the runoff and the flows and converted into
energy, you get off the order of about 200 EJ/year which is again orders of magnitude similar to
the kind of energy required globally by the earth.

279
From this if we look at the different sites that reduces to a potential of 140 to 145 and with a
particular use factor. This comes out about 50 to 60 EJ, then looking at economic factors. This
can come to about 30 EJ. So, that is the estimated potential in 2010. Now which is a reasonable
amount of the total which can be provided by large hydro.

The problem with large hydro is that in this involves submergence of large areas of land, and
because of this, there is resistance to this from the people who were displaced. There are also
problems in terms of sometimes they are on site where there is a, which are earthquake prone.
There is a problem in terms of when you have a large water quantity they it might affect the
disease vectors.

And so, in many countries of the world there is opposition to large hydro with the result that
large hydro has not been growing at the rate that it used to grow earlier. And because of that, we
are not quite sure that the total hydro potential will be realised. But there is a reasonable amount
of potential.

(Refer Slide Time: 12:15)

You can see, of course, in terms of generation. There is an overall growth in the hydro power
generation, and you can see that if we look at the distribution of hydro in different countries and
this is in terms of the generation which we are looking at, about 14000 TW/year is the
hydropower technical potential which is a significant proportion of the electricity use.

280
In the installed capacity, if you see this is the kind of distribution of the installed capacity in the
different continents, and in 2009 we are talking of 920 GW which was installed. The updated
values in 2017, about 1267 GW, so hydro large hydro has been growing, but we do not expect it
to grow at very much faster rate because of the kind of opposition which is there.

So, we can have in the case of hydro, we can have dams, we can also have run of the river
schemes. So, question of large hydro and small hydro in many countries of the world, large
hydro was excluded from the calculation of renewables. This was done primarily because large
hydro already had a large number and the renewables were relatively small.

So, in order to make it distinguished we looked at small hydro and different countries had
different characteristics in terms of what was considered as small hydro. But typically, you know
which started from 10 kW going up to 5 MW in some cases going up to even 25 MW.

Now, in the case of hydro it could be run of the river’s schemes or even with low heads and low
heads as low as 3 meters have been considered to be viable in the smallest areas, we look at
schemes which are not necessarily grid connected. They could be isolated and if you go if the
megawatt range, then they could be connected to the grid.

In all of this, the question is whether the water flow is annual or it seasonal. So, there is a
capacity factor which is there. But in most of the cases there is a reasonable amount of potential
of cost-effective power generation because the water itself the operating cost is negligible. It is
only the initial capital cost.

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(Refer Slide Time: 14:56)

When we talked about renewables, I also told you that we have starting from a small base, but
we have been growing at very fast rates and you can see that with the kind of 74% and 30%,
74% for the solar PV and 35%, 20% starting from a small base, but very high growth rates. Of
course, these will sort of. they will taper off and they will come to some reasonable numbers in
the future. But as of now, they account for a reasonable high.

(Refer Slide Time: 15:21)

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If we look at the overall annual fluxes. When we look at bio energy, solar energy, geothermal,
hydro power, ocean energy, wind energy and we take the fluxes, you can see that these fluxes are
actually significantly higher than what is the energy use in the primary energy use in the world in
a particular year.

So, if we look at the ratio of the annual energy flux by the 2008 primary energy supply we can
see that solar is almost 8000 times that amount. So, it means we are not constrained by the
amount of solar energy we have sufficient amount of solar energy. Geothermal is also about 2
times, bioenergy about 3 times, wind energy 12 times, ocean energy 15 times. So, in many of
these cases on a global basis. If we look at the total energy fluxes they are orders of magnitude
higher than our requirement.

However, these fluxes are not concentrated, they are dilute and they are distributed around the
world and we will look at. So, when there are issues in terms of costs, there are also quite
variable and hence there is a need for storage and that also adds to the costs.

(Refer Slide Time: 16:42)

So, we will look at, this in terms of we will try to answer the following questions first is how do
we estimate the potential for a particular renewable energy? We already said that we are talking
of flows and fluxes not stocks. Unlike in the case of coal or oil or natural gas, in each of these
cases there could be a technical potential and an economic potential.

283
There be a spatial distribution of the resource. There will be a daily and a seasonal variation and
there will be uncertainty. So, unlike in the earlier case where we had a certain amount once you
mine it you know how much coal is there and then you can use it whenever you want. In the case
of solar at a particular time of day depending on whether there is cloud depending on the kind of
insulation, you will have a particular generation, it is more or less predictable, but there are
uncertainties and we will need to be able to tackle those variabilities.

These energy sources and these energy resources will have a different way of operation and we
need to understand that and we need to design a system a little differently from the way in which
we design fossil fuel-based systems.

(Refer Slide Time: 17:59)

So, if we look at this what are the options that are there? The renewable can be direct solar that
means solar which you use to heat up water or working fluid or heat transfer oil this is called
solar thermal. Or we can look at solar conversion of solar into electricity through a photovoltaic
cell and this is solar photovoltaics.

When most of the electricity that we generate is from solar photovoltaics. and solar thermal is
used can be used for electricity generation, but that is currently a little costly. It is being used
mainly for solar thermal applications, which is for heating and cooling.

284
Wind one of the earliest electricity sources and now also the largest chunk currently of electricity
generation. Wind, again, is caused from indirect solar because of the differential heating of the
earth surface. You have high pressure and low-pressure regions and then you have wind going
from the high pressure to the low pressure and depending on the kind of wind there is a local
factor. We can see what are the wind rates. And there is a power which is available in the wind.

We can put a turbine within that power and extract that power connected to a generator and then
use that electricity. Ocean thermal, we will talk about ocean thermal wave energy and tidal are
all associated with the course. They are localised and we will see what other kind of possibilities
in this.

We talked about large hydro already. Small hydro does not have the disadvantages of large
hydro. They and there is quite a significant amount of potential. The problem is that many of
these are in remote areas and not so accessible. There may be a capacity factor, and so even
though there may seem cost effective they have not been growing at a very at the same rate as
the wind and solar PV.

Biomass is can happen in terms of, there are many different sources of biomass including waste
and crop residues, agricultural residues, and we will look at their different modes in which we
can use for conversion. Geothermal is happening is an energy source, which is happening
because of the Earth's crust being, Earth's core being much hotter than the Earth's surface and
then there are hot spots and when the water comes in contact with these hot spots we get steam
which comes out and that can be used for power generation for energy. So, we will look at each
of these in detail in terms of seeing what are the resources. What is the potential? What is the
current status? So, we start with wind which is one of the earliest commercial renewable energy
use.

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(Refer Slide Time: 21:19)

1
P w= ρ V 3
2

1
¿ × 1.2 ×(7)3
2

¿ 205.8 W / m2

1
ρ C p AV 3
2

When we talk about wind in the wind, if you see the depending on the velocity of the wind. The
power in the wind is half rho v cube. So, if you just take let us say rho is 1.2 kg per meter cube
and if we look at the, let us say, a wind velocity of 7 m/s. If you calculate this, you will find that
this comes out to be 205.8. This is an SI units watts per meter square.

So, this is at a wind speed of 7 m/s. If the wind speed is half this amount, what would happen?
The power in the wind will become 1/8th is proportional to cube of the velocity will become 1/
8th of this amount. So, it is going to be of the order of 22 watts per meters square. So, this is the
power which is there in the wind. Now, depending on the turbine, it will have its own coefficient
of performance.

286
So, the actual power which you get will be half rho Cp into the area into V cube. This Cp is
typically you will get something of the order of 0.3 to 0.4 and depending on the machine that we
have. So, in general, what will happen is we can measure if you see here. This is a wind
anemometer, which will give you the direction and the speed and then there is a wind vane
anemometer this is of this type and the windsock is giving you the direction.

So, we have usually wind measurement stations located all across in the areas where we expect
to have high wind and these this data is then monitored. It is then mapped and you have maps
which show you the distribution of wind speeds.

287
(Refer Slide Time: 24:00)

α
V2 Z
( )( )
V1
= 2
Z1

α 0.1−0.4

Wind speed varies with the height from the ground, and typically what we have is we have a
formula which is. If we measure. So, if we have a wind monitoring station at a particular height
and we want to estimate what will be the wind speed at a different height. Because we may put
we may have wind speed monitoring at let say 50 meters, but we will put a turbine at 80 meters
or 100 meters. We can use this correction factor, this correction factor.

The values of alpha are for different. It goes between point one to point four, and if it is a
relatively smooth terrain, we can use point one and then we can use this and get extrapolate what
will be the wind speed at a different height and we can use this to get maps of the wind speeds.

(Refer Slide Time: 25:04)

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When we look at this, you will see that this is the kind of map which is available and we talked
about the, you know for 7 m/s. We said it is about 200, that means point 2. You can see that in
this case we are looking at you look at these colours you can see some of the largest, highest
winds are of course offshore. But we have the different kinds of wind regimes which are there.

289
(Refer Slide Time: 25:44)

Look at the wind classification again in the GEA Chapter 7 you can see that these are the types
of wind classification the wind tower class going from less than 100 and going to the largest one,
the highest wind power class wind class 7 greater than 400 and this is the kind of wind speeds at
10 meters above the ground and in the case of 80 meters above the ground, that same class is
greater than a 1000 watts per meters square and you can see this is the kind of wind speed which
we are talking of.

In every wind machine, when you put a turbine, there will be a curtain speed, which is the
minimum speed at which the turbine must rotate in order to overcome all the inertia and then
start generating and from the minimum to the rated speed to the cut-out’s speeds. There is a
maximum speed beyond which the turbine will get damaged so that within that range when you
have a wind speed within that range, it will generate.

And remember, the wind fluctuates over the day, fluctuate over the season. And because of that
when you talk about the power supply, we need to be able to adjust that and match this supply
with the demand and I will show you some data about the Indian context before we do that.

290
(Refer Slide Time: 27:15)

Let us look at. So, this is giving you some of the fractions in different countries. What are the
kind of wind speeds in the and the number of sites extra. In the Indian context. If you see this is
a, this is the MNRE’s map, the ministry of a new renewable energy and you can see that we have
some sites in Tamil Nadu and some in Gujarat and the most of the wind is related is typically
along the coast.

You will also see that we do not have most of the wind speeds that we have are much lower than
the high wind speeds which are there in the US and Europe. The other point that we have is that
our wind is very, very seasonal. We get the highest wind during the monsoon months, four
months of the year where you get the maximum amount of generation.

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(Refer Slide Time: 28:18)

A similar kind of map has been drawn. This is at 80 meters and you can see here that we do have
some of the generation of the order of you know most of them are still in the lowest Category 1
and 2. The high winds regimes are in the wind class 2. We really do not have anything at a very
high wind regime. However still in many of these cases even with a seasonality and with this
wind regime we can have wind which is cost effective and that is why we have quite a number of
wind machines which have been installed.

(Refer Slide Time: 28:58)

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If you look at the wind potential 80 meters you can see that wind power density going greater
than 250 watts per meter square at a height of this, we are looking at a 1400 GW of wind. That is
a fairly large potential. And then if we if we look at something which is higher, this is this is we
are talking of 800 gigawatts of this.

So, total we are looking at something of the order of 2000 gigawatts of total wind potential at 80
meters. If we go to higher heights of course the potential can increase. This is based on a study
done by LBNL.

(Refer Slide Time: 29:53)

We like to take a look at what is the actual renewable generation in our country. And if you see
this, this is in 2015-16. This is the picture of the renewable generation for different months. A
couple of things emerge from this picture. The first thing is that it is actually wind which is the
largest chunk of course there is a reasonable amount of bagasse base and biomass based as well
as some small hydro and solar also coming up, solar increasing in coming up.

We find that there is a significant amount of seasonality in the renewable generation and that is
predominantly driven by wind where wind is mainly during the monsoon months and then tapers
other cases.

293
(Refer Slide Time: 30:47)

So, let us look at some of these in terms of the actual generation you see that this is from a
number of sight and talks you about the wind speed you can see that the wind speed fluctuates
and significantly and in different months you have different kind of wind regime.

(Refer Slide Time: 31:12)

So, if we look at this in a little for Tamil Nadu for a particular year 2007 you can see that the
generation in a few months were more than average been generation they wind energy generators
with a million units in the monsoon months but in the other months it significantly lower.

294
(Refer Slide Time: 31:39)

This is show, you can see also this is the annual and all India region wise annual wind generation
pattern and you can see even here that most of this is happening during the monsoon months and
rest of them time it much, much lower.

(Refer Slide Time: 31:57)

This Tamil Nadu plot shows you the generation over 0 to 24 hours and over different months and
you can clearly see that four of the months the generation is very high and, in some months, it is
almost negligible. So, what does it mean it means that when we provide the requirement in these

295
months from wind in the months where there is low wind you have to have something else which
is meeting that requirement.

And that means if it is a thermal power plant that thermal power plants have to be back down or
switched off during the time when there are high wind and this will involve additional costs. So,
that cost is being met by the thermal power plant. We need to look at regimes by which we see
what is the value of the energy provided? When it is provided and what kind of the wind has to
be able to compensate for the non-availability in the other seasons and so this is the situation in
terms of wind.

296
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 8
Renewable Energy Sources- Part 2

Let us know move ahead and look at solar, so in the case of solar, solar is much more predictable
and when we talk about solar isolation.

(Refer Slide Time: 00:30)

We are looking at the direct and diffuse, so we have a direct and diffuse, if you looking at direct
isolation, this is an instrument which is used to measure the direct beam insolation, this is called
the Pyrheliometer, this is focus, so that it is directly depending on the position of the sun, it will
be taking the direct normal beam radiation to the sun and you have this is measurement.

297
(Refer Slide Time: 01:02)

You also have what is known as a Pyranometer and the Pyranometer can be used for measuring
diffuse radiation or total, this is a blocking sheet which can be used to block the direct and then
what is measure becomes only the diffuse, if we remove this then we will get the total insolation
which is on a horizontal surface and that will be the global horizontal insolation. And so, the
direct plus diffuse will give us the horizontal and these are the instruments that can be used to
measure. Most of the measurement stations will have these types of instruments.

(Refer Slide Time: 01:45)

298
 2
I sc 1361 W / m

DNI

And the solar constant Isc which is incident is of the order of 1361 W/m 2, that is the total amount
of solar isolation available per meter square of surface. When it comes through the atmosphere
some of it gets scattered, some of it comes down and diffuse, some of it gets absorbed.

And what we have is what is known as the direct normal irradiance DNI and DNI at any point of
time when we talk about the solar photovoltaic we usually have a standard which is based on a
thousand watt per meter square and we create the characteristics for that insolation, when the
insolation is lower the output would be lower. So, DNI is the flux density of the direct un-
scattered light from the sun measure on a flat plane perpendicular to the sun’s rays.

And this DNI that we talk about which is, so this is DNI is perpendicular to the sun’s rays, so
that it is you have the normal irradiance which is there and this flux varies over the day as the
sun rises and the there is a peak and then it goes down in the evening. When we look at the DNI
every hour we can measure the DNI and then make a plot, we can take the aggregate amount of
the irradiance over the year and that is plotted as the annual DNI, so those are the kind of values
which are put.

299
(Refer Slide Time: 03:46)

When we look at the spectrum of the solar radiation if you see this, will have the sunlight which
is there some of it is observed then it reaches, this is at different wavelengths and some of it is in
the visible range and in the infrared in the ultra-violet and all of this incident onto the device and
depending on the characteristic of the device we have an efficiency which is there and this is
used to convert the energy.

(Refer Slide Time: 04:15)

So if you look at now, this solar irradiance these are from 3 a few of the sites which are there
where there are been solar plants and you can see that in some cases you have this pattern but

300
because of cloud cover for some hours there is a drop in the irradiance and this is from a site in
Gujrat for a particular day one of the days you have no cloud cover and this can see that the
generation megawatts is follows the classic example of what we expect from solar PV plant.

On another day there is some cloud cover at this point and then there is a cloudy day in this one
is a cloudy day with number of cloudy hours and disruptions, so these are the kind of things
which I told you in terms of the interruption and the variability which is there in solar.

(Refer Slide Time: 05:13)

Solar is much more predictable as we said that with the different kinds of you can measure this is
with a different unit its kilo joules per hour square meter. Usually we will put it in terms of watts
per meter square and then we can take watt hour per meter square multiplied by the number of
hours and then over the year you will get something like a kilo watt hour per meter square, per
year.

301
(Refer Slide Time: 05:39)

And this is the global solar irradiance and you can see this is the direct normal DNI which is
there and you can see the yellow region these regions are the ones with high DNI. In the Indian
context we have reasonably good DNI across most parts of the country.

(Refer Slide Time: 06:10)

302
And there is a variation ofcourse see this is the kind of average global irradiance and you can see
this is in watts average in watts per meter square over the months of December, Jan, Feb and this
is June, July, August this is again both of these are from the global energy assessment.

(Refer Slide Time: 06:34)

In the case of India, you find that most large parts of the country have, most of the country has
DNI greater than 1900 kilo watt hour per meter square and some of these regions for instance
this is more than 2200 and so this is quite a good DNI.

303
(Refer Slide Time: 06:59)

Now in order to make a calculation if we look at the total amount of electricity that we require
we can take that electricity divide it by the DNI that we have, take the efficiency of the cell and
then calculate what is the area that is required and if for instance if you are talking of 500 billion
kilo watt hours we can see that this can be met by installing about 2500 square kilo meters of 50
into 50 km or 4 smaller squares of 25 km x 25 km.

And so really speaking this location which has been selected is location which has the highest
insolation in terms of DNI it is also a location which is a desert and relatively low population
density. However, still you know getting 50 km into 50 km is difficult creating the transmission
and distribution line, creating the storage in actual practice when we try to get land, land is
always difficult to acquire.

And the requirement for land, the requirement for water in terms of the cleaning the panels and
in the case of solar thermal even as a working fluid, these are some of the problems in terms of
the solar penetration.

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(Refer Slide Time: 08:35)

As I told you for the you can see this is the global horizontal insolation watts per square meter
for a particular location of a PV module in the IIT campus and you can see that the generation
actually follows the insolation data.

(Refer Slide Time: 08:59)

We can also look at the DNI variation over the year and you can over this is for a particular site
at Noida and you can see that every day the DNI goes up and down but there is a variation in the
seasons and there is a fluctuation and so this is one of the issues when it comes to solar but when

305
we look at solar there are large tracks in the Indian context we have a significant amount of solar
radiation, most parts of the country are good solar radiation.

Most of the solar is happening though in mostly in the west and the south, east and north-east
relatively have less solar radiation, so we have this situation where when we talk about fossil
fuels, it was mostly in the east and little bit in the center most of the solar and the wind is
happening more in the west and the south, so there is a sort of regional disparity in terms of the
kind of resources which are available.

Let us now look at some of the other sources of energy, if we look at tidal, tidal is the renewable
energy source where it is not dependent on the sun but it is actually the moon, so the
gravitational effect of the moon on the earth causes the high tide and the low tide and the
principle typically in a tidal situation of course you can have tidal turbines which are in the
stream just like the wind turbines but in the other case we allow the water to come in at the high
tide and then we block it and then we release the water at the low tide.

This difference between the high tide and the low tide that is called the tidal range that gives us
the head for running the turbines which gives us the power generation, so the power generation
happens only at a fraction of the time when we are releasing the water during the low tide and it
will ofcourse be in.

(Refer Slide Time: 11:14)

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So, in the case of this kind of data we will need to have what is the tidal you know there will be a
daily tide or a semi diurnal tide, there will be a tidal range between the high tide and low tide and
this has to be mapped.

This has been for all locations of the course there are ranges of tides which are provided and this
is the tidal range map which is given in the, you can see ofcourse that we are looking at a tidal
range of 10 to 30m would be, could be cost effective again depending on the location and the
kind of things one can think in terms of. In India, we have not yet built there is a plan to build
and I am not sure what is the status of that of the coast of in the Bay of Bengal of the coast of
Sundarbans.

(Refer Slide Time: 12:17)

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There is a plan to build a tidal plant, there is also a plan at the gulf of Kutch, the largest tidal
plant is the one in France which is a 240 MW La Rance plant which has been operational for
decades and it is also a tourists attraction, there is a recent one which is being built in Korea in
the Sihwa lake somewhat 254 MW.

So, tidal as of now there is a potential it is not yet a commercial technology there are a few
projects, they are demonstration projects, they can be near cost effective but we do not expect
them to have a very major role in the future unless there are technology breakthroughs. In
addition to tidal there is also something called the ocean OTEC, or the Ocean Thermal Energy
Conversion.

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(Refer Slide Time: 13:26)

And this basically is using the principle that the surface of the ocean is much warmer than the
water which is there at the depth. And because of this it is possible to have a normal ranking
cycle where we use the temperature this temperature difference to generate electricity and the
advantage that we have is that we have a large volume of water and even though the temperature
differences are relatively small in the sense that we are looking at temperature differences of 18 -
20o even though they are relatively small because there are large volumes we can get, we can
generate reasonable amount of energy.

We had the largest plant being planned of the cost of Tamil Nadu it was a 1 MW power plant and
the problem was that most of the components were tested however when it was out in the field
the pipeline the HDP pipeline 1.1 km pipeline kept getting ruptured and because that was not
able to establish that was the project was abandoned. There are number of the, this is the most
difficult challenge in the sense that it has to be put in the ocean which is the most the, most
adverse and harsh environment.

But however, there is a significant potential to do this, in the case of wind also in many of the
countries in Europe the land for wind is not available and the plan is now to move off shore. In
the case of off shore, you we can have, essentially, we will have much higher wind speeds and
we can have large wind farms and that is the way this is going offshore is costlier again there are
technological challenges but this has been the way we going.

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In the case of wind also we have gone for larger and larger plants and now we have a single
turbine which can be generated of the order of 10 megawatts. So, this is in terms of we have
looked at tidal and we have looked at ocean thermal.

(Refer Slide Time: 16:10)

Then there is also we can also look at these ocean currents and it is possible to use some of these
ocean currents in terms of energy generation.

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(Refer Slide Time: 16:21)

The other possibility related to the course is to have the energy which is available in waves and
to harness that and in order to do that what happens is that see on the surface of the water
because of the wind we have the waves and the waves have the crest and troughs and we have
number of different devices which can be used you have the oscillating water column and you
have the Edinboro duct and you have the Pelamis different kinds of devices which bob up and
down and that movement reciprocating air is converted into electricity.

This has the largest number of patents which are available for wave power. The problem is that
this is all distributed you need to have a wave for taking out that power, we need to have a wave
for taking that power and converting it into electricity and then evacuating that electricity and
connecting it to the shore. So, this is again something where we do not that is a reasonable
amount of potential.

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(Refer Slide Time: 17:40)

And this is that you can see in different regions you can see that the total terawatt hour which we
are looking at exajoules it is about 106 EJ it is very large potential but cost-effective extraction is
an issue, there could be breakthroughs and this could provide reasonable amounts of requirement
especially for islands and coastal regions. So, we looked at tidal, we have looked at OTEC, we
have looked at wave and the other source of energy as we talked about is the geothermal energy.

(Refer Slide Time: 18:12)

And in the case of geothermal as we said there is that the at the depth the temperatures are much
higher and then you may look at the water coming in contact with this, we have essentially hot

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water or steam coming out, there are many natural hot springs where these come out and these
are usually tourists attractions.

Here there are many different technologies where we can have an injection well and an
extraction well where you inject water inside and or a working fluid inside and then you can
have an organic ranking cycle and have power generation. If you have lower temperature, we can
also directly use it for heating or we can use the vapor absorption refrigeration system using for
cooling there are also geothermal heat pumps and geothermal, so you can have ground.

From the ground if you take things the temperatures are 5 o , 6o lower and you can run, you can
save energy when you are trying to heat or cool a space, so that is again another application there
are many different countries where this is a commercial technology cost effective but it needs I
will be in areas where there is already the falls and you have the steam emerging at high
temperatures.

(Refer Slide Time: 19:48)

So, this is, this gives you an idea of some of the different countries and the kind of geothermal
installed capacity and you can see Indonesia, Island, Philippines a number of different countries
where there is a geothermal capacity.

(Refer Slide Time: 20:09)

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And this is a map showing the geothermal falls. Before we look at that in the case of India these
are the geothermal provinces and if you see the in the Indian context the around the fault areas
these are the areas where you have the geothermal but the temperatures in most of the case the
temperatures are relatively low. In some cases, in the Puga valley we are getting temperatures of
200 centigrade. So, this kind can be used for power generation there is a pilot being planned at
Puga valley, many of these are the places you can use it for cooking, you can use it for heating
and in we do not expect geothermal to have a very major role in the Indian context but locally
this can provide some of this requirement.

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(Refer Slide Time: 20:56)

The supply curve for we talked about supply curve, the supply curve for geothermal with current
technology you can see that we can get of the order of 200 EJ or 300 EJ at different kinds of
prices and with new technology of course the prices will go down, that is what the supply for
geothermal electricity. And this is for supply for geothermal heat, so similar kinds of supply
curves are available for many of these and this is available in the global energy assessment
resource chapter. We come to now another energy source which is in the Indian context quite
important, it is biomass.

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(Refer Slide Time: 21:46)

And biomass could be an agricultural residues, crop residues, it could be wastes which are there
and cattle dung and then this biomass of a variety of such biomass is available. There are many
different processes and process roots for conversion of this biomass.

(Refer Slide Time: 22:14)

When we try to map this biomass each of the biomass has the depending on the ash contained
and the moisture contained, you have a certain energy content of the fuel and you can see that in
all of this has the energy contained between we are talking between 12 to 19 mega joules per kg.

316
Remember that we were comparing this with when we talk of oil it is about we are talking of 40
mega joules, coal is about half of that but it is reasonable source, so it is slightly lower than the
energy contained in coal but it is something which is abandoned and of course in some cases
they already have alternative uses, it is being used biomass is being used as fodder for cattle, it is
being used as feed stock, it is being used hatching for houses.

So we have to see whether bottom of the supply and demand and we have to also look at if you
talking about animal dung, we look at how do we collect it, how do we process it but we can
estimate an all of this when we look at getting the estimates of this, this is, these are now stocks,
so we will have to have distributed ways of making this calculations.

When we do these calculations, we would need to look at for instance, we know in different
regions of the country or regions of the world what is the wheat production, rice production and
based on that, and based on the production we can find out per ton of product.

(Refer Slide Time: 23:58)

How much tons of residues are produced and we can multiply that, we can take the yield in terms
of how much area under plantation, what is the yield multiply that by the residue ratio and then
we will get the amount of residue, we can get the energy content of the residue.

Also depending on the growing season and the harvesting season the residues will be available at
a particular point of time. So, one of the recent controversies and which has been in the news is

317
has been about the pollution in many of our cities including Delhi and the problem with the air
quality has been blamed on the stubble burning which is happen in Haryana, in Punjab and the
crop residues and the stubble and it is possible of course to gasify it use it for and we have to
work out the things. So, this is the kind of potential.

(Refer Slide Time: 24:58)

So, in all of this you can take the rice again the quantity of residue, the residue ratio and the
residue energy. So that is how we can calculate the biomass.

(Refer Slide Time: 25:07)

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In the case of biomass, there are different possible processes there are thermochemical processes
where we can look at if its combustion just like we have in a power plant the ranking cycle
power plant, we burn coal and then we get steam and then we use that steam to run a turbine.

In this case we can take biomass, we can take biogas, we can take rice husk, we can burn it
generates steam, generate power. The efficiencies are slightly lower than that of a coal-based
power plant but it could be also co-fire you can have coal plus some biomass and the other route
is instead of combusting it completely we can gasify that means we add less air so that it is
partially gasified, it is gasified and you get carbon monoxide and hydrogen which is the producer
gas.

And that producer gas then can be used to can run an engine, a diesel engine or a dual fuel
engine or a dedicated producer gas engine or we can pressure it and use it for a gas turbine. Most
of are Indian experience has been with atmospheric gasification and we have been using that
gasified output for heating thermal or for running an engine and generating power, shaft work.

We can also think in terms of using this biomass for pyrolysis and getting liquid fuels, so this is
thermal chemical, the rates of reaction are higher these are all chemical reactions biochemical is
where we let now the microbes do the work for us, in the case of digestion, anaerobic digestion
we get biogas, it settles down and we get biogas and we also get slurry and we can use this also
for fermentation get ethanol, you can have oil extraction and you can have bio diesel then bio
fuel.

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(Refer Slide Time: 27:08)

In the GEA and in this special report on renewables you can find all this again in terms of
different biomass feed stocks, different kinds of conversion routes and different outputs in terms
of heat to, heat or power or liquid fuels or gaseous fuels, so there are many different things which
are possible.

(Refer Slide Time: 27:34)

In the case of biomass, the issues is that if we want to dedicate some land for biomass
production, if you want to dedicate some land for biomass production then there is an issue of
food versus fuel and we can if we on the other hand if we just use the resources the waste which

320
are coming from the animals or wastes which are coming from the harvest and then we can look
at these has alternative use, then we can look at the surplus which is there for energy conversion
and then look at the end use.

If we are doing dedicate plantation there is a fossil, there is a food versus fuel and that is a
problem we need to see we also need to see if we are getting bio fuels what is the amount of
energy that we are putting in, into creating that bio fuel. So, in a later lecture we will talk about
net energy analysis and we will see how this looks.

(Refer Slide Time: 28:45)

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So, when we look at biomass plantation, with the different kinds of fields this is the kind of
yields which are available in different parts of the world and this has given this has again being
classified in terms of a technical potential of biomass.

(Refer Slide Time: 29:01)

The problem in the case of biomass is that aggregation and creating a number for the country, a
number for the world is a difficult exercise and its subject to many uncertainties, this is a local
issue and we really need to identify locally the supply demand and the maps.

In the case, of bio energy this supply curve which is being drawn in the GEA if you see, this
supply curve gives you at different we can go up to a 80 EJ/year at about 6 $/GJ. Biomass can be
reasonably cost effective there is an issue of as we said the use of land, use of water and we have
to look at it in terms of the sustainability but biomass bio energy systems have not being growing
at the rate at which PV and wind have been growing.

Bio energy systems have the added advantage that most of the technology and most of the
generates local employment and these are something where we think in the future that there will
be much more in terms of potential.

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(Refer Slide Time: 30:15)

In Europe, there have been some estimates of the kind of form different kinds of there are again
there are different technologies for conversion. The first generation, second generation and with
genetic engineering we are looking at different kinds of conversion routes. In all of this we have
to look at the overall sustainability in terms of energy as well as other issues in terms of land and
water. But this is some of the things which is there.

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(Refer Slide Time: 30:44)

And this is an aggregate supply curve with municipal solid waste, animal waste, crop residues.
So, if we combine all of this you can see the this is a image which is there from the global energy
assessment which talks about electricity, heat and primary energy and talks about the exajoules
available, we can clearly see that in the case of renewables we are not constraint by the potential,
there is significant amount of potential, this may be distributed we have to see how and where we
can do it in terms of cost effecting methods.

When you analyze any particular location, we can find out what are the local resources in terms
of renewables whether it is solar or wind and then identify for the demand how much you can

324
require, we can then look at the cost effectiveness of such things. Now one of the key things
when we talk of renewables situation and when we are looking at large scale renewables is that
we have to match the supply and the demand.

And matching the supply and the demand means that we will look at solar the solar supply is
starting from let us say 6 o clock or 7 o clock in the morning and going up to 5 or 6 in the
evening. When you are demand is in the night and we are looking at the commercial load and the
lighting load coming in from 6 in the evening till about 10 or 11 in the night where we will have
a high demand we need to then slower the energy which is coming in from solar and then use
that energy in the night.

This involve an additional cost and the total amount of storage that we have installed for the
energy sector is not even 1 percent of the total energy that we supply and this is also there are
many different storage options and this is of course another topic.

(Refer Slide Time: 32:47)

But when we look at you can look at the economics of different kinds of storage, it could be
large scale storage it could be distributed storage and when we talk in terms of storage large
scale storage it is mostly we are looking at you know today the most cost-effective large-scale
storage is the pumped hydro.

325
Where we look at hydro having a low reservoir and a high reservoir and you pump the energy
from the low reservoir to the high reservoir even that today, at today’s price is that cost you
another 5 rupees per kilo watt hour. So, this is going to be an issue when we talk in terms of high
renewables. The matching of supply and demand we try to see so far in the electricity grid we
were looking at thermal and hydro scheduling.

Now when you have renewables we have thermal, hydro, solar, wind scheduling mostly today in
order to encourage renewables when we supply renewables we consider them as must run that
means when the PV generates we try to use it, when the wind generates we try to use it, this will
result as we saw in some cases in the backing down of thermal power. So, when we look at a
future demand and we have high renewables.

What we do is we take that future demand subtract from it the renewable share and then see the
net energy which has to be met by the fossil and this leads to what is known as that California
duck curve, so we have to see whether or not the supply system is able to meet that and this
involves, so at a system level when we talk of high renewable energy penetration we have to plan
our systems differently.

(Refer Slide Time: 34:37)

In the GEA, as well as in the special report on renewables, there are some supply curves given
for renewables and you can look at this in a little bit more detail. So, to sum up we have looked
at today we have looked at the different methods of assessing renewable energy resources, we

326
saw these resources are distributed and depending on the type of resource we would map the
distribution of the supply, we would also see how it would vary over the day and the season.

Whether it is wind, whether it is solar or it is the tidal OTEC or the biomass we have seen
different ways to estimate and look at the potential. Today these renewables are relatively small
but they are going to be an increasing part of our energy mix and when we look at a particular
application we need to estimate what is the technical potential and the economic potential and
then design our systems for that. With this we will close our chapter on renewables, we will also
now look at what is the situation in terms of materials that we need for the renewable sector.

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 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 08
Materials for Energy

We have already looked at energy resources and we saw that we have stocks, fossil fuels and we
have flows renewable energy. We saw that there is sufficient renewable energy to meet our
requirement. Now the question is we have sufficient renewable energy to meet our requirement
but each of these renewable energy sources needs technologies, those technologies materials, do
we have enough materials to meet the energy requirements or will be end up in problem related
to materials.

(Refer Slide Time: 00:56)

So, the question that we would, the issues that we would like to address, one is will we ran out of
materials? Can we create a closed loop materials system? Which renewable energy materials will
be constrained and what will be the impact? You are not going to completely answer all these
questions but we will look at the way in which we can analyze this and what are the typical types
of material and how they are looking at it.

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(Refer Slide Time: 01:31)

So, if we look at the materials, we find that of the significant amount of our CO 2 emissions are
accounted for by some of the most energy intensive and carbon intensive materials. If you look
at materials we are looking at steel, we look at cement, we look at aluminium, paper, plastic and
these accounts for the largest chunk of the carbon emissions its about 10 Giga tons of CO 2 out of
the total 28 Giga tons of CO2 in a particular area I think it is 2008. And this is from the paper by
Allwood you can look at this paper for more details.

(Refer Slide Time: 02:17)

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So, if we look at the periodic table which I am sure all of you are familiar with you have studied
it at some point of time either in your school or our college and you can see that there are several
of these materials including some of these rare earth and some of now these materials which are
being becoming important for batteries, for storage, for photovoltaic you have this whole set of
material which are coming in for the photovoltaic, for the lead acid batteries, cadmium telluride
then you have the other chromium, nickel, cobalt.

Then you have lithium, then you have these materials which are used for hydrogen storage and
many of these materials involve our located in some regions and in a few countries and they also
involve significant amount of energy used in their extraction. So, when we look at materials, we
can think in terms of material efficiency and this is from the paper by Allwood, We can try and
design so that we use less materials. So, we can this is called dematerialization.

(Refer Slide Time: 03:39)

You know look at your cellphone or look at your motor see how much steel and how much metal
is going into it, see if you can have the same functionality using less metal, we can also replace
the substitute, energy intensive materials by less energy intensive materials. Materials that are
less carbon intensity, so this that is we can do dematerialization, we can do light weighting and
now with nanotechnology we have the advantage that we can actually have design a material
which have the properties that we require.

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For instance, it is being told that if you look at Eiffel tower and you look at the weight of the
Eiffel tower today if you have designer steel which nano-composites and engineer steel you can
actually we could reduce the quantity of steel that is require with the same strength and we can
get a much more light weight Eiffel tower using less materials.

(Refer Slide Time: 04:55)

In general when we look at the production of a material we can look at the production going to
the and you have the at each stage of the production there would be some scrap we can recycle
that scrap that when we look at the demand and then the after the post demand when it is used it
can be recycled then some part of it, so we can try to see if we can have this entire thing as entire
loop as a loop which is closed and we use relatively less amount of virgin material and we can
try and recycle at each of these stages.

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(Refer Slide Time: 05:40)

If we look at the global materials used you will see that energy intensive materials account for
about 50% of the industrial energy used, cement steel, paper, chemical, fertilizers and also the
interesting thing is that most of these now these materials are being consumed by the developing
countries, there are much higher growth rates in the developing countries.

(Refer Slide Time: 6:10)

We have if we look at any of these materials we can plot. If you look at let us say steel used per
person and we look at the status of the country in terms of GDP per capita or GDP per person.
You find that this increases with income to a point where it stabilizes and then may be declined,

332
this is something like the, this is called the KUZNETS curve, so most of the developing countries
are at this stage where there is this growth, developed countries have already gone where you
have already produced all the steel you have of your infrastructure is already created. You have
the number of cars and the kind of things which is there and then the number of it starts declining
and so that is the kind of I will just show you some of these trends.

(Refer Slide Time: 07:24)

So, if you look at steel we see different countries North America, Europe, you can see China and
Indian over here and you can see that this is corresponding to something like we go to a
stagnation level which is of the order of about 450 kg / person /year. So, it is an apparent
consumption as a function of income high growth rates for developing countries and it goes to
saturation, there is an implication on the global energy used.

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(Refer Slide Time: 07:54)

Similar thing you can see for instance for cement, you can look at the kind of different levels at
which you have these developing countries, which are growing in these cases it is more or less
saturating of course it is saturating at different kind of levels.

(Refer Slide Time: 08:11)

And this is sort of global demand normalize you can see that there is an overall growth.

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(Refer Slide Time: 08:18)

Ashby has come up with this scientist in UK whose created this kind of design plots and this
these design plots are extremely interesting in terms of when you look at a particular
characteristic for instance you look at the Young’s modulus energy per meter cube and if that is
the requirement which is for a particular application and we are choosing between the metals,
polymers, ceramics and you have the embodied energy, which is the total energy required to
create that material and to extract it and to make it available from nature per cubic meter.

So, based on this we can use with this we can decide between different materials and see what is
the implication when we are making a particular choice in terms of what is the amount of energy
that is being used. So, this could be used and we can have similar kinds of lots giving the carbon
intensity of these.

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(Refer Slide Time: 09:33)

This is another plot which is will be talking about the strength and the strength in terms and the
embodied energy. So, these are interesting design age which can be used for us to choose less
energy intensive materials and less carbon intensive materials for a particular application.

(Refer Slide Time: 09:48)

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And so, you know the we will when we talk about embodied energy and we do the lifecycle we
will look at this is little more in detail but one can look at different types of elements and see
what kind of energy is embodied and what kind of efficiency is there.

So in general what has happened is that one expects that with materials as the demand increases
and if the in most of the material we are looking at a finite stocks, so these are the stocks but then
there are possibilities of substitutes and with technology improvement it is possible that we can
have less use of the material but in general what one expects is that materials will, we will run
out of materials and so there was this debate and you can see this there is a very interesting bet
which was there in literature.

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(Refer Slide Time: 10:58)

And you can see in science in 19, there is a general article published by Professor Julian Simon
in 1980 and he basically felt that planets resources are not finite, there has been ecologists and
environmentalists were saying that we need to look at material getting over we need to look at
resources and he said that planets resources are actually not finite,

(Refer Slide Time: 11:36)

On the other side of the bet were Malthusians, Paul Ehrlich, John Harte and John Holdren and
they have been saying that the we have one world, one earth and finite resources and we need to
conserve and use our resources efficiently.

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(Refer Slide Time: 11:49)

So, Simon challenge through an open challenge saying that if the scarcity is due to population
growth and the prices of all natural resources grain, oil, timber, metal should rise at any future
date and he said that he is willing to bet anyone because he believes that technology and human
innovations is such that there is no scarcity cause by human efforts and he said that he was
willing to bet anyone that prices would decline at any future date. And he made an offer that any
natural resources can be picked at any future date. So, when this challenge was issued Paul
Ehrlich and John Harte and John Holdren took up the challenge.

(Refer Slide Time: 12:56)

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Ehrlich, John Holdren, John Harte accepted the challenge in October 1980 and the choose the
following materials. Chrome, copper, nickel, tin and tungsten and they bet a token amount of 200
dollars each at 1980 prices on these 5, so total of a 1000 $ and the idea was that in 1980 at 1000
$ they bought a certain amount of this and idea was the future date of 1990 was picked and it was
said that whether these would the value would be more than 1000 $ or less than 1000 $?

If this was more than 1000 $ then Simon lost the bet and Simon has to pay that difference to
them, if the prices actually declined if it is less than 1000 $ they have lost the bet and they have
to pay Simon. So, what did you think happened? In this particular case actually Ehrlich, John
Holdren and John Harte actually lost the bet.

(Refer Slide Time: 14:05)

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And you can see this, these are the commodities which were mentioned, the you can see that this
was the in the 1980 and even you can look at 1990 you find that actually the prices went down.

(Refer Slide Time: 14:26)

So, essentially what happened is that you can see that this is what happened in 1980, this is the
situation in 1990 and so with result that they this of course this did not prove it conclusively
because this goes through ups and downs and there was an economists article recently which said
that just so happened that he was unlucky to choose the years if it had been some other years
then this would bet the kind of situation.

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But the fact remains that overall there are 2 trains which are there, one is that there is a problem
in terms of scarcity but also with technological innovation and volumes the cost reduction are
there, so over a long time period we have seen very significant reductions in cost of materials.

(Refer Slide Time: 15:23)

So, you can see for instance if you look at copper, real price of copper has been going down and
so it is not clear there is any issue of scarcity but there is also innovation and possibility of
technological improvements and so when we talk in terms of materials we have to be aware of
scarcities in the short term.

But it is not completely apparent that this will necessarily result in extremely high prices, there
could be back stop technologies another option which are available. So, for all these materials we
can use the same static R by P ratio or we can use something like the Hubbert’s curve if you
want to estimate time periods.

In many of these cases, these are all this price trends. In many of the cases, if you see we can
actually look at what kind of where is the distribution of this materials, so sometimes regionally
some countries have for instance if you look at lithium it is only available in a few countries of
the world.

342
(Refer Slide Time: 16:32)

So, the control of this materials and this could involve getting an advantage and then they are
taken industry and development may be affected by it. So, we need to look at substitutes, so with
this we have seen we have got a quick introduction of the kind of materials that are used for the
energy sector.

We looked at over with development that material used per capita will increase and then saturate
and may be then decline and then there could be possibilities in terms of substitution by more
energy efficient and low carbon materials and then we can look at it is not essential that scarcity
of materials always results in increase of price, historical trend show that there is also scope for
innovation and technology improvements where prices may actually decline with time.

With this we end the portion on materials for those who are interested there are more details in
some of these papers you can look at the GEA, you can look at the papers by Allwood and about
the bet you can look at John Tierney original article in New York Times which gives you about
the Betting on the Planet.

In the next session we will start with looking at the historical way of the mine mangers problem,
if you own a mine how much of that mine should you allow to be used every year and we will
cast this as an optimization problem and see how a resource, a coal or oil or gas how it should be
mined and distributed over future generations, thank you.

343
 Energy Resources, Economics and Environment
Professor. Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 09
Non-Renewable Resources Economics- Part 1

We have already looked at fossil fuels and renewable resources. Today in today’s module we are
going to start looking at resource economics. So, we will start with some of the earliest studies
and the earliest research which was done on non-renewable or fossil resource economics.

(Refer Slide Time: 00:47)

So, we start with way back in the 1930s Herald Hotelling, was an economist who was concerned
about resources, published a paper and we will upload the original paper for you to look at. But
in the introduction of the paper he talks about contemplation of the worlds disappearing supplies
of minerals, forests and other exhaustible assets has let to demands for regulation of their
exploitation.

And the feeling that these products are now too cheap for the good of human future generations
that they have been selfishly exploited at too rapid a rate and that in consequence of their
excessive cheapness they are being produced and consumed wastefully has given rise to the
conservation movements.

344
So this was the initiation of his study, remember this is 1930s an era where we were thinking that
we have abundant fossil fuels, abundant material and the idea is to try and use them at a fast
pace, so that the world develops and the economy is developed and this was the first paper which
talked about a fundamental theory to look at how much should be produce in a particular year
given the fact that the overall resources are finite and that is also called in literature as the mine
mangers problems, so we will start with his analysis and then we will built on that and see how
to work that.

(Refer Slide Time: 02:22)

So, this is the paper which was published in the economics of, this is the paper title was
Economics of Exhaustible Resources, it was published in 1931.

345
(Refer Slide Time: 02:38)

∏t ¿ Pt q t −C q t

Pt =MARKET PRICE OF RESOURCE

q t =OUTPUT OF RESOURCE∈PERIOD

C= MARGINAL COST OF RESOURCE ( ASSUMED CONSTANT )

And it starts with the idea that we have a function in the Tth year the profit that a mine manger
has is Pt where Pt is the market price of the resource, let us say coal or oil market price of the
resource per unit of course and qt is the production or the output of that resource in the Tth year,
output of resource in the Tth year, in period t.

So, this will be Pt into Qt minus, minus the cost that means there is a marginal cost of the
resource for extraction of the resource there is an amount that we have to pay to extract the
resource marginal cost of the resource, which in our simplest model we will assume that to be
constant, assumed to be constant. So, from the Pt qt which is the revenue we subtract minus C
into qt, this is the profit in the Tth year.

Now for a mine, the decisions that we have to take are how much should we produce in each of
the years and then you are going to have a production till the time when the entire resource gets
utilized and that is where it gets exhausted.

346
(Refer Slide Time: 05:01)

So if we look at this we are looking at the mine owner having a fixed stock of homogeneous
resource let us call that Q max and that is the total amount of coal or oil whatever we have in the
mind and we are saying that the fix cost of extraction which is C, so we are trying to get the
discounted value of the profits, so we want to maximize T equal to 0 to T we want to maximize
the profit and this profit remember just we discuss in the economics portion when we looked at a
project. Each year we will have a profit so you will have like profit Pie 1, Pie 2 and so on till the
resource gets utilized.

So each one will be the different values which you have will be defined as Pie t divided by, so
will take the discounted sum of this, so we will take this as, we are maximizing this, subject to
the constraint t is equal to 0 to t qt is equal to Q max. Naturally this constraint in the when you
get the maximum profit the entire resource will be utilized, so the decision is we have a total
amount of resource we want to decide how much should be mine each year till the resource gets
over.

And in each year based on this we are getting a certain amount of profit that is discount, that is
summed up and we get the net present value of all the profits that is what we want to maximize.
So, this is a classic optimization problem where we can see the time horizon T is exogenously
determine we have to find out what is that time horizon T. we can form the Lagrange and then
differentiate it to get the optimum.

347
(Refer Slide Time: 07:38)
T
πt
∑
t=0 (1+d)
t

T
MAX ∑ ¿ ¿ ¿
t=0

∑ q t =Q MAX
t=0

So, the problem which is being defines is simply sigma t is equal to t Pie t by 1 plus d raise to t, d
is the discount rate and in Hoteling’s original formulation he talked about this as the interest rate
but we now know that when we are looking at this it is the discount rate that we should really be
talking about. So, this Pie t we can write this down in this form t is equal to 1, 0 to t Pt qt minus
C qt 1 plus d raise to t, subject to sigma t is equal to 0 to T qt is equal to Q max.

This is an equality constraint and we are maximizing an objective function subject to an equality
constraint we can use the method Lagrange multipliers, we can create the Lagrangian and then
differentiate it with respect to the variables.

348
(Refer Slide Time: 09:11)

So, the Lagrange that we will get will be, Lagrange will be sigma t is equal to 0 to t, Pt qt minus
C qt by 1 plus d raise to t, this is your original objective function, plus lambda there is only one
constraint lambda. You associate a Lagrange multiplier with respect to the constraint and we take
that constraint as Q max minus sigma qt this is the Lagrangian that we have constructed.

Remember this is the objective function, this is the constraint which we have multiplied by the
Lagrange multiplier and added it to the modified objective function. Now we can differentiate
this with respect to the variables.

What are the decision variables, what are the variables that we have? The variables are qt that
means q1, q2, q3 and so on till it gets depleted, so this we can differentiate till Lagrangian by del
q and this will come to Pt minus C and then when you differentiate this Q max is constant, this
will have a term minus lambda is equal to 0. We have equations so we will have this as the
equations that we have you will have the dell by dell qt we can essentially, we will have this as t
is equal to 0, 1, 2 and so on to t. So, if you look at this what will be, there is the lambda will be Pt
minus C by 1 plus d raise to t that is the Lagrange multiplier and this is constant across the time
intervals.

349
(Refer Slide Time: 11:59)
P1 −C P t −C
λ = P 0−C = = .... .
(1+d) (1+d )2

Pt =C +λ (1+d )t

Rt +1− R t ∆ Rt
= =d
Rt Rt

R t =P t – C

So, if we write this down we will find that P0 minus C by 1 plus d raise to 0 which is 1 is equal
to P1 minus C by 1 plus d equal to P t minus C by 1 plus d square and so on. So, if you look at
this, this is essentially what we get is Pt is constant plus lambda into 1 plus d raise to t.

So, the price is equal to the marginal cost of extraction plus a user cost which increases with the
time. So, if we look at what is this difference between Pt minus C which is profit that we are
getting if we take return Rt plus 1 minus Rt by Rt we will get this as per unit profit that we are
getting or return is increasing has to increase year by year, the revenue in time t, this is Rt is Pt
minus C.

Revenue per unit in time t has to increase on a year to year basis at the discount rates, so that is
what we have shown. That would mean that in general what will happen is that the price if the c

350
is constant price will increase with time and the rate of increase would be at the rate of the
discount rate.

(Refer Slide Time: 14:15)

So, if you look at it in terms of a graph, what we will get is, you will get that, if this is the
marginal cost which is C which is constant and we start with price and time till the time when we
will actually, T when it becomes so costly that qt becomes equal to 0. Now this can be put in the
form of what is known as a demand curve but before we see the demands curve we will look at
what the result which Hotelling put in his paper.

351
(Refer Slide Time: 15:06)

And the result shows that the market price of a resource net the extraction cost must rise at a rate
equal to the rate of interest and this is what was there in his paper but we know subsequently that
when we are looking at this we are basically talking of the market price of a resource, net its
extraction cost will be rising at the discount rate and that is when we talk of an exhaustible
resource we will try to get the optimum strategy is to see that the price minus the extraction cost
divided by 1 plus d raise to t is constant across different time intervals and that gives us basically
an optimal extraction strategy. Now, let us move forward and look at what we understand as a
demand curve.

(Refer Slide Time: 16:10)

352
So, typically what happens is for any commodity when we look at price and quantity, typically
what happens is that as the price of quantity increases the quantity demand decreases, so you, we
have something like this which is, this is a something called a demand curve, this is a linear
demand curve and typically what we will do is we will say quantity is a function of the price that
is typically what we expect, this is a sort of linear correlation. Now, one of the things when we
want to understand in economics when we talk in terms of the demand we define something
called the elasticity.

(Refer Slide Time: 17:15)

Price Elasticity

d qt

||
q
ɳ= t
d pt
pt

And it is called the price you would have studied this in your basic economics, we talk about
elasticity and we will talk in terms of a price elasticity of demand and that typically is that if we
say that suppose the price of a commodity or a good increase by 1 percent what happens, what is
the percentage of demand for a unit percentage change in the price?

353
So, the way we define this is we define an elasticity which will be the delta dqt by qt divided by
dPt by Pt, so this is in general what will happen is as the price increases the quantity demanded
will be decreasing, so this could, this would generally be a negative term. Of course, in the
elasticity we may take the elasticity and we may take the absolute value of the elasticity, so this
is what we can define as an elasticity of price.

And of course, remember that as prices increase in the short term depending upon the kind of
good and service sometimes if prices increase for instance the prices of onions in seasons
sometimes increase very drastically. Sometimes you can substitute onions by something else at
some point in some cases for instance if you are looking at using a certain amount of electricity
and the price increases, in the short run you may still require that electricity and you have no
option but to pay that price.

So, then the demand may be considered you might have a relatively a demand where there is it is
in elastic, so even if the price increases it may not change much. On the other hand you might
have possible substitute and you might be able to instead of electricity you may be able to use
some other source of energy.

So then there would be an elasticity, so there in all these cases we have, we define two terms.
One is the short-term elasticity and then there is a long term elasticity. Normally long-term
elasticity is higher because you can actually putting investments so that you can have different
kinds of substitutes and there are different studies by which we estimate these long terms and
short-term elasticity.

(Refer Slide Time: 20:09)

q t =f (p t )

Inverse Demand Curve

Pt =a−b qt a>0

b>0

d qt Pt
ɳt=
| |d pt qt

354
 d pt
=−b
d qt

a−b q t −a
¿ = +1
−b qt b qt

So, we will take the demand curve that we have and then define this in term of an inverse. So, we
said demand curve is where you have qt as a function of Pt, we will talk about an inverse demand
curve and here will say Pt is a minus bqt, so if you look at the figure here you will see that this
corresponds and we are saying a greater than 0, b greater than 0 then you have a straight line
where you as there is a certain point at which at a particular Pt where the Pt goes very high then
the qt is equal to 0 and so on.

So, this is the kind of inverse demand curve, let us now calculate for this what is the elasticity of
this demand curve, we want to calculate what is delta t dqt by dpt and to pt by qt, so if you see
this, this is going to be, dpt by dqt is equal to minus b and so the elasticity is we look at dpt by
dqt, pt by minus dqt and pt is a minus bqt minus pqt. So, you will see that essentially the, at
different points the elasticity will change at different points on this curve. So, you look at this
and you will see that this is minus a by b qt plus 1, 1 minus a by bqt and so this is the kind of
calculation that you can do.

355
(Refer Slide Time: 23:10)

You will see that in these kinds of curve what will happen is that you will be able to calculate
and you will have the values will be different at different points, it is not a constant elasticity
curve. There is we can also look at an equation where we talk of a different kind of curve where
you have a constant elasticity curve and then in the constant elasticity curve you will see that we
can look at this, this is the kind of curve which we will have.

356
(Refer Slide Time: 23:52)

In this case, Pt we can write down an expression for Pt which is a by qt raise to b this is another
inverse demand curve where essentially. So, at t tends to infinity the qt tends to 0. So, in general
this is a constant and we look at, let us look at the calculating the elasticity of this curve, so if we
look at the Pt by dqt this is going to be a minus b qt raise to minus b minus 1 and if we look at
the elasticity which we had, if we look at the elasticity this is going to be now we are going to
calculate this as Pt by qt into dpt by dqt which is we have a minus b qt raise to minus b minus 1.

And if we see this this becomes qt raise to minus 1 plus 1, 0. So, this qt raise to minus b and Pt is
nothing but a by qt raise to b, so this is minus ab qt raise to minus b, this cancels and so you get
minus 1 by b. If it is the modulus value then this is 1 by b. So, if you see this a and b are
constants so this curve essentially represents a constant elasticity case.

357
 Energy Resources, Economics and Environment
Professor. Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 09
Non-Renewable Resources Economics- Part 2

So we have in the last module we have just seen the basics of Hotelling’s model in which we saw
the wide mangers problems reduces to a situation where we essentially keep the profit in
different intervals divided by the discount, the discounted profit in different years should be
constant and we also saw that when we talk in terms of the demand curve, we can look at
different kinds of elasticity.

And we will now take the result that we had got where we said that the price of the commodity
net the extraction cost, should increase at the discount rate for different time horizons, we will
take that and derive for a given demand curve which is known, we would like to see how long
will the resource last.

So, will consider a situation where there is a competitive mining industry which has a known
facing will first start with taking a linear inverse demand curve and then we will take constant
elasticity demand curve and we will derive how much is the time for which a given resource will
last in a mine. So, that is the problem that we are looking at and as we saw this is a kind of
inverse demand curve that we are focusing on, we would like to see first of all we start with a
competitive mining industry which is facing a linear inverse demand curve.

358
(Refer Slide Time: 02:05)

Let us say that when Pt is a minus bqt, so at that is given as the demand curve. Now at the time
when qt will be equal to 0, we talked about, so we were looking at a situation when we will have
the qt will be equal to 0 at some time interval.

And this is at a time where essentially we will have the price when qt is equal to 0, the price Pt
let us take linear when qt is equal to 0, Pt turns out to be a, so let us call this time interval as t
when the entire this is where we talk of Pt and qt at the time when the qt is equal to 0 that pt
becomes equal to a, this is a and this is at a time when over a period of time when the resource
has got completely utilized it is like we have something like there is a super abundant substitute.

So that no one continues to use this let us say coal, you have something which is much bet
preferred and then this is and then there are no additional resources. Now the question for us is to
determine this t, what is the date of exhaustion t and we would like to determine it using the fact
that the, it is a competitive economy and the mine manger is trying to maximize the profit.

So we have, we know that the optimal strategy is where Pt will be P0 into 1 plus d raise to t, for
this please remember that we have taken a constant extraction cost and we have subtracted, so
we can take essentially we are taking P0 minus C, we are neglecting the extraction cost or we
taking that the extraction cost is constant. So having said this, if this is the equation that we have
got we can now substitute and get Pt is a, is equal to P0 1 plus d raise to t.

359
(Refer Slide Time: 05:29)

If that is the case then from this equation we can substitute and we will get P0, a is known P0 is 1
a divided by 1 plus d raise to t. We can substitute back in that equation, so that we get Pt and any
time interval will be P0 into 1 plus d raise to t and substitute P0, so we get a into 1 plus d raise to
capital T, capital T is a constant which we do not know which we want to find out and this is at
any time interval t is equal to 1, 2, 3, 4 etc.

So, then this can be written as a 1 plus d raise to t minus capital T, this is now our expression for
Pt, we also know from the equation that Pt is a minus b qt this was our original inverse demand
curve, so now we can equate these two and what do we get? We will get that bqt is equal to bqt

360
will be equal to a into a minus, that’s the what we equate this, that mean b qt is equal to a 1
minus 1 plus d raise t minus T that means qt we have now got an expression for qt.

Generic expression for qt in terms of known coefficients a, b and d only unknown is capital T,
now what we can do is that we will take that the total sum t equal to 0 to T minus 1, why do we
say T minus 1? Because q capital T is equal to 0, so production is there from the 0th year to T
minus 1 here, qt this will be equal to the total reserve which is R0, or in the earlier case what we
has said q max and this is we can write the sigma notation t is equal to 0 to T minus 1 a by b into
1 minus 1 plus d raise to t minus T.

Now look at this we have got one equation we know R0, we know a, we know b, we know d the
only unknown that we have is capital T, we have a sigma notation, this is a geometric
progression, we can derive an expression for capital T in terms of these coefficients a, b and R0.
In which case we have completely solved the problem we found the time for which the resource
will lasts when it gets exhausted and we can substitute back and then we can get essentially qt as
a function of time or Pt as a function of time and was our objectives. So, let us just do the simple
calculations which are the, so when we look at this we get.

(Refer Slide Time: 10:00)

361
We open out the bracket and you will get a by b into sigma t is equal to 0 to t minus 1 there are t
terms, so this will be a by b into t minus a by b into sigma t is equal to 0 to t minus 1, 1 plus d
raise to t minus t. Now this is geometric progression let us just write this down in a separate way,
let us write this as S is equal to sigma t is equal to 0 to T minus 1, 1 plus d raise to t minus T.

Let us expand it, let us write it down, this is going to be the t is equal to 0 this will become 1 plus
d raise to minus t, so that is capital T and then it will be 1 plus d raise to t minus 1 and it gets the
denominator changes till you get 1 plus t. There are t terms and you can see that it goes 1 plus d
raise to T, 1 plus d raise to T minus 1, T minus 2 and so on till 1 plus T. So if you take this as one
equation which is S, I can just take S by 1 plus d, this will be 1 plus d raise to T plus 1 to and
then we can take 1 minus 2.

We can just do 1 minus 2 and if you do this you will find that we get S minus S by 1 plus d and if
you see in this case what remains is that we are going to have the all of these terms will get
cancel you will get 1 by 1 plus d over here minus 1 by 1 plus d raise to d plus 1 these are the 2
terms which will be remaining. So this is going to be 1 by 1 plus d minus 1 by 1 plus d raise to t
plus 1.

So, we can take this as with simple algebra, this take 1 by 1plus d common this is actually just
you could have just used the geometry progression formula but we just in one step we just derive
it and this turns out to be Sd by 1 plus d equal to 1 by 1 plus d now 1 plus d not equal to 0, so we
can cancel this and we get S is equal to 1 by d into 1 minus 1 by 1 plus d raise to t.

362
(Refer Slide Time: 14:28)

So, we can substitute back in the equation that we had earlier which was R0 is equal to a by b
capital T minus a by b into S and S is we just derived the S as 1 by d into 1 minus 1 plus d raise
to T. So, now we can simplify this, we can take b on b by, a by b is common here, I can take it on
the other side, so that I get b R0 by a as T minus 1 by d into 1 minus 1 plus d raise to T.

Now you want to actually solve for t so we can just write this now as T is equal to take the terms
on the other side, we have now solved for capital T which is what we wanted to do, we wanted to
find the date of exhaustion which is unknown, we do this in terms of the coefficients a, b, R0 and
d, a, b, R0 and d are known please remember this is a an equation where you have T on both
sides, so you can do it in an iterative fashion, you can start by assuming a certain value of T get
the next value and then so on till we get a converge value.

And so with the result that we right now we can now determine T and we will do a tutorial
example where we will plug in the values and then see how this can be done. So, once we do this
then we know the T, once we know T we now know the price trajectory as well as we know the
qt, so we know Pt as a function of T and we know Qt as a function of T.

(Refer Slide Time: 17:05)

363
And if you just see for a linear model typically for a, this is a example from Conrad book on
resource economics and we will also solve particular example with some values, so that we can
make our own calculations. This is a linear inverse demand curve and corresponding to this you
see that the price starts from a certain value and the price as a function of time increases at the
discount rate.

(Refer Slide Time: 17:35)

364
And when we look at the qt versus time we will see that the qt starts from some value and it
decreases till about the 20th year where it becomes equal to 0, so this is a example to show you
how the whole mine model problem is done for a competitive market. Now what happens if
instead of the linear inverse demand curve we had a different demand curve which is we had the
constant elasticity demand curve.

365
(Refer Slide Time: 18:08)

Let us derive for that. Pt is equal to a by qt raise to b, so in this case what would happen is you
would see that typically if we have this curve, you will find that the qt would not become 0 and
qt would tend to 0 only as it goes to infinity.

So, what we can do is we have the same term which we saw in the earlier Hotelling’s analysis
where we said pt will be 1 plus d raise to T P0, so in this case we do not have a choke price or a
price which where we find that, that will be equal to a in this earlier case where qt is equal to 0,
Pt was equal to a, we just have this expression and we can use this expression and substitute back
and we will get qt, we can write in this Pt is a by qt raise to b.

366
So, qt raise to b is going to be a by 1 plus d raise to T P0 and what we need to do is we need to
find out, so qt if I write this can be written as a by 1 plus d raise to t P0 raise to 1 by b, so what
we know is this is an expression that we have now for qt we know a, b, and d we do not know
P0.

(Refer Slide Time: 20:33)

And in order to find P0 we can use the, fact that sigma t is equal to 0 to infinity qt will be equal
to R0 or sigma t is equal to 0 to infinity, we plugin this value, our problem what we want to do is
we want to determine this value of P0.

In the earlier case we had the value of P0, so we want to find P0 in terms of the known
coefficients a, b and R0 and d and now when you look at this you will see that this is basically
again this is a geometric progression when we look at this sigma if we take this out you will see
that this is we can take a by P0 raise to 1 by b and you get sigma t is equal to 0 to infinity.

367
(Refer Slide Time: 22:32)

So, this is actually a geometric progression were we have this is of the form you know if we have
a geometric progression and we are multiplying the constant factor the multiplicant that we are
doing is 1 plus d raise t by b, so 1 plus 1 by 1 plus d raise to 1 by b and as the limit as we are
looking at term where this is of course going to be less than 1 in the limit as we take it to infinity
we take this sum to infinity, this is going to be equal to the initial term divide by 1 minus r.

So, this sum is going to be equal to so the what we get is that expression that we got a by P0 raise
to 1 by b into 1 by 1 minus r and the r is nothing but 1 plus d raise to 1 by b and this term will be
equal to r0 you can convince yourself that this is true. So, what this would mean is that we can
take this as a by P0 raise to 1 by b and we can take this as, we can multiply by 1 plus d raise to 1
by b so that you get 1 plus d raise to 1 by b 1 plus d raise to 1 by b minus 1 equal to R0.

So, we can now simplify and write this in terms of the basically we can get we want to, what is
our objective, we know d, we know b, we know a, we need to know P0. So, if you look at this
and you want to take this as a by P0 we want to find P0, P0 by a raise to 1 by b is what we have
here and this will be equal to 1 plus d raise to 1 by b raise to R0 into this is going to come in a0
will come in here and this will come there. So, you get R0 1 plus d raise to 1 by b minus R0.

368
(Refer Slide Time: 26:09)

So, when we simplify this will get an expression which is going to be nothing but P0 a into 1
plus d raise to b, so once we know P0 we know that Pt is P0 1 plus d raise to t we know what it is
Pt and we if you remember we have already calculated what was qt, qt was, so we can calculate
at any point of time qt. Now, what about the time of exhaustion, capital T? In this particular case
since there is a constant elasticity it will go asymptotically to 0, it will never become equal to 0.

So we can just take the point where a certain amount 90 percent of the resource is used or 80
percent but it will never get completely used because the price is going to keep increasing but
you will always use a certain amount of it and this is the constant elasticity case.

So, let us just take stock what we have done is we have solve the mine managers problem and we
first started with Hotelling’s original paper and we said that when we talk about a non-renewable
resource we want and if the we are looking at a mine manager whose is trying to maximize the
profit.

Given the constraint in terms of the known total resource which is there in the mine we want to
decide how much to mine at different points of time and based on that we saw that the quantity
which will be mined will be such that the price will increase at the rate of the discount rate and of
course this is assuming a constant extraction cost we can have more complicated models where if
the extraction cost are also function of time and one can have various additional complications.

369
But the principle by which we will do the calculation will be exactly the same and with that we
found that there will be a point at which the price increases to the point where there is a super
abundant substitute and the mine gets completely exhausted and that was the choke point we
used that and then said that suppose we know we have a perfect competition case and we know
what is the demand curve and we know the inverse demand curve we show that for a linear
inverse demand curve we can calculate what is the time for which the resource the mine would
last and this is under perfect competition

In the second case, we said that suppose we have another situation where there is a constant
elasticity demand curve, mean the constant elasticity demand curve we never get to a choke point
but the quantity keeps decreasing and beyond the particular point this will go asymptotically to
the price will keep increasing and the quantity goes asymptotically to 0 and in such a case we
identified all the parameters so that we could get qt as a function of time and we got Pt also as a
function of time, so this is the constant elasticity price trend.

(Refer Slide Time: 30:31)

And constant elasticity qt trend you can see that beyond a point after certain point of time it goes
asymptotically it is not exactly 0 but its keep getting going down.

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(Refer Slide Time: 30:43)

And this is we had derived this where we are looking at the competitive extraction and price
path, there is no choke point but we get the price.

(Refer Slide Time: 30:53)

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And this is how we say that we can derive this and as t tends to infinity qt tends to 0, Pt tends to
infinity and assuming an exhaustion we got this and we got the expression for the P0.

So, with this we have now derived all the expressions for the price trajectory and the quantity
trajectory for perfect competition. Now the question is what if there is a monopoly? What if the
mine manager controls all the mines? And the mine manager can then, will the strategy remain
the same or will it be different? We will look at this in the next module.

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 Energy Resources, Economics and Environment
Professor. Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 09
Non-Renewable Resources Economics- Part 3

We continue looking at Non-renewable Resource Economics and in the previous module we

have looked at a situation where there is perfect competition and we found out what is the
optimal strategy for the mine manager. We found out what is the price trajectory, we found out
how much quantity would be taken in different years and the time for which the resource will
lasts.

In this condition what happens is the demand or the inverse demand curve is given and any
company or an owner of a mine has no way of influencing that demand. Let us now look at the
question what happens if all the mines are controlled by one company or one individual? That
means what happens if there is a monopoly? And of course as you would expect the rules would
be changed because then the monopolists can actually influence the total quantity which is being
release and because the total quantity being released is being influence the price would change.

And so the monopolists has a way to dictate a price and can then decide so in this case the
optimization changes, the monopolist tries to maximize the revenue and this in a similar fashion
like the analysis we have done in the last section where we said that the cost are constant and we
can take the price minus the cost or we can neglect the cost.

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(Refer Slide Time: 02:03)

So the revenue that we will have Rt will be Pt into qt, now in actual practice we have seen this
case of a monopolist effecting the prices, in some cases it may be one individual which is a
monopoly or it could be a cartel of producers, for instance Opaque is a cartel of oil producing
and exporting countries and in the 1970s Opaque decided that it was going to control the quantity
the oil that it is going to release.

And with the result you could see a sudden spurt in the oil prices, this is called the oil shock and
that is the point at which all countries started looking at energy independence, looking at energy
efficiency and this was the start of the whole movement to look at energy conservation and
energy efficiency.

So, we would like to now look at from a monopolist point of view if you have the revenue and
we want to maximize the discounted sum of the revenue Rt by 1 plus d raise to t, t is equal to 0 to
T. So, it is very similar to the earlier situation that we had, only thing is that in the case of Rt the
monopolist is able to influence the quantity that is being released overall and hence is also able
to influence the price and this will be subject to the constrain that sigma qt t is equal to 0 to T is
equal to the total reserve we had which is R0.

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(Refer Slide Time: 04:10)

So when we take this we can take the Lagrange which is the very similar to the last analysis that
we did but R0 minus sigma t is equal to 0 to T qt and this Lagrange divided by the differentiated
with respect to del qt set this equal to 0, what we get is we will get the, we are differentiating the
total revenue that we have with respect to qt.

So, what we will get is the marginal revenue, we can differentiate this and we will get delta Rt by
del qt 1 plus d raise to t minus lambda is equal to 0. So, essentially what we get is delta Rt by del
qt is also known as the marginal revenue, that means the revenue per unit of q and the what we
would get then is that the lambda value is going to be equal to marginal revenue divided by 1
plus d raise to t. So, this is that in each time interval just like we had in the earlier case we had
the price increasing at the discount rate.

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(Refer Slide Time: 06:17)

Now we are having the marginal revenue. Marginal revenue 1 by 1 plus d and so on marginal
revenue t by 1 plus t raise to t. Now let us take a situation where we have linear inverse demand
curve, so we have Pt is a minus b qt so then Rt becomes a qt minus b qt square, so del Rt by del
qt is a minus 2 bqt. So, once we plug this in the value of lambda which we get is a minus 2 b qt
by 1 plus d raise to t.

(Refer Slide Time: 07:35)

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And we said that MRt increase, so M R marginal revenue in time horizon t will be equal to
marginal revenue 0 first year into 1 plus d raise to t. Now let us consider the linear inverse
demand curve and take the situation when the resource is completely exhausted. When the
resource is completely exhausted at that point Qt capital T will be equal to 0. At this point what
will be happening will be the marginal revenue which we have must equal to the price per unit
that will be equal to the price and that is when the monopolist will not want to produce any more
the marginal revenue will be equal to the price then that is equal to we said a minus b qt.

So this is going to be equal to a, so a is going to be equal to MR0 1 plus d raise to t and then we
can substitute this in this expression, so that we get MR t is equal to this is capital T. When it
gets exhausted capital T this is going to be a by 1 plus d raise to capital T multiplied by 1 plus d,
so this is marginal revenue is going to be 1 plus d raise to t minus T.

(Refer Slide Time: 09:26)

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And we have already derived that the marginal revenue for the linear inverse demand curve case
is a minus 2 bqt, so we can put this as a minus we can equate these 2 terms bqt is a 1 plus d raise
to t minus T. We can now get from this we can put this as 2 bqt is equal to a into 1 minus, looks
very similar to the competition case but with a difference, we have now this is qt is a by 2b into 1
minus 1 plus d raise to t minus t.

If you remember you can look back at the earlier derivation that we had done. In the case of the,
this is for the monopoly and for perfect competition for a competitive market we got qt is equal
to a by b. So, if you look at this of course in the case of the monopoly the capital the value of
exhaustion the number of years T would be different but in general what you would find this that
the monopolist would, in a particular year release less amount of q so that the price increases and
the overall revenue increases with the result that as we would expect the resource is going to
lasts for a longer period under a monopolist case.

(Refer Slide Time: 11:46)

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So, if we look at this we would expect qualitatively a curve like this where you have qt and t this
is for if this is the shape of our competition, competitive market then the monopolist would be
this is how the monopoly would look like. So, you can look at the book by Conrad on non-
renewable resource, on resource economics and there is a chapter on renewable resource
economics which shows some of this.

If we then take this the same thing you can see the this is the actual this is for a this is a plot
which his shown from Conrad which shows similar kind of trend for a particular example.

(Refer Slide Time: 12:56)

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So now what we would like to do is we would like to look at this take that expression and just
like we did for the competition case we would like to derive how much time the resource is
going to last for.

(Refer Slide Time: 13:09)

So in a similar fashion we take t is equal to 0 to T minus 1, remember that in the last year q
capital T is equal to 0 so that will not be added q t will be equal to 0 to T minus 1 a by 2 b into 1
minus 1 plus d raise to, and if we use this in the same fashion as we did derive for the

380
competition case this becomes a geometric progression and finally we get an expression which is
we get 2 bR0 this sum will be equal to R0.

So, 2 b R0 by a is T minus 1 by d 1 minus 1 plus d raise to t and the final expression that we get
is t is equal to 2 bR0 by a plus 1 by d 1 minus 1 plus d raise to T. This is for the time for a
monopoly and you would remember that we have a similar expression when we had the
competition and only difference was that in this case, this was b R0 by a and so what you would
find is that the time taken would increase and now the question is of course thus that mean that a
monopoly is better from a resource point of view?

From a resource point of view the monopolists conserves the resource because the monopolists is
looking at the overall maximization of revenue but in the process given the discount rate that is
there the population and the consumers are exposed to much higher prices and because of that
the overall utility of society is less under a monopolist case even though the resources gets
conserved for a longer time.

So now let us do one thing let us take the same whatever we have learnt for competition and for
monopoly let us now solve one particular example a numerical which is there in your tutorial
sheet.

(Refer Slide Time: 16:26)

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I will just show you this number and this is the tutorial sheet. This shows that we have a tutorial
problem the inverse demand function for a fossil fuel is given to you as Pt is equal to 1 minus 0.1
qt which means that a is equal to 1, b is equal to 0.1 and we have also the value of discount rate
R0 is given to you as 75, R0 is 75 and d is 5 percent which is nothing but 0.05.

So, the first part of the question is, what is the price of elasticity of demand for this function and
qt is equal to 5 units, so when qt is equal to 5, let us just substitute qt is equal to 5, so what is the
value of Pt? Just 1 minus 0.1 into 5 this is 0.5, so the answer is 0.5. So, the differentiate this del
Pt by del qt this is minus 1, so if we look at the elasticity that is going to be del qt by del Pt into
Pt by qt.

Which is this is del qt by del Pt this is 1 by minus 0.1 Pt we said is 0.5 and qt is 5. So, you will
find that the elasticity is minus 1 which implies that if we have a 1 percent increase in the price
there will be a 1 percent decrease in the quantity and that is the elasticity, so we have solve the

382
first part of the question. The second part b says determine the time value of extraction for a
mining industry under pure competition.

(Refer Slide Time: 19:10)

So, when we talk about solving this for pure competition we will have this as, we have Pt will be
for pure competition this will be Pt into 1 plus d raise to t, so 1 point d is 0.05, 1.05 t. Now t is
equal to T, qt is equal to 0 and Pt is equal to a which is 1. So, 1 is equal to P0 1.05 raise to T we
can substitute for P0, so that we get Pt is equal to 1.05 raise to t minus T.

So, you remember the formula that we had derived for the time that this will last, we want to this
is the only unknown is capital T we need to determine capital T then we can plug it back and we
can get the equations for Pt and qt in which case we would determine the time path of extraction.
So, once we do this we check b R0 by a plus 1 by d into 1 minus 1 plus d raise to T. Just
substitute the values this is going to be 0.1 into 75 by 1 plus 1 by 0.05 into 1 minus 1 by 1.05
raise to T.

(Refer Slide Time: 20:56)

383
So, if we simplify this we will get T is equal to 7.5 plus 20 into 1 minus 1 by 1.05 raise to T.
Now when we look at this we will this is as we said this is an equation where we have to
iteratively solve for T. So, let us assume a certain value of T, let us say suppose T is equal to 10
years we can substitute T and get T is equal to 7.5 plus 20 into 1 minus 1 by 1.05 raise to 10.

You can plug in this values and you will see you get T comes out to be 15.2. Now we take 15.2
as a starting point and solve t get the next value of T then you get T is equal to 18.0 and then the
next iteration we get 19.2 you can solve this and check 19.7, 19.8 and it converges to about 19
point, you get T approximately 19.94. We can round this off to about 20 years. So, we solve this
part C when does the resource get exhausted.

The resource get exhausted in at 20 years and then what happens is that if we now substitute
back we get the Pt which we had already solve we got this as Pt is equal to 1.05 into t divide by
1.05 raise to 20 and if you see this value of 1.05 raise to 20 turns out to, so you can get this so we
got an expression for Pt, we also now can substitute this and get the expression for qt and with
that we will get essentially the value of qt in different years.

384
Now let us look at for the same situation the part d, would the time path of extraction, so once we
have this we can plot it for different years and we have got the plot of Pt versus time and q t
versus time. Now the question is would the time path of extraction for a monopolistic mining
industry be different.

So, if you look at this as we have seen earlier what happens in a monopoly is that you are able to
effect the quantity supplied and hence the price and because of that you release less then it
perfect competition it is better for you to have less quantity mine and with the result that we
expected to last longer.

(Refer Slide Time: 24:12)

If we take this, if you remember we had derived now for the monopolists that this is going to be
2 b R0 by a plus 1 by d 1 minus 1 plus d raise to T more or less things the equation looks very
similar expect instead of 7.5 this is now 15. So, once we do this we will get obviously a different
converge solution.

So if we start with T is equal to 10, you will get T is equal to 15 plus 20 into 1 minus 1.05 raise
to 10 and you get the next value becomes T is equal to 22.7 and as we go ahead you will find that

385
it converges to about 30.5 years. So t approximately 31 years in the first case we found T is 20
years and in this case it is 31 years.

So, qualitatively we realize that essentially the monopolists wants to maximize revenue and
because of that we produce less from the mine in the initial years as compared to the competition
case and with the result that overall the revenue increases. Now the question is that what happens
we also saw repeat this with d is equal to 10 percent if the discount rate is higher what would
happen? If the discount rate is higher it means that we are counting future cash flows and
discounting it by a larger amount.

So, we would prefer to have a profit or a revenue today as compare to in the future with the
result that what would happen is that we would actually mine qt at the initial period would be
higher and then the mine would get exhausted in a shorter time period. You can repeat this on
your own and cross check.

So, with this we have completed the portion on non-renewable resource economics we have of
course done this with simplistic set of assumption, you can relax all of these assumptions you
could have a situation where the cost of extraction change, you could have situation where there
are different kinds of demand inverse demand curve and but this gives us a way in which from
first principles we can identify how an optimal mine manager would think and what is the way in
which the resources would be used subject to the fact that of course the total amount of resources
are finite.

386
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 10
Preferences and Utility

We have looked at the resources. We have also looked at a model by which we can
identify how the non-renewable resources would get utilized. We have just finished the
Hotelling model. We now switch tracks, we are going to now move into Environmental
Economics and we are going to look at how do we tradeoff between energy, development
and environment. Before we do this, we need to understand some basics of demand and
we will talk about preferences and utility. So, we will introduce some simple concepts
where we talk about preferences and utility.

(Refer Slide Time: 01:05)

Now, in general, in life we are always encountering choices and we have in these choices
we always have preferences. So, when we talk in terms of economics, we would like to
quantify these preferences. So, we would like to rank the preferences between bundles of
goods and services so, to simplify things, we will look at two goods, x and y and we are
talking of goods but it could be goods and bads, that means it could be pollution, it could
be garbage, but in general let us look at if we are talking of two goods x and y, how do
we choose between those goods and then we want to understand consumer choices and
preferences.

This is a whole field in itself but we are just going to look at the basics of it and use it and
quantify it and then use it to see how we can make tradeoffs between different choices.
So, we look at it start with first looking at individual choices, and then we will come to
when we aggregate these individual choices into a societal choice.

So for simplicity, let us look at two goods x and y, these goods could be wine and cheese,
that is the examples which is taken in the book by Kolstad on Environmental Economics,
pizzas and movies you will see if you look at different kinds of lectures which are
available, people are talking about pizzas and movies and sometimes when you have a

387
fixed amount of money, which you want to spend and you want to enjoy a movie or you
want to you want to see the movies or you want to have pizza or do you want to do both,
and we look at that.

And in a similar fashion, we take these two goods as things that we can relate to, but we
can translate that finally to resources, energy use and environment. In the case of
preference relation, we have some properties.

(Refer Slide Time: 03:19)

The first property is that there is completeness that means each individual knows his or
her preference between a different set of goods. At most one can say that, we are
indifferent, these two are equivalent, otherwise I prefer this to that or I prefer the other
one and so on. So, it is not that we to be left ambiguous that is in terms of completeness
of the choices. Then the second is that there is a transitivity we have, that means the
preferences are rational.

(Refer Slide Time: 03:54)

For instance, we create a suppose we say that you prefer, suppose I prefer apples to
oranges. So, this symbol which says apple is preferred to orange and suppose orange is
preferred to bananas. If the preference is rational then it will be transitive, that means if A
is preferred to B and B is preferred to C then A is preferred to C which means that apple
would be preferred to banana.

So, this is the second part we talked about completeness we talked about transitivity. The
third assumption for preference relation, the property is non-satiation and this is not
always correct assumption in real cases, but for the economic calculation, we say that
more is better. That means, if you have, if you watch two movies it is preferred to
watching one movie.

If you are having two pizza better than one pizza and so on. So, that the idea is that it is
monotonicity, there is no satiation in actual practice, you know that after a point you stop,
you do not have any hunger and you would not want to. So, there would be satiation but
for all the in the economic utilities context, we talk of non-satiation.

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(Refer Slide Time: 05:46)

So, in the preference relations which we have, now we have the following possibilities.
We had this sign where we talked about x preferred to y, this is a strict preference that
means x is always preferred to y and the weak preference is where x is preferred to or
equivalent to y this is a weak preference and x this is an indifference relations which
means that the consumer feels x and y are equivalent and this is called indifference.

(Refer Slide Time: 06:33)

So, with this we would like to introduce this concept of, we talked about transitivity and
non-satiation, we would like to look at these preferences.

(Refer Slide Time: 06:41)

So for instance, if we look at the, if you are talking of 3 points, in the case of A you have
1 movie and 2 pizzas, here we have 2 movies and 1 pizza and C is where you have 2
movies and 2 pizzas. As per the non-satiation C would be preferred to B and C would be
preferred to A.

Between A and B, we have to then decide it will depend on the individual. And suppose,
both are equivalent for the individual, then we can say that A and B we are indifferent to
this, we can join a set of all points where which are equivalent to us and that is called the
indifference curve. Of course, here we are talking of discrete values, but in general we
can look at a continuous kind of curve.

(Refer Slide Time: 07:48)

And this is the indifference curve is a set of consumption bundles that the consumer think
are equally good. She or he are indifferent to the consumption bundles that means if you
have consumption bundle X indifferent to Y, this set of these points is provided by an
indifference curve and this X could have a whole set of different goods and Y could have
another set of different goods.

Of course, we are looking at initially just looking at to simplify things, we are looking at
two different goods and the combinations of that.

389
(Refer Slide Time: 08:34)

So, for instance in that example that we talked of in pizzas and movies, if you said that 2,
1 and 1, 2 are equivalent, then we have an indifference curve here and this with 2-2 is on
a different curve and the utility or the value that I get from this is higher than the value
that I get from this.

So, this is based on the fact that there is non-satiation, so, the utility is a mathematical
way to represent the value that the consumer assigns to a particular good or a bundle of
goods and services and this the indifferent curve represents a locus of constant utility.
And so, this is utility is equal to constant this is, and the utility increases in this direction
so, this is the basic way in which we represent consumer choices.

And let us look at some of the characteristics of these indifference curves. So, let us look
at this whether or not it is possible for two indifference curves to intersect, based on our
initial principles, if you said all the points on this indifference curve will have the same
amount of utility and all points on this indifference curve will have the same utility.

So, which means that if we take the point which is intersecting that is X and compare that
with Y these would have the same value of utility. On the other hand, if we compare that
with Z, Z will also have the same value of utility as X. But if you look at these two
points, Y based on non-satiation the value of utility at Y is greater than that at Z, which
means that we have violated this.

So, the indifference curves will not intersect, they will be, in general they will be parallel
to each other, they will would intersect. So, this is not possible.

(Refer Slide Time: 10:42)

The other thing is that, is it possible, let us look at this, it is not possible to have an
upward sloping indifference curve, again this goes based on the fact that we have the
non-satiation, also it is not possible to have a thick indifference curve.

390
(Refer Slide Time: 10:58)

So, the way in which we will have in general utility shape of the indifference curve
would be such that it would be convex, which means that instead of having a combination
of two goods and services will have higher utility than the individual amounts of goods
and services. So, this is the characteristic of convexity.

(Refer Slide Time: 11:25)

Let us now define what is utility? Utility is an economic term referring to the total
satisfaction received from consuming a good or service. In many cases we try to quantify
some of these things by money, but in general we are looking at it as an expression by
which we look at the satisfaction received from consuming a good or service.

So, if we, what is the utility that we have by consuming an apple or consuming an orange
and we said this is dependent on the preferences, this is dependent the individuals choice
and when we have this and we can quantify it, then we can look at two different
individuals, their choices and look at the utilities which are obtained. So, in general the
utility is a function of the amount of consumption, it is a mathematical representation of a
preference relation.

There are many different possible utility functions and in the tutorial will give you these
you can cross check, whether these are convex and whether they can represent the utility
functions. And you can see these are some of the functions which are there and which
have been used in literature, in mapping some of the utility.

(Refer Slide Time: 12:44)

What are the properties of the utility functions? So, the first one is independence, the
utility is dependent only on the choice between those goods. Completeness, we said that,
yes, it maps the entire range of choices. Transitivity, we saw the transitivity of the
preferences and now transitivity is therefore the utility function. Continuity and there is
an, it is an increasing function with the u dash x greater than 0.

The other point which is to be remembered is that in general, in principle we consider

them as ordinal not cardinal that means we rank our preferences, we say that an apple is

391
better than an orange or is preferred to an orange, but we do not say we will not like to
say then an apple is 50 percent more than orange so, we do not convert it into that kind of
thing. But in many cases, when you look at the kind of calculations is done this
assumption is often relax.

(Refer Slide Time: 14:01)

So with the result that you create something like a utility function we want to also now
calculate the change in utility per unit of additional goods. So, that means we can look at
what is del u by del x. And if you look at the change in utility per unit of additional good,
the question is should this increase, decrease or remain constant? Think about any context
and you can understand how this will change and there is this law of diminishing
marginal utility.

(Refer Slide Time: 14:36)

And that if you see, so for instance, there is this example which is given by Serrano and
Feldman, where we are looking at and there is a rich tourist who is stranded in a desert, it
is hypothetical context and there is a monopolist who has bottles of water and the tourist
has 100 units of money available with her and we see that, you are really thirsty so, for
the first bottle of water, you are willing to pay a significant amount, that means 25 units.

For the second bottle, you are willing to pay less for the third bottle even less and so on
till the point so, basically what happens is for every additional good that we have, we are
actually, the utility of that good diminishes. So, del u by del x actually decreases as it go,
as you go ahead and so this is the law of diminishing marginal utility.

And we can also then see that what happens if we talk about two goods and we have a
utility function of these goods.

(Refer Slide Time: 15:58)

We have this curve where we are shown x, or let us put this as y and x and you have U as
a function of x y, we have U as a function of x y, we want that we have a fixed amount of
resources. That means for x, there is a price of x and there is a price of y and there is a
final budget that we have.

392
So, we can say that we want to maximize the utility that we have, maximize U as a
function of x, y subject to the total amount that we are willing to spend on both these
goods. So you may have a budget on each of these, we can say that let us say Px into x,
Py into y less than or equal to B. So, we want to maximize U x,y subject to the budget,
the total expenditure on x and y should be less than the budget that we have.

(Refer Slide Time: 17:13)

If we take that then we can create again the Lagrangian, which will be U xy plus lambda
B minus Pxx. So, if we look at this we can differentiate this and what would we get? We
would get del U by del x minus lambda Px equal to 0 by del y, del U by del y lambda Py
is equal to 0. So, we can write this as lambda is equal to del U by del x by Px lambda is
also equal to del U by del y by Py.

If we equate this, what would we get? We get and you can see this essentially what you
will get is del U by del x by del U by del y is Px by Py.

(Refer Slide Time: 19:41)

And this is essentially giving us the marginal rate of substitution and the marginal rate of
substitution is the how much of x which we will marginal rate of substitution when we
look at if we move on the utility curve and we have a change where the utility remains
constant then this gets minus delta x2 by delta x1 and this will be marginal utility of 1 by
marginal utility of 2, this is going to be equal to del U by del x1, by del U by del x2.

(Refer Slide Time: 20:31)

So, this is the marginal rate of substitution, in the equation, in the utility curve that we
had we get x y, then we had the utility curve, what we found with respect to the budget
constraint is that you would have a line which is tangential to the utility curve, which is
maximized and with the slope which is the ratio of the prices and this will give us the
optimum point. And then with this now we can see that what happens if the prices
change, what happens with the utility changes.

393
And in the tutorials will take a few examples where we can look at this, you can look at.
Of course, in the case of indifference curve, we can we can also look at indifference
between environment and resources and this is what we will go to.

(Refer Slide Time: 21:25)

There are a number of different resources that you can use for this section. And you can
look at the any of these, there is a book by Kolstad there is some lecture notes in the open
coursework, in MIT and then the lecture notes in Serrano and Feldman. And this will
give you an idea of preferences and utility.

We will next look at when we want to take these preferences and we want to aggregate
these preferences and we want to look at societal choices and societal choices between
environment and energy and resources and economics and we will link this all up in the
next section. Before we do that, we are going to look at the philosophical basis by which
we make decisions.

So, we will take a look at the different kinds of ways in which we can take philosophical
decisions related to the environment, what are the kind of choices which are there, then
we will look at the Kenneth Arrows theory of social choice.

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 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 11
Utility and Social Choice- Part 1

So far we have talked about individual preferences and for an individual choice between
two goods, and then we represented it in terms of a preference and then an indifference
curve and then looked at utilities and looked at substitution. We are now extending this to
the real world. We want to look at, when you have a society of a number of individuals,
how does the society make choices and specifically we are interested in choices which
relate to environment and development.

So, you may want to look at, there is a good textbook by Kolstad, Charles Kolstad on
Environmental Economics, some of this material is based on that. So, we want to ask the
following questions in environmental policy, what is the right balance between
environmental protection and use? How much of environmental protection should we
have?

And this question is not an easy question to answer. It is a social and a political question.
We will see in concept, how do we aggregate and how do we translate the individual
preferences into something which results in a group or a societal choice.

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(Refer Slide Time: 01:44)

So, in order to do that, we will first start with some of the, let us look at some of the kind
of choices that we have. So, in Kolstads book, he talks about three examples of
environmental choices. The first example is from Chile, a city in Chile, Santiago.
Santiago is one of the busiest cities in Chile in Latin America, and it has a severe air
pollution problem.

And most a lot of this problem is happening based on diesel private vehicles, as well as
diesel buses. And there are many different possibilities, the buses are used by the poor
and they have relatively low prices, there are in Chile, like many of the developing
countries, it is a, there is a significant amount of inequality. So there are small proportion
of the population which is rich and the rich population is more concerned about the air
pollution than the poor, the poor are concerned over much more immediate concerns but
the health impact happens to everyone who stays in the city.

And so the question is, how much investment should the city do in terms of pollution
control, can it modernize its bus fleet, if it modernizes its bus fleet, the cost of public
transport and the fares may increase, it may not be affordable for many of the poor to
travel in the bus. And so this is one of the choices that is there. It is a very clear choice in
terms of air quality, environmental damage, and then the kind of value and the value
proposition and the price.

The second example, that Kolstad talks about is an endangered species. It is a small bird,
the California Gnatcatcher, which is located in one area of Southern California and this is
also an area, the area around it is a area, which is highly industrialized. There is a lot of
business and there is a possibility of using that space for development.

However, that is the habitat of the California Gnatcatcher and the question is that should
it be declared as a protected area with the result that of course, it will affect the local
community in terms of that area will not be available for building up and for
development. However, the species will be preserved and then the environmentalists as
well as the individuals who are interested in preserving the species, the ecosystem from
that point of view, that this would be beneficial.

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But the question is, who are the stakeholders in this case? Is it only the people who live in
that area, is it the people who visit, is it the people from the entire state of California?
And so there are questions in terms of who are the stakeholders, what kind of matrix,
what are the kind of tradeoffs?

The third example that Kolstad gives is the largest electricity dam project in the world. It
is a Three Gorges Dam in China, which is in the large scale, at the Giga watt scale. The
reservoir is 500 kilometers in length. It had a lot of opposition initially, but the Chinese
government went ahead and built it, there is a large, it is on the Yangtze River, there is a
large amount of land which has been damned. The benefits of this will go for the
electricity generation, as well as the development of the country.

In terms of losses, it means that the local population gets resettled and then there are
several other issues because of this large dam of water. And these kind of issues globally
are affecting almost all large hydro projects and in many countries, this has resulted in
severe delays and sometimes even cancellation of some of these projects. To take this
back to now, let us look at a few examples from India, the Narmada Valley project.

(Refer Slide Time: 06:34)

Now, if you look at the Narmada Valley project, and you will find that this is one of the
largest hydroelectric projects, both for electricity as well as for irrigation in the country, it
involved the whole set of different states. There are states downstream and upstream and
the benefits accrue to a set of farmers and a set of regions and the losses are occurring to
people who are in the project affected zone.

There was a very strong movement called the Narmada Bachao Andolan, and there was
several court cases, the heights of the dam were reduced and overall the project was
delayed significantly by several years which resulted in cost overruns. Now, depending
on the kind of literature that you see, you are either for the project or you are against the
project. And it almost seems like there two different stories.

But when you look at projects like this, this is where there is this choice of development
and environment. How do you assess, how do you decide to make a social choice and

397
what are the kind of ways in which you can do that. There is a project in Kerala, the
Pathrakadavu hydroelectric project and this was very near the Silent Valley. And this is
the habitat of the Lion tailed Macaque, which is a particular monkey, which is available
whose habitat is in that region.

And the opposition to this project was that this will affect their habitat and it would affect
the biodiversity. The project went through several iterations and was stalled and again, I
think it has been revived, it is not yet, we are not yet clear about what is the final status
on this. The third example that I give you, is an example that you will find very
interesting bit it is unique in its context.

So, one of the largest companies in the world Vedanta has been mining bauxite for when
you look at aluminum and you have aluminum refining and bauxite mining, they wanted
to extend this to the Niyamgiri hills in Orissa and the Niyamgiri hills was one of the few
habitats where there are tribals who actually, the protection of the hills and the habitat,
and the trees in those hills have a religious value to them.

And so there were several NGOs who are opposing it, locals and there was a standoff
between the project proponents and the project opposer. And this is where the courts got
involved and finally this was the one example in which it was decided by the ministry
and the courts that the residents, the villages who were affected in these hills, there would
be an election.

And the project was to be decided, there will be voting on whether the project would be a
yes or a no. And it would be done at each Gram Panchayat level. There were observers
coming in, this is widely reported and there are videos and newspaper reports, you can
read about it. The first time this was done for an environmental project and interestingly
each and every village rejected this proposal, and with the result that this bauxite mining
proposal was installed. So this was an interesting kind of example.

Iron ore mining in Goa has become a sort of political issue. The mines were closed and
then so because of environmental damage and land use and so, again this is again another
open kind of issue, the advantage any mine or any industry that you talk off will create

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jobs, will create development, but on the flip side is that it will have a impact on the land
use, it will have an impact on the environment and we have to make tradeoffs between
this.

In Mumbai there is a large coastal road project going all the way to South Mumbai and
again this is a heavy investment and this had been this again has had several opponents
and I believe that with the change in government, this may again be reviewed. The most
cities in India now are going in for expansion of public transport with metros and metros
of course are that way environmental friendly because they are reducing the local
emission, they are reducing the congestion as well as the CO2 emissions.

For the metros, whenever you have the metros, you will have to have locations where the
metros will be parked and that means there is sheds which will take a reasonable amount
of land area, in a city like Mumbai, you do not have large tracks of land which are still
not, which is still available, the metro shared is planned Aarey and Aarey colony is one of
the few green patches in the city.

And so there have been, there has been opposition to the metro shed in Aarey, there were
protests and there was this case, Supreme Court case. Some trees were chopped down and
this was an issue in the elections, and subsequently, this is again going to be reviewed
with the change of government. So, as you see, these are some of the examples which
illustrate to you that there are many different aspects when we look at many of these
projects.

There is always this tradeoff that we think in terms of when we look at development and
the environment. So, we will try and see how we analyze this, what are the kind of ways
in which we can look at the framework that we have talked of in terms of utility and look
at individual choices and comparing individual choices with this. Before we do this, we
need to understand what are the perspectives or the individual beliefs based on which we
are going to do the analysis. So you can read up about most of these projects. If you just
Google them you will get details.

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(Refer Slide Time: 14:03)

So, this is for instance, the Pathrakadavu Hydroelectric Project, some details that I get
from the public domain in terms of the review, if you see this, the 70 megawatt project
cost of about 420 crores, similarly, you can look at the technical details as well as the
environmental impact, most of these projects would have some environmental impact
assessment.

And then normally there is a process where they invite public comments and then, but
many times they get mired in some kind of a controversy, but we are trying to look at this
in terms of how do we compare and how do we choose.

(Refer Slide Time: 14:54)

So, we would like to look at the kind of different philosophical perspectives. So, we look
at essentially three perspectives, biocentrism and which basically focuses on the fact that
every living organism has an intrinsic value. Then there is a second perspective, which is
a sustainability perspective where we want to preserve the health of the ecosystem.

The third perspective is a human centric, or anthropocentrism. So, depending on your

value system, whether it is biocentric or sustainability or anthropocentrism, it will result
in different kinds of choices.

And of course, in general people will have a multiplicity and you will not be extreme on
any of these, but it is good to understand philosophically what are the differences
between these three perspectives, and then precautionary principle if you know that there
are likely to be problems you may want to just take the safe we out and try to see that we
can preserve the environment and yet have some development.

In the case of biocentrism, we will talk about intrinsic value and instrumental value and
they will define what is biocentrism.

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(Refer Slide Time: 16:22)

So in biocentrism we are saying that the biologic world is the center of the value system,
all living beings have intrinsic value, regardless of their instrumental value. So, what is
instrumental value? Instrumental value refers to the usefulness of an object or of an
individual or of a being. So, it is the instrumentalness is the usefulness that if it can serve
as an instrument for achieving some useful objective and that is what is an instrumental
value.

So, only those things which can serve some useful objective will be said to have an
instrumental value and in the case of biocentrism, we say that all living organisms have
an intrinsic value, irrespective of whether or not they have any use, irrespective of
whether or not they have any instrumental value. So, something can be totally useless and
still have intrinsic value.

Example, the smallpox virus so in a biocentric world, the smallpox virus has a value and
you would not want to destroy it however we consider that to be the smallpox virus is
useless and actually has a negative value and damages but we in the biocentric world we
think that, all life, all of life is important and we want to perceive, we want to preserve
life.

So, in a similar fashion if you have a biocentric view of the world, even if you have
someone who is a known murderer, you would not prescribe a death sentence because
you feel that life itself has a value. And even though that person has a negative value in
society, you would still continue to keep that person in prison, but you would not destroy
it because life itself has an intrinsic value.

And we would like to, so, this is one extreme, and this would mean that if you have a
biocentric viewpoint of the world, you would try to not only preserve individuals, but you
would also like to preserve all kinds of all the organisms. And so that is, one kind of
perspective, philosophical perspective one which one we have. The second perspective
that we talk about is the sustainability perspective.

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(Refer Slide Time: 19:14)

Sustainability perspective initially was proposed by Leopold, way back in 1949, talks of
the land ethic, the health of the ecosystem is of paramount importance. So, you want to
make sure that the land remains fertile, that the land remains beautiful and we would like
to keep it in that fashion. So, in the case of sustainability, we are looking at an
environmental policy being right, only if it preserves the integrity of an ecosystem and
wrong if it does not.

So, the question is, is this consistent with natural resource use for humans? It could be,
so, it depends on it provided the use does not degrade the environment. For instance,
fishing is acceptable but overfishing is not because if you overfish, the entire population
of fish in the rivers would vanish and that is not sustainable. The logging is acceptable,
cutting of trees, but provided the long term health of the forest is not affected or it is not
jeopardize.

And so this is consistent however, if you look at fishing, fishing will not be consistent
with the biocentric view of the world because the life, living fishes have their own value
and you will not be allowed to damage that. Sustainability term is commonly used but
often not precisely defined.

(Refer Slide Time: 21:03)

We often approach sustainability from the point of view of what is not sustainable. So, a
few decades back the Brundtland Commission define sustainability as development that
meets the needs of the present without compromising the ability of future generations to
meet their own needs. And this is of course, mostly a human centric definition but when
we are talking of the land ethic and the sustainability, we are looking at also the
sustainability of the overall ecosystem.

(Refer Slide Time: 21:32)

Robert Solow has defined sustainability as making sure that the next generation is as well
off as the present generation and ensuring that this continues for all time. What are the

402
two aspects of sustainability that are important? The first is the degree to which natural
capital can be viably replaced by human capital. So, we always started with having things
available in nature.

We have a number of different processes and natural cycles, the history of human
development have been where we have made our own ways of doing things and
mimicking nature. So, we replace natural capital by human capital, by technology, by
materials, by devices. And so this is to what percent to, you know to what extent can we
do this and we do this essentially to make our lives more comfortable.

The second part of sustainability is that we, the present generation has an obligation to
future generations and so we also looking at sustainability in terms of how do we fulfill
that obligation, so that future generations can enjoy at least the same quality of life that
we enjoy. So, the man made capital, when we talk of machines, building.

So for instance earlier we used to have day lighting and you can have ventilation but now
we create lights, artificial lights, we condition the air in the buildings, and then we imitate
nature and we are able to do that so, that we can control and we can increase our comfort.
So, manmade capital and most importantly now we are looking at knowledge and
information as being substitutes for natural capital, particularly natural resources.

There are limits to this of course and there are physical requirements which are not
necessarily going to be substitutable. So, the question is, are sustainability and
biocentrism consistent? In many cases, they are not so, for instance, hunting can be
acceptable from a sustainability viewpoint, it may be desirable to reduce the
overpopulation and there may be a limiting condition in which different ecosystems and
different species can coexist in a certain.

So it may be natural from an ecosystem and a sustainability viewpoint to have hunting

but it is not acceptable for biocentrics. So, we saw two different perspectives, the first one
was biocentrism, the second one was sustainability.

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(Refer Slide Time: 24:48)

Let us look at the third, the third perspective, which is anthropocentrism. So,
anthropocentrism is basically a human centric viewpoint and the thinking is that only
human beings matter and the environment is only there for one purpose, to provide
material gratification for humans, this is also an extreme kind of thing.

But if you see the way in which human civilization have been progressing, we behave as
if everything is there for us and we are doing, we can exploit it as long as it serves our
purpose. So, anthropocentrism only provides an instrumental value to the environment
that means the environment is important only so far as it is useful to us. So, if there is air
pollution which affects human health, then we should be concerned about it.

But if we are polluting the ecosystem and it does not affect humans, but it is affecting the
rest of these civilization then we are not concerned about it. So, this is an extremely
selfish and human centric viewpoint, which is often which is actually fairly reflects the
way in which development is occurring today. The other slight variant of this is
utilitarianism, where we talk about the wellbeing that people attained from the
environment and this could be materialistic, spiritual, instrumental or intrinsic.

So for instance, if the Californian Gnatcatcher if we talked about, which was talked about
as a example in Kolstad book is something which does not have an environmental, useful
value. And we are not very clear about its contribution to the ecosystem in terms of what
is the impact to the humans. But it may have a utilitarian value because several people
may be happy that we have this species and it has not become extinct.

People may come and visit and see the California Gnatcatcher even if you are not in that
locality, the very feeling that we have actually, the perception that it has been saved and it
is there is there is a forest may give you a good positive feeling and you may get a utility
of that and that is from a utilitarian perspective.

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 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 11
Utility and Social Choice- Part 2

So now, the question is, individuals have different belief systems and then based on those
belief systems they will have preferences and make choices. We now want to look at how
we aggregate and make social choices from different individual values. So, what are the
methods for making decisions about specific projects or regulations that have some
adverse environmental impact, based on the individual preferences. Please remember,
there are no restrictions on the individual preferences. Every individual can decide how
he or she will choose between all the different options.

(Refer Slide Time: 01:11)

So, let us put this in a set of different equations, let us say that there is N person society,
there are N people okay, n people and let us say that there are, you know we talked of
potatoes, onions, travel, air conditioning, a whole set of different goods, let assume a
composite material good x, that material good has x1, x2, xm, different goods, good
services okay, each individual is consuming all of this in addition to this.

So, there is an individual state of preferences, how many clothes, how much food, how
much entertainment, all of this comes in this and then in addition to this will be e, e is the
quality of the environment, this is remember this will actually have multiple attributes,
we can talk about the air quality, we can look at particulate matter, we can look at global
emissions in terms of CO2, we can talk about it in terms of the visibility.

So, it could be a the quality of water, the quality of the soil. Now, the idea is that this e,
the x was dependent on every individual, so every individual would have a range of
different values of x and would also have in the utility, some value for the environment,
the environment quality is going to be common for all the n individuals, right. So, when
we talk about the utility wellbeing of every individual.

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(Refer Slide Time: 03:21)

So there are two things, the composite good ‘x’, which has those m different components
and the environment e and so each individual has a utility which is a function of xi and e.
So, x1 e, x2 e and so on for each individual, there will be a utility function and then they
will be n such utility functions okay.

Now let us look at when we look at, is it possible to substitute x for e, can we? If we
consume more of x, if you are consuming more fossil fuels, there is going to be
emissions, and so on. So, pure biocentrist will say that we do not want to have anything
where any ecosystem or the species is getting, species biodiversity or any life is getting
spoiled.

So, there will be no substitution for x for e. And in the case of extreme anthropocentrism,
you would not want to give up anything in terms of your goods for the environment. So,
you do not want to substitute any e for x, these are both extreme conditions, but in actual
practice there will always be this trade off.

So, also remember, whenever we are talking of choices, we talked about the n individuals
and their choices. However, the future generation and the utility that they will enjoy, right
will also come into the utility function that means utility xi, e and the utility of future
generations, where uj is the utility of person, j in a future generation and this is of course,
makes it all that much more difficult.

And this is where now you have this whole situation where you have children coming up
and opposing the governments in terms of the inaction related to climate change, you
have Greta Thunberg telling world leaders that we need to think about the future and we
do not have the right to spoil the choices for the future.

So, these are tricky things, but to in concept we think of, when we take the decision
which is a long term decision, it is also the utility of future generations which is involved.

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(Refer Slide Time: 06:03)

So, we will now try to look at how do we choose between two bundles, there are two
bundles of goods, two options A x dash e dash, where x dash is x1 dash, x2 dash, each of
these x is x1 is for individuals one and it is the whole bundle of consumption goods that
one, that that individual consumes and that has we said, it is a array of m different goods
and services.

So similarly, so this is a composite good as we said, xn dash and e dash. This is one
option, the second option is x double dash, e double dash alright, so the question is
should we choose A or should we choose B? Should the society choose A or should the
society choose B and what conditions should we choose? And the question is how do we
generate a set of societal preferences over different bundles given individual preferences
over the same bundles.

So, each individual will have a preference x1 dash and e dash, individual one has x1 dash
e dash as compared to x1 double dash, e double dash, x2 dash e dash, x2 double dash, e
double dash and here we are we will see under what conditions can we have a unanimous
choice, under what conditions how will we have tradeoffs and what are the ways in which
we can make these choices.

(Refer Slide Time: 08:21)

So, this problem was first solved in a sense by Wilfredo Pareto, Italian economist who
talked about the concept of Pareto optimality. And the idea was that we could get a
situation where you cannot have an improvement where everyone benefits and so that
become then you have the condition of Pareto optimality where there is no possible
change where everyone benefits and everyone will be agreeable to it.

So, we look at the Pareto criterion is what he defined. This has found applications in
many different fields and we will talk about it in the utility field.

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(Refer Slide Time: 09:02)

So, let us look at a situation, let us look at the graph, so what we have done here is we
have simplified it, we talked about n individuals in the society, now we are looking at two
individuals. So, we have A and B, and you have different combinations of in the case of
W look at each point, each point is a combination of resources which gives us A’s utility
and B’s utility.

There is a distribution of resources between A and B and this shaded region represents
the feasible region of all possible combinations. So, when we compare W which with Z,
you will find that A’s utility for Z is greater than A’s utility for W. So it is better off, A
better off followed with Z, in the case of B also B’s utility for Z is more, utility is more
than that of W.

So, what we say is both A and B are better off and this Z is said to be Pareto preferred
over W. Similarly, if you look at X and R, if you look at E and R, A’s utility in X and A’s
utility in R are both the same, so as far A is concerned X and R are identical, but for B
the utility for R is greater than the utility for X. So, for A is indifferent to this, but for B
this is better so, this is also R is Pareto prefer to X.

When we now compare X and S, you find that A utility in S more than A utility, A’s
utility S is more than A’s utility in X and Bs utility remains the same, again S is Pareto
preferred similarly, Y, but if we look at this curve, you will find that this represents from
this curve, there is no feasible solution of Pareto improvement. So, this curve represents
the locus of all the best points which are Pareto prefer, this is also called the Pareto
frontier. So, essentially we talk about Z being Pareto preferred to W and Y being Pareto
prefer to X.

(Refer Slide Time: 12:12)

So, in principle when we write this, we can talk about two consumption bundles, a dash
being x dash and e dash and a double dash is x double dash e dash and the group of
people i is equal to 1 to n with utility function defined over the consumption bundle.

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(Refer Slide Time: 12:29)

If for the group as a whole a dash is Pareto prefer to a double dash, that will mean that
every individuals for every i, Ui of a dash greater than equal to Ui a double dash and for
at least, at least one individual so, that means everyone is either better off or equal, it
could be that all are equal, a dash is equal to a, a dash is equal to a double dash utility, at
least for one individual the utility increases.

Then what we say is that a dash is Pareto preferred over a double dash, which means that
everybody is at least as well off in terms of the utility and at least one person is better off
with a dash then in a double dash, so the Pareto criteria will have unanimity, everyone
will opt for a dash, everyone will opt for a dash, because they are either equivalent or
they are better off.

So, this is the Pareto criterion and, of course, this is restrictive, it will be only in a very
small subset of cases where you can have this where everyone is better off or they are in
the equivalent situation and some are better off. So, for some it improves, no one gets
affected, no one loses off in terms of the utility. There are many other situations where
actually some lose and some gain and there is a modification which we try to do for
which is called the Potential Pareto improvement.

(Refer Slide Time: 15:05)

So, for instance in the case of X and if you look at X and R and we are moving from X to,
if you look at the benefit that we are getting in terms of moving from X to Z, we are
getting a benefit B’s utility increases very significantly, A’s utility decreases so, the
question is the amount of increase that B has if B compensates A to account for the loss
in utility that A has.

So that is compensated and based on that, this is equivalent at least equivalent for A then
we can have a situation where A also okay with the new option and since B gets so much
improvement in utility, they can transfer something back to A. So, that this is happening
and this is the principle which is used for dams, when we talk about resettlement, we try
to give compensation for to the people who are affected and with the result that the net

409
benefits outweigh the costs. And this is the whole concept of the potential Pareto
improvement.

(Refer Slide Time: 16:48)

So, in this what we do is we allow transfer of resources amongst the individuals to

increase the unanimity of opinion regarding the option, so for instance, suppose 80
percent of the population prefer an option A to B, while 20 percent prefer B to A and
according to the Pareto Criterion, we cannot say whether A or B is preferred.

But suppose the 80 percent can transfer significant resources to B and suppose the
resources transfer is large enough so, that unanimously can be reached an option A. So,
there is a compensation where B can agree that okay, we will go ahead and everyone
agrees to do that.

(Refer Slide Time: 17:25)

So, in order to do this, what we say is that in addition to x and e, we also have another
resource y and this y could be something which is tradable, for instance money. So, that
we are looking at a certain amount of y and we have transfers in y which are Zi that
means, for instance, in the example that we had where A has a certain amount of money
yA and B has an initial amount of money yB we transfers.

Since, A is getting, if you look at this graph, you remember sorry, B is getting most of the
benefits. Let us look at this point when we look at B is getting most of the benefits, so
what we do is B transfers money to A, so this will be Z. So, this becomes yA plus Z and
this becomes yB minus Z. So, with the result that because now the initial thing was xA, e,
yA now, it becomes xB, e.

The utility with this additional resource can be such that it is equal to the more than or
equal to this. So, you transfer that much resource, so that these become equivalent and
with the result that the utility of B is also increasing, even though it is transferring a
certain amount of money, because it is getting so much additional benefit. So, if it is
possible to do this such that the sigma of Zi is going to be equal to 0.

410
That means, there is no money or no additional resource coming from outside the system
this resource is balanced within the system it is traded so that we compensate those
whose utility is decreasing. And the individuals whose utility is increasing compensates
this overall if you can do that, so that the utility of those who in the earlier case were not
for the project, because their utility was decreasing.

Now their utility is remaining constant and it becomes after compensation, it becomes a
Pareto preferred choice. So, then, that is the situation that we can look at. So, we look at
the condition where we are comparing a dash y minus z is Pareto prefer to a double dash.

(Refer Slide Time: 20:40)

We compare a dash y minus z to a double dash y and if a dash y minus z is Pareto

preferred then we say that this is a potential Pareto improvement. So, this increases the
options that we have and we compare two bundles as we said vector of transfers so that a
dash y minus z is Pareto prefer to a double dash y then a dash is a potential Pareto
improvement over y.

So, this is clear that we can compensate and in the compensation at the result of that,
finally, every individual utility either increases or remains constant. Some of the
individuals who had the utility increase more they transfer some resources, their utility,
their part of that increase in utility shared with those who are losing out with the result
that now there is unanimity. So, this is called the Potential Pareto improvement.

Now, the third situation is called the Kaldor Hicks Compensation Principle and this is a
little controversial. This talks about the fact that if transfers could be made to achieve
unanimity, that means if we can have a choice where we transfer from the gainers, some
tradable resource to the losers, so that the losers utility remains constant with the result
that there is a net gain and every single individual is okay with the project.

If that can be conceptually done, and it works, then the choice is socially desirable, even
if the transfers are not equal actually meet. But this is highly controversial because in
actual practice, when you look at individuals and societies, there is already a significant

411
amount of inequality and what is mentioned here is that if the project is such that it is
possible to make these transfers then societally this project results in better utilities.

And the idea of equity compensation, links with the idea of equity is decoupled from
determining whether the choice is a good idea or not, the choice is a good idea or not, if
the hypothetically transfers could be made, and this would be then Pareto preferred even
though the transfers are not made, so, this is a fine sort of argument, but in actual
practice, this is what really happens in many cases.

We identify based on cost benefit, saying that compensation, even after compensation the
profit, the project is profitable, but then we do not do the compensation. So, then there is
this kind of issue and this is what often you know, this is the problem with the kind of
economic, sometimes the economic calculations.

(Refer Slide Time: 24:23)

Then another mode of choice is voting and voting means that every individual is asked to
vote on the project and this rule does not need unanimity. So, it is more flexible than the
Pareto condition but the majority rule cannot take into account intensity of preferences.
So, often majorities may decide some things which may not necessarily be correct in
terms of principles of natural justice. And so, now the next thing that we will look at is
we will try to create some kind of a social indifference curve.

(Refer Slide Time: 25:01)

We will look at the utility that we have for so, we would like to compare the society with
a welfare function.

(Refer Slide Time: 25:10)

Welfare function means there are n individuals. Each individual has its own utility u1, u2
to un, when we compare two different sets of preferences, where we look at two bundles,
and a and b and we would try to see, we put a welfare function where we calculate the
value of the utility for all the n individuals for a and the value of this utility for all the n
individuals in b.

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And if we say in comparing this, that this utility is greater than the you utility for b, then
a is socially preferred to b, where W is called the Bergson Samuelson social welfare
function. There are different ways of creating this social welfare function and there are
many different function values.

(Refer Slide Time: 26:13)

If you look at the Benthamite social welfare function, this is just a weighted average. So,
we basically say, un we call this as theta 1 u1 plus theta 2 u2 plus and so on theta n un
where theta i greater than or equal to 0, they are all positive. And we sum this up so, this
is some weighted average, some weighted values, and we can decide what are these
weights depending on this of course an Egalitarian function could be where we have
equal weights.

(Refer Slide Time: 27:24)

We can also try to see that we want to minimize the deviation from the, so you have this
Egalitarian function which you can see here is the sum of ui minus ui minus minimum ui,
so that the deviation from the minimum is we try to see that, we try to reduce the gap
between the average value and the minimum value and this can be an Egalitarian social
welfare function.

(Refer Slide Time: 27:49)

John Rawls who was a philosopher and a thinker, said that utility function should be
where we are maximizing the minimum utility of any individual so, the poorest
individuals utility should be first maximize okay. So, with this we have, let us just take
stock of what we have done, we have looked at this choices between environment and
development.

We have looked at the philosophical basis and the perspectives, we looked at a few
problems, few problem context and then we talked about the Pareto preference, the
Pareto something being Pareto preferred and something where we can have a transfer and
we can then use this with the transfer we can get a Pareto preferred option.

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Then we looked at the Hicks Kaldur compensation principle. So these are three methods
of choices Pareto prefer, Pareto compensation and then the Hicks Kaldur compensation
principle. We then also looked at voting, after doing that, we then said that let us look at
all the utilities and create a social welfare function where we get the welfare of the
overall society.

Please remember, in actual practice these are all conceptual constructs by which we
understand how we are making the tradeoffs. And it is difficult to construct some of these
utility functions, but conceptually this is useful to us to understand what kind of tradeoffs
and possibilities are there.

You may want to look at from your locality or your state or the context that you are
familiar with, try to identify problems where we talk about energy and development and
the environmental impacts, look at the kind of tradeoffs which are there, look at what
kind of who are the stakeholders and how would you identify what are the kind of
utilities.

And also think in terms of the value that we talked of e. How do we characterize and put
one quantitative value to talk about the quality of the environment, that is a difficult task
often, we are going to look at there is in the next module, we will look at the concept of
Arrows theorem where he talked about the impossibility of social choice. We will talk
about that and then we will move forward to define public goods and private goods.

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 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 11
Utility and Social Choice- Part 3

We have been looking at the issues related to utility, comparing utility and preferences
across individuals and in general, the idea of going from utility for individuals to group
choices or social choices. And we looked at different possibilities of having social
welfare functions and we carry on with this to try and look at the question that is starting
with the knowledge of individual preferences over a whole set of different outcomes.

Is there a general way of aggregating this into a social preference or an ideal way in
which we can get a social preferences that is reasonable. And this is the problem that has
exercised several economists and thinkers and one of the persons who did some
pioneering work in this was Professor Kennett Arrow.

(Refer Slide Time: 01:27)

And Professor Kenneth Arrow got the Nobel Prize in economics in 1972 and the noble
citation basically says for his pioneering contribution to generally Economic Equilibrium
Theory and Welfare Theory and the paper, one of the papers that enabled him to get this
prize was the paper that he had written in 1950 called A Difficulty in the Concept of
Social Welfare and so the theorem that he proposed is called Arrows impossibility
theorem.

And it is a very powerful result that he showed and basically what he started off is he
started off with a set of axioms if you want to make a choice, and if you want to look at
individuals, their choices and can these be used to have us way in which we can have an
ideal social choice and the interesting thing that he has showed and he proved was that it
is impossible to have a social choice which meets all the requirements of an ideal choice
mechanism.

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Unless you want to individually compare utilities, utilities between different individuals
if they are to be compared and quantified. If you just want to do it in terms of ordering,
then it is not possible to have a social choice mechanism, which is ideal and this is
extremely powerful result and for those who are interested you can go into the original
paper and read it, we will just talk about a few points which come from it.

(Refer Slide Time: 03:18)

So, his conclusion was that interpersonal comparison of utilities has no meaning and that
there is no meaning relevant to welfare comparisons in the measurability of individual
utility.

(Refer Slide Time: 03:34)

So, basically he said that if you have a social choice mechanism, that mechanism and
ideal social choice mechanism should have the following characteristics and the six
characteristics. Completeness, unanimity, non-dictatorship, transitivity independence of
irrelevant alternatives and universality and so if you look at what these mean.

(Refer Slide Time: 04:01)

In the case of completeness, it means that all social alternatives can be compared and that
essentially means that all the alternatives, when we are looking at, all possibilities can be
compared. So, all the entire set of choices is possible unanimity means that if everyone
prefers a particular option, if all the individuals prefer A to B, society will prefer A to B
and this is sort of an obvious statement.

Non-dictatorship means that it should not happen that one individual controls all social
decisions. So, that means no one should always get their way. And transitivity we talked
about this when we talked about preference, if A is preferred to B and B is preferred to C
implies that A it would be preferred to C.

(Refer Slide Time: 05:04)

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The fourth option that is there, fourth axiom is that the, there should be independence of
irrelevant alternatives. That means society’s choice between A and B does not depend on
the introduction of a third option and so it did does not depend on other alternatives.
Now, we can see very clearly that this need not always be true, you see this in the form of
elections, if there is an election between two candidates, and a third candidate comes in,
then there is choice between those two candidates often gets spoiled and it affects it so, in
reality, this does not happen.

To give you another example of this, let us say that three professionals, early working
professionals, they are sharing an accommodation.

(Refer Slide Time: 05:58)

So if you had this, you had in the Inder, Ram and Ashish all three of them say in a flat
and its been decided that we want to paint the flat. So, we have these preferences Inder
has a preference where he prefers painting black to white and yellow these are the three
choices we are looking at black, white, yellow.

In the case of Ram white is preferred to black prefer to yellow, Ashish prefers black to
white to yellow. So, in this particular case if you see it will be appropriate to paint both
two of them have black as the best preference and Ram has preference of black over
yellow, so from all these points it would be appropriate to paint the room black. Now
suppose we have a different choice where Rams choice is now replaced and Rams choice
now is white preferred to yellow preferred to black.

Now, if you look at it, what happens is two have a preference now, there are 2 blacks and
there are you know there are 2 whites, 2 blacks the decision gets quantified, change, but it
could be, we can look at black or white but if here now you have the option, you have a
statement which says that Ram essentially hates black. So, there is an intensity of a
preference where Ram does not want it to be black, in which case the choice which we
get is we will go for white.

But the fact that Ram has such an intensity of dislike for black is affecting the decision
between black and white for all of black, white and yellow for the choice. So, this is often

417
what happens is that you would have these kind of issues which are there in reality and
universality means that any possible individual ranking of alternatives is possible, that
means that whatever choice mechanism you should have. Supposed to have n set of
people, each one can have a whole set of different preferences.

(Refer Slide Time: 09:03)

And so, Arrows impossibility theorem states that there is no rule satisfying the 6 axioms
for converting individual preferences into a social preference ordering and this has been
shown with some examples and proof by Arrow in his pioneering work. So, this implies
that there is no need theory of social decision making.

And this has of course, very severe implications in terms of that means that there will
always be tradeoffs, there will be winners and losers and it is not possible to have in
general, it has been shown that it is not possible to have a social choice mechanism where
individuals have different preferences and it comes out into a neat preference where
everyone gets an improvement.

And this has been in future work, this has been relaxed with the idea that if you can
measure and compare utilities and then quantify under certain conditions, you can show
that you can have this kind of a social decision making, but the implication of this is that
in general, whenever we talk about society making decisions, there will be winners and
losers, and there will be tradeoffs involved.

And so, we will now move forward with this and try to see when we talk about the Pareto
optimality and we look at the markets, how do we try and get the optimal kinds of
solutions.

(Refer Slide Time: 10:45)

So, in general when we talk about we, this is from Kolstad, if you had two different
goods, we could have, we had talked about this earlier where we have a, we can see that
you have these indifference curves, which represents constant utility function and this is
increasing and then depending on the budget constraint between the two goods, we have

418
the marginal rate of substitution between these two goods, this is for a particular
individual.

Similarly, for other individuals there would be marginal rates of substitution. So, there is
this theory and within this course, we will not go into this theory, but you can go into this
if you are interested, you can look at the whole concept of the Edgeworth Box and the
idea is that if you look at two individuals who have different utility functions, and based
on the utility functions, they will have different marginal rates of substitution between the
two goods.

We could then the two individuals with their utility functions, we can see if individual A
will exchange with individual B so that overall the utilities get improved. And this is
where we can remove the inefficiencies in exchange.

(Refer Slide Time: 12:06)

And with the result that we can then go to something which is called between A and B,
we can get a set of preferred options and in based on the kind of resources which are
there, this is the preference region, this curve represents the limit in terms of, these are all
Pareto dominance points.

Any of these points is Pareto preferred over any other point which is on the interior and
movement between these points would the utilities would get modified but basically we
cannot have any improvement, if you are on any of these points, it is not possible to have
any Pareto preferred move where the utility of A or B one of the utilities gets reduced.
So, it is not possible to have any Pareto improvement when you are on this curve and this
is these are all Pareto dominant, this frontier is called the Pareto frontier.

(Refer Slide Time: 13:17)

And the Pareto frontier is defined as all allocations for which there are no allocations that
are Pareto preferred. And so an allocation is supposed to be efficient if it lies on the
Pareto frontier. And so that is the definition of efficiency. That means, that no movement
is possible with any Pareto preference and which means that either we showed this for
two individuals, but this can be generally extended for n individuals.

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(Refer Slide Time: 13:42)

And with this result that we can look at, these are under two sources of economic
inefficiency, inefficiency in exchange and inefficiency in production, we can analyze it
using the Pareto frontier example, we can look at creating the Pareto frontier and looking
at the fact that the marginal rate of substitution would be equal and would be equal to the
prices.

(Refer Slide Time: 14:11)

So, if there are two individuals, the marginal utility, the marginal rate of substitution of A
with respect to marginal rate of substitution of B this would be equal, if there is
efficiency in trade, so, that there is no incentive for trade and this would also be equal to
the ratio of the prices. So, this is in terms of efficiency of trade.

(Refer Slide Time: 14:33)

In a similar fashion we can look at the efficiency in production, if there are different
sources of production for instance, if we look at a tray, the production of garbage disposal
and wine if you look at this and you have different kinds of production possibilities, we
can find the marginal rate of transformation, in terms of machinery or equipment.

So, that you reduce, you have more garbage disposal or you have manufacture more wine
and you can see that these marginal rates of substitution would be equal so that you can
reduce the efficiency, inefficiency in production can be minimized.

(Refer Slide Time: 15:18)

And so, that the marginal rate of transformation between in this case bad or good or if can
talk about garbage disposal, which becomes a good and, and so on.

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(Refer Slide Time: 15:33)

So, in general what we are looking at is, we are looking at a marginal rate of
transformation between pollution and the good should be the same for all producers. If
this is not true, then we can actually get an improvement by producing more of good A as
compared to good B.

So, similarly, in the case of pollution where we are looking at pollution as a bad or
pollution control as a good marginal rate of pollution control should be the same for all
firms. That means, the per unit cost of pollution control would be equalized across
different firms. There are different ways in which we can represent goods and bads and
for instance, if you talk about garbage, garbage is created in the household level, garbage
is created in the in terms of pollutants at the industry level or at the commercial level and
that is something that has no value for us, it is a bad.

Garbage on the other hand can be shown as so, you can look at a bad and the good and
we can represent it in terms of supply and demand or we can convert the bad into a good
by talking about the removal of pollution. So pollution control or garbage disposal.

(Refer Slide Time: 17:01)

So there are two ways in which we can draw supply demand curves. And this is shown in
Kolstad you can see quantity of garbage consumed and the price of garbage if you look
at, the price would be negative because the negative price of garbage consumed, but if
you convert this in terms of in our normal way in which we analyze supply and demand
for a good, we would like to have a positive price, then we can talk about garbage
disposal.

And this will be having the same kind of mechanism that we talk of in terms of demand
and supply and so this is another way of representing. So, we can either represent it as a
bad or we can represent it as a good by converting it into garbage disposal, pollution
control and depending on the way in which you find it convenient you can do either of
these two representations, the sign of the price will change, but in all other aspects
analysis will remain the same.

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So, now let us look at when we talk about the market and market trying to get the reduce
the inefficiency, minimize and not have any inefficiency in trade or inefficiency in
production, we can look at the market and the equilibrium that is formed from the market.

(Refer Slide Time: 18:27)

So, there are certain assumptions that we have when we talk in terms of a market, the first
assumption is that you have complete property rights. What do we mean by complete
property rights? If we are looking at, we want to look at a pen, right. If this is my pen, I
have purchased it and I own this pen and then I can which means that I have a property
right over the pen.

Similarly, when we are looking at, let us say, a house or a product or you are buying
something to eat, you have you have complete property rights over that. And when we
look at something like a negative thing like garbage, if there are rules that prevent, if we
are responsible for the garbage that we create and we cannot just litter it and dispose it
anywhere.

If there are proper laws then there are complete property rights and that complete
property rights is essential, implementation of that complete property rights is essential
for us to have the ability to buy and sell the goods and to have the ability to try and find
out what will be the demand under different kinds of conditions. So that is the first kind
of assumption and that assumption is valid for most of the goods and services that we are
considering.

The second assumption is atomistic participants, atomistic participants means that there
are a large number of small participants. So, there are many different suppliers, there are
many different consumers, why is this required? This is required, so, that no one
individual has that much demand that he or she can affect the overall dynamics and the
setting of the price and with the result that this is the, this can someones utility does not
predominate and this is one of the assumptions which is there.

Similarly, there should be there cannot be multiple, there should be many suppliers, one
supplier cannot have a monopoly and then you and affect the whole thing and this is one

422
of the things which is an approximation in many cases this is violated and that is why
then there are problems with the market and then you need to have regulation.

Complete information, now, complete information means that every producer has
information about the different kinds of conditions, about the conditions of the market,
about the conditions of the demand. Similarly, every consumer knows what is the prices
which are available in different markets, and this is often not there, there is asymmetry in
information so that often the end user then this leads to middlemen.

People who get a benefit because they use this asymmetry in information to be able to get
some kind of leverage and get some revenue and profit and the fourth thing is that we
presume that there is no transaction costs, there is no cost for entry or exit, you want to
start manufacturing something, you can just go ahead, you can if you want to make
something and transfer it to the consumer again there are no transaction costs. In reality,
ofcourse, there are transaction costs and this, ofcourse, creates some modification in this.

(Refer Slide Time: 22:34)

So there are these two theorems of welfare economics and I will just state them we are
not going to look at it in too much detail, but basically, we are looking at in a competitive
economy, we are talking of a market equilibrium, and the market equilibrium results in a
Pareto optimal solution.

There are no Pareto, it is on the Pareto frontier, there is no inefficiency in the trade or no
inefficiency in production and so we get a Pareto optimal solution no further
improvement is possible. Of course, this is the ideal case of market equilibrium when all
these conditions are established in terms of the requirements for transparency in terms of
complete information for non-atomistic participants.

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(Refer Slide Time: 23:31)

It is also the second theorem of welfare economics says in the competitive economic, any
Pareto optimum can be achieved by market forces provided the resources of the economy
are appropriately distributed before the market is allowed to operate. So, the market does
not have anything to talk about the distribution and in case the distribution is unequal,
then the solution which is there will result in being unjust and unfair.

However that solution may not result in any, it may be a Pareto optimal solution and it
may be something which is from a market point of view it is efficient. And so, the
economics, when you talk about efficiency is only looking at overall whether any
improvements are possible through efficiency in trade or efficiency in the production
transformations it depends on the pre-existing distribution.

So, the market often will tend to perpetuate and accentuate the status quo and just to give
you an example of this, is an extreme example there is a memo, which was written by one
of the economists in the World Bank, way back in the 1990s. It is very controversial
memo, it was a memo written by Lawrence Summers and Lawrence Summers wrote, and
he was the chief economics of the World Bank when he wrote this memo.

Subsequently Lawrence Summer also served with the US government and was also the
President of the Harvard University. But just look at the memo and what it says and then
we will come up with this is just to illustrate to you the fact that a market economy need
not necessarily result in something that is ethical or that is correct or fair.

(Refer Slide Time: 25:41)

So this is a memo, which was written in December of 1991, it is there on different

websites and I am just going to read this out to you, talks about Dirty Industries and of
course, when there was a big controversy about the memo, Lawrence Summers said that
he was just, he mentioned, he did not mention it very seriously it was just to illustrate
some of the facts which are there in the economic calculations.

He sort of backtracked but the fact is, this was a memo which he send to others in the
World Bank. So, the memo says Dirty Industries just between you and me, should not the

424
World Bank be encouraging more migration of the dirty industries to the less developed
countries. So, the idea is that instead of having the industries polluting the developed
countries, they should actually be polluting the developing countries.

And then he goes ahead to talk about three reasons. The first reason is the measurements
of the costs of health impairing pollution depends on so, if you look at health impairing
pollution, we are saying how many days of labour loss, what are the kind of increased
because of loss of work, increasing morbidity or loss of life increasing mortality. So it
depends on the foregoing earnings from increased morbidity and mortality.

From this given point of view, a given amount of health impairing pollution should be
done in the country with the lowest cost, which will be the country with the lowest
wages, since it has lowest cost and lowest wages that would mean that the impact would
in money terms would be much-much lower than it would be in a developed countries.

And I think the economic logic behind dumping a load of toxic waste in the lowest wage
country is impeccable and we should face up to that. So you can, it is a shocking
argument but it is an argument which is being made based on an economic terms. So this
is the point one.

(Refer Slide Time: 28:25)

The second point that he made is costs of pollution are likely to be nonlinear. So, that
means in a country or a region which has very low pollution. The initial cost of or the
initial cost of that pollution is likely to be very low. So the nonlinear, initial increments of
pollution probably have very low cost and then he goes on to say, I have always thought
that under populated countries in Africa, a vastly under polluted, their air quality is
probably vastly inefficiently low compared to Los Angeles or Mexico City.

So the idea is that those who have less pollution are from an economic point of view
under polluted so, you can just see what is the kind of argument which is being made
only the lamentable fact so much pollution is generated by non-tradable industry. So what
he is saying is that it is unfortunate that when you talk about industry, we cannot
transport the pollution.

425
And so we look at transport, electrical generation, it is happening locally and the unit
transport cost of solid waste are so high, prevent world welfare enhancing trade in air
pollution and waste. So, what is being proposed from an economic viewpoint is that it
would be, it is been proposed that we should trade and move the pollution from the urban,
from the cities which are highly polluted and which have high wages and take them to
regions where the cost of the damage is relatively low.

And you can see that very clearly from an ethical point of view, from a feminist point of
view all these arguments are completely wrong. But from an economic point of view, this
is and this is one of the biggest problems with economics and it continues to be, several
people do realize this but you can actually see that someone actually makes arguments
like this in an official document and a memo.

(Refer Slide Time: 30:07)

The third point that he makes is, the demand for a clean environment for aesthetic and
health reasons likely to have very high income elasticity concern over an agent, for
instance, that causes one in a million change in odds of prostate cancer, obviously going
to be much higher in a country where people survive to get prostate cancer than in a
country where the under-five mortality is very high.

Much of the concern over so essentially what it says is, if in regions where there is higher
income, higher quality of life and higher people survive for longer, their demand for
clean environment would be much higher and they would be willing to pay much more so
then, they are basically say, he is again arguing for trading goods that will be, the
pollution will increase in developing countries, but it will increase their welfare.

So, the production is mobile consumption of the good quality air is non-tradable and so
he anticipated that this would create a controversy and people would oppose it. And so
the last sentence that he says that the problem with arguments against all of these
proposals for more pollution in LDCs intrinsic rights to certain goods, moral reasons,
social concerns, lack of adequate markets could be turned around and use more or less
effectively against every bank proposal for liberalization.

426
And this is one of the problems which has been there with many of the multi-lateral
agencies and their proponents. Often the economics when we talk in terms of equilibrium
and market equilibrium, does not consider anything in terms of what is fair or what is
moral. And it just looks at the efficiency from a Pareto frontier perspective. Please keep
in mind this is not the final perspective, the perspective has to have an issue of values and
ethics and morality.

And so this is just word of caution to say that whenever we do all of these calculations,
we can calculate the costs and the economics but then we have to see overall what is fair
and what is just and what is the right thing to do.

427
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 11
Utility and Social Choice- Part 4

(Refer Slide Time: 00:21)

Okay, so now to get back to our usual analysis, when we talk in terms of creating, this
figure is from Kolstad, we can do a similar kind of thing if we are looking at, let us say
any goods and services if you are looking at coal or oil or natural gas, we are looking at
the quantity and we have the price. So when we do this, we can create first of all, a
typical demand curve. So, that means at a certain price, if you are looking at let us say
coal, at a certain price, there will be zero demand for coal and as the price decreases, the
quantity increases, so this is the demand curve.

On the other hand, if we look at the supply curve, we will find that there is a minimum
amount of price which the supplier must get before they decide that they will supply the
product. So, we will start with a minimum and as more and more quantity is demanded,
more and more price, more and more price is there, more or more quantity will be
supplied.

Because at higher prices there will be others will come into the market and so, you will
have a supplier curve something like this. So, here, if you see, we will get this point,
which is the point of intersection, which will give the price at which we will operate in
the market, we can draw a straight line through this and this then becomes the quantity
demanded and this is the price.

Now, what happens in this is if we look at this, you will find that, as we look at any
particular amount of quantity, if we look at this point, at this point, people are willing to
pay a higher price than the price here, since the market is clear that this price all the entire
quantity is now available at that price.

428
However, if the quantity required was lower, you are willing to pay an additional price
but we are getting it at this price this difference is the surplus that is available to the
consumer. And when we integrate this, this total amount, this is the consumer surplus.
We will define this in a bit, in a similar fashion, if you look at a producer, producer is
getting this price.

Producer was willing to produce at this price as it goes on. So, at any point of time, you
are getting this prize but you were willing to produce so this part shows the producer
surplus and if you integrate this again over the entire range of quantities, we will get, this
is the producer surplus and this total is consumer plus producer surplus.

When you look at this, the consumer if I fixed some other price, if I had the market price
at some other point, we would find it, suppose we added at let us say, at a higher price,
then the producer surplus would increase, the consumer surplus would decrease and the
total would actually decrease. So, you can actually show that in this particular case the
total surplus is maximized when we have this point as the intersection of the market
clearing price. So, that is an interesting kind of aside, we can actually show that this is
the case.

(Refer Slide Time: 05:14)

Now, let us define these so, the consumer surplus as we have defined, as you can see in
this case is that we have let us say consumption of q star units for a consumer, we talk
about any consumer which is.

(Refer Slide Time: 05:40)

Let us redraw this and let us know draw these curves and we can so, in general this is the
quantity and this is price and this is the consumer surplus. So, you can see that this is the
consumer surplus, this is p star and this is q star. So, if you look at this, it is the q star
units for a consumer the area between the demand curve, this demand curve and the
horizontal line p is equal to p star, this is the line p is equal to p star. This area between q
is equal to 0 to q is equal to q star, this area under this curve is the consumer surplus.

(Refer Slide Time: 07:16)

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And in a similar fashion, we can show the producer surplus. So, we can draw this and
here now, again we have q star and p star and this is your price and quantity. So, in this
case when you define this, this is the way in which we have turned this and now, we are
looking at the producer surplus as a production of q star units for a producer, which we
were talking about this is the point and the area between the horizontal line p is equal to p
star, this is p is equal to p star and the supply curve between q is equal to 0 and q is equal
to q star, this is the producer surplus.

So, with this we have defined, formally define the consumer surplus and the producer
surplus. And, to quickly sort of sum up first we have looked at the Arrows Impossibility
Theorem, which says that there is no need theory of social choice which meets all the six
axioms that we had. And then having said that, we then looked at the kinds of when we
talk about a market.

We talked about the movement so, that we are on the Pareto frontier, no Pareto
improvements are possible, there are no inefficiencies in trade and no inefficiencies in
production.

(Refer Slide Time: 09:25)

And then we said that there are these theorems of welfare economics, where we say that
the competitive economy, market equilibrium is Pareto optimal. And then any Pareto
optimum that we have can be achieved by the market forces, provided resources of
economy are appropriately distributed before the market is allowed to operate.

We also noted that, the market says nothing about fairness or distribution of resources
between individuals and equality or inequality. We then talked about the different
assumptions which are there for creating a market and talked about the definition of the
equilibrium, market equilibrium, the consumer surplus and the producer surplus. And we
said that the equilibrium which is obtained maximizes the sum of the consumer and the
producer surplus and this is the basis for saying that okay, the market is a good thing to
happen.

430
We will see the assumptions which are there in terms of creating this analysis for the
market, many of these assumptions often will not be relevant in the real world. And then
there are distortions in the market, where there is a need for government intervention,
there is a need for policies and we will take a look at some of this.

(Refer Slide Time: 10:49)

You can look at more details in the book by Kolstad or the book by Webb and you can
look up the Lawrence Summer Memo. We are going to now look at in the next module,
we will look at the different kinds of goods and services, we will look at what are known
as public goods and private goods and how do we differentiate this and then we will take
that forward and look at how do we look at goods and services and the environment and
try to see how we can include the environment in the calculations that we are doing for
the market equilibrium.

We have seen the concepts of market equilibrium and we said that the market equilibrium
gives us a Pareto optimal. It is a solution on the Pareto optimal frontier, we also said that
the market equilibrium maximizes the total surplus, that is the consumer surplus and the
producer surplus.

(Refer Slide Time: 11:47)

So, let us take a simple example to illustrate the concepts that we have just learned. So let
us look at an example, we have a supply curve for petrol in a country where the price is
given as 10 plus 2Q. So, it is a linear supply curve and obviously, if the price is more,
more of the producers will be willing to supply. So, that is a P plus is 10 plus 2Q, the
demand curve on the other hand is given us P is equal 100 minus 4Q, where Q is the
quantity and let us say that the P is the price in rupees per liter, this is an aggregate
demand curve.

So, the Q would be for the country as a whole maybe in terms of some millions of liters
or millions of tons, but we will just look at it as a unit, physical unit and P is the price in
rupees per liter.

(Refer Slide Time: 13:02)

431
So, the question which is asked is plot the supply and the demand curves and determine
the equilibrium price and the quantity, what is the consumer surplus and the producers
surplus and show these on the plot.

432
(Refer Slide Time: 13:19)

So, let us just do this, let us draw first, right down the axis this is Q, this is P and when
we look at the supply curve that is 10 plus 2Q. So, when Q is equal to 0, the price will be
10 and it will increase as a straight line.

And here when this is the supply curve P is equal to 10 plus 2Q. In the demand curve
when Q is equal to, when the price is 100, there is no consumption and then when the
price is 0, this will come to 4Q is equal to 100, so Q will be equal to 25. And we will get
something like this, this is 100, this is the demand curve. This point becomes the
equilibrium point and this is the, the producer is getting this price.

Let us calculate that price, let us equate the two, that is 10 plus 2Q is equal to 100 minus
4Q, let us just use another piece of paper and so you get 10 plus 2Q is 100 minus 4Q. So,
we get 6Q is equal to 90 and Q is equal to 15, whatever units million tons, million liters,
put this back in the price. So, the price is 10 plus 2 into 15 that is going to be 30 plus 10
that is going to be 40.

So, the price is 40 rupees per liter. And the quantity is 15 whatever million, tons. So,
now, when you look at this, if you go back to the figure, this is going to be 40 and this is
15. The shaded area that we have is the surplus of the producer because the producer is
getting 40 rupees per liter and for at any quantity less than 15 when we look at it you are
getting 40 but we were willing to pay the supply curve says it is a smaller value.

So, at any point this is the surplus, which is the producer surplus when you sum it up over
the total amount of Q this is the amount. So, if we look at what is the producers surplus,
this is the producer surplus, we can find out this area, this area is going to be half, it is a
triangle, half base into the height and this base is if you look at this, this is 10 half into 30
and into 15. So, producer surplus is going to be 15 into 15, 225 units.

The consumer surplus is like this at a price of 100, the consumer will not buy, there will
be no demand, but at any other price, the actual willingness to pay is this value and the
actual payment is only 40 rupees. So, this much is the consumer surplus, if you aggregate

433
it over all the consumers, this triangle which is shown here, which I am now shading, this
is the consumer surplus.

So, the consumer surplus here if you look at it, if this triangle the area is going to be half
into this is 40, 100 minus 40 is 60 into 15 so, this is going to be 30 into 15, 450 units.
Total surplus then becomes, it is also known as the market surplus, total surplus or
market surplus. Market surplus is 450 plus 225 is 675 units. So we have solved this, we
have got the equilibrium point and we have got the total surplus, we have got consumer
and the producer surplus.

(Refer Slide Time: 19:21)

Now, the question is that if the government decides to fix a price of let us say rupees 50
per liter, explain what happens to a consumer and producer surplus, is this price fixing
efficient from a economic viewpoint? So, in a sense, for instance, if you see actually in
India today, the X refinery price of petrol, of petroleum products on that on top of that is
taxes and duties.

So, the actual price that we pay for petrol is almost double of what is the price X refinery.
And this is because the government uses that as a revenue mechanism, also wants to
discourage the consumption of oil because we have so much oil imports, but if we now
just said that let us say instead of 40 we would like to make this at 50 at this point, then
what happens to the consumer surplus and the producer surplus?

Now, what would happen is in this case, if you see this area is reduced from the
consumer surplus so, consumer surplus will reduce by this quantity. The actual
equilibrium value of supply would reduce and we can calculate this by putting in, this
point can be just calculated by looking at 100 minus 4Q is equal to 50, so Q will be 12.5,
this will be 12.5.

Now, when you look at this, you will find that basically now, the consumer surplus has
decreased by this amount and the producer surplus, on the other hand has now become
this amount because the amount of course, presuming that all of this money is going to

434
the producer and not to the government as a tax. If we fix this, then this is this amount of
area is increased while this is decreased and this is the total.

But as compared to the earlier case, this small triangle that we have is the dead loss and
this is the inefficiency because of the price fixing and as we saw earlier, the total surplus
that is producer surplus and consumer surplus is maximized at the point where we have
the market equilibrium, where the points intersect and if we fix any other price, the total
surplus would actually reduce.

So, you can cross check and you can calculate for 50 rupees and you can calculate this
area and you will see and so, this is basically this is the reason why we say that the
market is efficient and market equilibrium is the point at which we can get the Pareto
optimality and the efficiency. Of course, this is subject to all the assumptions that we
have made for the operation of the market.

435
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 12
Revision Paper -Part 1

So, we would like you to revise the concepts that we have learned in the first 3 weeks of
this course, when we run this course at IIT, towards the middle of the semester, we have a
mid-semester examination. So, the paper that I have given you is the mid-semester
examination that we used in the last year in 2019-September, so, what I would like you to
do is when you solve this paper, adhere to the time, the total time that will be given to
you is about is 2 hours.

During the time you solve the paper, do not keep access to your videos and your notes,
you can keep a set of formulae or formula sheet with you in case you need to make some
calculations, keep a calculator and then try out the paper for 2 hours. The portion is from
the initial part where we talk about energy and society, energy and environment, energy
and resources the overall country energy balance and the energy economics portion,
resources and renewable resources, non-renewable resources.

And so, take the question and solve it and then we will in the next module, we will show
you the solution so that you can correct it on your own and you can estimate what is your
performance. So, we will go through this paper, when you take the paper please do this
with a given time limit which 2 hours and then solve the entire paper and then look at the
module where we have given you the solution.

So, that you can compare, if you have any queries based on the solution and what you
have done, you can upload it and ask our TA so, that we can give you any inputs on this.
So, please do a little bit of preparation, revise the parts that we have talked about, and
then attempt the paper and see how you can look at your performance.

436
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 13
Public and Private Good/Bads

We have seen the concept of Pareto optimality of market equilibrium and then we saw the
concept of consumer surplus, producer surplus and identified the point at which we would
get an efficient price. Now, when we look at different kinds of goods and bads and services
so for instance, we are looking at buying electricity, we are looking at buying batteries, we
are looking at garbage, disposal of garbage, we look at environment in terms of the air
quality, you can look at using and getting a benefit from a park.

So, you can see that all goods and services are not of the same type and especially when
we trying to understand the impact of energy systems on the environment and we would
need to be able to differentiate some of the qualities of these goods and bads that we are
talking of and typically in the economic literature, we talk about public and private goods
and bads.

So, in this module, we will look at what are the characteristics of goods and bads and based
on these characteristics, how do we classify goods as public goods and private goods and
when we know that there are public goods or private goods, what does it mean when we
want to aggregate and look at the kind of demand curves that we can get. So, this is the
sequence in which we will develop this thought.

437
(Refer Slide Time: 02:20)

So, there are two concepts that we are going to look at, one is excludability and the second
is rivalry. So, we will look at what we understand when we say that a good is excludable
and what do we understand when we say that a good is a rival good or a non-rival good.
So, in both these cases excludable non-excludable.

(Refer Slide Time: 02:41)

So, a good is excludable if it is feasible and practical to selectively allow consumers to

consume the good. So, for instance, if you look at this pen, if I buy this pen and then this

438
pen belongs to me, then someone else cannot buy the same pen, so that is a sense of saying
what we mean by excludable. If you are looking at consumption, we are looking at a certain
amount of, you look at an apple, if you consume an apple, then that apple is not there for
someone else to consume.

So, when we want to differentiate between private and public goods and bads, we want to
look at two characteristics, one is excludability and the second is rivalry. So in the case of
excludability, we want to make sure that if I am supplying electricity, those who are paying
for the electricity can be provided that electricity and if you don’t pay for it, you will not
have access to it.

If I am looking at in any market when you buy something, it is possible in the market for
you to get access to it only if you make that payment, if you are going, so it is feasible and
practical to selectively allow consumers to consume the good. Similarly, in the case of a
bad, bad is excludable if it is feasible and practical to selectively allow consumers to avoid
consumption of the bad.

For instance, if I am looking at garbage, that is being created in the household and if I have
a mechanism by which I can take that garbage and I can pay the municipality a certain
amount to be able to dispose of the garbage, then that garbage is excludable. So, when we
talk about excludability, it means that we can, we have a mechanism by which we can
ensure that good is only available to an individual.

So it is feasible and important is not only that it is feasible but it is practical to selectively
allow consumers to consume the good. Once we can do that, then that provides us the basis
for creating a price and a mechanism for excluding those who are not paying that price. So,
this is a particular characteristic that we are looking at excludability.

439
(Refer Slide Time: 05:37)

The second concept that we want to understand is the concept of rivalry. And in the case
of rivalry we are talking of a good or bad is rival if one persons consumption of a unit of
the good or bad diminishes the amount of the good or bad available for others to consume.
Which means that if I have a fixed amount of some good, if you have a set of, I have bought
a set of pens and if a person it takes 5 of those pens, those are not available for the other
person.

So in a sense of, if you are looking at food, if you are looking at bananas or apples, if we,
if I consume that banana that is not available for consumption by someone else. On the
other hand, there could be a sun, a sunset, and you are enjoying the beauty of the sunset.
My enjoying the beauty of the sunset does not affect someone elses ability to enjoy that.
So, then it is non-rival. So you understand the difference between rivalry and non-rivalry.

A rival good is where someones consumption of that good diminishes the amount of the
goods available for the others to consume. So, these are two important characteristics.

440
(Refer Slide Time: 07:11)

And what we try to do is we create a matrix which says let us have 4 quadrants, let us say
that we have excludable and non-excludable and then we have rival and non-rival. So, what
we will find is that if we are looking at the good, that is rival and excludable, this good is
called a private good, that means that we are saying that this is going to be, we are looking
at this quadrant, where goods are rival and excludable these are also called pure private
good and this is ideal for a situation where it can be tackled by the market.

At the other extreme, you would have goods which are neither rival, non-excludable. So,
this is in this quadrant, this is a pure public good, this is where it is non-rival and non-

441
excludable and a pure public good and we will see that for pure public goods there are
problems with the market trying to provide pure public goods, and we will prove and see
what that means.

Okay, so we talked about now the difference between rival, we have talked about
characteristics like rivalry and excludability. And then we have used that to characterize
goods as pure public goods, pure private goods in a similar fashion, it can be pure public
bad, and pure private bad. So, once we have done this, and if you have understood these
concepts, now, we should be able to classify different kinds of goods and services.

So, I have a list of different goods and services and let us spend a little bit of time thinking
about each of these and characterize them as public and private goods.

(Refer Slide Time: 10:47)

So, let us start with the first one, fairly simple think about it a pizza, is it excludable, is it
rival? So pizza is obviously excludable, you order it, you pay for it then only you get it. So
it is possible to when it is made it is only given based on the payment. So it is excludable.
Is it rival? Yes, once you consume it, it is not available for someone else to consume so,
pizza is rival, excludable and hence it is a pure private good.

Let us look at higher education, we will talk about this, think about it and we will come
back to this and we will discuss this in more detail. This will depend on the assumptions

442
that you have and the kind of belief systems it is not a direct calculation, we will talk about
both rivalry and excludability. If you look at ice cream, again the same concept just like
the pizza, and so it is both rival and excludable and it is a private good.

Now, look at a lighthouse, lighthouse is in the earlier days, this would be provided on the
shore and it would provide light for ships in a particular location. So, in this case is it rival,
is it excludable, in general, if you have any ship in the vicinity, they would be able to see
that light and unless you do some kind of a technological change, basically it is accessible
to everyone.

So, it is not excludable, if you had some modification in technology where you could
provide that access only based on some fee, then it would have been excludable but as of
now it is not excludable, is it rival? It is not rival, in the sense that if one ship sees the light,
it does not affect this light being seen by the other ship, it is at a height and so this is non-
rival, non-excludable, it is a pure public good.

Let us look at another one, a TV broadcast. Now, this is a little confusing in the sense that
if you had when you look at the free to air channels, right, so it is possible if you had free
to air channels where anyone buys a TV and has the hardware, they can access it. But now
we have the satellite and the dish where you can control, so it is excludable in the sense
that when you talk about cable TV only if you pay the fee, you will get the access.

So, technology has permitted the fact that you can get the access so, it can be excludable
and what about rival? So, my watching the television does not affect your watching the
television, so unless there is congestion, this is something where it is non-rival, but it is
excludable and it is more like a private good. It is not a pure private good, but it can be
considered as a private group.

Now, if you look at the next case, the radio broadcast, in most cases when we talk about
radio and the FM radio it is you need to have a radio, so that is you have to purchase that
but the broadcast is free to air and it is not excludable and it is non-rival. So it becomes
then a public good, what is the model that then people use, the radio broadcasts actually
use advertising and they get revenue from the advertising, which makes this.

443
It is possible technologically to have a possibility where you need to subscribe to some
radio station only then you would be able to, there could be a password protect or
something but in most of the cases, what we are looking at is the radio broadcast is a public
good. Now let us think in terms of basic research, this is a more tricky question, basic
research by its very definition is supposed to be for the good of humankind.

And so, it is supposed to be non-excludable, non-rival. But in practice, what happens is

often the basic research if that research is being commercialized and that is being used and
could be patented of course, that then goes into application. So, the basic research by very
definition is like pure public good. World Wide Web, as per the founders and the start this
was meant as a way of free communication.

The access to the web you may have to pay and the bandwidth you may have to pay but
the web itself is in general, free, it could subject to congestion, it can be non-rival, non-
excludable. Some features of it, websites and others can make it excludable by providing
passwords and providing access and asking for a fee, but in general, the web was meant to
be free and the public good.

Weather forecast again depending on the depending on the kind of forecasts, if it is and the
way in which it is being provided, it could be, you could make it a excludable of course it
would be non-rival. And in some cases, if the government is providing this and it is
broadcasting it then it could also be a pure public good, but in some cases it can be
something which is for a fee or of service.

Newspapers, as you would know that I mean, this is like it is excludable and rival and so it
can be newspapers are sold. Let us look at, we would not go through all of these, let us
look at a few tricky ones, if you look at a freeway or a highway, so a freeway or a highway
subject to the fact that it is not getting congested, then it would be non-rival.

Of course, it could be excludable because you could always have a toll, in the case of a free
way since it is designed by society to be free, there is no toll, it is non-excludable and if
there is no congestion, it can actually be a pure public good. Metro rail, excludable as well

444
as, well depends the rivalry depends on if it is not congested it may not be rival but it is
more like a private good.

If you look at air pollution typically non-excludable, all people who are there will have that
and you are not sort of excluding people from the air pollution and it is non-rival. So it is
like a public bad. National Defense is something where everyone, all of us are getting the
benefit from it, so it is not excluded for any individual, non-excludable and its non-rival.

And so similarly, one can look at many of these other things, please think about this and
so, you get the idea of how we classify goods as public and private goods. And what we
will see is that when we talk about how to estimate the demand, based on the characteristics
of the good, if it is a private good, the demand aggregation is just done on a very simple
market principles.

In the case of the public good we have a problem and we can look at how we can tackle
the aggregation of demand. So, let us before we do that, let us talk a little bit about this
concept of higher education and whether higher education is a public good. Now, this is of
course, a question where there are many differences in opinion.

(Refer Slide Time: 20:27)

And this is, the question is should the public pay for higher education, is higher education
a public good? So, the characteristics that you may want to look at is that, is it excludable?

445
Is it rival? So, obviously, in a sense, higher education can be excludable because we charge
a certain amount of fees. We also make sure we will not admit people unless they have a
certain, they get through certain exams, we have the fixed number of seats which we can
deliver. So, in that sense it is excludable.

But however, if we look at recording all the lectures and making it available in the public
domain, in that sense, it could be converted to something which is non-excludable, where
it is non-excludable it is accessible to everyone, in terms of rivalry in general the higher
education is non-rival except for the concept of if you have a limited number of seats.

So, in that sense, this is the, and my belief is higher education is essentially a public good,
in most countries of the world higher education is a way in which we prepare future
generations for society and every individual who goes through higher education adds a lot
of value and over the productive years he or she will return to society much more than what
was paid for by society.

And this is an on an economic argument basis. It is also in the form of in general, when the
individuals who go through higher education also create value, they create knowledge. And
in many cases, they also create employment and jobs. And so there is rationale for actually
subsidizing or providing for society to provide funds for higher education.

(Refer Slide Time: 22:48)

446
And you can see this in most countries of the world for instance, this shows you the share
of higher education, public funding of higher education and you can see that most countries
of Europe the bulk of the funding is coming from the government and from society.

(Refer Slide Time: 23:01)

And you can also look at what this is a plot which just shows you the average tuition fees
and the percentage of that fee which is provided from percentage of the students who are
also benefiting from the public funds and loans. And you can see that most of the countries
where we are looking at it, that you have a significant amount of funding either directly
from the government or in the form of loans.

447
(Refer Slide Time: 23:36)

And then you can see that essentially, there are benefits from higher education which go to
society directly, the individual benefits in terms of we can look at the total income which
is generated by the individual and the knowledge which is generated by the individual, post
facto, there is a sort of multiplier effect because that individuals and the families and then
the jobs created by the individual.

And so, overall, there have been many studies which clearly show that in the long run any
payment on higher education really benefit society. Of course, we are currently in a
situation where most, in most places there is a problem in terms of funding. And
governments are looking at ways in which the individuals gaining the individual benefit
pays a significant proportion of the costs of that education.

And often the cost of that education is in specially in developing countries is high as
compared to the average income and this becomes a deterrent, and the solution of course,
then is to provide loans and low interest loans. And in countries where this is there this
results in very significant amount of indebtedness, and people come out after their higher
education with a large amount of loans and it takes 6 to 8 years to repay those loans in the
early years.

448
(Refer Slide Time: 25:27)

And this is, in many countries, this is actually a problem for instance, in the US, the student
debt exceeded 1 trillion and yet, about one third of the students who take the loans drop
out of the higher education system, and a significant proportion of the loans are in default.

(Refer Slide Time: 25:45)

So just to give you an idea, this is from a report which is there, which talks about the
average student loan debt per student and you can see that in the UK in Australia, Sweden
significant amount of debt per student.

449
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 13
Aggregation of Demand Curves

(Refer Slide Time: 00:17)

Let us look at how we aggregate demand curves in the case of a private good. So, if we
have two individuals and if we can prove this for two individuals, we can just extend it to
n individuals in the society. So, if we have the marginal willingness to pay represent that
on the Y axis and the quantity demanded on the X axis, so if the goods are rival then at any
price we will sum up the total amount of goods that the consumers are willing to consume.

450
(Refer Slide Time: 00:55)

451
So let us look at this, let us sketch, let us consider a person who has a demand curve like
this, which for a particular commodity, if the price goes beyond 500 we do not want to buy
any of it and if the price reduces, the demand will increase, the maximum that we require
for this customer is 30 units even if the, and if the price is 0, we are not going to consume
more than that.

So, this is one particular demand profile, and let us look at another individual who has a
demand profile where the consumer will only buy if the price is less than 250 rupees and
at 0, at a 0 price the maximum amount that consumption would be 60. So, if we take this,
you have these two demand profiles.

Now, we want to create the aggregate demand profile of these two consumers A and B so,
at each price, we would see how much is the total demand. So, between 500 and 250 the
total demand is just this, it is just that of A, here its B and beyond 250, when we see 250
and less than 250 at each price, we add up the demand of A and the demand of B. And so,
what is going to happen is that beyond this point of 250, we are going to have a different
slope.

At each of these points we will, at any point we will take the QA and QB and this will be
the total demand. So, this is now going to go to about 90 over here okay, so this is our
aggregate demand curve, this is the shape. So, just let us look at it whenever we are looking

452
at something a good that is rival at any price we will sum up all the quantities demanded
by the individual demand curve and that is how we get the aggregate demand curve.

Now, on this if we superimpose a supply curve will get an equilibrium point, so for a private
good this is fairly simple, you can take a look at it this is what we have drawn, this is the
demand curve of A, demand curve B at each price then we aggregate sum it up from 500
to 250, it is only that of A and beyond 250 then we sum them up and this is what we get.

So, when we look at the then if we look at a particular supply curve, we will get an
equilibrium. So, in the case of a rival good and a rival private good, this is fairly simple,
each price just sums up all the quantities, we get the aggregate demand curve, combine this
with this aggregate supply curve, so, that we can then get the equilibrium points. So, this
is a fairly straightforward aggregation and this is how we can do this for the market.

Let us now look at what we can do for public goods. So, in the case of the public good
what would happen is that we would consume, let us redraw this.

(Refer Slide Time: 04:55)

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At every, this is the marginal willingness to pay, this is the marginal willingness to pay and
this is the quantity. So now, what happens is that, in this society when we are talking of a
non-rival good, all consumers will consume the same amount of good.

So, what would happen is that at every value of Q, we have to just sum up the total amount
of price which we people are willing to pay. So, in this case, here when Q is 0, then at any
Q value, we would then just add up the amounts of price which is being paid. So, here it
would be 500 and so, you basically start at any Q we take and we add up this and then go
ahead.

And so, this is the kind of, which starts from 750 and beyond Q is 30 it will come to here.
So, this is how it is going to look, this will be a demand curve. So, the problem then
becomes that when we try to get the kind of if you look at this curve which we have drawn,
if we have a.

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(Refer Slide Time: 07:08)

In the case of the private goods, when the supply and demand curves intersect the marginal
cost of production will be equal to the price.

(Refer Slide Time: 07:20)

But in the case of the public good, which is non-rival, we will not be able to infer the market
price from the intersection of the supply and demand curves for a non-rival good. For
instance, if you look at, if the quantity supplied is here, we have two consumers who have

455
different, who are actually seeing different prices and so this is the problem when we have
any, when we have an intersection of the supply curve and we get this, we do not know
what will be the individual prices.

And then so, this is an issue when it comes to the non-rival or the public goods. So, let us
look at how do we talk about an efficient public good pricing and let us look at an example
where we are trying to see if we can get a Pareto optimal solution. So, consider a non-rival
good. Let us say that there is a park with a fence around it and so it is non-rival, let us
assume that it is a large park so, there is no congestion.

So, that means even if more people are coming in, it will not affect the quality of the
enjoyment of the park by the people who are there. We can have a fence, we can have an
entrance which we can control so, it can be made excludable.

(Refer Slide Time: 08:46)

Now, let us make another simplifying assumption that the operating cost is only a fixed
cost and it is not dependent on the number of visitors. So, if that, and that fixed cost which
is there, let us say is subsidized or provided by some company as a part of its CSR or by
the government and we want to know what is the efficient operating price.

So, let us look at a situation where we have the demand for this park in terms of number of
visitors, that is the demand. Now, obviously, the number of visitors if the, if we look at the

456
price to be charged, price of entry, that some price there will be no one willing to come to
the park. And as the price reduces, the number will increase so you will have something
like this, this is the sort of demand curve for the park.

(Refer Slide Time: 09:18)

Now let us look at a situation where we put a certain price of entry okay. Let us assume as
we said, let us say it was a fixed cost which is taken care of so, we do not have a problem
in terms of providing some minimum costs, we want to know what is the solution, what is
the price at which we should allow entry, so that we are getting the Pareto efficient frontier,
what is an efficient operating price?

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So, let us say that this is P star, now let us look at a situation where we have this P star, at
P star, there are q star people who are willing to take this and come into the park. The
question is this a Pareto efficient solution or would it be better to reduce the price? If you
reduce the price then there will be more people so, now there are all these people who are
not coming for the park.

But if I reduce the price and make it q dash and make it P dash, P dash less than P star you
will find that at that price there are now more people, there is this q dash minus q star, these
people from the point of view of these people that price reduction is better for the people
who are anyway going to come at q star, for them also the this is a good option.

So, this point clearly is a Pareto preferred point, if we look at A, B is Pareto preferred to
A. So, as you can see, what that means is that you can basically go down and the efficient
price is when there is no charge for this public good and so this is a very interesting and
useful result and so, the q0 then and this is where we will get the maximum number of
visitors q0. So, it is efficient for a non-rival excludable good, the optimal price from the
consumers viewpoint is 0.

Similarly, the optimal compensation for a bad is zero and that is an interesting kind of
thing.

(Refer Slide Time: 13:18)

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For instance, if you look at an airport and you say that the airport has noise and should we
compensate people who are staying in the vicinity and give them some benefit, because
they have to face that noise. So, from an economic viewpoint and the optimal compensation
is 0, because if we put a compensation this will adjust the tradeoff between noise and the
other benefits of being near the airport.

And this can be shown that basically, even for the bad is a non-rival bad in the case of noise
it is non-rival then it is not from an economic viewpoint, this compensation is not desirable.
However, if the people were staying initially, and then you had an airport which is being
built in terms of an equity and a fairness consideration, there could be a case for
compensation and so, but from an economic viewpoint, as we said, the efficient public
good pricing is 0.

(Refer Slide Time: 14:42)

So, the next thing that we would like to look at is an example from Kolstad. So, as we just
summarize what we have seen, the optimal producer price, efficient consumer price is 0,
producer of course must have sufficient revenue to meet the cost and if the producer raises
the prices, demand will get reduced and too little of the public good will be produced and
so that is the kind of situation.

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(Refer Slide Time: 15:03)

So, now we would like to see some logic in terms of, we would like to look at an example
in terms of what can we talk, say about the market and the provision of public goods.

(Refer Slide Time: 15:37)

So, we have a hypothetical example, this example is from Kolstad, we assume that there
are n identical individuals. this is you know hypothetical example, is created in order to
illustrate an important concept.

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All of these assumptions that are made can be relaxed when you talk of a generic context,
but we start off do this for simplified assumptions and then we get some very interesting
result. So, each individual we are saying each individual can consume two goods. One is
x, which is a rival, excludable private good and the second one is G which is a non-rival,
non-excludable public good, it should be public.

And though it is a public good, it is possible when it is being provided, it can be provided
in the way of a market and it can be bought for. So, each individual has an income,
maximum income W and we assume that the quantities are adjusted so, that the prices of
the goods are set to unity that means, we will set the price of good x to unity and then the
good G also can be taken as unity.

We can of course, adjust the quantities so that both have the same unit price and with this
example, assumption, each individual will have a utility function.

(Refer Slide Time: 18:23)

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 Remember this was a n identical individuals, each utility has an, individual has a
utility function, which is a function of both these goods which are being consumed, x and
G, x is the private good, privately produced, privately manufacture, the public good is
public good.

But it can be produced and can be also bought privately, in the sense that, for instance, if
you are looking at a park, an individual can contribute to the park management and pay
money so, that you can have more features in the park. So, if we look at G being, let us say
air quality.

Let us say some facilities which are being provided, which are enjoyed by everyone, which
are non-rival, non-excludable and the total income that we have, which we are paying is
going to be x plus G is what we are spending, sorry, x plus G are the other two benefits that
we are getting.

In the case of G, G is provided by the provision from society, from all the other individuals
and what each individual is paying, where g, small g is the individual purchase, individual
purchase or payment for the public good and G dash is provided by the rest of society. So,
the utility that you will have will be now, the total income that we are paying W will be
equal to x plus small g. So, that x is W minus g and so this is in terms of the variables, W
minus g, G plus small g

462
And now with this, you will see that if there is cooperative action, where I know that if I
am making an investment, there is an agreement between all the n individuals, which says
that if I increase my investment in the public good everyone else will cooperate and
increase their investment. If we know that then what will happen is that this G bar will be
n minus 1g.

(Refer Slide Time: 21:26)

463
And we can make a plot, you can see this plot this is from Kolstad on the x axis, we can
see the amount which we are investing and this will go from 0 to W on the public good.
And on this side the amount which rest of society is investing in the public good.

Now, if you look at this, you will find that we are going to have utility functions as a
function of as we had just now seen, this is a function of W minus g, G plus g, we can
write, draw the utility function in terms of G bar and g and you will find that something
like this where its increasing, while it is increasing. Now, if we have a situation where we
know that there is cooperative action, then we will have a line with the slope.

This is the response that we will get with the slope of n minus 1 and the point where this is
tangential to the utility function, this will be the best response and this point essentially is
the optimal amount that we should be paying for the public good with the optimal amount
by everyone else and this is if we know that there is cooperative action, where if we increase
the amount that we are going to pay, others will also increase and then we get this kind of
optimal and if you see on this point, this is where this will look like.

This is the line which is showing that this is the slope is n minus 1 and this is the, on the
other hand if we do not know that this is going to be the case, and if we are given a fait
accompli that others are going to, we know that others are paying a fixed amount, if others
are paying a fixed amount we will essentially take any case and then take the amount g that
we are doing.

So, accordingly if you keep increasing, we will get something like, we get a best response
line like this, which is shown here, that means, take a fixed amount which is known and
then you pay for that given that others are paying that, what is the maximum utility that we
can get by paying? We will pay gN and this is the maximum utility and this of course, if
this quantity increases this goes up.

But the interesting thing that we see is that the total amount of the good that we are
producing gN plus GN cap is lower than the optimal amount g star and G star cap. And
that is an interesting kind of thing which tells us that when we talk in terms of public good,

464
the market provision of the public good is not efficient, market will always under produce
or under provide a public good.

And that is the reason why we need to have government intervention, we need to have
policies and there is a case for looking at government provision and societal provision of
public goods otherwise we will under produce, under provide.

(Refer Slide Time: 26:09)

So, in concept if you think about it, this can also be explained with the fact that if I look at
a public bad, it will be in the other way where the market will over provide public bad.
And the reason for that is very simple. When we look at this, when we are making an
investment, we are getting some benefit, but others are benefiting proportionately much
more and if we are making a loss, we are taking a fraction of the loss, but we are taking the
total fraction of the cost.

So, for instance, in this same thing is happens when we think in terms of this is the classic
tragedy of commons example, if you look at Garrett Harding’s original paper, if we look
at a situation where there is a commons, which is enjoyed by different farmers, where the
cattle are grazing on that farm and the question is that the commons can be sustained if the
grazing is regulated.

465
But if each farmer is trying to maximize the revenue by having more cattle, it comes to a
point where the commons actually gets depleted. Because if I add one more cow, I get the
benefit in terms of the revenue directly, the loss is distributed amongst all the people and
so this is the classic tragedy of commons case and then the climate change problem
essentially is amenable to the same situation.

So basically, the number of polluters are injured somewhat by polluting most of the damage
accrues to someone else, and that is the reason why we actually over produce public bads
or under produce public goods.

(Refer Slide Time: 27:51)

And typically, what we are looking at is the market typically under provides public goods
and over provides public bad. So now the question then is that how do we decide what is
the price for a public good.

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(Refer Slide Time: 28:15)

So, there is a Swedish economic, Lindahl, who proposed the Lindahl price and the Lindahl,
sorry Norwegian economist, Erik Lindahl, and the Lindahl equilibrium or the Lindahl price
is done in this fashion.

We look at individual demands and marginal willingness to pay. We presume that we asked
each consumer what he or she is willing to pay for a certain quantity of goods or services
and then get the marginal willingness to pay. We then add up all the marginal willingness
to pay to get the total willingness to pay at any quantity and that is what we saw in the
earlier graphs when we did that, and with the result that we then get an equilibrium.

Now, what you will understand in this case is that there is a problem, do you think this
equilibrium will occur? Think about a situation where everyone is contributing for
something. And everyone has been asked to state at what is your willingness to pay for that
good. You will clearly see that there is an incentive to understate your willingness to pay.

Because you have a benefit by not disclosing your actual willingness to pay and there is no
way of finding out the real willingness to pay and this is the biggest problem in terms of
the Lindahl equilibrium but as a concept this is possible if you have a way if there is a
society where people can disclose their willingness to pay and this is an honest disclosure,
we can then sum this all up and get the total marginal willingness to pay.

467
And then we can get a Lindahl equilibrium and then find the intersection of the demand
curve and the supply curve, but remember, then, what will happen there is that at that same
quantity, which is being supplied, different individuals will be paying different prices based
on their own willingness to pay and this is practically difficult to enforce.

So, what we have done today is we have looked at the classification between public goods
and private goods. We have then seen when we talk in terms of demand aggregation for
private goods and public goods. How do we make that aggregation, we looked at what is
an optimal price, if we are looking at let us say, how do you set a price for a park or a public
good?

And then we said, if we look at the marginal willingness to pay is there any way in which
we can find an equilibrium and that is how we got, we talked about the Lindahl equilibrium
and the Lindahl price. Thank you.

468
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 14

Externalities
We have looked at the difference between private goods and public goods and we have also
seen that the market typically under provides public goods, we also looked at the Lindahl
equilibrium is one way of trying to see how one can price public goods. But of course, we saw
that there are practically, there are difficulties in there.

Today we will be talking about externalities and that is in a production function or a

consumption function of any individual or company, if something else well which is not within
their control comes into it and affects the production or the consumption utility and So we will
define what is an externality, try to see how to analyze it and see what are the ways in which
we can incorporate it into the economic calculations.

(Refer Slide Time 1:20)

So, a definition of an externality, you can look at any textbook and you will find similar
definitions. This definition is from Kolstad, an externality exists when the consumption or
production choices of one person or firm enters the utility of another entity without that entity’s
permission or compensation.

So, please remember the critical point is that, if some variable enters the consumption or
production choices without the permission or compensations, so in case two companies have

469
an agreement and there is a transfer of an output of one company to the other company, that
would not be considered an externality.

But when something comes in, which is not within the control of the company and without the
permission of that company, then it becomes an externality. So, let us look at, in the public
domain, there are a number of cartoons which illustrate negative and positive externalities.

(Refer Slide Time 2:27)

This cartoon is from the economist and it is about Shale gas and as you know, in the oil sector,
the Shale gas had the potential to transform the oil sector and it has actually resulted in some
countries for instance, the US which was a net oil importer, has now become an oil exporter
and this cartoon shows there is, in Greek history there is this concept of there were these sirens
who were an attractive set of who with their singing would attract ships and these ships would
get then stranded and destroyed in these rocks.

And this was there in the legend. So, in a similar fashion, this cartoon basically shows that
when you are trying to get Shale gas, the difficulties, the environmental impacts of fracking
and fracking is the process of extraction of Shale gas which involves horizontal drilling, the
environmental damage in terms of the water usage and the other damage which is created to
the environment because of Shale gas is one of the obstacles in the part of Shale gas.

This is actually the reason why in India, though we have some Shale gas resources in parts of
the country, which are actually water scarce and then that is why we have not been focusing on
extracting that Shale gas. That is a negative externality.

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(Refer Slide Time 4:22)

In the case of a positive externality. This is from Dennis the Menace and you can see Mr.
Wilson, his wife tells him that have you noticed that every yard on the street has Christmas
decoration except ours? Everywhere you look, there are lights, reindeer, Santa’s, candy cakes,
and ours is the only dark spot on the street ablaze with Christmas spirit and what Mr. Wilson
takes this on as a positive externality in the sense that yes, it is fantastic.

They do all the work and we get to enjoy. It is a great arrangement, isn’t it? So basically, even
if you think in terms of in Diwali, if people are lighting up their homes and putting kandils, and
if you are not making that effort, but you are getting the benefit of that effort by seeing, then
that becomes a positive externality.

In the similar fashion if some people maintain some very good gardens, and they are putting in
efforts to do that, people who are in the neighborhood, who are not putting in that effort are
getting the benefit of it and that is a positive externality. In most of the cases when we are
talking of environmental economics, we are usually dealing with negative externalities.

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(Refer Slide Time 5:47)

So again, to repeat after looking at these two cartoons, we again repeat the definition where we
seeing that basically, whenever a variable enters the utility of another entity without the entity’s
permission or compensation.

(Refer Slide Time 6:01)

So, let us look at the example and this is from Kolstad. Let us say that there are two factories,
there is a steel mill which is producing steel and in the neighborhood there is also a laundry.
So, let us look at what is the, here we are looking at steel production and here we are looking
at laundry.

So, based on the capacity of the steel mill and the laundry, we can maximum produce a certain
amount in the laundry. So, this is the maximum amount and for the steel plant, let us say, so

472
you have this rectangle where if both if they do not affect each other then you will get this
value L and this is the value S.

And this is, but the fact is the steel in the process of making steel, we have some emissions and
the pollution, the air pollution which is there, that air is coming to the laundry, when you look
at the laundry, it is drying the clothes using steam and it is taking the air which is there, it
depends on the humidity and the composition of the air. The exhausts of the steel plant pollutes
the air and because of that pollution, the laundry output decreases.

And so, this is a negative externality that it could happen in the following forms. It could be,
this is like a modest or weak externality or it could be a strong externality, where production is
affected in this fashion. So, if you see, as the quantity of steel being used increases, the output
of the laundry decreases and so as a result of the steel production, despite the laundry not
actually planning for it, the output gets affected and instead of L, we are now only able to
produce a certain smaller value as this S curve.

(Refer Slide Time 8:44)

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So essentially what happens is in an externality you can see this. In an externality we are saying
that if we take an entity with a utility function U as a function of x and y, x are all the input
parameters that it controls and it plans for, y is a parameter which is coming from outside,
which the entity does not have control over. So, for instance, if the laundry has a production
function like this, which says L x1, x2 to xn and e, where e is the emissions occurring because
of the steel factory.

So, this is an externality, this affects the laundry production and we saw that for the steel plant,
this is, S is z1, z2 and so on, zm and then the value of e which is created, e is also a function of
z1, z2 to zm. So, the externality which is created is a function of the amount which we are, the
value of S and we get a certain emission factor which is coming out.

(Refer Slide Time 10:50)

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So now, if we look at this, this would mean that if you look at now the effect which is
happening, we are seeing that let us say that, let me start with S and L and then we have
something like this. So, if you look at this, because of the externality, the points that we can
now operate, we can have maximum we can get the output now from the laundry is here and if
we look at this, we can operate either at this point or at this point where we have a maximum
amount of steel production and certain amount of production in the laundry.

And in this case, what would happen is that, if we look at the cost function, the total revenue
which is the price of steel into production of steel, price of laundry into production of laundry,
for this, this is a line with the slopes related to the prices and if you look at this, if S is equal to
0, what we get is y0 is PL into the value of L0.

So, L0 is y0 by PL and this is this point, this point is y0 by PL and we will get curve which
goes through, this is the revenue function. Now, suppose we want to remove this externality.
One possible way of doing that is to say that let us say that the same company owns the laundry
and the steel mill or the steel mill buys the laundry in which case, this now does not remain an
externality.

It is a decision that, you can change the factors z1 to zm, so that the emission changes and
because of the emission, the laundry changes, so the laundry output would change. So, what
we can now do is we can get a line parallel to this and we will get a new point which is S1, L1
and obviously the revenue here is going to be higher than the value that we had. So, this is now
y1 by PL and so essentially what we get is we are maximizing the revenue. Now this no longer
remains an externality, this is internal, the emission becomes internal to the company.

So, this is one way of removing the externality, thinking in terms of maximizing the total output
of the laundry and the steel mill and we can compare this and then see how much is the overall
loss between these two, the laundry and the steel mill. But if they are separate, we can then
compute that this is the loss in revenue of the laundry caused by the externality and based on
this. So, this is a sort of simple example to illustrate the impact of the externality.

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(Refer Slide Time 15:09)

In many cases, when we talk about externality, when we look at our marginal costs, we have a
private marginal cost, which is not looking at the impact that it is having or the adverse impact
it is having on society. If we add to that the marginal cost of pollution, we can get another curve
which shows the social marginal cost. Now, this was we were talking in terms of this in terms
of an externality caused by the production function, let us think in terms of the externality cause
due to the utility or the consumption function.

(Refer Slide Time 15:41)

So, let us consider an individual and let us look at river, an individual who has not given a
utility function, and that utility function has a combination of different goods and then what we
are looking at, is the total amount of, if you are looking at the amount of goods which is being

476
other goods, which is being purchased, we are looking at individual, who is getting some utility
from swimming, and utility from other goods, and then what happens is as if the river pollution
increases, then the utility or the benefit that you get from swimming starts decreasing.

So, with the result that to have the same amount of utility, you must have other goods to
compensate for it. So, you will get a curve like this for this constant utility, if we are looking
at an indifference curve, if this goes to this point. If this goes to a point where the river is so
polluted that we would not, there is no utility to be gained through swimming, which would
mean that the utility function will become a horizontal line. So, this is a particular indifference
curve and then you would have another indifference curve which is parallel to this, going up to
here and then, it should come up to here.

It should basically, you will see that it comes up to here and then this. So, this is another way
of looking at the indifference curves and then this is the consumption externality, consumption
externality caused by river pollution and that pollution could be done maybe by the steel mill
that we were talking about.

And so, the question is that, of course, we can convert this into an economic term by looking
at, let us say a holiday resort, where it gets a revenue based on swimming and then there is a
steel mill which is polluting the river and because of that, the revenue of the holiday resort can
decrease and we can quantify this kind of an impact.

(Refer Slide Time 18:23)

477
So, in a sense, we have shown some simple examples, hypothetical examples of production
externality and consumption externality. Now let us look at a simple example and this is from
the book by Callan and Thomas. And we have two characteristics supply and demand curves.
the price this is for a refinery. The price is given as 10 plus 0.75Q, we are just following that
example. So, we will use the units.

This is the supply units given by the example in Callan and Thomas and the demand is P is 42
minus 0.125Q where Q is thousand barrels per day and P is the price in US dollars, US dollars
per barrel. So, let us look at the supply which we are talking of. This is also the marginal private
costs. So, this can be, we can write this as the marginal private cost is going to be 10 plus 0.075
Q and the marginal private benefit is 42 minus 0.125 Q.

(Refer Slide Time 20:34)

478
Now, we can take this and draw. So we can look at drawing this, suppose, there is also a
marginal external cost, marginal external cost is given as marginal external cost that means, for
every barrel that is processed in the refinery there is a certain amount of pollution and that
pollution is we assign a cost to it and that is cost which the refinery has to pay maybe as a tax,
as an environmental tax to the society and that is given as 0.05 Q.

So, if marginal external cost is 0.05Q, then the marginal social costs, social costs, this will be
the sum of the marginal private costs, which is the cost to the refinery plus the marginal external
cost that means, see now we have put a value to the externality.

The externality is because the refinery is affecting the utility functions of the society. So, we
can do this and then the marginal social cost will be 10 plus 0.075Q plus 0.05Q and this comes
out to be 10 plus 0.125, 75 plus 5, 0.125 Q. What about the marginal social benefit?

Marginal social benefit, this will be equal to marginal private benefit plus marginal external
benefit. So, in case there was a positive externality, this is what would have come. Now here
MEB will be equal to 0. So, this marginal social benefit is equal to marginal private benefit
which is nothing but 42 minus 0.125 Q. Now, let us look at the equilibrium that we get.

479
(Refer Slide Time 23:14)

480
So, what happens here is if you see we had written this marginal private cost and marginal
private benefit and if we do not consider the externality, which is the normal situation, where
we are just looking at the equilibrium between the private cost and benefit and then this is going
to be, we can equate the two, 10 plus 0.025 Q is 42 minus 0.125 Q. So, we get 32 is equal to
point, this comes here 0.25 and 0.75, so you get 0.2Q and Q becomes equal to 32 by 0.2. So,
this is 160 and this is the 1000 barrels per day.

Now, let us look at what is the price, price is going to be equal to 10 plus 0.075 into 160. So,
this is 160 if you see it is 12, 7.5, 12 into 1.6, it is 10, 16 into three fourths that is 12, 12 plus
10, this is 22 US dollars per barrel. So, we got the equilibrium which is going to be 160 and
22.

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(Refer Slide Time 26:21)

482
So, if we draw this sketch this now, you can show this as this way and you will get, we get this
value 160 and 22. Now, what happens is that we can sketch it like this. We get this as 10 and
this is coming from 42 onwards. So, this is 42 and this comes down here and here you have 10.
This is the price and this is the quantity in 1000. This is the price and we get an equilibrium
which is here, which is 160, this is 22. Now, what happens is we want to now put the, if you
remember we brought the marginal social cost and that marginal social cost we had calculated
that as, added to that the external cost.

So, we got the marginal social costs as 10 plus 0.25Q. So, then the slope, this slope changes, it
starts with 10 but it will… So, as a result of this what happens is because now we are taking in
additional costs, the optimal equilibrium point now shifts, the price increases and the quantity
decreases and as a result of this what happens is that we are now reducing the total amount of
quantity, we are also reducing the pollution which is happening in the society.

So, if you see this, in this curve you see that this is what happens and we can make that
calculation because now what we have is it is 10 plus 0.125 Q is equal to 42 minus 0.125 Q.
So, what we get is 0.25 Q is equal to 32 Q becomes equal to 128, 128,000, you can substitute
that back in the price and you get price now is equal to 26 dollars per barrel. So now this point
which is there is 128 and this is 26.

So, with the result now, what happens is in the initial case we had maximized, we have the
consumer and the producer surplus being maximized. However, we had not taken the
externality into it. Once you shift this, there is a social cost which was there which we had not
considered.

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(Refer Slide Time 29:58)

If you look at this now, we are measuring up, if you look at the society is net gain in the refinery
market and this is again from the Callan and Thomas example, you see that these are the
equilibrium points. If you look at these points, you will find that there is a net, the society gains
this trapezium WXYZ. WXYZ is the society’s gain. The refineries are losing XWYZ. This is
loss, this is the loss in the overall surplus which was there and because of that now the net gain
which is there is just WXY.

So overall what is happening is that we can be, if you don’t consider the external cost and the
social cost as compared to that the refinery is losing, there is a net loss in the surplus. However,
the societal cost, when that is considered the externality that is the impact to society that is
decreased now because the pollution is decreased, the quantity is decreased and that offsets the
loss which is incurred by the refinery.

And because of that, the overall it makes sense to quantify and to cost the externality and to
put a price on the social cost. Of course, this is easier said than done. What is the appropriate
price and this but you can see that by doing that, the equilibrium shifts and, so this is one way
in which we can deal with the externalities.

484
(Refer Slide Time 32:13)

You can look at more details in the three books by Kolstad, Tietenberg and Callan and Thomas.
Now we would like to look at a related issue. When we talk about the externalities, we need to
think in terms of property rights, and the property rights and the Coase theorem are related
issues and we will just briefly touch upon this.

485
(Refer Slide Time 32:46)

So, property rights when we talk about property rights, it means that if you have some goods
and services, you have property rights on that. This is enforceable, so that means, if someone
steals your cell phone, you can make a complaint to the police and get it back and so stealing
essentially is illegal, you have the property right over your goods and the services that you have
procured. If this is not there, the goods could not be excludable, could not be used in the market,
cannot be rationed using prices.

So, for instance, take another example of a private badge for instance garbage, if there are no
laws to prevent littering, then garbage would not be considered to be excludable and then there
would not be any property rights in terms of the garbage because any garbage can just, you can
just throw it wherever you want and then then there is no issue in terms of… However, if there
are strict littering laws, then you have to dispose off the garbage. You own the garbage, that
disposal, you will have to incur some costs in doing the disposal.

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(Refer Slide Time 34:06)

So, now the question of property rights is, in the case of environment, these are important. So,
who has the right? If there is a factory, there is a steel mill, does the steel mill have the right to
pollute and release emissions to the air? Should we have the right to clean air? Should we be
entitled to elimination of pollution? Should we be entitled to compensation for pollution
damage? Or should polluters have the right to pollute? And this is an interesting question.

There is an ethical questions related to these questions of fairness, questions of justice. But the
interesting thing is from an economic viewpoint, Ronald Coase provided an interesting
argument, which is a little counterintuitive, and essentially, the argument says that from an
economic viewpoint it does not matter who has the right. Whether the society or the citizens
have the right to clean air, or the industry has the right to pollute, the final optimum economic
optimum remains the same.

And so that is a very interesting and the example Ronald Coase paper talks about a number of
different examples. It talks about the example of farmers raring cattle and the straying cattle
affecting the farmers crops and then another example where there is a tall building blocking
the air currents of a wind turbine. So, the wind turbine output gets affected by the building.

So, the question is whether the building has the right to do that, or the wind turbine has the
right to have a free space and the building should get permission from the wind turbine or
should compensate the wind turbine manufacturer. A building casting a shadow on a cabana
and swimming area in the sunbathing area of a hotel and resulting in a loss of revenue to the

487
hotel and then, so then there are these airport coming in a particular location and affecting the
residents and the noise and then there were many different cases which are there.

(Refer Slide Time 36:38)

So, Ronald Coase discusses and looks at legal judgments in many of these cases and the
question being raised is who should have the rights? The polluter or the victim? For instance,
we talked about the steel factory or the laundry and then we said, if we combine them, we get
an optimal but who has the right? Does the steel factory have the right? Or the laundry has the
right? And the laundry has the right to clean air then the Steel factory will have to compensate.

If the steel factory has the right to pollute because maybe it was there before and then the
laundry will, then it would not give any compensation. A refinery or a car factory, again the
refinery affecting the output and polluting and affecting the car factory, steel factory or a hotel,
refinery or recreational users and these are all from different textbooks and Ronald Coase paper
talks about a doctor and a confectioner.

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(Refer Slide Time 37:37)

So, Ronald Coase proposed the Coase theorem and got the Nobel Prize in 1991. This paper
was published in 1960. It is called the problem of social cost. It is in the Journal of law and
economics and you can look up the original paper and his theorem, the Coase theorem says in
the absence of transaction costs, the allocation of resources is independent of the initial
assignment of property rights, which means that if there are no transaction costs involved, then
it is immaterial who has the rights, whether the polluter or the victim has the rights and the
result, we would get the same economic solution.

(Refer Slide Time 38:34)

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And so, the proper assignment of property rights, even if externalities are present will allow
bargaining between parties such that an efficient solution will result regardless of who holds
the right and this assumes costless transactions and it assumes that damages are accessible and
measurable.

(Refer Slide Time 38:56)

So, in Coase’s own words, he says that what I showed in that article as I thought was that in a
regime of zero transaction costs and assumption of standard economic theory, negotiations
between the parties would lead to those arrangements being made, which would maximize
wealth and this irrespective of the initial assignments of rights. This is the famous Coase
theorem named and formulated by Stigler, although it is based on work of mine. So, it was
Ronald Coase who gave this, who did this, but it was articulated as the Coase theorem by
another famous economist who is this, Joseph Stickler.

490
(Refer Slide Time 39:36)

So, the example that he gave Ronald Coase talked of in his paper is that the confectioner is
making cakes and other confectionery items and this has two mortars and a pestle and have 60
years of operation on a particular street. So, it has confectionery shop which was doing fairly
well and it is been there for a long time and there was also a doctor’s clinic at the same time
and there was no difficulty for the initial eight years and till the doctor built a new consulting
room next to the confectioner’s kitchen.

And the confectioner, the noise from some of the confectioner’s machinery prevented the
doctor from examining patients, specially for chest diseases where the sound being used from
the chest which has to be actually assessed by the doctor, the sound of the machinery affects
that and there was a case which was filed and legal action to stop the use of machinery. And
so, the court ruled in favor of the doctor and got an injunction against the use of machinery.

And what Coase says is whether the doctor won the case or the confectioner won the case, the
final result would be the same and bargaining is possible. The confectioner could assess what
is the doctor’s loss of income, and because of that, the doctor could move, so depending on
what is the amount of loss of income caused by the doctor or the doctor’s inconvenience to
move to another location could be the cost which is incurred. And if the confectioner’s revenue
exceeds that, the confectioner could compensate the doctor for this.

And this would be done even if the confectioner… The doctor could build a wall or mitigate
the noise and this could be done where the confectioner, if the doctor had the rights and the
confectioner is losing out on, the doctor had the right and the doctor stops the confectioner

491
from continuing its operation, the confectioner’s revenue exceeds the losses of the doctor, the
confectioner could then pay the doctor to build a wall or to mitigate the noise or to move.

And if the confectioner had the rights, and the doctor had a loss of income and that income was
less than the confectioner’s the doctor would go ahead and build the wall to mitigate the noise.

(Refer Slide Time 43:09)

So, the interesting thing, so the thing is that confectioner willing to do this if the payment to
doctor is less than the fall of income if he changed the mode of operation, abandoned operation
or switched his operation. So, what if the confectionery had won the case? If that is confectioner
has won the case, then it would depend on the doctor making the, getting the loss of revenue,
and the doctor would pay the confectioner to continue the operations or make its own.

So then basically, if there is no, if this transaction cost is negligible, or is zero, then it does not
matter who has the rights and this is the, this is a very interesting kind of statement. Of course,
in practice we always have transaction costs and in terms of fairness, there is always the issue
of compensating the, in the case of an industry you have to compensate the people who are
affected, and so externalities and of course in all of this, there is an issue of tradeoffs and costs.

And there is an issue in terms of the equity and fairness. So, with this, we complete the portion
on analysis of externalities and we will move on now and we will talk in terms of financing of
energy.

492
 Energy Resources, Economics and Environment
Professor Ranjan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 15
Revision Paper-1 (Party 2)

I hope you have been successful in solving the paper. It is a fairly simple paper which just
revises all the things that we have touched upon. We will go through the paper, question by
question. So, let us start with the first question.

(Refer Slide Time 0:33)

The first question was where we have to write true or false and explain the reason for the answer
and of course, you should give yourself marks only if your reasoning is correct. So, the first
part of this one, A says, the human disruption index for CO2 is 0.0005. Now look at what is the
definition of the human disruption index.

(Refer Slide Time 0:59)

493
Human disrupt index which if you remember was proposed by John Holdren is the ratio of the
human generated flow of a particular global pollutant, human generated flow annually divided
by the natural or the baseline flow. Now, what happens is that, this would mean and we said
that if the human generated flow is 1 or more than 1 then we have a problem. HDI suppose this
HDI for CO2 was 0.0005 then nature would be able to take care of the CO2 emissions very
easily.

It is small as compared to the natural or baseline flow and then there would not be a CO2
problem. So, this statement is false, the HDI for CO2 is much higher. It is approximately 0.1
and since the concentration of CO2 is increasing, and its, it is not possible for nature now to
take care of it and that is why there is a global warming problem. So, the answer as we said is
false because if the HDI was so small, then there would not have been a CO2 problem. If the
CO2 flows, the human generated flows would be much lower than what is generated by nature
and what nature can actually sustain. So, this was the first question.

(Refer Slide Time 3:07)

Let us go to 1b. 1b is saying ONGC Videsh acquired natural gas mines in Kazakhstan. This
results in an improvement in India’s energy security. So, as we said, energy security, the
definition of energy security is where we would like to see that our energy sources will not get
disrupted and we can have uninterrupted supply of energy that is required for the society. If we
add natural gas mines in Kazakhstan, which will increase the control and sovereignty over gas
supplies in India, and then this will increase our energy security.

494
So, the answer to this is that this is true and this will increase our energy security because we
have control over additional gas resources, which will be under the sovereign, under the
ownership of the company ONGC Videsh and so that is, this is going to be, this answer is true.

(Refer Slide Time 4:14)

Let us look at the third question. The third question says, the cost of saved carbon for a grid
connected 1 megawatt PV plant, the same plant, exactly the same technical configuration and
characteristics will be the same for a location in Kerala as it is for a location in Chhattisgarh.
Now, what is the cost of saved carbon?

(Refer Slide Time 4:36)

495
Cost of saved carbon is the incremental annualized cost of that measure. So, that would mean
what is the capital cost of that PV plant and when we annualize it, and then divide that by the
annual carbon dioxide savings. So, couple of things, the first thing is that in two locations in
Kerala and Chattisgarh, the solar insulation may be different. So even though the plant is the
same, the outputs may be different. Of course, this may not be drastically different.

The second thing is that when you look at the supply mix, in Chhattisgarh, the grid is
predominantly thermal. Chhattisgarh grid, predominantly thermal which means that when we
put a PV plant there we are actually replacing coal-based power and the amount of CO2 savings
would be much higher than the CO2 per kilowatt hour. In Kerala, it is a predominantly hydro
grid.

So, the CO2 per kilowatt hour would be much lower and hence, these two would be quite
different, solar installation may also be different. So, the answer is that this is going to be false,
it is not going to be the same. The answer to this is false.

(Refer Slide Time 6:37)

Let us look at the next part. 1d. 1d says solar radiation is a form of secondary energy.
Remember what was our definition of primary and secondary energy stopped primary energy
is the energy that is available in nature, goes through a sequence of conversion steps to get
secondary energy. So, this is false because obviously solar radiation is available in nature. It is
a primary energy and not a form of secondary energy. So, the answer to this is clearly false.

496
(Refer Slide Time 7:11)

Let us look at 1e. 1e says the carbon dioxide emission factor of a thermal power plant will
remain the same even if its energy efficiency is increased. So, let us look at what is the carbon
dioxide emission factor, carbon dioxide emission factor. Carbon dioxide emission factor will
be the kg of CO2 per kilowatt hour of electricity. That is the carbon dioxide emission factor.

Let us see what is the efficiency, efficiency, this is going to be the electricity output in kilowatt
hours divided by the energy input. So, we can write this as kilowatt hour of electricity divided
by kg of coal into the energy content of coal.

497
(Refer Slide Time 8:54)

Now, if the coal composition remains the same, what would happen is that if we look at kg
CO2 per kilowatt hour, that will be equal to kg of coal per kilowatt hour into kg of carbon per
kg of coal, that is the percentage of carbon in the fuel into 44 by 12. Now, if the efficiency
increases, for the same amount of electricity generated, we would be using less coal. So, this
would decrease and if the composition of the coal remains the same, this would mean that the
emission factor would decrease.

Emission factor would decrease if the efficiency increases, would decrease and the statement
here says that if the carbon emission factor of a thermal power plant will remain the same, even
if the energy efficiency is increased, so the statement is clearly false. If the efficiency increases,
and it is the same coal that we are talking about, the emission factor would decrease.

(Refer Slide Time 10:37)

498
So, let us look at the 1f, the next statement. It says that it is not possible for a country with a
lower electricity consumption per capita than the world average, to have a human development
index greater than any country that has an electricity consumption that is more than 120 percent
of the world average.

(Refer Slide Time 11:07)

So, now if you remember the plot that we had showed, where we showed the HDI, if you show
HDI versus electricity use and the Human Development Index, you clearly see there is a
pattern. But there is also a scatter in the data and you have a curve something like this, which
saturates beyond the point. But at any electricity use, there are a large number of countries
where there could be a variety of human development indexes.

So HDI, as we saw is a composite index of a set of things. The life expectancy at birth, life
expectancy at birth, income and education. So, it is possible there are countries which are using
less energy services, but which have developed better quality of health and education. So, many
countries have focused on health and education and they can have a better quality of life, even
though they have not increased their electricity use.

So, it is possible that there are countries where, it is not possible with a lower electricity than
the world average. It is possible that there are countries which have lower consumption than
world average to have a better quality of life. There are countries which have significant, high
electricity consumption and which is inefficient, there is much more inequality and the health
and education is not that good.

So, this statement is essentially it is false, because it is possible for a country to have a higher
HDI. In general, there is a minimum amount of electricity required for improving the quality
of life. But within when you make the comparison, there are many other factors apart from the

499
electricity use, which affect the AGI. So, these are the six statements and if you have got the
answer, true or false correct and your reasoning is correct, then you can give yourself the full
2 marks for each of these sections. So now let us look at the second question.

(Refer Slide Time 13:40)

The second question is on the resources it is a country had an annual production of coal in 2018
of 600 million tons and the production of coal in 2013 was 500 million tons. The proven
reserves is 140 thousand million tons. Calculate the static R by P ratio. So, the static R by P
ratio that we calculate should be for the most recent year.

(Refer Slide Time 14:11)

500
So, let us take 600 million tons, all that we have to do is divide 140 thousand million tons by
600 million tons and we get 233 years. This is the static r by P ratio. The second part of the
question is considering the compound annual growth rate during 2013 to 18 as the growth rate
for an exponential growth model, calculate the number of years that the coal will last and
obviously that is going to be less than this 233 because we are talking of an exponential growth
model.

So, let us, see P 2018 is 600 million tons and P 2013 is 500 million tons. These are similar to
the numbers for India actually for coal. So, if we want to find the growth rate, it will be 1 plus
g, 2013 to 18 is 5 years, 1 plus g raised to 5 is equal to 600 by 500, 1.2 and so g comes out to
be 0.037 or 3.7 percent. Compound annual growth rate of 3.7% during these 5 years.

(Refer Slide Time 15:50)

501
Now, let us see how do we calculate the number of years for which the coal will last. So, we
can just take this. We just derived this earlier, P plus P into 1 plus G and so on, P into 1 plus g
raised to n, you can of course, if you remember the formula that is also fine, but you can just
derive it in one or two steps.

So, this gives us S into 1 plus g minus 1 is P into 1 plus g raised to n plus 1 minus P. So, S by
P and this is the, S by P is the total that we were looking at, is the static r by P ratio. This should
be 1 plus g raised to n plus 1 minus 1 by G. Substitute this, we get 233 is equal to 1.037 raised
to n plus 1 minus 1 by 0.037.

(Refer Slide Time 17:21)

So, what we can then do is we can just you can see that this is going to be equal to 233 into
0.037 is equal to 1.037 raised to N plus 1 minus 1. This comes out to be 8.621, you can take
the 1 on this side, this comes to 1.037 raised to n plus 1. You can just take ln on both sides and
you get ln of 9.621 is equal to n plus 1 into ln 1.037 and you get N plus 1 is equal to 2.264 by
0.0363 and you get this as 62.3.

N plus 1 is 62.3. So, N approximately equal to 61 years and so that means the date will last
from 2018 plus 61 year in which it gets completed will be 2079 AD, so that is the model, earlier
we got R by P ratio as 233 years, now we have got it as 61 years. So that is the question part
B.

502
(Refer Slide Time 19:19)

Let us look at Part C, the coal production data has been fitted. So, you have a data set and it
has been fitted to the data set and an S shaped curve, logistic curve, that means this is production
S, this is QP by t, QP is integral Pdt, that is what has been done and this has been fitted for an
ultimate reserve of 140 thousand million tons.

And this is the equation that we got, QP, this has been given to you. 140 thousand divided by
1 plus 600 e raised to minus 0.06 t where QP is the cumulative production and that starts from
t is equal to 0 is 1960. So, the question that has been asked is calculate the time when the peak
production is reached.

503
Now, if you remember when we had derived this we had derived the, you can differentiate this
and find the point at which we are getting the peak that is going to be the differentiation of this
gives you dQP by dt will be the production and second differential of that and set that equal to
0, that will be when the production is maximum, you can check, this will give you tQP by is
lnA by BQ infinity.

This was the formula that we had derived and we can substitute the values. This is going to be
ln 600 by 0.06. 0.06 is BQ infinity and this is your A. So, this turns out to be approximately
106.6. So, it is about 107 years. That is when the peak will occur and if t is equal to 0 is 1960,
so peak will occur in 2067 AD. Remember, we found in the exponential growth case that it
will last get depleted in 2079, here it will, the peak will occur in 2067.

So, if we want to calculate the second thing which has been asked is calculate the time when
the peak production is reached, and that we have just done and when 90 percent is exhausted.

(Refer Slide Time 22:05)

So, when 90 percent is exhausted, we want to put QP is point nine into 140 thousand, this is
equal to 140 thousand by 1 plus 600 e raised to minus 0.6 T 90. T90 is what we want to find
out. So, then this becomes 1 plus 600 e raised to minus point, 0.06. 0.06 T90 is equal to 1 by
0.9, this is 1.11. So, we get 600 e raised to minus 0.06 T90 point and we can take logs and you
get T is 143.2 years.

So, 1960 plus 143 comes out to be 2103 AD. Then you asked, compare the three estimates of
time duration of coal in A, B, C. So, obviously, the smallest value comes out to be with
exponential growth. T exponential growth less than T pearl curve or s shaped or the Herbert’s

504
model S shaped curve or pearl curve and this will be less than the static R by P ratio. These are
three different ways in which we get estimates of time for which the resources will last.

(Refer Slide Time 24:18)

So, the last part of this question says what are the limitations to the Herbert’s model and are
there any other approaches possible. So, there are in all of this, the technology, in Herbert’s
model, technology is assumed to be static. So, what happens is that with time resources which
are not considered to be minable based on improvements in technology and economics, many
of these now become mineable and so the estimate of the results changes.

So, that is one that is one problem with the model. The second problem with the model is that
the curve considered is symmetric about the point of inflection, but in actual practice, when
you reach the peak beyond that, that will not remain symmetric. Also, there are other substitutes
and so that is not considered in this model.

(Refer Slide Time 25:25)

505
Another approach or other approaches possible, there are approaches where you have, do you
create a cost of supply and you can see this, this was there in the global energy assessment
chapter on resources. If you look at the quantity that you can get or the reserves which are
there, at different costs of supply, we can actually create a supply curve in terms of cost of
supply and the quantity of the reserve.

That means today we may get it at some costs, then may be other reserves which are relatively
more difficult to mine, where they can have, so we can have basically different things and these
could be, these need not be deterministic, these could also be probabilistic. So, let us look at
now the next question.

(Refer Slide Time 26:23)

The question three is a question on economics we are talking of, let me just read out and explain
the question to then we will go over it step by step. Diesel engine generators and you may see
this all over the country wherever there is problem with power supply, we usually have what
is known as a Genset. It is a diesel engine cum generator. They are commonly used as backup
power supply.

And we want to look at a company with a discount rate of 30 percent, which has a diesel engine
generator dg set of rating 25 kilowatt for its outlets as backup supply with the normal electricity
supply coming from the grid. And in 2018 we are told that the diesel engine generator was
operated for a total of 800 hours with a total electricity generation of 12,000 kilowatt hours.

So, the details of the generator are given. Capital costs of the diesel engine generator is 4 lakhs,
life of the dg set is 10 years, then there is an operating cost, there is a fuel and the non-fuel.

506
Non-fuel operating maintenance costs annually is given to us as 25,000 rupees, the efficiency
is given as 35 percent, fuel used is light diesel oil. The energy content and the price and the
carbon percentage is given.

(Refer Slide Time 27:43)

So, let us see what else we are asked to determine. The first thing is calculate the annual amount
of LDO used, light diesel oil used and the annual fuel cost. So, first let us see we the total
electricity generation annually is given as, total electricity generation is 12,000 kilowatt hours
and we want to find out how much fuel is being used.

So, we have the fuel input will be the generation divided by the efficiency, 12,000 kilowatt
hours, 1 kilowatt hour is 1 kilojoules per second into 60 seconds per minute into 60 minutes
per hour. So, this is going to be 3600 kilojoules per kilowatt hour.

507
So now this numerator is in kilojoules divided by the efficiency, 35 percent. Fuel input in
kilojoules is this and if we want to find out, so this is the fuel input in kilojoules. If you want
to find out in mega joules, this is going to be 12,000 into 3600 by 0.35 divided by 10 raised to
3, this is in mega joules and this comes out to be 123429 mega joules.

If you want to find out how many kgs of fuel is used, we know what is the energy content of 1
kg of coal, 1kg of a LDO, diesel oil is 41 mega joules as given in the question. So, we just
divide this by 41 and we get approximately 3000 kgs, 3010 kgs of LDO in one year. So, what
is the annual fuel cost? Annual fuel cost is taken this and multiply it by the price. So, 3010 into
rupees 50 per kg comes out to be rupees 1.51 lakhs.

(Refer Slide Time 30:30)

508
The next part is to calculate the annualized life cycle costs and the cost of generated electricity
for the LDO system. So, if we look at the cost, we have the annualized lifecycle cost will be
the annualized capital cost. Let us calculate this in lakhs. So, we have the dg set has been told
that it costs 4 lakhs. 4 lakhs into the capital recovery factor.

So, that we annualize it, discount rate is 30 percent, life is 10 years plus the fuel costs which
we just now calculated, which was 1.51 lakhs plus the nonfuel O&M which was 25,000 rupees,
which is in lakhs which is 0.25. So, this is in lakhs, CRF 0.310, we have already calculated,
this is 1.3 raised to 10.

This is 0.323. So ALCC is 4 into 0.323 plus 1.51 plus 0.25. So, this comes out to be 3.1 lakhs.
Cost of generated electricity if you want to calculate, cost of generated electricity, we divide
this by the total amount that we are generating annually. So, it is 3.1 into 10 raises to 5 divided
by 12,000 and this will be rupees per kilowatt hour and if you calculate this it comes out to be
25.4 rupees per kilowatt hour. Done some rounding off, so if you get something which is similar
off by a decimal place or so, it is all right. So, this is the amount of, you keep this number in
mind we will compare it with the new.

(Refer Slide Time 33:12)

509
The next part is compute the carbon dioxide emission factor for the dg set and the annual carbon
dioxide emitted. So, annual kg of CO2, we said 3010 kgs of diesel, we are also told that the
diesel has 84 percent carbon. So, this will be 3010 in 0.84 This is the kg of carbon which is
emitted. Now, C plus O2 giving you CO2, this is 12, this is 44. So, kg of CO2 per kg of carbon
is into 44 by 12. We have done this a number of times. So, you probably just remember this
factor but so this way we can get this.

This will give us 9271 kgs of CO2 annually or if we just talked about carbon it would have
been 2500 kgs of… So, this is 9.3 tons of CO2 being emitted. Now, let us see what was the
emission factor, emission factor is the amount that we are emitting 9271 kgs divided by the
output which is in kilowatt hour. So, this will be kg per kilowatt hour and if you do this number
you will find that this is 0.773 kg of CO2 per kilowatt hour. So, this is if you look at the numbers
that are there in our power sector, you will find that this is a reasonable number it is within that
kind of range and the power sector is sector which is responsible for significant CO2 emissions.
Let us look at the next part of the question.

510
(Refer Slide Time 35:15)

Next part of the question is that there is a proposal to replace the DG set with a solar PV module.
Why are we trying to do this? Well, we have DG has emissions, both local emissions as well
as CO2 emissions and we replace this with solar. Then these emissions would be avoided and
there is an annual cost of fuel. If you replace it with solar there will be no annual cost of fuel.

So, in this case, the solar PV module rating is 10 kilowatt, module life of 25 years, price 6 lakhs
and battery rating of 30 kilowatt hour, price 2.4 lakhs, life five years and balance of system
power electronics controller is 1 lakh, life 10 years. So, assume that the final the electricity
supplied by the system from the battery is the same as that of the DG. So, if we look at this, we
can just take this as total capital cost.

(Refer Slide Time 36:11)

This is very similar to the example that we had done. 6 plus 2.4 plus 1, this is 9.4 lakhs. What
is the annual saving? The annual saving is essentially the difference in the fuel price, the O&M
is almost similar. So, the annual fuel saving is 1.5 lakhs. 1.5 lakhs and what is then the simple

511
payback period? It is just going to be 9.4 lakhs which is the investment divided by 1.5 is
approximately 6.3 years.

Now, the point in this is that this is, this considers the entire capital because we are saying that
the DG is already there. We could also take in some cases, if we, if it is a Greenfield project,
we can take the initial cost, we can subtract from these 4 lakhs and then the payback periods
would be much lower. If we consider and if we neglect the non-fuel O&M in the case of PV
then the annual savings could be slightly higher. So, this is the in terms of the simple payback
period.

(Refer Slide Time 38:06)

Now let us calculate what is the initial cost and simple payback period. We have done this.
Calculate annualized life cycle cost. So annualized life cycle cost for the PV system is going

512
to be 6 into CRF 0.325 PV modules have a higher life, the battery 2.4 lakhs, capital recovery
factor, discount rate is the same, life is five years plus balance of system 1, CRF 0.3, 10 years
plus let us say 0.25 lakhs is the if we say that the non-fuel O&M is almost the same, then this
is going to be 6 into the CRF 0.325 turns out to be approximately 0.3 itself, 0.301 or something.
This is 2.4 into 0.411, please check these numbers.

And this is 1 into 0.323 plus 0.25, when we add this up this turns out to be 3.36 lakhs and the
cost of generated electricity then becomes 3.36 into 10 raised to 5 divided by 12,000, turns out
to be 28 rupees per kilo watt hour. Just compare this with the earlier number that we had, that
number was 25.4. So, this looks to be a costlier option. Of course, it depends on the discount
rate and what is the scarcity of capital. If you do the same numbers with a discount rate of 10
percent, you might find that the PV seems to be viable.

(Refer Slide Time 40:04)

In this case, let us the last part is should the company opt for the PV battery? Well, based on
the economic calculations and the discount rate, the company would not opt for the PV battery
system because the LCC is going to be less for the DG system. However, if we look at the cost
of saved carbon and if there is an incentive based on the carbon and you have a carbon credit,
then the test might make it viable. So, let us calculate the cost of saved carbon.

513
(Refer Slide Time 40:43)

This is going to be 3.36 minus 3.1 divided by 9271. This is the annualized life cycle costs in
the case of PV, annualized lifecycle costs in the case of dg, the difference in that divided by
the tons of carbon the cages of carbon saved and this turns out to be rupees 3.34 per kg of CO2
or rupees 3340 per ton of CO2 then you can compare it with the carbon price for a CER, CER
is one ton of CO2 and so you can see this and compare it with that.

So, if the CERS are sold at a price which is greater than 3340, then of course this will become
viable. So, we have seen this option, it is essentially various simple in terms of, it is a simple
application of what we had learned in the energy economics and the emission factor. Now let
us look at the fourth question.

(Refer Slide Time 42:15)

And the fourth question talks, so this is data for Sweden for two different years, 2010 and 2016
and you can see the populations growing but not much. 9.3 million and 9.9 million and look at
the GDP in market exchange rate.

It is been growing and interestingly GDP and purchasing power parity, less than the GDP in
the market exchange rate and the total primary energy supply you can see it, it has declined the

514
electricity consumption, CO2 emissions and the energy imports. So, based on this, these are all
available for IEA statistics.

(Refer Slide Time 43:00)

And the aggregate data is also given to you for India and the world in terms of and this is for
snapshot in time in 2016. Here we have both 2010 and 2016. We have the similar numbers
now, the overall indicators for India and the world. And the question which is involved is a
comparison of the Swedish energy sector and the economy with India and the world.

515
(Refer Slide Time 43:37)

So, the first thing which has been asked is what is the GDP per capita? What is the difference
between the GDP based on market exchange rate and GDP based on purchasing power parity?
Which one should be used for inter country comparisons? And in the case of Sweden the GDP,
purchasing power parity is lower than GDP market exchange rate. Is this also true for India?

(Refer Slide Time 44:03)

So, this is straightforward calculations. First GDP per capita we just take the GDP and divide
it by the population, 560 by 9.9, turns out to be 56.6 billion dollars, this will be billion by
million. So, this turns out to be 56,566 dollars per capita and if you see the India, India’s
numbers will of course be lower and this is based on the market exchange rate, 2016 GDP
market exchange rate.

Similar thing if we did base on purchasing power parity we find that this is 45,252 dollars per
capita. Generally, GDP purchasing power parity is used for inter country comparisons and that
is to adjust for the fact that in different economies there are different types of when you look
at the exchange rate, it does not always reflect the purchasing power. So, the cost of living and
prices in Sweden is high, higher than the basis. So, the actual GDP is overstated.

516
When you correct it for GDP by purchasing power parity, that amount which is there turns out
to be lower and so in the case of Sweden even the GDP per capita is lower. Is this also true for
India? This is not true for India. For India, on the other hand, the GDP in the market exchange
rate in US dollars is much lower than the actual value of that money. So, the GDP by purchasing
power parity is higher than the GDP market exchange rate.

517
 Energy Resources, Economics and Enviorment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology Bombay
Lecture – 15 P2
Revision paper – 1 (Part 3)
(Refer Slide Time: 00:20)

The next part of the question is compute the per capita electricity consumption and per capita
primary energy use for Sweden in 2016. This is simple, this is just divide these numbers and
you get, just take the total population divided by the total electricity used, kilowatt hour, divided
by the population and you get 13,838 kWh/capita. Primary energy if we again we divide 2048
into 10 raised to 15 by 9.9 into 10 raised to 6, turns out to be 207 GJ/capita

518
Now we can compare it with the primary energy per capita for India and the world and you can
see that the primary energy is supply, the per capita for Sweden is greater than that of the world
average and greater than that of India, which is as we expected, but we have been able to
quantify it. So, then the question is comment on these values, how do these link with
development.

But typically what happens is that, with a higher level of income, you would have a higher
requirement of electricity use and you can see that very clearly that in the Indian context the
energy use and the electricity use is significantly lower than that for Sweden.

(Refer Slide Time: 02:11)

We have also the next table shows us the Sweden electricity sector mix in hydro, nuclear, wind
and solar and the generation. So, you we can see very clearly that in this particular case, there
is a significant amount of then the total including the thermal if you look at it the installed
capacity of hydro is quite significant. And we can see that hydro and wind together is a
significant proportion of the total.

519
(Refer Slide Time: 2:51)

So, we should then the question asked is compare the capacity factor of the wind and nuclear
plants for Sweden. So, this is fairly straightforward, because we have the installed capacity and
the generation and all that we need to do is that we need to find out the capacity factor.

520
(Refer Slide Time: 03:22)

So, in the case of wind the generation is 15 point, if you see 15.5 terawatt hours, that is 15.5
into terawatt is 10 raised to 12 watt hours and if you want to make it in kilowatt hours, this will
be 10 raised to 9 kilowatt hours divided by let us look at the installed capacity of wind, installed
capacity of wind is 6520 megawatt which is into 10 raised to 3 kilowatt and into the total
number of hours is 24 into 365 or 8760. This is the maximum generation possible if all the
wind capacity is operating continuously at its rated value.

So, this will be also in kilowatt hours, this becomes a factor which is the capacity factor. You
can calculate this and you will find that this turns out to be 0.267. 26.7 %, it is a fairly high, for
wind it is a fairly high capacity, the Indian wind regime capacity factors are much lower. It is
like 14, 15 % on an average. But also remember that this is going to be lower than that, which
is there for the base load coal or thermal plants. We will also see that it is actually going to be
lower than the nuclear.

Let us look at the nuclear same way. Let us calculate the nuclear. In the case of nuclear we are
told that it is 60.5. So, we can do in the same fashion and nuclear is 9075 into 10 raised to 3
into 8760. Calculate this if 0.761, 76.1 %.

521
(Refer Slide Time: 05:39)

We are also asked to compare the capacity factor of this. Obviously, capacity factor of nuclear
is higher. We expect that it runs as a base load plant, wind will the capacity factor is constrained
by the supply of the wind. And now we are asked to compare the carbon intensity of Sweden's
energy sector with India and to comment on the emission intensity of Sweden's power sector
as compared to India.

(Refer Slide Time: 06:17)

522
So, in order to do this the carbon intensity let us see, we have the total CO2 emissions, which
is given to us as CO2 emissions million tons, let us take it for 2016. This is 36 million tons.
And this is to be divided by the amount of electricity that we are generating. And the total or
sorry we are doing it per unit of primary energy, so, by 2048 primary energy and this is in Giga
joules. So, this is 10 raised to 15. If we want to do this in terms of kg we will have a 10 raised
to 3 factor and you will find when you calculate this, this comes out to be 36,000 by 2048, 17.6
kg of CO2 per Giga Joule.

(Refer Slide Time: 07:28)

Let us look at now what were those India numbers. CO2 for primary energy for India and the
world are almost the same, Sweden is lower than this. And the reason for this is that if you look
at Sweden, there is a significant share of renewables and hydro and India is predominantly coal
based and with the result that we expect that the emissions intensity of Sweden's power sector
is going to be lower than that for in India, significantly lower than that of India.

523
(Refer Slide Time: 08:11)

The next part of the question is, you has asked to use the Kaya, using the Kaya identity,
comment on the changes in the carbon intensity of energy, the energy intensity of the economy
for Sweden during 2010 to 2016. And then compare this energy intensity with energy intensity
of India. What does the energy intensity reflect? Does a lower energy intensity imply more
energy efficient economy?

(Refer Slide Time: 08:41)

So, Let us look at the Kaya identity. If you look at for Sweden for 2016, the total CO2 emissions,
CO2 emissions is 38. So this is 38 by 2048. This is CO2 per unit energy into energy, per unit
GDP, E by GDP into GDP per population into population. And the next year this becomes 46,
this is, this is sorry this is the recent year 2016. In 2010, it was 46 which was 46 by 2132 into

524
2132 by 391, let us just check which year it was, let us see the values. 46 is the sorry 46 yeah
46 is for 2010 and this is for in 2010, we had this as 2132, the purchasing power parity, this
was 391 and then this was 391 by 9.3 into 9.3.

So, if you look at this first term in 2016, 2010 this turns out to be, the number is CO2 Kg’s you
see what happens in this case is that we have a decrease in the carbon intensity, 38 by 2048 is
less than 46 by 2132, there is a carbon intensity of energy decreases and this decreases from,
this decreased by about 14 %. The energy use per so, there is an overall decrease in the CO2
emissions, because the carbon intensity has decreased as well as the energy intensity of the
economy.

So, that means both these numbers when you say 38 by 2048 has decreased, this 38 by 2048 is
less than 46 by 2132, this is decreased and similarly 2048 by 448 is less than 2132 by 391. So,
both the carbon intensity CO2 per unit of energy has decreased as well as energy per unit of
GDP has decreased. So, even though the GDP increased and the population increased, overall
the total CO2 emissions has decreased. So, this is the situation for Sweden.

(Refer Slide Time: 12:42)

Then the next part of the question is that, comment on the, compare the energy intensity,
compare the energy intensity with the energy intensity for India. The energy intensity of
Sweden is similar to that of India. But it is less than if you look at these values the energy
intensity per unit of GDP if we are looking at that, in the case of India it is about 4.6 mega
joules per US dollars. And in the case of Sweden when we when we calculated this, we saw
that it is almost similar.

525
The next point was that, what does the energy intensity reflect? The energy intensity can reflect
the efficiency in your system. If you have a more efficient use of energy then we would have
this the energy intensity per unit of output would decrease, but does not energy lower energy
intensity imply a more energy efficient economy? This is not necessarily true. Because the
energy intensity of the economy also depends on the structure of the economy, where does the
GDP come from?

If the economy produces more industrial goods, the energy requirement is higher if it is more
in manufacturing, if you are doing steel, cement, aluminum, we will need more energy.
However, if the energy inten the GDP is coming from the services sector, the energy
requirements are less. So, lower energy intensity, if the structure of the economy is the same,
and the GDP is coming from the same sectors, then of course, if you have a lower energy
intensity it means that we have become more efficient.

But if the structure has changed, it is possible that a lower energy intensity can be done because
we have shifted from manufacturing to services and even though we have not improved the
efficiency.

(Refer Slide Time: 15:24)

And so, then the last question which is there in the paper is comment on the difference in
perspectives and strategies for Sweden and India vis-à-vis, the global climate change
negotiation. So the first point which should be kept in mind is that Sweden, when we look at
the CO2 per population, it is significantly higher than that of India, it is also the, it is about 3.83
tons per capita. The income is higher than that of India.

526
So, Sweden would be one of the countries for which would be considered as a developed
country. It has also now gone to a stage where the energy used per capita is significantly higher
than is higher than the world average. It has an onus to reduce its energy intensity, it is fortunate
that it already has a mix of energy which is less carbon, which is the CO2 per unit of energy is
lower than that of India or of the world average.

And the negotiation strategy for Sweden would be where it is trying to actually stabilize and it
is already contributing more to the problem. It is it is in one of those countries which has already
utilized the reasonable part of the of its CO2 budget. India on the other hand is a developing
country, where all the different components, the infrastructure is not yet in place and we still
need significant increase in the basic energy services. Sweden may have almost saturated in
terms of energy services.

So, in a sense we are approaching the problem from different perspectives. India wants to have
space to grow and try to grow that sustainably which is reflected in our Paris commitments.
Sweden on the other hand, could take a stance that we would like to try and minimize, but it
would try to it is already one of the countries which is one of the, on a per capita basis, higher
emitter. It would like to negotiate for emission targets based on per GDP, rather than per capita.
India would like to negotiate based on a per capita basis.

However, having said that Sweden is actually one of the countries which has been pushing for
higher enables and strategies which will reduce and mitigate climate change. Sweden has also
made ambitious targets and as you saw over the years, in this time period 2010 to 2016, the
overall CO2 emissions have actually declined.

So, from the Paris agreement of view, different countries could have different prospective
based on what is their status and what is their expected growth. So, with this, we complete the
solution of this paper, you may want to just look at how you have performed and then if you
have any questions, please feel free to mail those to us.

527
 Energy Resources, Economics and Environment.
Professor. Rangan Banerjee.
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay.
Energy Projects Financing-Part 1.

In this module we are going to talk about financing of energy projects. Previously we have
been looking at energy economics.

(Refer Slide Time: 00:34)

And in energy economics, we looked at how we can look at an upfront C0, which is an initial
investment and then we were getting returns A1, A2, An. So, this was typically for a project
where we are looking at a tenure of the project of n years, we had an upfront investment and
we compared the benefits with the cost. And we looked at different ways of doing this, the net
present value, benefit cost ratio, internal rate of return, the life cycle costing, annualized life
cycle costing.

At that time, we did not bother about where we are getting this initial investment from the C0
and that is what we will be talking about in this module. How do we finance or get the
investment required to actually implement or initiate a large energy project? So, let us start
with seeing that, in that session we talked about building a solar thermal power plant.

And in a solar thermal power plant, you will have the solar field, that means you will have for
instance you have parabolic concentrators, where you have the solar insolation coming in that
is concentrating the energy to a working fluid, normally that is a heat transfer oil. That heat
transfer oil is then heated to us high temperature, in some of these cases it may be 390-400
degrees centigrade, that heat transfer oil then is used to generate steam in a heat exchanger.

528
That heated steam then is used to drive a turbine and generate power that shaft power that is
connected to a generator and you get electric generator, you have electricity which then is
transmitted to the grid.

(Refer Slide Time: 02:47)

So, in all of these components, if you look at the components if we want to estimate the different
cost components of this, we have different components the solar field, the turbine and the solar
Insolation. So, we need to estimate based on the… So, we start by looking at for a given
location, we will know what is the solar insolation, from that insolation for a particular output
we can estimate what will be the solar field area, based on that you have the solar field costs,
the land area, the land costs and the heat transfer fluid and its cost.

So, with all of this we get also the power plant, the power turbine and the generator and the
heat exchangers and then you get the power block and the capital costs. And then from all this
capital cost, then we can analyze it based on live discount rate and we can calculate the
replacement cost, the capacity factor. This is in terms of the overall cost analysis.

529
(Refer Slide Time: 03:47)

When we want to look at now the cost, the total capital cost, that can happen in terms of we
may use our own finance, our own equity or the company itself puts in the money. Or we can
take a loan and we can finance it and we have to, for the loan will have to repay the loan and
then we can see for the equity, what is the rate of return on the equity. And So, typically when
we look at this, we are trying to see whether or not the company should invest. And of course,
in that there are choices in terms of where will the funds come from and typically, we are
looking at funding coming from equity or debt, that means your own money or you are
borrowing the money from somewhere.

(Refer Slide Time: 04:47)

530
So, let us look now at a little bit of the basics of financing, when we talk about a project. A
project is a well-defined entity, for instance, we talk about wind based by wind turbine, wind
field, solar power generator, a particular heat, these are all specific projects. If you look at, let
us say you are building a road, that is a fixed project for a particular goal with a particular time
period, and then you can look at the investment. So, in each of these projects, there will be a
profile of risks and returns that means there are some uncertainties or risks involved, especially
if we are talking about new technologies.

And then based on the risks, based on making the investment, you will get returns based on the
benefits that you get from the project. So, the whole issue when we talk about financing, is to
estimate what kind of risks and what are the trade-offs between the risks and the returns.

So, in general, there might be a credit risk, that means the project whoever is sponsoring the
project, how credit worthy is that individual or company and what is the guarantee that they
will actually return the money and once they get the revenues. So, there is a credit risk and
there are commercial risks. So, in the case of commercial risks, there could be a risk related to
the technology.

If you are trying out a new technology for the first time, it may be you have estimated how it
will perform but actual performance may not be the same. So, it may be a proven technology
or not. In some cases, there may be a risk in terms of resources. For instance, many of the new
plants which were installed in the case of wind, the wind speeds were much lower than what
was expected and so the capacity factors or the amount of generation that were being obtained
were relatively less and with the result then the revenues were less.

Similar kinds of problems have happened with solar insolation. Sometimes there are have been
sites where the solar insolation data has not been mapped over a long period. And after we
installed, we expected a certain, we installed it based on certain design values of solar radiation
incident and actual solar radiation was lower, with the result that the output was lower than
expected and there could be environmental risks.

For instance, if we think in terms of large hydro project or let us say a large nuclear project.
For instance, there is this project which was the VBERs with VBERs with Russian technology,
in Kudankolam and the problem in that has been, there had been strong local opposition, with
the result that there have been delays. And this has, this again associates with it a certain amount
of risks.

531
There had the extreme and the project, the environmental impacts and the opposition to the
project. The actual environmental impacts or the perceived environmental impact may result
in the project actually getting installed, it may go to the courts and the courts may go against
it. So, there could be various issues and that is another risk, which were the company or the
project developer has to take.

There could be a problem in terms of revenues. For instance, in order to mitigate this risk, the
government in the Indian context, created the National Solar Mission, and in the solar mission,
it was decided that for all the new solar projects, there would be a separate entity called, which
would be a joint venture set up jointly by the NTPC, which would guarantee that the project
always got a fixed amount of revenue.

And this was the NVBN, which was buying the electricity from the new solar projects and it
was sheltering it from the DISCOMs. However, finally, the NVBN has to have the DISCOMs
or the distribution companies taking the solar electricity and one of the risks is that if for
instance, the demand, we have created excess capacity and then there is not sufficient demand,
then it is possible that there may not be companies who are interested in purchasing that
electricity at that price.

So, even though there is a guaranteed price, there might be a problem in terms of revenue. The
operational maintenance requirements. In case there are issues related to O & M and there are
additional operation maintenance costs, if there are shutdowns or there are problems with some
of these O & M, operation and maintenance problems, this can also be another source of risks.

In terms of the returns, the project costs, there could be cost overruns, there could be project
delays, and we can look at how much costs are put and how much we have to actually pay out
and how much we are getting in and then what is the mode of financing, there is a financing
risk and what is the cost of capital. So, this is essentially overall picture of some of the kind of
risks and returns.

532
(Refer Slide Time: 10:50)

So, when we are talking of financing we are differentiating between. If you look at the C0, C0
will be equal to the sum of the equity plus debt, equity and debt. So, the fraction of debt is the
D by C0 and depending on, normally whenever one thinks in terms of taking a loan, there will
always be a certain minimum amount of equity or your own contribution that you need to pay.
So, the debt by definition would be, the acquisition of funds by borrowing and this could be
either cooperate or project loans or it could be a leasing arrangement.

And equity is the, is your own, is the promoter's own contribution. And it could also be done
in terms of selling some of the shares for raising the capital, so that you give someone a share
of the company. In addition to that, we could also have financing in the form of grants and
guarantees. And this is especially true for relatively clean energy technologies.

In the case of something that the government would like to do in new technologies, you may
actually get a certain amount of your initial investment actually paid for in the form of a grant

533
which does not need to be repaid. In the case of debt, this is something which will result in
some repayment in the future.

(Refer Slide Time 12:41)

So, essentially, what will happen is that, if you look at the initial thing is we saw we had C0
and we had all of these, that is your AK, A1, A2, general Ak, An and this is C0. Now, if instead
of putting the entire amount C0 here, we put only a fraction of this, which is the equity, which
is nothing but 1 minus the fraction debt into C0 and this remaining amount is the amount which
is being put by the company giving the loan and that is the debt. This is being invested and so
actually we are only putting this equity.

As a result of this equity, we have to repay the loan, loan repayment, each year till the duration
of the loan okay. So, whatever is the term of the loan in L, we have the loan repayment. So, the
question then becomes that in each year what we will have is, we will have now the benefit
stream will become A1 minus LR or Ak - LR. And the question is, should we take the loan, to
what extent should we take the loan. In some cases, we may not have the option because we
may not have enough money to pay C0.

And so, this is the kind of issue which is there. How much should I take in terms of debt and
how much should be equity. And of course, in most of these cases what happens is that there
is a leverage ratio, but there is a minimum amount of your own contribution. So, typically we
will do some examples, we will see whether you have debt to equity. Let us say 70-30 or 50-
50 and we will see the effect. And of course, this will depend on, for the loan, there will be an
interest rate, and then we will convert that loan into equivalent annual payments.

534
And you can see in many of the cases even when you buy some, if you are buying a car, or you
are buying high end phone, you can buy it out outright or you can also pay it in installments.
So, we will see how to make that calculation of these payments in installments. So, typically
what happens is, for large, well defined projects, we can have a way in which we can talk in
terms of project financing and see where the money is going to come from.

In general, we can decide whether to choose between debt or equity and then we can see a way
in which we can calculate and find out which ratio of debt-equity is good for us for a particular
project. So, let us look at a little bit of background and history.

(Refer Slide Time: 16:15)

And before we do this, typically what will happen is that, in general, there will be a risk return
profile. So, typically, for any project, we get some returns and then there are certain risks and
typically, there will be, this is the acceptable risk for a given return and if your risk is less than

535
that, then we will invest and if it is more, do not invest. So, this is the risk return profile and
this will be the characteristic of a particular individual or a company which is making these
investments.

And then we will try and see what kind of risk. Of course, explicitly when you want to think in
terms of risk and risk quantification, it is a little tricky and then there are uncertainties in all of
this.

(Refer Slide Time: 17:46)

So, let us, again, we have talked a little bit about the risk, but let us just list out all the risks
which are there. So then, we talked about credit risk in terms of credit worthiness. Construction
and development risk again, and sometimes when you are going ahead with the construction
and development, especially, let us say we are talking Metro, there are certain areas where you
need to get right of way, or you need to get the land being cleared.

And you need to and if that there is opposition and you do not get that, you may need to rework
your plans and so that is a construction and development risk. Operating commercial risks. We
saw that in terms of resources, we saw that in terms of technology, we saw that in terms of O
& M , in terms of environment.

Political risk, now, this is you will see that often, that a particular government opts for a project,
and if that is a high-profile project, which has had opposition, if the government changes, the
new government can always reassess the project and so there is a risk in terms of that.

536
Normally, governments try to have continuity so that you try to honor commitments which are
done, but sometimes there are issues. For instance, in Andhra Pradesh, the when a new
government took over, in Telangana when the new government took over, they actually said
that we will relook at all the power purchase agreements, which was signed with renewable
companies.

Now these power purchase agreements were signed for a period of 25 years and now the
developer or the company which is owning this has the issue of renegotiating the prices. And
this has become a big issue, especially in the case of solar photovoltaics, where the prices have
really come down drastically. When we started off the initial feed-in tariffs, we had electricity
at 11 rupees per kilowatt hour, now we are signing agreements at 2 rupees 50 paisa per kilowatt.

Naturally many of the distribution companies want to relook at the agreements which were
signed earlier. But, please remember these agreements were done in a regime where renewables
were considered to be more risky, there was a technology risk, there was a market risk, and
there was a legal process by which the developer and the distribution company signed an
agreement at a particular price.

There could be financial risks and the risks could be in terms of some of the companies which
are financing having problems, some of the companies which were participating in the project
having a lot of outstanding funds. And there will be risks in terms of payments, especially this
is true for many of the distribution companies which have large accumulated losses in the order
of lakhs of crores.

And that means that, for instance, every unit of electricity which is sold to a distribution
company, we actually do something like 80 paisa per kilowatt hour or 90 paisa per kilowatt
hour. So, in such a case when such a company agrees to, comes up with a PPA, it is possible
that the payments are delayed, or the payments do not happen in the way in which was
contracted to be.

There could be regulatory or legal risk because the regulatory regime might change, the legal
frameworks may change. Environmental risks we already saw this, there could be also certain
things, for instance, if we created a bus fleet in a city, which was running on diesel, and we
created a diesel infrastructure to cater to this bus fleet, and because of the environmental
emissions if it was decided to ban all diesel vehicles in that particular city and we went into
CNG, then there will be an environmental risks for the diesel supply chain.

537
Force Majeure, is also known as an act of God. It is something on which we have no control.
For instance, you have suddenly a flood or a Tsunami and some kind of an extreme weather
event which causes severe disruptions and that results in, it affects the viability of many of the
projects. This is not something one can anticipate by its very definition, but this is something
that constitutes a significant risk. And of course, you can buy insurance to sort of cover for that
risk.

(Refer Slide Time: 23:08)

There are 2 types of different finances and if you look at it, we have a corporate finance which
is financing a company. A company or which is a multipurpose organization has many different
products, can get into different lines of business. On the other hand, there is a project the project
is a single purpose entity, it has final goal, it has a specified timeline and that goal is to make a
particular project with a particular output.

In the case of financing this, there should be permanent or an indefinite time horizon for the
equity which has been put. In the case of project finance, is a finite project timeline and often
it matches the life of the project and it may also so that you are getting the returns during the
time, the life of the project. The different policies in terms of reinvestment and dividends, and
the corporate management makes the decisions and it can make that decision, it is autonomous
from the investors and creditors, of course investors and creditors are informed.

In the case of project finance, if there is a fixed policy immediate payout and no reinvestments
are allowed. The capital investment decisions in corporate finance is opaque to creditors. But,
in the case of project finance, it is supposed to be transparent to the creditors. The financial

538
structures have a common form in the case of corporate finance, and in the project finance it is
very very tailor made, dependent on the structure of the type of project which is being built.

The transaction costs for corporate finance are relatively low due to competition from the
providers and for routinized mechanism, short turnaround times. Project finance requires high
cost due to documentation and longer gestation periods. Size of financing, for corporate finance
could be flexible, but in project finance typically we need a critical mass to cover the high
transaction cost so that usually they are in large chunks.

And that is why you have these large solar parks, you have insulations in the case of solar
which are like 648 megawatts, one of the largest insulations in the world, in Tamil Nadu. And
so, that means, that you have a large amount of financing which is required for this. Then the
basis for the valuation of the project of the finance, in the case of corporate finance it depends
on the overall financial health of the entity, the focus is on the balance sheet and the cash flows.

In the case of project finance, it depends on the technical and economic feasibility of the
project, focus is on only on the project and the project assets, the cash flows and the contractual
arrangements for the particular project. And corporate finance relatively has lower costs of
capital, while project finances higher costs of capital. And the corporate finance has a larger,
broader participation by the investor base and has the secondary markets.

Project finance typically of small group of funding agencies and there is a limited secondary
market. So, you can see that there is a difference, distinct difference between corporate finance
and project finance.

539
(Refer Slide Time: 26:43)

There are many different financing instruments and this is from an IEA report on PV projects.
And you can see that we can get funding for large solar photovoltaic projects or small rural
electrification projects and you can see they you can be from multilateral development banks
like the World Bank, the IMF and the Asian Development Bank. It could be bilateral aid, that
means Indo Germany, Indo US and these this can involve loans and soft loans. It can also
involve some grants, it can also involve technical assistance.

And then we could look at many funds and foundations that are interested in the case of, for
sustainable energy, for low carbon, for climate. And again, these are, they have loan soft loans,
they also have grants and they have some possibility to do also equity investments. Green
investments would be typically equity investments and then when we look at the national
development funds, they could be again in the form of loans and guarantees and technical
assistance. Commercial loans and investment will be typically market based loans. They can
also be, we can also invest in equity. So, this gives you sort of an idea of the kind of financing
modes.

540
(Refer Slide Time: 28:22)

Historically, project finance has been around for quite some time for more than 700 years. The
recorded historical case is in about 1300, 1299 the English Crown or the English government
and in this case, it was the royalty which was ruling England, it financed in Devon a silver mine
and this financing was done by an Italian Bank of Florentine Bank Frescobaldi and they
provided the funds to actually mine and start the silver mine and take, extract the silver from
it.

Frescobaldi was given a contract for a concession in which one year's lease and mining, it was
allowed on this Devon silver mines. So, the arrangement was that, the bank, the Florentine
Bank Frescobaldi, provided the entire money for this development of the mine, with the
understanding that whatever they could extract in the first year belonged to them and that was
the full payment for the financing of the mine. So, this was the first example of project finance.

In a similar fashion in England in the 17th century, there used to be sailing ship voyages, and
it was financed on voyage by voyage basis. So, in they would start with a voyage which was
going to a particular targeted location and they would, during the voyage, they would
accumulate different kinds of goods and wealth from various countries and locations and
whatever was got and traded, whatever came back as cargo and ships, these were liquidated.

So, that means they were sold and the money collected, the proceeds were split among the
investors based on the agreed upon formula or the contract which was done when the ship was
financed. So, that gets, it gets, the ship goes, it acquires goods and it buys things it gets from
various places, it then sells these, and then the proceeds are split amongst the investors. There

541
have been many large projects, including the North Sea Oil pipeline off the coast of the United
Kingdom.

These are large projects with large investments, which involved a whole group of financers
coming together for financing this and then they got revenue, which was staggered over time.

(Refer Slide Time: 31:38)

So, in the public domain, there is a Wharton teaching note on project financing, and there is a
paper by Wynant in the Harvard Business Review. So, this defines project finance as a
financing of a major independent capital investment that the sponsoring company has
segregated from its assets and its general purpose obligations. So that means this is a project
which is sheltered from the rest of the things and it is, this represents a major independent
investment and you can also look at the flows associated with that particular project and it is
not connected with the rest of them.

542
(Refer Slide Time: 32:25)

So, if you look at the funding sources and stages, we have, depending on the level and the
technological readiness level of a particular technology. At the first point, when we started the
early funding stage, you have what is the research stage, the R & D stage. And this is typically,
this would be primarily funded by the government. Once you have the technology which is
there and you do some basic experiments, you have shown something and you now have a
prototype or we have the knowhow and then it has to be developed into a technology.

And then this is where you have the possibility of venture capital coming in. Some companies
may be started and you might get private equity which comes into this, and you have the
technology development. Then next step is you have this technology, it is demonstrated, it is
developed and we need to think in terms of large-scale manufacturing and scale up. And that
is the third stage.

This typically will require public utility funding, and may also have involve mergers and
acquisition. And then finally, once this is done, we would roll it out and create the assets. This
would be asset finance, and this could come from either credit or debt markets and it can also
come from equity and mergers and acquisitions. So, you can see different kinds of, at different
stages of the technology development, you have different possible funding sources.

543
 Energy Resources, Economics and Environment.
Professor Rangan Banerjee.
Department of Energy Science and Engineering.
Indian Institute of Technology, Bombay.
Lecture-16.
Energy Projects Financing-Part 2.

(Refer Slide Time: 00:17)

Now, we have we have to define the difference between financing with recourse and non
recourse finance. So, financing with recourse means that, in case there is a problem and in case
the funds have to be repaid, we can actually go ahead and we have recourse to the corporate
balance sheet and the corporate financing and balance sheet financing. So, you have recourse
to the rest of the funds of that company.

And non recourse financing means that the lenders only have recourse, they are only having
access to the cash flows of the project and the assets and the project assets in the event of
project failure. So, in case the project fails, the assets may be liquidated and those returns can
be used to pay off the organizations that have given us the finance.

544
But in case that is not sufficient, the company is at, the corporate who has created that is at
arm's length, risk is only to be met from the cash flows of the project and the project assets. So,
this is the difference between recourse and non recourse financing.

(Refer Slide Time: 02:18)

Let us move forward now, we would like to take a look and this is from the landscape of climate
finance, it is a 2012 report, which gives you an idea of the different kinds of financing available
for green energy and you can see that there are two types, you can differentiate between public
funds and private funds and in the case of public funds there could be carbon market revenues,
carbon related taxes and general taxes.

So, some part of the general taxes can be used to finance the, you provide funds to the public
financial intermediaries, the Development Financial Institutions, national, bilateral and
multilateral climate funds.

545
(Refer Slide Time: 03:08)

So, for instance, in the Indian case, we have an organization, a specialized organization called
IREDA which is the Indian Renewable Energy Development Agency and this IREDA
essentially can provide soft loans, which can provide loans at much lower interest rate. So,
often what has been done is IREDA has a scheme where it will finance of part of the debt which
is being given by some of the conventional banks

And if we look at that bank, we can provide, we are giving 30 percent of the debt, for example
at an interest rate of 5 percent and if you are looking at a debt ratio fraction that is 70 percent,
it will mean that 21 percent of the total amount required is being financed and is being financed
at this low interest rate of 5 percent.

(Refer Slide Time: 04:58)

546
And we can look at this and this results in some, as a result of this we have some risk
management, some grants, some instruments, which are their policy instruments. When we talk
about policies and policy instruments we will come back to this. In the case of institutional
investors, we can look at project level mass market debt, and then project level equity and then
there could be balance sheet financing. Again, here in terms of private funds, institutional
investors, the project developers, the corporate actors, the households everyone can provide
funding.

And with this then we can have the disbursal channels and predominantly if you look at it, it
has been mainly financing mitigation, the energy efficiency renewables projects, but also some
amount of money going into adaptation, relatively smaller amount of money going in for
adaptation.

(Refer Slide Time: 06:05)

Now, if you look at the kind of numbers we are looking at, you will see that this is showing
you, you can look at the landscape of climate finance in 2015-16, it shows you the different
types of those, which are going from one end to the other and the kind of investments which
are required and you will see that we are talking of us for 463 billion US dollars as the kind of
order of magnitude of financing.

547
(Refer Slide Time: 06:31)

Most of that, we saw most of this is been for mitigation, that means for reducing the CO2
emissions and reducing the climate change or stop and increasingly what is happening is that a
lot of this financing is now going to the developing countries and about one third going to the
large developing countries, China, Brazil and India. Then, out of this 85 billion US dollars are
coming from government budgets and development financial institutions. In the case of China,
its development financial institutions accounted for 30 percent and in India about 7 percent.

(Refer Slide Time: 07:17)

So, if we look at the distribution of the renewable based investment, in 2018, this is from the
Bloomberg New Energy Finance report in 2019. You find that 2.6 trillion is the total amount

548
of investments in renewable, of which if you see solar is the largest chunk, little more than half
because it is 1.3 trillion, and wind is another 1 trillion.

So, these are the two chunks, then you have some amount going to Geothermal, some biomass
and waste, and small Hydro and biofuels. Of course, this can change as the as the technologies
sort of change, but right now it is predominantly solar and wind.

(Refer Slide Time: 08:14)

If we look at the net capacity added in renewables, again, this is from the Bloomberg New
Energy financing report, you can see very clearly that in terms of installed capacity, solar 638
638 gigawatt and 467 gigawatt of wind and to 283 gigawatt of hydro. Interestingly, coal is
about 529 gigawatt and gas 438 gigawatt, of course, this is talking about one decade. And the
interesting thing to see is that in this particular decade, the renewable installed capacity
outpaces the additional capacity from coal and gas.

Of course, this coal and gas has much higher capacity factors. So, in terms of generation, the
picture will be a little more balanced, where maybe the thermal will be higher in terms of the
generation. Of course, this is over a 10 year time period, as we go forward and we are looking
at, if you look at only 2018 or 2019, you will find that the share of renewables has increased
even more, especially by installed capacity and of course, now we are trying to report it more
by the generation.

549
(Refer Slide Time: 09:37)

So, out of these, if you see the kind of sources of finance, you will find that the bulk of it, we
said 2.6 trillion out of which more than 2 trillion is asset financing, which is where you are
trying to build a power plant or you want to finance that asset and the value of asset is mortgage
against that and you have an escrow, you can always sell that and get your money in case the
project does not work properly.

Then small distributed capacity of funding, some government funding, some public markets
and overseas R & D, corporate R & D, corporate R & D, a little bit from that, but predominantly
asset finance.

(Refer Slide Time: 10:22)

550
We can look at different sources. This is from a report, which talks about US solar and the way
in which US solar has been financed and can be financed. And in this a number of different
sources, for instance venture capital, the development, private equity, infrastructure, funds,
hedge funds, banks, the large corporations, mutual funds and retail investors and then you can
see what is the targeted rate of return, for instance, venture capital would target about 30 percent
rate of returns.

Private Equity may have a slightly lower rate of return expected. Infrastructure funds have
definitely rates of return less than about 11 percent and hedge funds for a period of about a
year, and they would have lower rates of return, banks will have their commercial rates and
these vary from country to country and so 7 percent, 5 percent, 8 percent, 9, 10, 11 percent that
is the kind of order of magnitude which you are looking at.

And large corporations also may provide funds and they would have slightly lower rates of
return expected. The mutual funds, retail investors, again, relatively low rates of return and in
each of these cases a comparison has been done in the characteristics of the funding and the
funds source.

(Refer Slide Time: 12:12)

This table continues and you can look at increasingly pension funds and endowments which
are maintained and these pension funds are invested in order to create the… see that we get the
type of returns. And so, this has expectations of slightly lower returns 7 to 8 percent, but they
normally will not invest in very risky projects.

551
The utilities again have some rates of return and these are for the US utilities. Insurance
companies have quite a lot of funds, the vendors and the UPC installers, land loaners and of
course the government. So, you can see very large number of different types of funding sources,
and each one has slightly different characteristics.

(Refer Slide Time: 13:08)

This is again from the BNEF and it just shows you a time series trend of the kind of renewable
investments which have been made. And you can very clearly see that the largest chunk of
these investment and it is been growing, has been in PV and in the case of onshore wind that
has been growing at a reasonable rate, but it has been surpassed by PV in the recent times and
then of course, one can look at other things like the offshore and the solar, thermal and so on.
So, this is the sort of order of magnitude of the current trends.

552
(Refer Slide Time: 13:51)

There is an interesting report by Shrimali and Nelson which compares the costs of financing
renewables in India with US and Europe and in that, if you look at it, it talks about the different
types of investors, we are talking of large scale commercial banks, some venture capital, private
equity, insurance funds and development financial institutions and of the large number of such
institutions which are there for financing or investors, the ones which are active in the
renewable sector is a smaller subset of this.

(Refer Slide Time: 14:36)

This comparison is being done by (Nelson et al) to try and see, when we talk about solar PV
and wind, what are the different components which leads to the cost of electricity that we are
getting. And as compared to running the same plant in India and the US, we can see that

553
essentially, the finance cost increases the cost of energy by a certain percentage, but there are
many other factors which can decrease the costs of energy.

Similarly, if you are looking at the onshore wind and the CAPEX, India's lower CAPEX
reduces the cost and so based on this, the India's financing cost increase the cost and by 22
percent, it is a reasonable chunk and so one can offset some of the improvements that we were
getting, but then we can take a call of the kind of investment.

(Refer Slide Time: 15:46)

Similarly, on different projects. We have looked at the expectation in terms of rates of return
for debt and equity and we can see very clearly that in the Indian context, the debt is available
at much higher rates than in other countries of the world.

554
(Refer Slide Time: 16:11)

And because of that, we can see that there is a, when we talk about the increase, this result in
some increasing costs. Of course, we have had big advantage in terms of reducing mitigating
some of the risks, large projects being bid, we had this reverse bidding concept, and with all
the facilities and land being provided.

And since those risks reduce, we have been able to actually reduce the price of electricity from
such facilities. And in the case of renewables and photovoltaics that has actually gone down to
less than 2 rupees 50 per kilowatt hour.

(Refer Slide Time: 16:52)

555
And of course, we can see in the case of India, the interest rates are higher than many of the
other countries. Now the question which one may ask then is that should we be taking
international debt. This itself has its own problems, because there is an interest rate ceiling on
the foreign debt and then there are some issues related to swapping of the currencies and the
exchange rate.

And with all of this, you see that some of the benefit that we could get by getting low interest
foreign debt are actually wiped out, and the Indian debt and foreign debt are equivalent. We
can look at a variable rate which is floating and over the time as the conditions change the rate
could change or we can go for a fixed rate kind of debt.

556
(Refer Slide Time: 17:58)

So, in general in this report, they have compared the different kinds of factors, which affect the
availability, which affect the cost. and if you look at the main report, you will be able to see
issues related to renewable specific issues, there are foreign investment and there is a tech
specific issues, there is site specific and state specific and there is a financial market.

(Refer Slide Time: 18:26)

Similar thing that was for debt and similar thing is available also for equity. So, this will give
us give you an idea if you go through it, it will give you an idea of what are the kind of issues
related to debt and equity and what are the expected returns from both in the Indian context as
compared to the global context and so this is the type of projects.

557
(Refer Slide Time: 18:55)

Based on this some calculations have been done with the debt and equity and the debt equity
spread. Let us move forward with this and then see. So, financing in the case of Nelson et al
they showed that the financing adds a significant proportion, about 20 more than 20-25 percent
to the LCOE. And this is a problem, even the kind of high cost of debt result in this kind of an
issue.

(Refer Slide Time: 19:35)

And you can see this is as we talked about the type of rates of return of debt and equity in India
and Europe. And you can see very clearly in the case of debt and the case of equity if you see
the equity rates of return which we are expecting and the equity return in the case of required
return on the rate percentage per year, you can see that equity is in the same range. Actually,

558
Europe and US expect higher returns on equity. While in the case of debt, we can clearly see
that much lower interest that is available in most of the countries of the world as compared to
India.

(Refer Slide Time: 20:41)

And because of that, this will add to our costs of power generation, costs of renewables and
this has been added to see what happens in terms of financing and how much does it add to the
overall cost.

(Refer Slide Time: 20:49)

And then we also talked about the interest rates and the fluctuation in the interest rates and
these can be used to make the calculations.

559
(Refer Slide Time: 21:00)

And then as we said, this is in terms of different kinds of sustainability. One can actually then
calculate for a given amount of debt and equity, what would be the price of electricity, finally
that we get in terms of rupees per kilowatt, and as I also told you that there is not much
advantage to be you got by taking debt, international debt and the foreign exchange rate and
the other issues related to international debt. It would result in the same cost finally and so there
is not much incentive to go for this. We talked about the debt in summary and the Equity
Summary.

560
(Refer Slide Time: 21:42)

And finally, if you see, the feed-in tariffs was supposed to be, have been shown to be better.
There are other mechanisms, the clean development mechanism, accelerated depreciation,
generation based incentive and some income tax exemption. The mechanisms which are there,
when we talk in terms of, there were initially, we started off with the preferential tariff which
is a feed-in tariff.

But subsequently what has happened is that we now have the renewable purchase obligation
and each of the distribution companies is mandated that it has to meet a minimum percentage
of its generation of its supply, which is coming from renewables.

And if it is not possible to actually add that much generating capacity, then it is quite possible
for the company to actually buy from other companies which have supplied that much and buy
the renewable energy certificate, and that renewable energy certificate will enable it to meet its
RPO requirement, Renewable Purchase Obligation requirement.

The renewable Purchase Obligation requirement percentages have varied from state to state
and several of the states have not, distribution companies are not meeting that requirement and
this has also been a struggle. So, the option we will, when we discuss policy we will discuss
the feed in tariffs versus the RPO kind of issues.

561
(Refer Slide Time: 23:31)

There is another interesting paper which you may want to look at is by Shrimali et al. It is an
energy policy and we will send you the link, you can essentially compare a whole set of, what
he has done in this paper is their authors have compared a whole set of different projects where
they are looking at improved cook stoves and using business models and market mechanism to
see the deployment of these in improved cook stoves.

(Refer Slide Time: 24:01)

When we look at cooking, if you see the cooking, this is a nomogram, which is there in the
World Health Organization, it is also part of the global energy assessment. And you can see
that as we go from the traditional cook stoves and traditional stoves, then you go to wood
stoves, charcoal stoves, improved charcoal and then you go to the LPG and the electric. And

562
in all of this, if you see there as we go down this line as you go in this direction, the amount of
time taken for cooking would be significantly lower.

And so that is an important parameter. You can also see that the capital costs will increase as
we move in this direction. And then of course, when we talk in terms of stove efficiencies, you
will see that these correspond to higher stove efficiencies and so there are multiple trade-offs
and one has to see how to manage these trade-offs.

(Refer Slide Time: 25:06)

And for these companies, they have different kinds of price ranges and different kinds of
mechanisms by which they would operate. And these mechanisms have been compared in this
paper and I am not going to go into too much details of that. But the number of years when the
first stove was disseminated and marketed and then you have a scatter in terms of the total

563
number of stoves which have been distributed and the kind of approximate years since the
distribution of the first round.

(Refer Slide Time: 25:44)

And interestingly, this is a table which shows the different kinds of comparison of these
technologies. That means the technology in design, then the target customers, who are the target
customers, are they household or commercial and based on that they would talk about different
sizes. And then there is external enterprise building management experience and the scale at
which you could operate and whether is sustainable or not, and the rationale for assessment of
financial sustainability.

So, in all of these, you can look at the different models and there is a tableau and a matrix,
which compares them on different basis. So, please take a look at this paper and this will give
you an idea of how these different models can be compared and specially in terms of how the
stoves are financed.

564
(Refer Slide Time: 26:47)

And then as we said, this is in terms of different kinds of sustainability. Now, let me talk to you
about a couple of examples and then we will do some calculations in terms of financing. So,
one example which is there in terms of financing is an example from the Ahmedabad electricity
company.

Now, in the distribution companies, one of the issues is that you have to supply the active
power, but based on the fact that many of the smaller industries and commercial establishments
have essentially have low power factor and you have to supply much more reactive power to
be able to meet the requirements and the active power that they need.

So, one of the simplest solutions is for the industry to compensate and to do static power factor
correction and it could do static power factor correction, it could do automatic power factor

565
correction, but basically we need to put capacitor banks and this was be installed in the
company. And so, the project here in Ahmedabad is to relatively smaller industries and
companies which did not have the ability or the capital to be able to make the investments in a
large set of capacitors.

So, instead of this, the capacitors were leased from the manufacturer. This is Saha Sprague
Limited and these were least to the end user. As a result of this, since the maximum demand
reduces, the electricity bill would reduce and some part of in on a monthly basis some part of
the lease rental would be repaid to the distribution company that is the Ahmedabad electricity
company. And this lease rental minus the administrational cost will go to some account, which
is an escrow account and then the lease rental fee goes back to the company.

The IREDA provide take some charge from the escrow account. But finally, these lease rental
fee is repaid and this is used to repay the loan. So that is the kind of mechanism, it is a very
neat mechanism. What happens in this is that the end user benefits by the virtue of reduced
bills.

Some part of that benefit is paid to the distribution company as an electricity bill lease rental.
From this electricity company with the lease rental minus the administrative cost goes to an
account on which the IREDA has the first right of taking the money so that they get a repayment
on their loan.

Saha Sprague after getting the revenue from the lease rental fee also repays IREDA. And with
the result that this is something where we are able to see a deployment, even though the end
user does not have the ability to actually purchase all these capacitors. So, they lease the
capacitors and over a period of time through the bill, this is recovered by the electricity
company and then paid to the manufacturers and pay back the loan to the financing agency or
IREDA.

566
(Refer Slide Time: 30:40)

A similar kind of scheme was started for the switch from incandescent to compact fluorescents
and so the idea, this was called the Bachat Lamp Yojna. And the idea was that the lamps were
issued by the retailers, the invoices were made by the suppliers, the reimbursement was done,
and there was some partial payment by the customers, which resulted in payment to the
financial Institute.

(Refer Slide Time: 31:06)

So, if you look at this scheme, this is what was proposed by the Bureau of Energy Efficiency.
And you have these technologies, the compact fluorescent lamp, and then we had the CFLs
being given at very low prices to the household and there was a guarantee also involved.

567
And when we aggregate all of this, because of the switch from incandescent to compact
fluorescent so to say, this is aggregated and put in as a requirement, it is standardized. And we
apply for carbon credits and get funding for the carbon credits. Now, this entire financing was
dependent on a certain price for the CER or the Certified Emission Reduction. Using that price,
can make this as viable option.

However, during this time when this happened, the CER market crashed and the CER prices
came down, so that it was no longer viable to have this and there were relatively less
stakeholders coming in for this in the districts and at the state level and with the result that of
course. There is was also a technology change and a technology risk because essentially a LEDs
took over from CFLs. And so, it was no longer worthwhile to sort of push CFLs but to go to
the LED.

(Refer Slide Time: 32:41)

And the dependence on the carbon market resulted in 12 dollars per tonne initial CER price
that is what was budgeted, but actually it came down to 5 dollars per tonne and the payments
given the kind of complexity of the system, the manufacturers and utilities take 3 to 4 years.
And the actual target was not, much much lower than what was targeted, and it was also one
of the problems was the lack of investors. And I said that the risk because of the CER has also
created.

568
(Refer Slide Time: 33:18)

In the case of rural access and village electrification, free find the large number of small case
studies, we also find a number of companies and startups operating in this domain and it is
interesting to try to compare across this, we do not have time to go into details of this, but I
will just show you some examples.

(Refer Slide Time: 33:40)

For instance, one of the successful companies is Selco, and that Selco was a for-profit
companies, solar home systems started in 1996 and the idea in this is its main, it had some
innovations in technology, but its main innovation was in financing and essentially they were
doing this in an area in Karnataka which was known for large number of successful banks and

569
so they partnered with 9 banks and with a particular interest rate, and then they also the
company also decided that the margin money.

That means the initial upfront payment which has to be given, which people found often in
smaller, poorer households difficult to give, they would arrange for that, the household or the
consumer. And financial institutions paid the largest chunk of this, monthly payments of 300
to 400 rupees over a period of about 5 years.

The financing and repayment options were tailor made to the end users. So, one of the
interesting things which Harish Hande, Doctor Harish Hande talks about, he is the person who
started Selco is that a street vendor is not able to pay 300 rupees per month but the street vendor
is easily able to pay 10 rupees per day. So, if you have a collection mechanism for a street
vendor, where you collect on a daily basis, then that is a benefit.

In some cases, if you had a farmer which had 2 crops, then you could have a payment schedule
which is twice a year, coinciding with the crops being sold in the market. And then they also
arranged for funding from different agencies to meet the margin amount for poor customers.
One of the biggest benefits that they could do is they made customers bankable by providing
them an incentive and by providing them some guarantees and ensuring that they interface with
the bags.

(Refer Slide Time: 35:57)

There is another model which is DESI Power, predominantly in Bihar. And their model was to
aggregate, have local distributors and then they got government funding, they got some equity

570
which they put in and they looked at energy efficiency, they tried to tie up with enabling micro
enterprises and tie up with telecom towers to increase the capacity factors.

And so, they many of the cases instead of putting meters they just charged the monthly rate
and then based on the number of bulbs or loads, and they had a circuit breaker to limit the
consumption. So, that means if you exceeded that limit over a couple of months you will be
disconnected from the supply.

(Refer Slide Time: 36:40)

There is this concept of energy service company. Now as we saw, you know, we actually do
not need energy per se, but we need the service that energy provides and energy service
company essentially comes into the industry or commercial organization and says we will
supply you energy you are currently paying a certain amount for your energy, continue to pay
that amount we will invest in energy efficiency or in renewables and out of the savings, you
share some of the savings with us and so we take some of the risk, and then we do this.

So, this is of course dependent on a whole host of things including contracting. It is an

interesting concept, but it has not taken off much in the Indian context for a variety of reasons.

But just to tell you that the energy service concept ESCO energy service company concept is
not old. The earliest known record of an ESCO is James Watts company, and his proposal was,
we will leave a steam engine free of charge for you. We will install these and we will take over
for 5 years the customer service.

571
So, that means 5 year annual maintenance contract of customer service. We guarantee you that
the coal for the machine costs less, then you must spend at present as fodder on the horses,
which do the same amount of work. So, this, if it is horse driven and then you are feeding the
horses the amount of money that is paid to feed the horses, the number of horses, you get saving
by, when we look at these kind of machines where we are looking at coal and then using that
to get the steam engine.

And so, what is required in this case to what the agreement is, everything that we require of
you is to that you give us a third of the money which you save. So, one third of the saving will
go to James Watts' company and this was the kind of model as I told you the first known ESCO.

(Refer Slide Time: 38:54)

We talked about Desi Power and the other model was Husk Power. Husk Power, of course
started off by getting funding for their idea in terms of prize money and then they started
directly reaching the end user and looked at doing the estimation of the demands accurately.

572
(Refer Slide Time: 39:18)

So, with this, we end the portion on financing. We are going to look at these concepts in terms
of doing a couple of examples. So, with this, we have seen the overall history of project
financing, we have looked at the different sources of finance, we have looked at debt and
equity, risks and returns. We have also looked at the way in which you have either, you have
recourse and non-recourse kind of financing.

We have looked at a couple of examples of how this financing is done. In the next module, we
will take this forward and then do some calculations in terms of when we look at a loan how
much do we have to repay and then take an example to decide how do we decide the debt equity
ratio.

573
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 17
Energy Projects Financing-Tutorial

We have already looked at the basics of financing energy projects, we looked at the sources of
funding the difference between debt and equity and now let us operationalize this in terms of
understanding how much of debt and equity we should take and how do we configure in our
calculations, the calculations of the loan repayments. So, we let us take a first a simple example.

(Refer Slide Time 0:50)

If we are taking a loan, a certain amount which is your initially we are looking at a debt which
is being paid. So that means, this is the amount which is paid to us, this is the debt and then
annually we are repaying, till what is known as the duration of the loan or the tenure of the
loan, NL. So, what would happen is, suppose we have an interest rate which is i, we want to
convert this into an equivalent amount which we are paying.

So, for a given interest rate i and a duration of loan NL, let us first see how we can annualize
this into an equivalent amount that we have to pay. Let us take this as a equated annual payment
which is a loan repayment in equated annual amounts of course, there could be loans where
you could have different amounts being paid in different years, but it will be equivalent, we are
converting it into an equivalent annual amount.

574
So, this will be very similar, it is similar to the formula that we had for the capital recovery
factor and instead of d, now, we are going to use i, which is the interest rate. So, this will be
the debt into i 1 plus i raised to NL divided by 1 plus i raised to NL minus 1. And this is the
annualization factor that we will calculate, that will be multiplied by the debt to give annually
how much we are repaying in the loan.

So, you will see for many of even the consumer durables and let us say a car or a high end
phone it is possible either to pay for it upfront or you can also pay in equated monthly
installments.

(Refer Slide Time 3:15)

So, let us calculate, for instance I just looked at the web and I found that there is a car which
whose price, overall price is 10 lakhs of rupees and for this, this is the price, there is an ex-
showroom price plus there are some taxes and other payments that have to be made and it is
possible to get a loan of 90 %of the X, you know the price, the original price that you are getting
from the supplier.

So, that turns out to be, that does not include the taxes and other things for registration the
payment which is made, so we can get a loan of that say 8 lakhs. So, let us just see, should the
individual take the loan of 8 lakhs or should do to the individual pay the total 10 lakhs up front.
Of course, in some cases you may not have 10 lakhs to pay and then you have no other option
but to take the loan. We need to know what is the interest rate of the loan.

So, I just looked at a particular website. Today, it looks like for that car along the vendor itself
is giving an option to have an equated monthly installment and the interest rate on the loan is

575
10.5 %. This is interest rate which means i is 0.105, this has to be repaid in a period of 60
months. So, we want to calculate how much will be the monthly EMI, equated monthly
installment.

Also, this is NL then is 5 year. So, using a formula the annualization factor that substitute and
get, annualization factor is i 1 plus i raised to NL 1 plus I raised to NL minus 1.105, 1.105
raised to 5. If you substitute this, you will find this is equal to just calculate it, you will find its
0.267, 0.2672.

(Refer Slide Time 6:17)

So, now, the loan repayment, annual loan repayment will be 8 lakhs into 0.2672 comes out to
be 2.14 lakhs. So, on a monthly basis this will be 2.14 into 10 raised to 5 ₹ divided by 12. This
is the equated monthly installment and if you work this out, this will turn out to be 17,810
rupees per month. So, what is happening is that you have an option which is you pay 10 lakhs
here and nothing else or we pay 2 lakhs up front and then we end up paying 2.14 lakh each
year for 5 years.

Now the question is which of this is preferable. It will of course depend on what is your
discount rate and how much access to capital that you have. So, let us compare. Let us say that
we are taking a discount rate. Suppose the individual has a discount rate of 30 %in which case
what was the capital recovery factor?

576
(Refer Slide Time 8:00)

Capital recovery factor d, n will be 0.3. You remember we had done this in the energy
economics portion, this turns out to be 0.2737. And what we are now doing is we are making
these 2.14 lakh payments every year. We are discounting only at the end of the year, we are
not doing it monthly basis, we could also compound it and discount it on a monthly basis.

We want to replace this by an equivalent upfront amount, which will be 2.14 divided by the
capital recovery factor d, NL and this turns out to be 2.14 by 0.2737 which is 7.82 lakhs. Please
note that this is less than the 8 lakhs that we are taking in the loan. So, with an effect we are
getting a net benefit of 18,000 ₹ and hence we should go for the loan.

577
(Refer Slide Time 9:25)

What if the discount rate is lower? Let us say the discount rate is 8 %. So let us recalculate. If
discount rate is 8 %, then the CRF, 0.08, 5 years will be 0.08, 1.08 raised to 5, can calculate
this and you will see that this comes out to be 0.2505. Now, when we look at the loan
repayments, we are repaying 2.14 lakhs is the repayment which we are making each year. So,
2.14 for 5 year. So, that means, when we look at what is the net present value of all these
repayments, that is going to be equal to the annual amount 2.14 divided by the capital recovery
factor 0.2505.

And when you calculate this, this will come out to be, this is, the net present value you is 8.544
lakhs, please look at this. This now is more than the initial amount of the loan taken which was
8 lakhs. So, the net present value of the repayments is more than if it was a direct payment and
hence, we should not take the loan. So, very clearly the decision on whether to take the loan or
not will depend on the discount rate that the individual has and compare that with the rate at
which we are getting the interest rate for the loan.

So, in this case since the discount rate for the individual is less than the interest rate of the loan,
this turns out to be the loan is effectively much costlier than actually paying this from the own
individuals funds.

Now, let us put this together in the form of let us look at a question where we talk about a
company which wants to decide whether it should finance a particular energy project, either
through its own funds, that is equity or through debt. So, let us look at there are two examples.

578
I will just read out both the examples explain them to you and then we will solve the first
example, you can go ahead and solve the second one also.

(Refer Slide Time 12:39)

So, it is like a tutorial. The first one is there is an infrastructure company which is planning to
invest in a wind farm of a rating of 56 megawatt. So, rating is 56 megawatt, we are given that
the capital costs is of the order of 340 crores and this is a reasonable, this is typically the order
of magnitude of the capital costs of wind machines, grid connected. The wind farm has a
preferential tariff for wind based electricity at 4.5 rupees per kilo watt hour and then there is
an annual operation and maintenance cost of 45 paisa per kilowatt hour.

So, this O&M cost will be multiplied by the annual generation. We are told that the life of the
plant is 25 years, and the capacity factor is 30 %. So, we know how much generation. We want
to calculate the internal rate of return. First if we just do this on our own, and then if debt is
available at 11 %interest and a tenure of 10 years, calculate the internal rate of return, IRR on
the equity for a debt equity ratio of 50-50 and 70-30 and the question is how should the
company finance the land. So that is the, this is the first problem.

579
(Refer Slide Time 14:04)

Second problem is now for a gas turbine based plant, an independent power plant proposing a
250 megawatt gas based combined cycle power plant in Maharashtra. Direct capital costs for
the gas turbine is given to you, 880 crores, including all the, you know, during the construction
there is some interest, during construction and escalation. So, it is a total overnight, it is called
an overnight cost, which is as if you could build the plant overnight, then what would it cost
you?

The heat rate is given. So, based on the heat rate we can calculate how much is the fuel which
will be required, the heat rate should be, this should be to 2000 kcal/kWh and using that we
should be able to calculate the calorific value of the natural gas which is, the calorific value is
given and the price is given.

So, we can know how much natural gas is used for generation. The costs are shown as a fixed
operation and maintenance costs and a variable operation maintenance costs. Life is given as
25 years, PLF is 70 % and the power purchase agreement has a purchase rate of 3.50 ₹, calculate
the internal rate of return and if debt is available at 12 % and for 10 years, again to look at debt
equity ratio, two debt equity ratios- 5050 and 7030. So, you can try both these problems.

580
(Refer Slide Time 15:47)

We will take a look at the first problem, which is we have a wind farm. If we write it down this
is a wind farm rating is given to us as 56 megawatt and the capital cost or the C0 which we
were talking off is ₹ 340 crores. We are also told that the life is 25 years and we have the
preferential tariffs of rupees 4.50 per kilowatt hour.

We have this is the tariff, this is how much we will be paid and the capacity factor is 30 %, this
is all the relevant data and then we have that annual O&M cost, is variable. It depends on the
amount of generation and it is given to you as 45 ₹, 0.45 or 45 paisa per kilowatt hour of
generation.

581
So, first of all, let us first calculate, this is all the data, let us first calculate how much is the
generation from the wind turbine, wind plant. So, if we look at this, this is we are told that the
capacity factor is 30 %. Capacity factor is the actual generation divided by the maximum
possible generation. So, the actual generation, actual annual generation is going to be 0.3 into
56 megawatt into 24 into 365 or this is 8760 hours per year. This answer will be in megawatt
hour.

So, if you look at, if you do this number you will find that we get a number which is, this comes
out to be 14000, 147168 megawatt hours. So, what will be the total revenue each year? Net
revenue will be the tariff which we are getting and we are subtracting from that whatever is the
operation and maintenance costs. So, that means this will be 147168 megawatt hour into 4.5
minus 0.45 into, 1 megawatt hour is 10 raised to 3 kilowatt hour, this will be in rupees.

If we want to get this number, since we are talking in crores, let us get this in crores. So, 1 lakh
is 10 raised to 5, 1 crore will be 10 raised to 7, we can divide this by 10 raised to 7 and this will
become 3 raised to 4 and if you see this, 1234, it will be 14.7 into 4.05. Of course, we have
rounded off some decimal places but you can look at this and you will get, this turns out to be
59.6 crores. So, you can check this and this is the amount that will be there.

(Refer Slide Time 20:21)

So, in the if we look at what happens here, we are paying 340 crores and we are getting 59.6
crores every year for a total life period, N is equal to 25 years. So, the question is, we want to
calculate what is the internal rate of return, internal rate of return and we want to calculate that.

582
So this is going to be, this will be where we are putting the c 0 is 340, will be equal to 59.6
into, we was looking at this as r 1 plus r raised to N, 1 plus R raised to N minus 1. Look at the,
so, this is r can be written as 59.6 by 340, 1 minus, so, we can take this and we can do the
calculation, we can assume a certain value of r and then cross check and get what is the rate of
return that we are getting.

(Refer Slide Time 22:26)

583
So let us see, let us just use a spreadsheet. If you are using an open office or you are using
excel, we can, let us create a new sheet. So, let us see we are doing 59.66 divided by 340. And
that is, that comes out to be 0.1752 into 1 minus 1 plus r raised to N where N is 25.

(Refer Slide Time 23:17)

584
So let us put, let us calculate, let us take a value of, let us start with the starting value of 0.2. If
r is 0.2, we are getting the 1 plus r is going to be 1.2 and we take, this one point, we take this
and put 1.2 raised to 25 and that is 95.39. We can do 1 minus 1 by this. So, that is a bracketed
term. That turns out to be, if we look at this, so r, if we start with r is equal to 0.2 we get r, the
next value of r which we are getting is 0.175 and 2 1 minus 0.989.

585
(Refer Slide Time 24:18)

586
And, this is R is 0.175 into 0.989, that is what we have to do this is the bracketed term. So, we
will get this as, now what we can do is we can convert, so this value now can be taken as, we
can take this as 0.1735 as the new value of r, r is 0.173 and then we can multiply this is going
to be now, we can copy these cells, we can just copy them and paste. So, we get this and then
this is going to be this value into 0.98.

So, now this is coming to the next value of r, we get this as the new value of r comes out to be
0.173. So, it is fairly within so which basically we are getting a decent rate of internal rate of
return of 17.3 % which is a reasonable amount that we are getting.

(Refer Slide Time 25:52)

Now we go back to that question which we were trying to solve and if you see in this, the next
question says that assuming a life of 25 calculate the internal rate of return, we have already

587
calculated that. If debt is available at 11 % interest and a tenure of 10 years, calculate the
internal rate of return on the equity. So, now, what happens is that we are having a debt which
is available to us at 11 %.

(Refer Slide Time 26:24)

So, this is, i is 11 %. That means, i is 0.11, the tenure is 10 years, that means NL is 10. So, I
can calculate the annualization factor as 0.11, 1.11 raised to 10, 1.11 raised to 10 minus 1 and
if you substitute this, this comes out to be 0.1698. Now, we are let us look at the first case
where we have 340 crores and we are saying debt equity ratio is 0.5. So, fraction of that is 0.5
which means, the total loan that we take is 170 crores.

If we are taking a loan of 170 crores how much will we be paying annually? Annual loan
repayment 170 into 0.1698 and you can calculate this, this comes out to be 28.87 crores. So,
now what happens to our stream of cash flows.

588
(Refer Slide Time 28:00)

Now, we are only paying 170 crores of equity and in each year in the first 10 years we are
getting the, you remember we were getting 59.6 crores each year. Now we have to pay from
that revenue, the annual revenue of 59.6 we have to repay the loan. So, we have to do 59.6
minus 28.87 and this comes out to be 30.7 approximately. So, when we look at this situation,
we will get now each year, first 7-10 years, we are getting 30.7 and then from the eleventh year
onwards we are getting 59.6 till 25 years

So, when we write the internal rate of return, we on the equity, we are trying to balance it and
get the rate of return where 170 is equal to we will get this as some of, in each case this will be
30.7 1 plus R raised to k, k is equal to 1 to 10. This is the first 10 years where we are paying
the, we are repaying the loan and from the eleventh year onwards, k is equal to 11 to 25. This
will be 59.6 divided by 1 plus r raised to k.

So, in the similar fashion that we had done the other calculation, we have to start with a trial
value of r and find out what is the internal rate of return on the equity. Now, if this internal rate
of return, we have to compare that with the return that we had got earlier, and if it is higher
than that 17.3 %, I think we had got, if it is higher than that, it makes sense for us to go with
the loan. If it is not then we should not hope for that.

Of course, it also depends on whether we have 340 crores to spend. If we do not, then as long
as this is the rate of return on this is positive and is more than our minimum rate of return, then
we should go for it. So, in order to calculate this let us again, let us just see a simple calculation
with excel.

589
(Refer Slide Time 31:23)

590
591
So, if you look at this we have already drawn this excel sheet. So, we are talking about a debt
fraction of 0.5. So, 340 into 0.5 giving us 170 with the loan move at an interest rate of 11 %
for 10 year. In the first year, we will have 30.7, 30.7 crores we said was the net input and this
is, cash flow is there if you see 1, 2, 3, 4,5 6, 7, 8, 9, 10 years. After the tenth year, from the
eleventh year onwards, it is 59.6 crores and this goes on till 25 year

Each year, what we have done is we have divided, we will take an assumed value of r. So let
us say if we take 30 %, 0.3, then in the first year, we will just divide by 1 plus r which is 1.3,
second year 1.3 squared, 1 plus r squared, 1 plus r cubed and so on and this is in the last year
this will be 1 plus r raised to 25. So, if we look at this, this is what we have done. And then we
have divided this number by the denominator and we have calculated it for each year. Then we
have summed up all of this.

So, we sum up all the cash flows which are the benefit streams and then we subtract, this is the
equity which we are paying minus 170 crores. So, we take the total sum of this and subtract
from that the initial out payment and so, you see the net present value is negative. So, obviously
we will not have a high debt, 30 % is too high a debt fraction. Let us reduce this and see, try it
out with 20 % and see what happens.

You see now that we are getting something which is 174 crores, overall net present value, so it
is positive. So, the fraction that we are getting is now we are getting the rate of return is going
to be 20 % or more. We can try with, let us change this 0.22. Let us change it 0.22 and you see
it 0.22, it is negative. We can bracket it even further. Let us take 0.21. 0.21 is also negative, so
it is more like 0.205 negative.

So we can get it within an accuracy of 0.201 is positive, 0.202 is also positive. So 20.2, 0.203
and 20… So you see, it is between 20.3 and 20.4. We can just say that this is, it is 20.3 % is
the rate of return and, of course, this is higher than the value that we got from the in the case
where we are not taking the debt. We were getting 17.3 % return on our equity. So it is better
that we take the loan. What if we increase the loan fraction and take it as 70-30?

592
(Refer Slide Time: 35:56)

When we take this as 70-30, what will happen is that the amount that we have to repay increases
but the initial amount instead of 170 crores, now the equity is only 102 crores, but in the first
10 years, we are getting 19.19 crores instead of the earlier value that we had gotten 30.7 crores
with the result that you can see now that actually the interest the rate of return will increase.
Let us try with 0.3. 0.3 is negative. 0.25, 0.24. This is also negative.

So, you see it is now it has come to, earlier it was 20%. Now we are getting 23%. So, obviously
from the point of view of the company, it is viable to go for a higher debt equity ratio. Of
course, there will be a maximum debt equity ratio which the financing institution will give you.
So, but if you can go up to 70 and 30 in this case, and that is the way in which we can calculate.

So please look at what we have done. We first calculated in case we did not take the loan, what
will be our rate of return and the internal rate of return then we for the loan, based on the terms
of the loan, we calculated how much will be the loan repayment, then adjusted in the years
when we are repaying the loan, from the revenue stream we subtracted that amount and then
build up the cash flow streams and then calculated the internal rate of return on the equity.

We tried with the two different debt fractions and the debt fraction that gives us a higher rate
of return on the equity is the fraction that we would choose. In this particular case we can even
without doing the numbers, we could have estimated what would happen because on the equity
we are getting a rate of return of 17% and for the loan we are only paying 11%. So it would
naturally make sense for us to maximize the equity.

593
There would be other situations where it will not be so obvious, and we would need to do the
detailed calculation. With this we complete the portion that we have done on energy financing
and I would suggest that you solve the second problem, which is given in the tutorial in a
similar fashion and make sure that you yourself can do all these numbers

594
 Energy Resources, Economics and Environment.
Professor. Rangan Banerjee.
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture-18.
Input/Output Analysis-Part 1.

We are now starting with a new topic, we are going to talk about input output analysis and its
application to energy systems. We have looked at, at the level of the different projects, how to
do the economic calculation to look at the environmental impacts, we now want to see what is
an overall impact at a larger scale, at the societal level and for a city for a region for a country
and for this, there are different ways in which we do energy economic models.

(Refer Slide Time: 0:57)

So, we have different types of energy economic models, the questions that we would like to
see is that what if we replaced all our thermal power plants with renewables? What would be
the impact not just on the energy sector, but overall on the economy? What would it mean in
terms of the investments, what would it mean in terms of the prices, what would it mean in
terms of the jobs, what would be the kind of macroeconomic methods? So, then there are
different kinds of models which are available in literature.

And there could be models by which we are looking at the energy economic interactions and
these typically could be classified the simplest kind of model is the input output model, which
is what we will study. There are also optimization models and simulation models. There are
models like Markal and there are models which are computable general equilibrium models

595
and then there are models for estimating the demand based on end use accounting and the
econometric models.

So, there are a whole host of different models and in this course, we will have time to only look
at one type of model. We will talk about the input output model, which will give us a way in
which we can analyze the impacts of the energy sector on the rest of the economy.

(Refer Slide Time: 2:27)

The models can be classified depending on the purpose, are we using it for one particular sector,
are we using it for the overall economy do we want to see what happens if there are different
growth rates. We can look at it in terms of short medium long term and obviously, in the short
term, what would happen is all the coefficient to remain more or less constant, in the medium
term, we can make changes in a variety of things and in the long term, many more things can
be changed.

The models can be also classified as top down versus bottom up. Top down means that we look
at an aggregate for the entire country as a whole or the entire world as a whole or for the state
and then make an estimation, then based on that, we then work out what will be the impacts at
different sections. A bottom up is where we start looking at different end users, the different
sectors, look at the residential, the commercial, industrial, and for each one we have
assumptions of different technologies and then build up by taking an aggregation what is the
overall picture.

Then models can be also classified as simulation versus optimization. In the case of simulation,
everything is specified and we would just like to know what if, what if we did it this way, look

596
at all the technology and the systems and then work out what would be the cost etc. and
optimization is where we have some degree of freedom and there are decision variables that
we can choose and then we can see what is an optimal.

We can minimize the total sum of costs or minimize the emissions are maximize the revenue
and things like that. So, this is another way in which we can classify. We can also classify
based on the geographical coverage. At the highest level is the world model, we can have
regional models, we can have national models, state models and local models.

(Refer Slide Time: 4:20)

I talked to you about this model, which is there, this is called the market allocation model,
which is a bottom up kind of model, starts from with a reference energy system with the primary
energy, then the conversion technologies they induce and then the demand and then you can
have either with some assumptions, it results in a linear programming kind of framework or it
could have based on if there are nonlinearities then we can have a mixed integer kind of, if
there are discrete variable.

So, there are various ways in which we can optimize and the detailed modeling can be done
and you can see, there are many papers where this has been applied to India, for the world for
many different countries of the world.

597
(Refer Slide Time: 5:03)

The model that we are going to talk about is the input output analysis and this was proposed
by Wassily Leontief way back in the 1930s, where he initially proposed it, and then he used
this methodology to extend the date to develop an input output model for the US and this was
done, there is a paper in Scientific American, it is available in the public domain and you can
take a look at it. This will give you an idea of exactly how the original work was done, where
he talked about the entire industry flows.

And Leontief got the Nobel Prize in Economics for his work and this was given in 1970s, 1973
and you can see the Nobel lecture that he proposed, where he created a simple aggregate model
of the world economy and divided it into developed countries and less developed countries,
and then saw what would happen in terms of investments and pollution, and looking at the
possibilities of trying to reduce pollution and the investments in industry as well as in pollution.

So, they had created a set of interesting scenarios. This is also available in the public domain
and I would urge you to look at both these papers that will give you an idea of the historical
development of this method. So, I am going to quickly go through some of these data and tables
which were shown in these papers, which will give you that initial idea and then we will, from
first principles, develop the theory of the input output analysis and show how it can be used for
the energy sector.

598
(Refer Slide Time: 7:05)

So, this is the sequence in which we… So, this is the paper, the Scientific American paper input
output economics and he said that we are concerning a new method which can portray both an
entire economy and its fine structure by plotting the production of each industry against its
consumption from every other sector.

(Refer Slide Time: 7:39)

So, typically the input output method, input output analysis as proposed by Leontief, finally,
results in a set of n linear equations in n unknowns. And that is, the beauty of the method is its
simplicity, we can say start with what Leontief said is that there was data of the economic
activity of and we can look at a region which could be a country, it could be a state, it could be

599
a city or it could be a region. Typically, of course, this would be have to be data, an entity for
which the data is usually available.

So, usually at the country level is where the data is available. So, in any economy there will be
the flow of products or goods and services, that means goods and services. So, this is, these
flows are also called these will be from the producer or the seller to the consumer or the buyer
and even at that time when he did this paper in the 50s and in the 1940s, the economy was
being tracked.

So, what we have to do is we have to take this, this will be the inter sectoral or the inter industry
flows or transactions which are actually observed and this is observed for a period. This is
observed for a period and typically that period is a year, is an annual. So, this could be either
the calendar year or in many cases, for instance in the Indian case we will talk about the
financial year. The financial years starts from 1st April to March 31st. So, you will say 2018-
19 2019-20 and so on.

And so, based on this, we will have different producers and sellers, different consumers and
buyers and every good, if we talk about a particular good, for instance, if you look at steel, steel
is being manufactured by the steel industry, that steel is being used by different sectors, let us
say in the automobile industry.

(Refer Slide Time: 10:35)

And so, we can replay we can talk about this in either physical units or monetary units and, if
you think about it, if we are talking of so many tons or so many for an economy over the year,
so many million tons of steel which are being produced. And then we will talk about so many
million tons of cement which are being produced and so many million kilowatt hour of

600
electricity which is being produced and so on. But when we compare the different things and
we add them all up, it is difficult to have multiple physical units.

So, one of the best ways to do that is take the physical unit, multiply it by the price or the value
which is there, so you get it all in terms of monetary terms. And that is typically the way in
which these transactions are put. So, essentially what we have is we can put each transaction
as Z ij, which is the monetary value of the annual transaction from sector i, which is the
producer, to sector j.

And so, if you look at one sector, if you are looking at steel, steel is being used for the power
sector, steel is being used for the cement sector. So, there are inter industry, internally the
output of one sector is being used in the other sectors. In addition to this, there is a sales to
purchasers, who are exogenous, purchasers who are external to the industrial sector.

That means purchasers who are not having any production, who are exogenous to the, and that
will be the final demand, exogenous to the industrial sectors. This will be the external demand
and this will, who are not, they are not producers.

(Refer Slide Time: 13:25)

So, these would typically, these sectors would be households, government or maybe you are
exporting it, foreign trade. So, these, this is the external demand. So, if we look at xi as the total
output or production of sector i or production of sector i and fi is the total final demand for
sector i's product, we can write a balance equation which is xi is Z i1, from i to the first sector
and then there are n such sectors Zi2 + n so on Zin + fi.

601
(Refer Slide Time: 15:04)

So, we can write this as xi, Z ij plus fi, where Zij are the inter industry flows, transactions in
money terms. Inter industry flows or transaction.

(Refer Slide Time: 15:46)

So, let us see how this was represented in the paper by Leontief in Scientific American, you
can this is not very clear here, there are small items and we will explain this. You can see this
in the paper, large number of sectors and in each of these from one sector to the other sectors,
these are the kind of industry flows.

602
(Refer Slide Time: 16:06)

So, if you look at the types of sectors, we are talking about agriculture and fisheries, food and
Kindred products, textile mills, apparel and so on and each of these sectors, these are the i's
which we are talking. From each sector the agricultural products are used in the other sectors
and so that those transactions are represented in this matrix.

(Refer Slide Time: 16:32)

And then, we also talked about the final demand and the final demand if you see foreign
countries, government, households and the private capital formation.

603
(Refer Slide Time: 16:46)

And this is a sort of in more detail, you can see each of these sectors and from the sector to the
other sector, this is the transaction matrix. From agriculture to agriculture and fisheries, some
of the products are used internally. For instance, if we look at electricity sector and we look at
the electricity which is used within the electricity sector that would be like the auxiliary
consumption of the power plants.

(Refer Slide Time: 17:15)

And so, this is the way in which these transactions and then we talked about the final demand.
And when we sum this all up, this will be equal to the total gross output or the xi that we had.
And this is the final demand, these are the internal demands.

604
(Refer Slide Time: 17:31)

And similarly, we had this kind of curve. With this, what the paper showed is that for some of
the sectors, it illustrates, what it can do, and this was done, this is a 1950 paper using the data
for 1939. It is the tons of steel for a certain amount of output, which is there and you can see
tons of steel ingot per thousand dollars of production of each of these sectors. So, if you look
at the construction sector, in the metal fabrication, the motor vehicles and sector, these are the
three main sectors and relatively less for the others.

(Refer Slide Time: 18:09)

We can also look at, for the automobile industry, what are the per thousand dollars of output
of the auto industry, how much is the input and you can see the ferrous metals is the main input
and then you have all of these. So, these are some of the illustration of the kind of things.

605
(Refer Slide Time: 18:30)

And then Leontief used this for static economy wide, US wide mapping of all the inter industry
transactions and then he wanted to illustrate that what happens if we have a 10 percent increase
in the salaries or the wages and how would that affect the overall economy and then showed
the impact on different sectors.

(Refer Slide Time: 18:59)

Leontief's other paper, which was part of the Nobel Economics Prize Talk, he talked about in
this case, this was a talk given in 1973, he estimated and built up input output framework for
the world as a whole. For the world, he divided it into developed and developing countries.
And in this he aggregated it in terms of extraction industry, other production, and then pollution

606
and then the employment and value add and then looked at the transactions in billions of dollars
from each of these sectors.

(Refer Slide Time: 19:35)

And similar kind of thing was done for the less developed countries and then based on this, he
created different scenarios. And there was one scenario for the less developed countries where
you had not that much production.

607
(Refer Slide Time: 19:49)

The other one was where you had a large amount of pollution control in the less developed
countries and with these scenarios used, showed the power of the method. And I would suggest
you look at the details of this paper and that would give you an idea of how this methodology
can be used.

(Refer Slide Time: 20:09)

In general finally, when we look at the input output table that is there, this is from the book by
Blair and Miller, you can look at the book on input output analysis, the second edition, we will
see different kinds of producers and then the final demand. And in addition to this, so we look
at this it typically agriculture, mining, construction, manufacturing, all of this will have, you
have a matrix where it goes agriculture to agriculture, agriculture to mining and so on.

608
In addition to this is the salaries that we pay, the taxes that we pay to the government and
anything in terms of the profits, etc. So, all of this together, if you look at the entire transactions
we can get, if you look at overall, this will give us any indication of an estimation of the gross
domestic product.

609
 Energy Resources, Economics and Environment.
Professor. Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 18.
Input/Output Analysis-Part 2.

(Refer Slide Time: 0:28)

So, let us look at, let us derive this, move forward with this. We are looking at x1 as Z11, Z12
plus Z1j Z1n plus f1. Then we have for the ith row, this will be Zi1, Zi2, Zij, this is Z1n Zin
plus fi, and xn would be Zn1 Zn2 Znj, Znn plus fn. So, this can be written in matrix form,
whatever we have written so far this can be written in matrix form.

(Refer Slide Time: 1:29)

610
So, that we have these following matrices. X is x1, x2 and so on to xn. Z matrix is Z11 to Z1n
and so on, Zi1 to Zin and then f is equal to f1, f2 and so on to fn. This can be written as X is
equal to Zi plus f, where i is a column matrix with 1,1,1,1,1, all the identity 1 value.

(Refer Slide Time: 2:42)

611
So, this is the way in which we can write this, we can also see, this is the equation which are
there and this is the values.

(Refer Slide Time: 2:52)

Now, the basis of this method, the fi, if you see the basis of this method is that we are going to
write this in the form of the amount that we need from each of these. Finally, which we are
looking at is going to be dependent.

612
(Refer Slide Time: 3:15)

The Zij will be a function of xj. That means the amount that we need from the ith sector to the
jth sector will depend on the total output that we have from the jth sector and one way the input
output method, the fundamental assumption is that the inter industry flow from the ith sector
to the jth sector depends entirely on the total output, depends entirely on the total output of the
jth sector, entirely on the total output of j for that period.

So, which will mean that we say that aij, this is the coefficient that we will define, is Zi j by x
j. In the input output method this coefficient is assumed to be constant, this is a technical
coefficient, this is also known as a direct coefficient or the direct coefficient.

(Refer Slide Time: 5:14)

613
So, for instance, if we are looking at aluminum being used for aircraft production, so this will
be aluminum input by aircraft output. Now what will be the units, this will be in millions of
rupees, crores of rupees, so, it is going to be in the monetary units rupees per rupees. So, it is a
ratio and so this will be, aij will be defined here as value of aluminum bought by the aircraft
producers in the last year, in the year we are looking at, divided by the value of air craft
production.

Now, can we say anything about aij? So, aij has to be between 0 and 1, it cannot be negative,
which is a physical amount of quantity that is required. It cannot be greater than 1 because
finally, the total value that is there in that sector has to be a combination of all the value adds
of different components. And since all the, since none of them can be negative when we add it
up, this is going to be there. So, this aij xj is equal to Zij, this is the basis. These coefficients
are constant, which means that economies of scale are ignored and this operates under constant
returns to scale. In the Leontief system, the entire basis is that the production operates under
constant returns to scale.

(Refer Slide Time: 8:48)

So, we can now write this as, if we look at this matrix a11, a12, a1n, Zij, if you remember the
Zij's which we had, we can write the expression, let us start from the… Let us write down let
us look at the expression, that we had got earlier, which was in terms of x, xi being equal to
that Zi plus fi. We can write the Zij, as we said is going to be a combination of a into x.

614
(Refer Slide Time: 9:05)

So, we are going to have X is equal to the Zij, Zi plus f is what we had and this is going to be
nothing but A into your X. So, this is a X plus f. So, we can take X into the identity matrix, we
have identity matrix I minus A, once we take it on this side into X is equal to f and now we can
get X, what we want to do is if we know the final demand, what will be the values of X that
we will get. So, X will be, we can take the inverse of this I minus A inverse into f.

615
(Refer Slide Time: 10:16)

So, essentially what we had is we started off with Ax plus f is equal to x, x minus Ax is equal
to f. So, this x is the identity matrix, identity matrix will be for 2 by 2, it is 1,0,0,1, it will be
1,0,0,0,1,0,0,0,1 for 3 by 3, this is I minus A into x is equal to f and so x is equal to I minus A
inverse into f. This value I minus A inverse is called the Leontief inverse and this can be written
as Li j.

(Refer Slide Time: 11:26)

So, we can write this as x is equal to x1 is equal to L11 f1 plus L12 f2, L1n fn, and so on xi is
equal to Li1. Similarly xn, so we have to calculate in each case the Leontief inverse and so, by
essentially for instance, you may remember, if you look at 2 by 2 matrix, if you have A is equal
to a, b, c, d, we can calculate A inverse will be nothing but 1 over module determinant of A

616
and this is d minus b minus c, a and we have determinant of A as ad minus bc and of course,
determinant of A should not be equal to 0.

With the 2 by 2 is something we can do by hand, but if we want to calculate this for 3 by 3, 4
by 4, 5 by 5, n by n we can use any, you can use MATLAB or you can use Excel and you can
do the matrix inversion and get the Leontief.

(Refer Slide Time: 13:23)

So, essentially what happens is we can take this and we would have the different sectors, the
buying and selling sectors and then we will get, we also said that the final demand is a
combination of the different sectors, the consumption, the government consumption, the
exports.

617
(Refer Slide Time: 13:37)

And then there are these payment sectors which we talk of, which is, in the columns, these are
the additional sectors that we are talking of where we are paying the amount which is going to
the other like wages and to government and any other services, labour, government services
and inputs. And this will add up to the 2 outlays, the rows will add up and so will the columns.
And so, typically, if we are talking of 2 processing sectors and some payment sectors, this is
what we will get and this is finally the kind of input output table.

(Refer Slide Time: 14:17)

These are the balance equations that we already talked of for the 2 sectors that is X is equal to
x1 plus x2 plus L, this is a balance equation for the row and the balance equation for the
column and with this, this you will get this kind of calculation.

618
(Refer Slide Time: 14:37)

So, if we look at these sectors, L is the labor services employment, N all other value added and
M are imports, all of these will come under each sector in the column. And in the row if you
look at it, there are additional final demands, which will come in terms of consumption,
investment goods, government and export. So, F will be equal to C plus I plus G plus E. And
this is the payment sector, which is the additional thing which will come in the column.

(Refer Slide Time: 15:10)

With this, we will take an example, which is from the book by Blair and Miller. It is a 2 sector
example and we will take that example and then process it and then see what will happen when
we make, what are the coefficients, how do we take Leontief inverse, what is the implication

619
of the Leontief inverse and how can we use it to see what if in case there is a growth or there
is some change in the sectoral demand.

(Refer Slide Time: 15:40)

So, if we look at this sector, let me just write down this. We have essentially, let us say there
is an agricultural sector and a manufacturing sector. And so, if this is the agricultural, you have
an agricultural sector, and then you have a manufacturing sector, and in this case, this is 1 and
2 and then here also we have agriculture and manufacturing and this is some 150 some units,
billion rupees, million dollars, the financial units, manufacturing is 500 and the total final
demand fi for this is 300. So, the total which is there, the xi which is there to total final demand
is going to be 150 plus 500 plus, this is 350.

So, this is total output, total output. This is the transaction which we have noticed that means,
from agriculture of the output of agriculture 150 million rupees is being used in agriculture,
500 million rupees is used in manufacturing and 350 is the final demand. So, total output of
agriculture is 1000 million rupees and from the case of manufacturing, 200 is going here and
100 going to the manufacturing sector. The final demand for all the manufacturing products is
1700. So, if you add this up this comes out to be 2000.

And then there is this payment sector as we said wages, taxes, profits whatever else we are
looking at. So, remember this has to balance out, so the total outlays which are xi's, total outlays
must balance out, so this must be equal to 1000 which will mean that this is 650. And this is
again this will be equal to 2000 and this will be 1400. The final demand in this case is for the
payments 1100. So, if you add this up this is 28 and this is 3150, this is 3150 total, which is the
total value add in the economy is 6150 appropriate financial units.

620
Now, let us look at how do we calculate the aij's. So, if we look at a11, a11 is what is the
amount per unit of agriculture what is the amount of agriculture use. So, this will be equal to
150 by 1000 which is 0.15. That means per unit of agricultural output 0.15 times of that is the
ratio of what is used within this sector itself. a12 is the percentage of the agriculture which is
used in the agriculture… If you look at the transaction from agriculture to manufacturing is
500 units and this will depend on the output per unit of manufacturing.

So, here this is going to be 500 divided by 2000. This will be divided by xj in this case x2, so
this is going to be 0.25. Similarly, this is going to be 200 divided by 1000 which is 0.2 and this
is 100 divided by 2000 which is 0.05.

(Refer Slide Time: 20:30)

These are the technical coefficients, we have the A matrix which is point 0.15, 0.25, 0.2 and
0.05, this is the A matrix and we can then put down, if you see this is the A matrix, the f matrix
is 350 and 1700 and the value of x is 1000 and 2000. Now, the question is that what if instead
of this kind of output we had a change, where the agricultural output decreased and both of
these…

If the agricultural output suppose instead of the final demand for agriculture instead of 350 if
that increases to f new, if we say that instead of this we are converting, we increase it to 600
and the industrial demand decreases. So, suppose we move from here to here, we want to know
how, what will be the changes in the economy and how much of each of these products would
be calculated. So, this is what we want to do in terms of x new.

621
(Refer Slide Time: 22:10)

So, in doing this, first thing which we can do is calculate I minus A, if you remember this is A,
so 1 minus point 0.85 and here is 0 minus 0.25, so it is minus 0.25. This is 0 minus 0.2. So, this
point 0.2, 1 minus 0.05, so it is 0.95. This is I minus A, and we want to calculate the inverse of
this. And you can see the determinant of this I minus A.

You can check this out, it comes out to be 0.7575. And so, the Leontief inverse is, I minus A
inverse is 1 by 0.7575 and this is now 0.95, 0.25, 0.2, 0.85. You will see that this comes out to
be 1.2541, 0.330 and 0.2640 and this is… So, this is what was told, we calculated this.

(Refer Slide Time: 24:01)

622
And so the interesting thing to see is if you look at this values that we have of the Leontief
matrix 1.2541, 0.3300, 0.2640, 1.1221, you will notice that all the coefficients which are there
in the diagonal these are greater than 1 and that is essentially which means that in the per unit
of, we had said there is a direct coefficient which is what is the amount of agricultural output
increase per unit of agriculture.

But if you look at for a particular value of output, if we look at x, how much is the total direct
plus indirect requirement these values in the diagonal will always be greater than 1 and that is
by the nature of this.

(Refer Slide Time: 25:14)

So, we can now take, if we want to calculate the value of x new, we can just take L into f new
and this is 1.2541, 0.3300, 0.2640, you multiply the two matrices 600, 1500 we get 1247.52

623
1841.58 and what are the Z new? Z new can be the new inter industry transaction will just be
A into X new.

(Refer Slide Time: 26:21)

And if you do this you will find that Z new is 187.13, 460.40, 249.5 and then if we look at this,
then we can we can get the new final output input output table.

624
(Refer Slide Time: 26:52)

And that will now be agriculture, manufacturing 187.13, 460.4 fi is 600, 1247.52, we could
round it off also, this is 249.5, 92… Payment sector. Now to calculate the payment sector, you
will see that this total is 1247.52 subtract from that these two and you will get this as 810.89,
this is 1289.11, this will remain unchanged, the total will be 3200, total outlays, I can add this
will be 1247.52, 1841.58, 3200, 6289.10. Let us look at what it was earlier and then we can
compare these two.

(Refer Slide Time: 28:28)

625
So, you see to what has happened here is that the total output in the agricultural sector even
though the final demand of the agricultural, the final demand of the agricultural sector has
increased from 350 to 600 with the result that the total output of the agriculture sector in order
to meet this demand has increased from 1000 units to 1247 units.

And in the case of industry the demand has reduced final demand has reduced from 1700 to
1500, it has reduced by 200 units, but the total output has also reduced but not in the same
amount. It has reduced, it has reduced to 1841.

And when we look at the addition of this, the earlier the total output of the economy, the 2
sector economy was 6150 overall now, the economy has increased to 6289. And so, the we can
see that increase in agriculture decrease in industry, what is the impact. So, there are many
different things that can be done with this and with this we can also look at some of the energy
sectors as well as the manufacturing sector.

So, the impact of energy intensity, we can also, all of this can be done in, this was done in
money units, we can also do it in hybrid units where some years, some of the terms, some of
the sectors are represented in energy terms and the other sectors are represented in money terms
and we will look at some of these examples and the applications in the next module.

626
 Energy Resources, Economics and Environment
Professor. Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture-19
Input/Output Analysis-Part 3

So, we continue with this module where we are going to go ahead with input output analysis.
In the previous module we looked at the basics of input output analysis, we looked at Leontief's
initial formulation, we also said that in an economy when we talk of a number of different
sectors, an output of one sector is used in the other sectors and it is also then used to meet the
final demand. When we look at this, this and we sum up for each sector we get a set of
interactions between the different sectors and this is represented, through the matrices that we
create.

We then for the input output we said that the requirement of let us say steel for automobiles
depends on the total output of the automobiles and these requirement, this correlation is
assumed to be linear. So, with linear constants when we have the direct coefficients, we create
a matrix equation. It is a set of linear equations in the n variables and with that, we can see that
if the final demand for once our sector increases, what happens to the rest of this.

So, we then talked about two sets of coefficients, the direct coefficient, which is the direct
requirement, let us say of steel for agriculture or steel for electricity or agricultural output for
chemicals and then we have the total which is direct plus indirect and we did this by then
creating the matrix creating the Leontief index inverse matrix, and then that relates to the final
demand. So that any change in final demand results in a corresponding requirement or a change
in the output of the different sectors.

When we created that matrix, we saw that the diagonal element of the matrix is greater than 1
which is sort of intuitive. Because, if we need a certain amount of final demand for steel,
because of that final demand for steel to produce that we will need other chemicals, we will
need electricity, for that chemicals and that electricity again we need a certain amount of steel.
So, when we couple that up, we will see that for the diagonal elements will all be greater than
1.

627
Now to take this forward, just to illustrate this from the book by Miller and Blair on input
output analysis, I would like to just show you some examples of aggregate for a country input
output tables and what they mean.

(Refer Slide Time: 3:13)

So, this is the US, this is the A matrix which we talked about this is A ij for the US and this is
a 7 sector 7 by 7 matrix if you can see. If you look at this, let me just get the laser point. You
can see for agriculture, from 1 to 1 is the agricultural products being used for agriculture.

Then agricultural products being used for mining for construction for manufacturing, for trade,
transportation, utilities, for services and for others and similarly mining to this manufacturing
to variety of things and services going to variety of things and so, you can see all of these are
between 0 and 1 and this is the total.

628
(Refer Slide Time: 4:18)

Now, when we take this A matrix, we can write down for this matrix, we can calculate I minus
A and then take the inverse of that and that gives you the matrix which we are talking of, this
is the inverse matrix that we are looking at and this is the L matrix. So, this is the matrix that
we calculate. If you look at, this is the Leontief inverse that we are talking of.

Now you see the diagonal elements, agriculture is 1.26, which means that an increase in the
final demand of agriculture by 1 unit results in a net overall requirement of increasing
agricultural product by 1.26. Because that an increase of agriculture requires all other inputs
from the other sectors, which again in turn requires the amounts from the agriculture. So you
can see all the diagonal elements 1.26, 1.07, 1.0047, 1.34, 1.008, 1.41, 1.03, all the diagonal
elements are greater than 1.

All the off diagonal elements are obviously less than 1 they are between 0 and 1. And so this
is the L matrix. We could then take the L matrix and see what happens when you if you change

629
the final demands. So, the assumption in the input output method is that these coefficients are
static, and these coefficients remain constant.

(Refer Slide Time: 5:54)

Now just to give you an idea of this, we could also represent… See all of these, when we talked
about these input output tables, these were all represented in monetary units. It was also
possible that we can talk in terms of the physical units in terms of bushels and tons. So, if you
are looking at, let us say corn or agriculture in bushels of corn, and if you are looking at let us
say oil, tons of oil. If we had an example, where this is a physical quantity, we said that 75
bushels of corn is used in the agricultural sector, 250 is used in the manufacturing sector and
175 is the final demand. So, the total demand is 500.

630
Similarly, 40 tons are used in agriculture, 20 tons used here 340 tons and 400 tons. So if you
look at this then if we had a price in dollars per physical unit that means dollars 2 per bushel
and dollars 5 per ton, then we could multiply each of these units, 75 into 2, 250 into 2 and so
on, so that you can get it in money terms and then what we get is this is the conventional matrix
that we had used for the input output analysis, then we can do the normal analysis in terms of
the Leontief inverse and make the calculations, we can get the coefficients and these will be all
in the monetary terms.

We could also go back and if you see this, this 150, 200, 500, 100 that we got after multiplying
this, if we change the revised physical units of measures to reflect the price, then this becomes,
this is the matrix that we got can be converted into physical terms. That means we now have
this as 150, 500, 350, 1000.

(Refer Slide Time: 8:11)

In physical terms, now, this is in rupees or dollars in this example it is when dollars this is, 1
dollar is the cost of half a bushel per unit price. So, physically this represents half a bushel and
that is a physical and this one if you look at it in tons 1700, 2000 and this is 1 fifth ton. So, we
can actually move between physical and money terms and there are certain cases where we can
also look at this in terms of the hybrid unit, where you have both physical as well as money
terms.

631
(Refer Slide Time: 9:06)

Now, we can have on this side, if you remember in the column, the last row in the column are
the different payment sectors, one of them could be wages and if we look at this, this is the
wages 650, 1400, 1100, 3150 and if you look at this in terms of the output, you will see that
the wages or the labor or the employment is 650 by 1000.

(Refer Slide Time: 9:53)

And so that unit is, we can get a coefficient which is 650 by 100 which is 0.65 and 1400 by
2000 which is 0.7. And these are representing the employment factors, or the employment
index per unit of the money that we are spending in that sector. And this could be useful for
instance, if we were thinking in terms of, instead of coal we go for renewables and we go for
photovoltaics, we can see the growth in the two different sectors. We can have an employment
factor in terms of ratios, and then see how many jobs are being created, how many jobs are
being lost. And so that that is an interesting way in which we can look at that.

632
(Refer Slide Time: 10:39)

So, that we could actually take for instance, the ratios of this and then use that to then calculate
what is the amount of labor under different conditions. We can come make a composite index
of energy. For instance, in the case of US, we saw the Input Output matrix for a particular year,
we can also draw as we have seen, in the initial lectures, we saw the Sankey or the energy
balance diagram for the world and for India and these diagrams will represent the relative
proportions of the different fields and the flows in different sectors and this can be then
converted into…

633
(Refer Slide Time: 11:30)

So, we could have the input output in terms of some sectors, the energy sectors and non-energy
sectors. So, we could create a hybrid input output table where your transaction matrix has
energy units and money. So that, then what happens is that when I have a transaction from
energy to another sector, it will be in terms of the value add which is provided by steel. The
steel, cement or the other industrial sectors chemicals all of them are put in terms of millions
of rupees or millions of dollars and the energy could be in mega joules, pita joules or in kilowatt
hours. In the case of in the Miller and Blair example, they have talked of it in terms of BTU
and dollars, British thermal Unit

So, when we have this kind of this is called a hybrid input output framework. Please remember
this is equivalent to the same thing we can take the hybrid, the energy terms multiplied by the
price and then convert it into the conventional input output table that we had seen earlier, which
would be everything in money terms. And then we can see the amount of electricity which is

634
in money given to the industry sector. In the case of a hybrid system, where you have energy,
we can actually look at the energy use per million rupees of steel produced.

And so, this is as long, as we are consistent in terms of the units we can otherwise go ahead
and do the same kind of example. So, to just give you an example, this is again the example
from the textbook.

(Refer Slide Time: 13:50)

And there are two things here, there are some output of some products which are called widgets
and there is energy and then there is a final demand, final demand we saw, FI and then we have
the total output. So, in this case, if you see 10 million dollars of widgets being used for the
widgets, for making the widget and 10 million dollars of widgets being used for the 20 million
dollars for the energy sector and 70 is the final demand for widget. So, total when we add it up,
this is 100 million dollars and in this case it is 30, this is 40 and this is 50, this is 120.

So, in quad BTU this is given in terms of this can the same the same row can also be
represented. Now this is million dollars and this one is in quad BTU in energy units, this will
be 60, 80, 100, 240. So, if you clearly see this is equivalent to a price in terms of 30 by 60, the
price is 0.5 million dollars per quad BTU. And one could operate this with the money terms,
do the calculations, after we get the final results, use this factor to get it into the energy term.

So, we can move seamlessly between energy and money. Of course, another way is sometimes
you operate with a hybrid input output framework, but we just have to remember this that these
coefficients will have then units. In the case, in the normal case, the aijs are all ratios, which
are in terms of between 0 and 1 and so then that becomes an easy way of doing this.

635
(Refer Slide Time: 16:40)

So, this is in terms of the essentially, we then have the following matrices, the normal matrix
that we talked Zi plus f is equal to x. This was our financial one and instead of this now, we
also have the Ei, that is the energy plus the demand for energy is equal to the total g and then
that could be the way in which we could write this. So, q is a vector of energy deliveries to the
total final demand and g is the factor of the total energy consumption. So, we could operate it
this way or we could operate it in the normal input output with the money terms and then make
the calculation.

636
(Refer Slide Time: 17:28)

So, just to give you, if you look at you can look at the textbook by Miller and Blair, there are
several examples of this. So, for instance, there are these three sector, three sectors and one
automobile sector. So, you have crude oil, refined petroleum, electric power, and then you have
the crude oil is going for refined petroleum sector then it goes, some of it goes to the electric
power sector, there is no final demand for the crude oil, you add it up that comes to 10 million
US dollars.

Refined petroleum, some of it is being used in the crude oil sector and some of it, of course is
going into this and so on, when you add it up, this is the total. And then electric power electricity
going into each of these sectors and they have, there is a final demand for automobiles and then
this is the total output.

(Refer Slide Time: 18:27)

And one could then convert this in terms of the price. And you can get the in terms of BTU,
this is the kind of matrix which will then come. So, it is basically dividing those money units

637
by the prices. And please remember, in a situation it is possible that prices of energy to different
sectors may be different and that can be also configured into this framework.

(Refer Slide Time: 18:58)

So that is the situation in terms of looking at the examples, different kinds of examples where
we take these different sectors, the energy sector and the automobile sector and then convert it
into this.

(Refer Slide Time: 19:13)

We also, I showed you earlier the input output table from the textbook on the Input Output
analysis and similar kind of input output table is shown here, which is now a hybrid unit and
this is hybrid unit has transactions millions of dollars for non energy sector and in quads or 10
raised to 15 BTU for the energy sector. So, you can see basically coal mining oil, natural gas,
petroleum utilities, gas utilities, all of these will be in BTU. The chemicals agriculture, mining,
transport and communication rest of economy are all going to be in the money terms and then

638
we can make the if we know the prices, we can convert it into a money term aspect and then
do.

(Refer Slide Time: 20:16)

And so, we saw last time, the numbers in terms of direct coefficients for 2003. Please remember
that as the economy changes, you will find that the coefficients also will change. And so, when
we talk about input output analysis, if you are taking fixed coefficients that will be valid only
for short term kinds of calculations. If you are looking at long term calculations and if the
structure changes, it is quite likely that there will be very significant changes.

Even when we compare, you can take this table with the values and compare it with the 2003
coefficients and you will find that there are some changes in some of these coefficients and
over a longer period of time, you will see that these coefficients change quite significantly. For
instance, the energy use for industry may decrease if there has been significant improvements
in energy efficiency and so that those are that is the way in which there is coefficients.

(Refer Slide Time: 21:30)

639
And if you look at the total coefficients, now this is after we take that same, if you take this
2006 matrix that we had get I minus A, take the inverse of that, that will give you the Leontief
inverse. And you will find then that these coefficients, we talked about the diagonal coefficients
being greater than 1 and you can remember. If you remember the earlier in 2003, this value
was lower than this, this is now almost 1.6 times, and so on. So, this gives you an idea of how
you can use this and then also that these things change.

And that is just to show you another set of data, this is the 97 data. And you can clearly see
when you take 97, 2003 and 2006, you can see quite clearly there are reasonable differences in
all of this.

(Refer Slide Time: 22:16)

And so, we will take an example before we take that example, let me talk to you about the way
in which this can be used, to assess the impact of different kinds of possibilities for a particular
sector. So, this is one of the papers, one of the research work done by one of our PhD students
and you can see this paper, you can look it up in the energy journal. It is an integrated modeling
framework for energy economy and emissions modeling and this is a case study for India.

640
(Refer Slide Time: 22:50)
Integrated Modelling framework

So, in this if you see the approach that we had was, we essentially looked at the emissions
intensity, the emissions intensity is the emission per unit of GDP. And we broke up the emission
intensity into the difference in terms of the energy intensity of the GDP and the sectoral
contribution to the GDP. So, typically what happens is in any, in any country, the GDP comes
from a whole set of different sectors.

(Refer Slide Time: 23:33)

So, if you look at it, typically the most important sectors are industry, services and agriculture
and over a long period of time, if you look at India, for instance, over the last 10-20 years, you
will see that the share of agriculture in the GDP has been declining. Share of services has been
increasing, share of industry more or less remain constant, slight increases slight decreases. So,
when we look at this, what has happened is that the share of services in the total GDP has been
much higher than, has grown and as compared to the industry and industry share has declined
a bit.

641
Now, if you look at the energy requirement for industry and for the high energy intensive
industries, that energy requirement is much higher per million rupees of value add as compared
to something in the services sector and in the services sector, at most your need something with
the energy for the air conditioning and space cooling. But in industry, we are looking at
manufacturing and transformations and so that is much more energy intensive.

(Refer Slide Time: 25:04)

Integrated Modelling framework

So, we can the first thing is we did a decomposition analysis to see what is the share of what is
the breakup of the share of the sectoral contribution and the how much of the energy intensity
improvements and then we got ranges for these parameters. This is from the past and from that
we started with a particular base year and then made projections for the target year.

So, when we looked at the projection, we projected different possible scenarios for India in
terms of industrial growth, services growth and agricultural growth. And based on that, we got,
we took an input output model with some coefficients and then, saw when we looked at this
with the kind of investments required we also built a detailed model for the power sector. And
for this kind of requirement we estimated what is the demand for electricity, then saw what
kind of new capacities have to be added, we try to do an optimization model under different
scenarios.

And using that we estimated what is the total demand for goods and services and then ran an
input output method to model to see what will happen in different sectors and this then gives
us an idea to see, we then saw what is the impact of different household classes and the income
and income distributions and if you remember earlier we talked about equality and inequality
in incomes and we talked about the GINI coefficients.

642
So, after looking at these kind of investments in the energy sector, and whether how much is
the government and private investment, based on that we try to see what will be the investment
in the other sectors and as a result of that, we try to see the impact on the income and income
distribution.

So, this is basically the method, it is a set of coupled models. There is an optimization model
of the power sector, there is an input of model and then there is a decomposition analysis and
different scenarios.

(Refer Slide Time: 27:06)

So, under each of these scenarios, we first identify different drivers, we took a high services
scenario, high industry scenario, and then we looked at the additional investment, either if it is,
if the investment which is made, have been proportional cut backs from each of the sectors, or
the additional investment from cutbacks in welfare sector and then in the power sector, we ran
2 scenarios where there is no restriction on emissions and we go for the minimum cost or if
there are restrictions on emissions, and then the initial investments may be higher.

643
(Refer Slide Time: 27:45)

And based on that we could actually see under these scenarios, what happens in terms of the
growth rates and the per capita income, and interestingly we can also see the difference in the
GINI coefficient. So, for instance, in this case, in the case when we have more restrictions on
emissions, we see that it results in a slightly higher inequality and this is just, the numbers are
not that important, you can look at the details in the paper, but basically it gives you an
illustration of how input output analysis can be used to answer what-if questions about the
impacts of policy.

(Refer Slide Time: 28:27)

So, that is basically the idea of how this input output analysis can be used at the aggregate level
for the energy sector.

644
 Energy Resources, Economics and Environment
Professor. Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Bombay
Lecture 19 Part 2
Input/Output Analysis - Tutorial

(Refer Slide Time: 00:15)

Now, let us take one simple example and try to solve and we have already seen in both the, in the
last module as well as in this module how to do the calculations.

645
(Refer Slide Time: 00:24)

Now, let us do this for the, for this example. So, there are two sectors given here, the agriculture
and the manufacturing sector.

(Refer Slide Time: 00:38)

Agriculture, manufacturing and so agriculture, manufacturing and let us say that we are talking of
this in terms of money terms, in million rupees and what has it, partial table has been given to you
of transactions. So, the questions the, unit is million or million Indian rupees. We are considering
a two sector economy with an input output table as shown for 2017.We are asked to fill in the
blanks in the input output table, compute the A matrix and the L matrix.

646
(Refer Slide Time: 01:21)

Then we are supposed to consider two cases, one is where the agriculture final demand increases
by 200 million rupees in 2018, while the final demand for manufacturing remains constant. So, if
agriculture increases and manufacture remains constant, the second one is where agricultural final
demand remains constant while manufacturing demand increases by 200 million rupees, we want
to compare the two cases in terms of the input output tables. Is the total output of the economy the
same in both the cases and then we also want to ask in concept, how can we use the input output
table to compute the impact of employment of two different options?

(Refer Slide Time: 02:09)

So, let us do this example. Please try this, it is fairly simple. It is related to whatever we have done
so far. So, we had this is 300, 500, 800, 200, 400, 1500 and then you have the payment sector and

647
then the total. It is given to you, this the value is given, payment sector outside. This is fairly
straightforward we have already seen this. We can sum this up 300 plus 500, 800 plus 800, 1600
this will be the total output here. Here, 200 plus 400, 600 plus 1500, 2100 million tons. Now, we
know that the column when we are looking at agriculture, agriculture is being used for agriculture,
and these are transactions here.

So, the total payments in terms of wages, profits everything which is there must be such that this
total output is the same. So, this total output here will be 1600, total output here will be 2100. As
we subtract, we can take 1600 minus 500 and that will give us 1100. Similarly, when we look at
this, it is going to be 2100 minus 900, it is 1200. Then when we add this up, this is 8000, 2300 plus
1000, 3300. Let us add this up, 2300 plus 1000, 3300. Now, this two has to add up and that is clear.
So, 2100, 1600, 3700 plus 3300 is 7000. 7000 million tons is the total output of the economy.

(Refer Slide Time: 04:54)

And now let us see the question which has been asked is to see what happens if we change if this
increase, if the, let us see with the question says that agricultural final demand increases by 200
million, final demand for manufacturing remains constant. Before that, we are asked to fill in the
blanks which we have done. Compute the A matrix and the L matrix.

648
(Refer Slide Time: 05:05)

So, A matrix is straightforward. Let us look at the A matrix, A matrix is going to be 300 by 1600.
This is 500 by 2100, this is 200 by 1600, 400 by 2100. So, this comes out to be 0.1875 and this is
0.2381, I will just round it off. This is 0.125. This is the A matrix. Remember the F matrix is 800
and 1500.

649
(Refer Slide Time: 06:57)

So, when we look at this A matrix, we can now calculate I minus A, I minus A becomes 1 minus
0.1875 is 0.8125, 1 minus point. So, this is minus 0.2381, this is minus 0.125, 1 minus 0.1905, this
is 0.8095, this is I minus A. We can take the inverse of this and you can you can do this. I am not
going to show you all the steps, you just with the rounded up values, you will find that this is turns
out to be 1.29, 0.38, 0.2. It is rounding off; this is almost similar. So, this is your I minus A inverse
and very interestingly these are the diagonal elements and when you now multiply this, by now
the value of f, we will change.

fnew is going to be 800 will become 1000 and this remains as 1500. We can multiply this and what
you will find is Xnew, you can calculate this multiply this with this and add this and then you get,
you will get 1858 and 2340. Remember the total output last time which we had this was, earlier it
was 1600 and 2100. So, obviously both of them have increase and have increase by different
amounts. So, this is increased by 258 and this is increased by 220. Of course, the increase in the
agriculture, is the percentage increase in agriculture is higher.

650
(Refer Slide Time: 10:06)

2140

651
Using this we can then make the final table that we had. And you will see that now, agriculture
manufacturing, agriculture manufacturing. So, we have the final values which we calculated 1858,
2340. The direct coefficients will remain the same, we can just multiply by the direct coefficients
to get these values and you can cross check that and round it off, you will get 348 and here you get
509, that is basically 0.1875 into the value that we had and then this is 232, 408 final demand that
we had was 1000, 800, 2000 and this is 1500.

When you add this up you should get 1509 plus 348, you get the same value that we had 1858 and
here also 19 and 2,1540, 1500 and this comes to, this should have been the value of Xnew here
when you multiply it is 2140, 2340 it is 2140. So, we have a slight increase in the value of the,
manufacturing output from 2100 to 2140 but significant increase in this. So, this is 2140. Now
when we look at the payments sector, we get this as the subtraction, take this as 1858, 2140 this
one will remain constant.

The remaining part 1000. So, then this is 2000 and 1500, 3500 and these values we will get as
1277 and this is 1223. When we add this up, this comes out to be 3600 and when we add this total
up, we will get a total of 75, 58, 48, 98, 7598. Now just compare this with what we had earlier.
This was 7000, 3300, 2100, 1600. This has now become 7598, if you look at the overall output
growth, this is 7598 by 7000. It is less than 10 percent, you can, we can calculate the amount 598
by 7000 that is the percentage growth.

652
(Refer Slide Time: 13:44)

So, let us look at the section b, where we now keep agricultural final demand remaining constant
while manufacturing demand increases by 200 million rupees. So, the question is whether increase
of 200 million rupees in the agricultural final demand. That is what we saw last time and instead
of that we keep that constant and manufacturing increases by 200.

(Refer Slide Time: 14:09)

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So, now the final demand that we are looking at is going to be 800 million rupees for agriculture
and industry increases from 1500 to 1700. So, we can take this pre-multiply by the inverse that we
had and that is going to be 0.20, 1.29 multiplied by 800, 1700. This will give us the value of Xnew
and you can multiply 1.29 into 800, plus 0.38 into 1700 and you will see this comes out to be 1676
is the total final output of the agricultural sector. And for the industrial sector, this will be 0.2 into
800, plus 1.29 into 1700, this will come out to be 2358. This is now Xnew.

Now we can take this and multiply it by the coefficients that we had calculated last time, which
are the A coefficients. If you remember these were the values 0.1875, 0.2381, 0.125, 0.1905,
assuming that these coefficients remain constant. Z we get the value of Znew and this Znew values
turn out to be 314, 562, 209, 449. You can check this for yourself, to see if these numbers are what
we get. So, unless you made some error in the multiplication. This is the value that we will get.

654
(Refer Slide Time: 16:24)

So, now we can go back and replace the matrix, final matrix that we get in this scenario. That is
agriculture, manufacturing, final, demand and the total. And here you have the payments sector
and then you have the total. So, this we can write this as 314 million rupees, this is 562 million
rupees and then we said f is 800. When we add this up this will come to, the total value that we are
looking at which is 1676 and here we have 209, 449 and this was increased from 1500 million tons
to 1700. This turns out to be 2358. Remember this totals will be the same. So, this is 1676, this is
2358 and this value will remain unchanged as 1000.

Once we do this, you can now take this minus 314 minus 209 and we will get 1152. And this is
1348 and this turns out to be 3500. When we look at this now, you will find that when you add this

655
up you get 1152 plus 1348, plus 1000 and this turns out to be 3500. Now when we add this up, this
will be 1676 plus 23, 39, 4, 55 you get, we get total of 7535. Remember, if we now compare this
with the original value that we had, this was 7000 as compared to 7000, we have got 7535. So, if
you see the growth, this is 7535 by 7000 and that comes out to be, the growth rate is 7.1 percent.
That is where the industry grows by 200 million rupees.

(Refer Slide Time: 19:37)

656
Now, let us compare that with the agriculture not growing, industry growing by 200 million rupees
and let us compare that with what we got for the agricultural case. Now in the agricultural case, if
you see there is a, an error that we have made here. This is, should be, when you add it up 1277
plus 1223, this will give you 1000, 2500 plus 1000, this is 3500. So, this will be 7498. So, when
we do 7498 by 7000, we get the growth rate, this is 107.1. So, the growth rate is 7 percent, 7.1
percent. So, the interesting thing that we find, this is, this one is the earlier case 7535, this is 7.6
percent, this is under 107.6 you can just see this.

So, as compared so, this is said the b part, this is a. In the case of a when we increase the agricultural
output by 200, but the industry remains the same. We find that the, in the overall growth rate
increases to 7.6 percent that is b, but when we increase agriculture by 200 and the industry remains
constant, then it is only 7.1 percent. So, given a choice, you would prefer that this growth happens
in terms of the overall growth, the impact of the industrial growth on the total row total growth is
more than incremental change in the agriculture growth.

Then in this of course depends on the way in which these transactions are done. So, you can do
this in, you know you can do this matrix inversions either on excel or in MATLAB and you can
create this. We have shown this for a 2 into 2 matrix, but we could as well show it for a, 7 by 7,
10 by 10 and sometimes we have these 78 by 78 input output tables, which are, which you can get
from the central statistical organization. These are given at that some different years and then we
can take that and make this calculation.

657
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture - 20 P1
Primary Energy Analysis – Part 1

We have looked at different ways of calculating whether a project is viable and mostly we have
been looking at the economics as the basis. We have also seen how to look at, the environment
and environmental impacts and quantify that in economic terms. In this module and in the next
module we will be looking at, how do we assess a project from an overall energy point of view.
So, first we will look at primary energy analysis.

(Refer Slide Time: 00:53)

We have discussed this earlier, in passing initially we talked about the energy flow diagram that
means we said that, when we look at finally the energy that is required, we need an end use or an
energy service. So, for instance, if we are looking at illumination or the lighting that is being
provided or if you are talking about going in a vehicle then we are looking at the distance travelled,
we are looking at cooked food. That is the final energy service.

And so this has finally the end use. For that we need some useful energy, that useful energy is
coming in the form of, we are getting some energy utilization equipment and systems, the energy

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that we are getting, the delivered energy the consumer is buying that is also called final energy.
So, we looked at this final energy going to the useful energy.

In order to supply the consumer, energy is coming through a transmission and distribution network.
For instance, if you are looking at electricity there is a large transmission distribution network,
which is coming in, that electricity is a secondary energy source. There is a power plant, there are
coal mines and finally, we from the energy service that we need and the useful energy that we use,
we go backwards and we calculate the total primary energy or the energy that is available in nature.

So, we have already discussed this but I am just repeating we have this different terms, the primary
energy, the energy that is available in nature that gets converted into a form like refined oil or
electricity, secondary energy that is then distributed and is delivered to the consumer you get final
energy, that final energy gives the useful energy which is used for the end use activity to provide
the energy service.

So, whenever we talk in terms of primary energy analysis, we will look at two different options,
in terms of, go draw the entire chain and calculate the primary energy which is required. And then,
with each step of this chain we can look at what are the efficiencies, we can also look at what are
the emissions. So, this is the primary energy analysis where everything we convert and compare
on the basis of primary energy.

(Refer Slide Time: 03:31)

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So, as we saw earlier the different end uses that we can list down is, for instance, food cooked is
the energy service, illumination for lighting, distance travel for transport, shaft work for motive
power, space cooled, fluid heated and each of these have different devices. Like the chullah, the
stove for cooking, incandescent fluorescent, compact fluorescent lamps for lighting.

And for travel, transport cycles, cars, trains, motors for shaft work, fans, air conditioning,
refrigeration, space cooling, boilers and geezers for heating and in all of these there are many
different possible devices, different sources so we can have actually a whole set of different
diagrams, the energy flow diagrams.

(Refer Slide Time: 04:25)

So, whenever we are looking at the types of decisions, we saw this earlier where we were looking
at either a yes, no timed of decision or a best possible decision amongst options, that is for system
selection. We may also be choosing, designing the system or the component. For an existing
system we may decide an operating strategy and we may decide policies and these are the types of
decisions.

And when we look at perspectives, you can look at it from the perspective of a end user, the
manufacturer, utility, society government and others. When we are talking of primary energy
analysis, we are looking at an option from the point of view of the entire chain and that means we
are looking at it from the societal point of view, the overall efficiency, the overall cost.

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(Refer Slide Time: 05:24)

We can also look at it from a subsection of it that is from the point of view of the end user and we
will take set of, for all of these decisions there could be different kinds of costs, criteria, the cost
criteria we looked at initial operating life cycle cost, reliability, emissions, sustainability and
equity. In primary energy, we will be looking at the total amount of energy and the issues related
to sustainability and emissions.

(Refer Slide Time: 5:50)

So, in primary energy analysis, what we are doing is we are going to compare different options
based on the primary energy input for a given we will decide a certain amount of final energy

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service or final output which is required and for that we would compare these options and then we
will compare them based on the primary energy.

We will draw the energy flow diagram or the energy chain for both or for each of these options
then compare work backwards and compare the primary energy input. So, let me give you a set of
different examples and then we will try and do a couple of them.

(Refer Slide Time: 06:27)

So, for instance if you look at agriculture, in all over the country where we have, in our agricultural
fields, we need water and that water is pumped. So, there are different ways in which we can
provide the energy for the water pumping. The first one is we can have essentially grid electricity,
going, driving an electric motor.

And the second option is that we can have a diesel engine, running so grid electricity, driving a
motor, driving the pump. Diesel engine, directly coupled with the pump and driving the pump. So,
you do not need to actually generate electricity. We can have a gasifier, running an engine and
then running the pump.

So, there you have biomass and then this could be a dual fuel engine so there could be some amount
of diesel. We can have solar, PV during the pumping. These are four of the options, we can have
a whole set of other options also, we can have combinations, we can have hybrid. So, we will look
at this example.

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In the case of vehicles let us look at, if you look at car or a bus and, we can compare an IC engine
vehicle again, this could be petrol, it could be diesel, it could be CNG. We will look at an example
where we are comparing diesel vehicle. We could have fuel cells in hydrogen.

So, that means hydrogen is the fuel, hydrogen can be generated, can be stored, hydrogen can come
again from different sources. It could be from natural gas, it could be from renewable energy. We
can have, an electric vehicle, running on grid electricity and then you have the electric transmission
and then we can, so for all of these you will have a completely different chain and we can look at
the different primary energy use and the different emissions.

We could also create, biofuels from different kinds of bio sources could be waste, could be,
actually plantations and then we can use these bio fuels to run engines and then you can have, so
it becomes a renewable source. So, this is in terms of cars and buses.

Similarly, you can think in terms of cooking, for cooking write down the different sets of options
that we can have for cooking and then for each of these again, you can think in terms of making
these calculations for primary energy.

(Refer Slide Time: 09:12)

So, let us look at now, an option. We will look at the first option, that is water pumping and we
want to compare the options based on primary energy input and so the example is agricultural
water pumping. If you look at, typically there are a large number of pumps used all over the country
and we have some measurements in terms of the kind of water use.

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The final end use which is there for the pump is the flow rate of water into the head that is
developed and that is the power output which is the end use and that in multiplied by time
depending on the number of hours of use. So, based on the studies, which have been done in the
country. Typically, the value of end use, which we require is given to us as 3 GJ. So, we need, this
is given 3 GJ of final useful energy.

(Refer Slide Time: 10:21)

And we want to see, what will be the primary energy requirement in three cases? You could also
do a similar thing for solar, we are not doing that in this. The first one is electric motor pump, the
second B is diesel engine pump and C is the biomass gasifier dual fuel engine pump. So, if we
look at the electric motor pump, just take a minute and sketch the diagram, schematic diagram of
the energy chain.

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(Refer Slide Time: 11:02)

So, we will start with basically, we will have the pump. Then before that will be the electric motor.
This is the useful energy output, which we are given as 3 GJ/year. Now, this is the electricity that
is purchased by the farmer and if you look at this boundary, this system boundary is what the
farmer sees.

So, here if you look at this as eta motor and eta pump. The overall efficiency, which the farmer
sees is, eta motor into eta pump and so the energy input required in terms of electricity input is 3
into 10 raise to 9 joules divided by eta motor into eta pump. Now, here before this, you would have
that electricity that we are getting is coming through a transmission and distribution network.

So, you have a transmission and distribution network and this will also have another efficiency eta
T and D. This is the secondary energy that we are getting and before this we have, you would have
the power plant, eta power plant. Before the power plant would be the, if we think in terms of coal,
you will have the coal mining and transport and then this is your primary energy source, which is
coal.

Of course, you could have the similar thing from hydro or from any other source, and so here
again, you will have eta CM. So, if we look at this overall efficiency, this is going to be eta CM
into eta PP into eta T and D into eta M into eta P. That is the overall efficiency.

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(Refer Slide Time: 14:33)

So, this is what we have just now seen, if you see it now in the, you know better fashion, which
we have seen, this is the values. Now, we can put down typical values of this even if we look at
the best values that we have for motors and pumps. You can put down these values and you can
calculate these. Now, just to give you an idea, you may want to think about how you would
calculate these.

For instance, if we want to see how to get the efficiency for coal mining. We would look at a
particular mine and see that in that mine how much energy is being used, electricity as well as
diesel, convert that in terms of energy terms, convert that in terms of the kgs of coal, which is
being mined and then see what is the output and what is the input and based on that we can get an
efficiency.

In the case of transport if we see, if the coal is being transported by train, we would look at the
distance which is being transported, for that distance then we would see how much is the, if let us
say it is an electric train or it is a diesel, how much energy is being used and see the total carrying
capacity divide by that and we can get what is the energy use per kg of coal and then convert it all
in terms of percentages and get an efficiency. These are not very low.

There is not, not too much of energy is used in the transport and in the mining. So, the efficiencies
are relatively high. However, in the power plant, that is the point where we have the loss of the
efficiency because we have basically the understanding that when you are talking of transfer of

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heat to power, we have the thermodynamic limitation and that is why you will find that power
plants typically with have slightly lower efficiencies and that is the power plant and T and D.

So, if we look at these are the typical values, you can crosscheck these but these are the typical
values that we see. Motors, the good efficient motors will have 88 percent and pumps if rated as it
is best efficiency point maybe 75 %. In actual practice pump may be operating at part load and the
motor may also be operating at part load. So, you may find that instead of 88 and 75, we may be
looking at something like 50 % for the pump and maybe 60 %. So, then that becomes the overall
thing becomes, much lower.

(Refer Slide Time: 17:26)

So, let us look at what is the efficiency that the farmer sees. The, in the farmers side we are looking
at an efficiency of eta motor into eta pump, which is 0.88 into 0.75. 3 by 4, so 0.22 this is, comes
to 0.66, 66 % efficiency. And we also said that let us say 3 GJ of electricity which is being used.

So, that means this is 3 GJ, the input energy will be 3 into 10 raise to 9 divided by 0.66. So, if you
look at this, we will get this is as the, total amount of energy which is being used, you can just
check this 3 divided by 0.66, it will be approximately, we can just check this 3 divided by 0.66 it
is 4.54.

Now, if we want to convert this into the amount of electricity, you will find that this is 4.54 into
10 raise to 6 kilojoules, 1 kWh is 3600 kilojoules. So, if you do this, you will find that this is, this
comes out to be something like 1263 kWh. So, we found how much is the energy which is being
used at the side.

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(Refer Slide Time: 19:44)

We can also calculate the overall efficiency and the overall efficiency will be eta overall for case
A, is eta CM into eta PP into eta T and D into eta M into eta P. And this is 0.9 into 0.3 into 0.78
into 0.88 into 0.75. And if you check this, this comes out to be 13.9 %. So, we saw that from the
point of view of the end user. We are looking at this as 66 % is the overall efficiency at the farmer
side. The, but if you look in terms of primary energy, this is going to be 0.139 and we can also
then see how much is the input primary energy required.

Primary energy, primary energy input, this is going to be 3 GJ divided by 0.139 and you can
calculate this as 21.58 GJ. We can also convert this into the amount of coal that is being used. So,
suppose we are looking at this as, let us say coal has a calorific value of 5000 kilocalories per kg
then this will be 21.58 into 10 raise to 6 kilojoules by 5000 into 4.18. This is kilojoules per kg, this
was in kilojoules. So, this will be in kgs and you can calculate, it will give you approximately 1300
kgs of coal. You have calculated now, what is the primary energy that is required.

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(Refer Slide Time: 22:54)

So, in a similar fashion, let us look at now the second option. Second option is where we are using
a diesel engine. So, even a diesel engine if you see, we start with, if you look at this again, you
will have the pump. And then before the pump instead of an electric motor you just have the diesel
engine. Then the diesel which is coming to the farmer, then we have this is the final energy. This
is 3 GJ and this is the diesel which is being bought.

This is mark farmers boundary. We will look at this as eta pump, eta diesel engine and then they
will be the diesel which is being transported, there is something similar to what, diesel transport,
T and D. This is like the T and D. And then we have the refinery and then we have the, maybe the,
the oil well, oil extraction and then this is the primary energy which is crude oil.

We have taken this together as one term with eta R, as the efficiency, this we are talking of is eta
DT. So, if you see it now here, the same thing which we have drawn crude oil and we have merged
the oil extraction and the refinery into eta R, diesel transport, eta DT, diesel to the farmer, diesel
engine and then the pump.

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(Refer Slide Time: 25:10)

So, now let us calculate, for the farmer’s side now, the efficiency that the farmer sees is eta D into
eta P, which is 0.4, 40 %, 0.75. So, the farmer, at the farmer side the efficiency is 30 % and if you
look back at what we calculated earlier for the farmer in case A, the farmer’s efficiency was 66 %.

So, from the point of view of, at the farmer side the farmer sees in case A, efficiency is 66 %. In
the case of B, it is 30 %. So, it looks like the diesel engine pump efficiency is half the efficiency
of the electric motor pump. So, that is an interesting thing to see. So, it looks like it is, it is less
efficient.

Let us look at it in terms of, so that means the input energy that we now need, input energy will be
3 GJ divided by 0.3, which is 10 GJ of input energy. Let us look at now the overall efficiency,
overall efficiency if you see refinery is 0.92, diesel transport is 0.95. So, the overall efficiency is,

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going to be eta R into eta DT into eta D into eta P. 0.92 into 0.95 into 0.4 into 0.75. So, that comes
out to be 0.262, 26.2 %.

So, now if we compare that with what we had calculated for case A, you will find that in the case
of A, for case A we had calculated this as let us say 13.9 %.

(Refer Slide Time: 27:47)

So, we see that case A, case B from the farmers side, at the farmer end if you see the efficiency for
case A it was 66 %, case B is 30 % and overall this is 13.9 %, 26.2 %. Interestingly, what you find
is that, the, it gets almost reversed. So, the here it is in the case of B this, in the case of the farmer
for A it is double that of B and that means the electric motor pump seems to be more efficient than
the diesel engine pump, but from an overall, when you see the entire chain, this is 13.9, which is
almost it is a little more than half of the case B.

So, B looks more efficient from an overall point of view, but at the farmer end does not look so
efficient. And so that is an interesting point. We can also now calculate, like we calculated the
amount of coal which is being used, we can also calculate the amount of oil, crude oil which is
being used, the amount of diesel input. So, the amount of diesel input which is there will be just
10 GJ divided by let us say 9700 kilocalories per kg into 4.18 and we wanted in litters, because
that is how we, that is the unit which we see, so it is 290 litters of diesel.

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(Refer Slide Time: 29:47)

So, now we can see we can calculate how much here, we have by 1263 kWh, from the farmer point
of view. What is the difference in the operating cost? If you look at that we can just take let us say
of course earlier people used to have subsidized electricity and now let us say we are paying 3
Rs/kWh, then this will come to about Rs. 3789 is the annual cost of operation. Motor pump
relatively, the capital cost is only you are only paying for the motor pump. So, capital cost is of
the order of 12000 rupees. In this case the, the operating cost is 50 into the 290 and this comes out
to be 14500 rupees.

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So, obviously the diesel engine pump, the operating cost is higher than the electricity cost. The
capital cost is also higher because for the diesel engine the cost is there. So, from a cost point of
view, this is the diesel engine pump set looks to be a costlier option. From the farmer point of
view, it looks like this is a cheaper option, also this is a more efficient option from a farmer point
of view, capital cost is also lower operating costs is also lower.

The disadvantage is that, in most of the country, of course the situation is improving now, but a
large amount of, for the agricultural pump sets there are a number of power cuts and so, at the time
when we want to use it, we may not be able to get the.

So, then and in this case, this is the, this is uninterrupted, you can use it as per requirement. We
calculated 1300 kgs of coal and similarly, we can take the oil and then divide by the calorific value
of the crude and you will get this as 300 kgs of crude oil you can crosscheck this. Now, the question
is how do we compare 1300 kgs of coal with 300 kgs of crude oil?

From an energy viewpoint, this 300 kgs of crude oil is less energy. However, we have from a
national viewpoint coal is relatively abundant. And also, in this case we can change the mix, as the
mix changes there is flexibility. So, it need not necessarily be on coal, it could be on oil, it could
be on gas, it could be from renewables. While here it is definitely on oil and then there is an issue
in terms of the refinery mix.

So, in, as we have seen earlier in India, we have the largest chunk of our requirement for oil is
coming through imports, but we have a lot of refining capacity. So, there is a lot, mostly we are
refining crude and when we refine crude, we get the heavy fractions, the middle fractions and the
light fractions.

In the middle fractions, we have kerosene and diesels and what happens is that the requirement for
diesel is high. So, when we have a particular refinery mix, you will get for a particular amount of
crude, you will get a fraction, some percentage which will come in the middle distillate.

Now, that percentage is not sufficient for the requirement that we have and we are also importing
the diesel and kerosene and with the result that we have what is known as the middle distillate
bulge and so, from a refinery mixed point of view you would like to see, if we can reduce the

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amount of diesel consumption. So, this shows us from different perspectives how primary energy
analysis can be used to make the calculations. We will also the one last thing that we would like
to see on this example is that what about the CO2?

(Refer Slide Time: 34:03)

So, we can take the suppose we saying 1300 kg of coal, which we are using. We can take this as
let us say 54 % carbon into 44 by 12. This will give us annually the total amount of CO2 in option
A. So, these are simple calculations which we should be able to do and this will result in this
number comes to 702 kgs of carbon multiply by 44 by 12. This will be 2574 kgs of CO2 per year,
that means one agricultural pump has 2.5 tons or 2.57, 2.6 you can say, 2.6 tons of CO2 per year
is the emission.

If we look at this now from the point of view of the, option B, which is the diesel engine we can
then now, see that this is going to be 300 kgs of crude oil let us say approximately 0.84, this comes
to 252 into 44 by 12, 924 kgs of CO2 per year. So, this is also something that helps, that the primary
energy analysis helps you do, it tells you about the overall thing and so, this comes out to be 0.9
tons of CO2 per year.

So, from a CO2 viewpoint it is better to go in for diesel and then you see the trade-offs. Diesel is
costlier, from a societal viewpoint there are issues in terms of imports and energy security. From
the option of CO2, the oil option is better. From a security option, the coal option is better. So,
these are the kind of trade-offs which are actually there are in many of the cases.

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 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture - 20 P2
Primary Energy Analysis - Part 2

(Refer Slide Time: 00:18)

Let us quickly, look at the option C, which was, where we have the biomass gasifier. So, here what
we do is, we have a gasifier, where we fire biomass and then we are getting producer gas. This
producer gas goes to a dual fuel diesel engine or dual fuel engine. It could also go to a dedicated
spark ignition engine so that it could be, but dual fuel engine is also consuming a certain amount
of diesel and then this is converted over to the pump and this is the energy output. So, we have 3
GJ. Now, for this duel fuel engine, there is usually a certain limit in terms of what is the proportion
of the producer gas in this.

So, at most what we are looking at is, we are looking at something like 75 % of the input can be
provided from the producer gas and 25 % comes through diesel. When we look at this then what
we will do is, we will say 3 GJ, which is in the pump, take the pump efficiency and get what is the
input which is required here. So, that means 3 divided by 0.75. So, this will be 4 GJ here. Now,
from the 4 GJ, let us say by energy terms 75 % will be provided from the biomass gasifier.

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So, that means 4 into 0.75, it turns out to be 3 GJ as the output of this producer gas, 3 GJ. So, the
efficiency of the gasifier is 0.7 so we can do 3 divided by 0.7, is the gasifier input. We can then
divide this by the calorific value of the biomass and will get a certain amount of biomass which
we get and you can cross check these numbers.

(Refer Slide Time: 02:57)

And then so basically, what we get is in this case, we have 75 litres of diesel. Remember we earlier
had, 290 litres of diesel and this is 754 kgs of biomass. So, if the biomass price is 2 rupees, per kg
then the total cost, operating cost will be, 2 into 754 plus 75 into 50. You can check this, this comes
to about 5258.

(Refer Slide Time: 03:38)

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So, let us compare it with the, diesel engine pump instead of 14500, we are getting now 5258. So,
of course the operating cost reduces. However, the capital cost increases because now you have
the gasifier, there is, also it is more tricky in terms of operation and maintenance. We will see that
in terms of CO2 now. The CO2 emissions will reduce because the biomass is considered as carbon
neutral and we can then calculate.

(Refer Slide Time: 04:13)

This is just going to be roughly what we calculated 75 by 290 into 0.9, is what we had calculated,
tons. So, the amount of, CO2 reduces significantly in this option and of course, but it is a costly
option. There are other things that one can think of and then we have, there is now move to have
solar photovoltaic based pumping.

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(Refer Slide Time: 04:50)

So, you can look at this. Now, one of the issues in all of this, is that, the distribution companies
because of the agricultural pump sets and the theft which is there, agricultural pump sets many
cases have been given, were given free electricity. So, with the result that typically distribution
companies have been making significant losses and you can see these are the different years with
this uday scheme, based on the government estimates, reasonably large lost components.

(Refer Slide Time: 05:26)

So, one of the things that the distribution companies are thinking of, is to try and look at supporting
agriculture pump sets moving to solar and of course there is a capital cost involved. So, typically

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what happens is you will have the solar PV modules and then you will have the, pipeline for the,
there is a schematic, for a particular company with a solar pumping system.

(Refer Slide Time: 05:55)

And when we look at this, this is typically how it will look in the field and the, the advantage also
is that in many of these cases if you have some storage, it is possible to then pump whenever you
have the solar and then you can use it in the pump, use this in the field, if you have the water
storage and that may be a.

(Refer Slide Time: 06:18)

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There are many different types of configurations, which we can do and you can see that you have
different modules of arrays going from 900 watt p to about 2.7 kilowatt. Different kinds of
centrifugal pumps or submersible pumps and their large number of possible configurations. So,
this is another option which we can see.

(Refer Slide Time: 06:49)

And in this if you look at the efficiency when we talk in terms of this, it is going to be only the
pump and then we have some kind of a power electronics and then you have the PV, incoming
solar radiation. Power electronics is a fairly efficient, will be of the order of, let say 0.95 or even
more. Pump we had set, pump efficiency we had set 0.75. Some of these submersible pumps, etc.
might have slightly lower efficiencies. The PV modules in the field may have efficiencies ranging
from 15 to 20 %.

So, from an overall efficiency point of view, this is the, you may find that the efficiency is lower
than the efficiency which we had from the oil. But please remember efficiency is important
provided the resources constraint. Since this solar insulation is relatively free. We do not have to
pay for it and it is not constrained then the efficiency may not be the criteria when we think in
terms of solar. So, with this we complete the part, on the we, the example that we saw.

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(Refer Slide Time: 08:23)

Now, we would like to look at another example and that is for a car. We would like to see, is it
possible to think in terms of a fuel cell based car, and how would that compare with the IC engine
based car. So, in this example, we are going to just, I will just show you some of the numbers and
you can calculate it yourself. We are not going to, do the detailed calculations like we did in the
earlier example so that you have already got that.

Now, when we think in terms of hydrogen, there are several, several researchers and several energy
professionals believe that hydrogen is going to be the future and hydrogen is in general, it is a
secondary fuel. So, when we think in terms of a pathway to have hydrogen, we can have hydrogen
from a variety of different sources. We can start with fossil and then we can do cracking and shift
reaction and then get hydrogen and that is the largest this steam methane you reforming is the
largest chunk of hydrogen production. It is, today it constitutes more than 90 % of the hydrogen
produced in the world.

We can look at hydrogen from nuclear, we can look at hydrogen from solar, both and when we
can look at, photochemical, photo biological, hydrogen from biomass, gasification, fermentation.
So, there are a whole set of possible ways in which we can get hydrogen. After we get hydrogen,
we can use that hydrogen in a fuel cell, to give us electricity. And this is compact, it has no
emissions with it and no moving parts. So, it is, an it is high efficiencies. Unfortunately, it is still

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very costly and the life is relatively low. So, this is why fuel cells and hydrogen has not become
as common as one expected it to be.

(Refer Slide Time: 10:32)

So, we will look at two applications for hydrogen, one is an application where we are looking at
distributed power generation. So, we want to generate power and in the case of distributed power
generation, we have many different options. Let us look at an option where you have, so here we
are looking at not the grid, but it is an isolated system.

We can, I have the diesel engine, generator or we can have a gas engine fired by natural gas, gas
engine generator and in the third case we can have essentially a hydrogen based option. So, these
are the base cases, we can, I have compared it with a fuel cell hydrogen option. In the second case
for the vehicle, the base case can be IC engine for petrol or diesel and at second base case could
be CNG engine.

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(Refer Slide Time: 11:21)

So, if we look at the option for power generation, from diesel we can see the generator, the diesel
engine, transport of diesel, oil mining and refining and this is very similar to the system that we
saw for the pump. We have put down typical efficiencies, you can multiply it.

(Refer Slide Time: 11:42)

And the second option is when you look at natural gas, natural gas the same thing generator, you
have a gas engine, then natural gas transport, natural gas extraction. Again, you can see the
efficiencies are pretty good.

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(Refer Slide Time: 11:54)

In the case of fuel cell, we now, let us look at natural gas giving us, the natural gas having the
extraction then we have natural gas transport and then we are using that natural gas in steam
methane reforming to get hydrogen, that hydrogen is used in a PEM fuel cell. Which can have
efficiencies from 40 to 50 % and then you get electricity.

(Refer Slide Time: 12:20)

And we look at this, if you look at the distributed generation you find, that you can do these
numbers, now convert it into primary energy. And you find that in the overall case, for the A1,

685
which is based on oil, we are getting point, about 0.25 kgs of crude per kilo watt hour. Similar
kinds of things for natural gas.

In the case of fuel cells, the overall efficiency is slightly lower and it is similar to the fuel cell. If
you take an higher efficiency of fuel cell, of 50 % then it goes up to 37 %. So, it is very similar to
the natural gas cycle, if we can go up to higher efficiencies. From an efficiency point of view, it is
almost similar from a, when we are taking it from natural gas.

(Refer Slide Time: 13:18)

But the interesting thing is, from a carbon dioxide point of view, this turns out to be better and we
can see that in the case of, with an efficiency of, 0.5, we are getting now 0.136 kg of carbon per
kilo watt hour, as compared to 0.187 or 0.211 kgs of carbon, for crude oil or natural gas. So, from
there is an incentive to go for, fuel cell hydrogen from a CO2 point of view. And of course, if we
get the hydrogen from renewable sources or from biomass, that would be even better incentive.

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(Refer Slide Time: 14:04)

So, this is in terms of the distributed generation option. Now, let us look at the option for, hydrogen
vehicles as compared to IC engine vehicle. So, if we look at the chain that we had, we have the
vehicle, you have the petrol filling station, the petrol transport, the refinery, transport and crude
oil production and that is the fossil fuel chain. Hydrogen chain will be vehicle, filling station
hydrogen storage and delivery, the pipeline transport, hydrogen production centre and the primary
energy source that we have.

(Refer Slide Time: 14:36)

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We will take an example, with a small vehicle, a small size passenger car, Maruti 800. Petrol
fuelled 37 bhp – Break Horse Power, which is comes out to 27 kilowatt. This was the largest chunk
of Indian passenger market in 2005, 2006. Today, that share would be lower because you have the
other models. But just to give you for the example, this is an example, we had done some time
back, you can make this as a basis.

(Refer Slide Time: 15:06)

Now, when we calculate this, we have to calculate all on the same common basis. So, what we
have to do is, we have to see how, what is the weight that we put on the vehicle because based on
the weight that is there on the vehicle the power requirement will change and hence the fuel
requirement will also change. So, the, we take the weight of the empty vehicle, the body excluding
the engine and the tank and that for the 800 Maruti, 800 was five 550 kgs. Assume a certain number
of weight of the passengers, that is 350, so that this becomes 900.

We have the coefficient of drag and the coefficient of rolling resistance, the frontal area and then
we have to presume a certain amount of travel. We have done this calculation for a 100 kilometres
of travel per day. Now, look at based on the amount of range or the amount of time that you have
to, you can use before you refuel, we can decide what is the capacity of the tank. And I will give
you a, I will upload a paper where you can see the details.

So, basically the petrol tank is, least in terms of weight because of the, it is 40 kg, CNG tank is
140 kgs and fuel cell turns out to be 130 kgs. And the engine 60 kg, 60 kgs and then this is 15, for

688
the motors and 15, so that is 30. So, total if you see this is 160 kgs and CNG is about 200, here it
is 100. So, that is the difference in weight.

(Refer Slide Time: 16:50)

That difference in weight. So, what we do is, if you look at, different kinds of drive cycle and you
can look at there is the, automobile research association of India, which does work on different
kinds of automobiles. Drive cycle basically shows you the speed versus time trace typically.

And then there is, there are different drive cycles for highways and for urban. In the case of urban
driving, mainly it is the road conditions and the traffic that limits and then so you have certain
amounts of acceleration, deceleration. So, if you see as compared to the European drive cycle,
Indian urban drive cycle has a lower average speed. Rapid accelerations as compared to 23.4
kilometres per hour, instead of 62.4.

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(Refer Slide Time: 17:47)

So, with this drive cycle, we then calculate. You can look at there is a freely downloadable software
called advisor. You can put in the values over there, for choose your vehicle, vehicle characteristic
and then we can, you can also just calculate it up front. By calculating the power required to
overcome the drag, the frictional resistance and the inertial force and then this gives you the total
and then you have the power at the wheel.

(Refer Slide Time: 18:18)

And then these are the data that we use for the base case and we can, you can take a look at all of
this.

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(Refer Slide Time: 18:24)

And then with we said, we have a driving range and then we got a cost in terms of rupees per
kilometre.

(Refer Slide Time: 18:35)

So, essentially with this what we can do also is we have to have not just the vehicle but we also
look at the hydrogen fuel chain, then the production, production can be from different sources as
we said PV electrolysis, wind electrolysis, biomass gasification, steam methane reforming. And
then you have a transport which is the pipeline transport. Storage could be compressed hydrogen,

691
liquid hydrogen, metal hydride and there is, this is an area of research and then the utilization
which we are talking of is in the PEM fuel cell.

(Refer Slide Time: 19:08)

So, in the steam methane reforming, what we are looking at is, CH4 plus a 2H2O, giving you 4H2
plus CO2 and then you can get a price of hydrogen, based on the price of coal.

(Refer Slide Time: 19:18)

So, if we look at now the efficiencies, you can find them for the petrol engine, this is the
transmission, the IC engine, transport of petrol and the oil mining.

692
(Refer Slide Time: 19:33)

If we look at the gas engine, slightly different but almost similar order of magnitude.

(Refer Slide Time: 19:40)

In the case of fuel cell. We look at the, in here, it is the fuel cell efficiency which is the determining
factor. The motor and the transmission are highly efficient and overall this is the kind of efficiency.

693
(Refer Slide Time: 19:55)

So, based on this you can multiply the numbers and cross check. You would find that the overall
efficiency of the fuel cell is higher than this, that in both the cases. In the gas, gas engine, CNG it
is almost similar and the interesting thing is there is an incentive in terms of efficiency. There is
also an incentive in terms of the CO2. I have not shown you these numbers, but you can cross
check and you will see that the CO2 emissions per 100 kilometre of travel, is lower and you can
actually calculate this from the first principles.

We have in India, like in most parts of the world, we are looking at a transition, to electric vehicles
and there is a policy where we would like to have much more of electric vehicles in our mix.
Currently, of course electric vehicles are a very, very small almost negligible percentage of our
mix. Now, when we talk about an electric vehicle and comparison of electric vehicles with the IC
engine vehicle, whether it will result in a saving in CO2 or not, will depend on what is the mix of
our is electricity.

694
(Refer Slide Time: 21:19)

So, there is this interesting graph, which is from the world energy outlook of 2019, which talks
about the gram CO2 per kilometre of travel and it shows different countries. And this is the, value
which you can see for India and you can see currently this value is, the IC engine is of the order
of 150. And when we look at an electric vehicle, we are looking at something which is actually
today it is higher than that and it depends on the of course the way in which you do the calculation.
As the mix changes with this, this is going to be, so hybrid vehicle may be higher, the existing,
this is the kind of difference that we can get.

As the mix changes with the sustainable scenario, the electric vehicle can be significantly lower.
And so that is the, that is the kind of thinking but basically what happens is you can calculate that
the relative carbon footprint of IC engine versus the cars will strongly depend on the power sector
mix.

And so, because of that the trade-off that we are talking of, this is the IC engine, which will go
through if we looking at the, hybrid, this is the kind of thing that we are looking at, and. So,
depending on the calculations and depending on the type of mix, if our mix is completely going to
be more coal. In some states, that it may actually, there may not be significant CO2 savings.

However, of course local emission savings would be there and as our mix gets reduced, we can,
the share of CO2 in our electricity mix gets reduced. We can actually move towards something like
this, much lower value and that is the kind of target that we are thinking of. So, just to summarize

695
what we have looked at in this module is, how do we calculate and compare different routes from
the primary energy viewpoint and we start by drawing the energy flow diagram, put down
efficiencies and then compare them with primary energy. There are different, sometimes the two
different sources are compared.

So, then we are comparing coal versus oil and then can also calculate the total CO2 emissions over
the chain. We can compare not just based on the energy, but then we can see, what is the relative
scarcity and from an energy security point of view what is the trade of between these fuels. We
will take this forward in the next module, where we will now go to the next step, where we talk
about net energy analysis. And we will look at everything from an energy viewpoint. Thank you.

696
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture - 21 P1
Net Energy Analysis –Part 1

In the earlier module, we have looked at primary energy analysis. Where we looked at different
options from the point of view of how much primary energy they are using. We, now extend
this and move forward to look at a new technique, the life cycle analyses and within life cycle
analysis we are going to focus on net energy analysis.

So, we will look at some applications of these techniques, different criteria and how this can
be used to help in decision making. We have seen earlier the decision making based on an
economic analysis and at sometimes it is we want to look at the different options from the point
of view of how much energy it takes over its life cycle.

So, the whole field of life cycle analysis or LCA as it is known started in the early 1960s 1970s.
In the initial phase this was, there were multiple methodology and in the 1990s there were two
different societies the SATAC and the ISO which tries to standardize and provide a set of
methodology for carrying out life cycle analysis. So, let us look at what is life cycle analysis.

(Refer Slide Time: 2:06)

You may want to look at the International Standard ISO 4040, which sets out the methodology
for life cycle analysis and you look at this. It is available in the public domain.

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(Refer Slide Time: 2:09)

There are some addition values, this one is 1997 edition and this provides a framework for
carrying out environmental management or life cycle assessment and the principles and the
framework. This initially LCA was used to compare different products and mostly products for
packaging.

So, we looked the entire life cycle from the point at which it was manufactured right from raw
materials, to use and to the disposal. So, all of this constitutes the life cycle analysis. So, in life
cycle analysis the basic steps involved are first we compile an inventory of relevant inputs and
outputs. The different inputs, which are coming into the process and the outputs for the process.
And then for each of this, we evolved the potential environmental impacts associated with these
inputs and outputs and then we interpret the results.

698
(Refer Slide Time: 3:22)

Now, there are two approaches here, we can do what is known as cradle to gate or cradle to
grave. And this typically means that, we start with the initiation, the actual manufacture and
then the to the gate where it is the produce and use. Cradle to grave means we also look at
disposal the phase so the full cycle if you want to take it will be a cradle to grave analysis, in
some cases we just do analysis till we get the end use and that the cradle to gate.

(Refer Slide Time: 4:17)

So, if we look at the different the mythology for life cycle analysis. The first step in the life
cycle analysis is to identify the goal and the scope, define the scope and the goal. Once we
define the goal and the scope. We can then look at, what is inventory what are the inputs and
outputs doing in to the system boundary that we have. And of course, there is some iteration
both ways between the goal and the inventory analysis.

699
Based on this we can then do an assessment of the different impacts again and then in all of
this we would interpret the results. So, there is scope for interpretation we have these values
which will there and there will be multiple different criteria. And then this will also. So, this
essentially represents the framework for LCA.

Now, what you need to do is need to take some examples so that you know how to do this type
kind of calculation and it will be useful in a whole variety of examples. And we take we will
take some examples from literature this entire framework will then go for the, this will give us
the direct applications.

And there are different types of application we can look at it for improving the current
mechanism so that we can reduce the environmental impact. The second is we can look at it
for decision for product development, we can look at if choices, we can look at it for strategies
for companies, we look at it for policy analysis.

(Refer Slide Time: 6:46)

So, what we had just seen this is let me just put the pointer. This is what we have now just now
seen this was the LCA framework this from the ISO manual and this give you finally the direct
application that we are talking of.

700
(Refer Slide Time: 7:06)

So, as we moving forward when we look at the products system we may want to decide in the
system. The different kinds of flows, which are there in the systems. So, when we are creating
a product, we may actually build in some materials which come in, raw materials and then there
will be flows in to that system. These raw materials will be converted and there is production
phase.

There is a use phase, there is the recycling and reused and then the waste and the waste
treatment, there is some energy supply and transport and finally there is this product flow which
we are taking of. So, this could be an example of a product system based on which we can do
the life cycle analysis.

701
(Refer Slide Time: 7:56)

The, when we talk about the goal, it is important for us to understand who, what is going to be
application of the LCA. And depending on the application you may modify the mythology,
decide the system boundary. So, what is the intended application what is the reason for the
study.

Who is the audience who is the person, who are the people who are going to use this LCA?
May be it is being used for some comparative assessment so this goal and then based on the
goal identify the scope what is the product system, what is the functions.

What kind of we may want define a functional unit. This is very important in most the LCA
that we carry out that we define clearly a functional unit. Use it as a basis for comparing
between different things, identify the system boundary also in the many of these cases
allocation procedures because in your process we may have multiple products and to allocate
the energy flows or the material flows to one of the products. We will have to have a basis by
which we make this allocation.

702
(Refer Slide Time: 9:14)

There are large number of different life cycle analysis, which have been done. Which are
available in the public domain, in the papers and in reports and in books. And depending on
your application, you can always find something which is similar, which have been done but
then you want you do that for your own local context.

Because globally or nationally or locally the, there are differences in the way, in the electricity
mixes, in the kind of procurement of the raw materials, in the environmental impacts and so
the LCA, an LCA which has done for Europe may throw up different results from the LCA
which has been done for an Indian context.

So, as I told you with the functional unit is a very important point in your starting point for the
LCA. We must define a functional unit, which is related to the purpose of the process or system.
So, and it should be consistent across the options being assessed.

So, for instance if you are looking at a power plant we may say you want to generated 1
megawatt hour of electricity, per megawatt hour of electricity. How much is the energy input?
How much are the emissions? And then we can compare coal-based plants, photovoltaic based
plants or wind-based plants or biomass-based gasification.

And then the quantified performance of a product system which is for use as the definition of
a functional unit is the quantified performance of a product system for use as a reference unit.
So, initially once we start the study and we identify what is the use we can then define a
functional unit then compare all the options based on that functional unit.

703
So, let us take one of the interesting studies, which is there in literature. Number of papers on
it is when we look at the, we know when you have tea or coffee there as many different options
by which you can have your tea coffee in. So, you can look at a paper cup, you can look at a
cup which is a polystyrene cup which is made, which is basically plastic and one can also think
in terms of ceramic cup which can be washed and reused.

One can think in terms a glass cup. Which made of glass again can be washed and reused. And
you can also think in term of in rural India and even in some of our towns we still have those
coolers. Which are fired clay and the you can have tea in that and it is disposal cup but it gets,
it can the broken cups are again fired and reused.

So, one can think in terms of. How do this, when we think in terms of a unit which we are
comparing for having hot beverage like tea or coffee. How do this compare? So, there is this
paper, the two papers by hawking, the first paper is a comparison of the paper cup with a
polystyrene foam cup.

(Refer Slide Time: 12:53)

And there is another, so there is paper versus polystyrene cup and you can look at and there are
we can also so for each of this, for a given amount of liquid to be the given capacity of the cup.
So, in this case this is an A towns cup and the entire life cycle analysis has been done.

In the case of paper, it start with the wood which is the wooden waste and in the case of the
polystyrene it is using, it start from petroleum as a feed stock in each of this the paper making
process is energy intensive also requires water and other resources, has environmental impacts.

704
So, based on a certain amount of cup, certain quantity. The entire chain has been drawn up and
based on that the amount of energy and materials which are embodied or required in this is
calculated. So, just to give you an idea now we look at ceramic, plastic, glass, paper and foam.
We can, the weight of the material per cup, is given here and you can see the difference in this.

The polystyrene cup is about one fourth this mass of the paper cup. However, the specific
energy per kg is much higher for the polystyrene cup and the so the, but still the total and
bodied energy lower than that of the paper cup. So, the hawking in his first paper mix an
argument that one thinks that the paper cup is likely to be environmentally better but he says
that the plastic, the polystyrene cup turn out to be better than the paper cup.

Of course, this is dependent on the kind of assumptions and the, so this is, and this comes out
to be so you get point 2. If you look at `this the functional unit is one cup and each of this cups
are of the same capacity and you can see this is 0.20 this is 0.55. When we look at re-useable
cups ceramic, plastic and glass, and you can see the difference in the, you can look at the
original papers so that you can see more of the details I am just giving you the final results,
which will give you an idea of how this can be use.

So, look at the cup mass the material specific energy and then based on this when you multiply
this, this gives you embodied energy or the energy per cup. Now, in the case of reusable cups,
what would happen is that the number of reuses as well as we want to you know we want to
sure this is done hygienically. So, this will mean that we will need energy to wash and this the
calculation which has been done by hawking is for using the cups in a dishwasher. And the
energy used in a in per wash is computed and that is added.

705
(Refer Slide Time: 16:39)

And based on this we get, a situation like this depending on the number of uses you can see
that. There is trade-off between the foam cup and the paper cup and the reusable. So, if you
look at the glass beyond a certain number which comes out here this is the breakeven number
of if we going to use it for, let say 40 or 50 times then you can see that it is going to have a
smaller energy per use will be much lower.

However, if you are using less than 10 you can see that this is, this is lower than this. So, the
paper cup turns out to be and for the foam cup you can see that it is it actually seem to be quite
the energy use is lower than the requirement for the reusable until you go to a very large
number.

So, this is an interesting. Of course, if we change the assumptions and the ways in which we
process the results may change. So, if you look at this paper by Hawking in science, there was
a cretic and then were was the discussion so the assumptions depending on the assumptions
one makes about the process the things can change.

Also, both in terms of polystyrene and paper the process and glass and ceramics actually there
have been process efficiency improvements, so this are relatively all this are in the 1990s if
you did the numbers today you would get slightly different numbers little more efficient as
compared to the earlier.

706
So, I would suggest that you look at both these papers and this will give you an idea of one of
the earliest ways in which one has done the life cycle analysis and in energy, energy and
environment impact analysis for something that we always look at the different kind of choices
of disposable versus reusable.

(Refer Slide Time: 19:19)

Now, when we think in terms different energy sources. If you look at. Let us say extracting
coal or extracting oil in a period of time what happen is that if we look at an oil well. We have
an oil well, we need to input different kinds of material will come in into extraction process.
There is a certain about energy which is used, there is the axillary Eself.

There is gross energy input which is coming from the oil and then there is a net energy output.
This is going to your economy. So, we would like to see now here if you we look at it there
will be some materials and then there will be energy which is purchase. So, typically it might
using electricity and we want to look at this boundary.

So, see all that we are using, which we have all that we are putting in is E self plus E purchase.
And the energy return on investment is defined EROI as E net, E self plus E purchase. Now,
there are many different energy sources. We do not take the content of the oil or the coal which
is there in the ground whatever we are using in the process.

And this can be done either primary or it can be done up to the final use. In final use, if we are
looking at it up to the final use. It means whatever energy is being use in all the processing

707
finally when we are suppling that energy and over the life time of this process what is the
energy return on investments.

(Refer Slide Time: 21:32)

So, this is called energy return on investment. Just like we did the return on investment for the
financial terms this means how much energy am I investing and how much energy I am getting
out of it. So, typically what happens is in the case of in the early years when we had the oil
well this energy return of investment was high.

This has now been coming down, and if you look at this we can see there is paper by Cleveland
in the journal of energy, in the energy journal in 2005. And it shows the energy return of
investment starting from the early 1900s and then going down, and so you see there is energy
return on investment for oil has gone down, for coal and so on. So, this is of the order of 100
and it has is come down recent.

708
(Refer Slide Time: 22:55)

If you look at a coal-based power plant. There would be the energy inputs are all provided in
the initial year. When it is start operating there is whole set of embodied energy because you
have the steels, you have all the material which are coming in to the construct the power plant.

And then so this is all the energy which is invested during the operation there is an axillary use
which is the self-use and then there are material and other embodied energy which is the O&M.
So, the net which we are generating is this and when you subtract this, this will be net output
we can see how many years it takes to pay back for the energy which is invested in the life of
the power plant.

709
(Refer Slide Time: 23:49)

Levels of Net Energy analysis

Source: www.oilanalytics.org/neteng/neteng.htm

And in all this when we do the levels of analysis we can look at different sets of level. So, at
the first level is we can just see in making the power plant what is the amount of embodied
energy. That means we see how much of steel, concrete, steam generators, piping systems, the
assembly energy so this is the, this is one level of calculation.

Then we can go to the aspect where we look at what is the amount of how much, how much
energy is going in to production of the steel and then the iron ore which is coming in to making
that steel. So, we can go to that level we can also than look at what is the energy which is taken
in making the equipment which makes all of this.

So, one can go to different levels now when we go to next level the, you have to stop someone.
So, you have to see if I go to the next level how much additional amount what percentage does
it add to my overall numbers. So, at some points we make that closure and then go ahead. So,
one of the calculation is in all this we calculate not just the energy but we also look at what are
the amount of emissions which is coming in.

710
(Refer Slide Time: 25:30)

So, local and global just to show you an idea of the CO2 emissions of coal-based power you
can see that it start with the mining, the transportation, the construction and power plant
operation. And the this for, this is the study done by Mann and Spath NREL and this showed
that most of it, the largest chunk of it is been is in the actual operation of the plants. Some of it
3% is for mining, 2% transport and so on. But predominately it comes to about kg of CO2
equivalent per kilowatt hour.

(Refer Slide Time: 26:10)

Similar comparison has been done for biomass and the net energy is biomass is consider to be
almost carbon dioxide neutral. Because what happens is that the biomass during its entire
growth cycle actually acts has a carbon sink. So, if the CO2 which is recycled in this case is of

711
order of 890 grams per kilowatt hour and the net CO2 emissions again depending on how we
do the numbers is just 46 gram per kilowatt hour as compare to that 1 kg per kilowatt hour.

And this feedstock production, the transport, the construction and the CO2 emissions here
which gets absorb at that. And so overall there is 98% CO2 closure in IPCC considers biomass
if it is done sustainably to be carbon neutral options. So, it is actually taken at as zero CO2.

712
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture – 21 P2
Net Energy Analysis – Part 2

(Refer Slide Time: 0:18)

We had done a study and you may want to look at this study, where we had calculated the
lifecycle greenhouse gas imp acts of coal based power plant and if we wanted to instead of
coal, if we wanted to import natural gas through the LNG, basically liquefied natural gas import
it from the US, look at the entire lifecycle of that and then see what happens in terms of the
CO2 point of view.

(Refer Slide Time: 0:48)

713
So, if we look at this, you will find that in the Indian context, the most of the as we saw, most
of it is in the power plant itself, very similar to the Mann and Spath study. Here we got it as
1082 kg CO2 equivalent per megawatt hour. Mine to plant has something coming in with the
mining, at mining the CH4 emissions, fugitive emissions at the mine. Diesel and electricity use
at the mind and the transport. So, this accounts for just 59 grams of 59 grams per kilowatt hour
or 59 kg per megawatt hour. And so, this gives you a sort of break up, just from the, this is
cradle to the gate kind of calculation.

(Refer Slide Time: 1:50)

And if we look at a similar kind of thing for the, if we wanted to use imported natural gas, we
find that the power plant accounts for much lower, the total comes down from 1000 to about
585. Here the well to power plant is significant of which it starts with the this is where they are
looking at hydraulic fracturing and so, pack the production of the oil and then processing, the
transmission in the US, liquefaction, shipping, regasification, that adds much more than the
mine to, mine to the well.

As in the coal case, where we started from coal mining to the power plant that was very small,
this is much higher, but then the actual operation is much lower. So, overall it turns out to be
less.

714
(Refer Slide Time: 2:46)

We also saw, based on this we made a distribution of the actual CO2 emissions for the coal
fleet of the Indian, of India and you can see very clearly that the mean is around this. There are
some plants which are, which are more efficient, maybe there are the supercritical ones, and
there are some which are operating with a much poorer emission record. And in the case of
natural gas, if we had this kind of distribution, you can see that the mean will be much lower
than this. So, this gives you an idea of what are the kind of GHG emissions for the power sector
and how we can look at it from an energy point of view.

(Refer Slide Time: 3:29)

When we look at energy return on investment, there is a recent paper in nature energy which
you may want to look at, which calculates the EROI and shows EROI for different kinds of
different sources, including renewables. So, we can look at the energy EROI based on primary

715
will be whatever energy is used in the extraction and the production, but we can also look at
the energy embodied and used in transmission and distribution and the final energy. So, finally,
if we look at this as the framework, the EROI values that we would get would be lower than
that we have, we would get only if we looked at the primary.

(Refer Slide Time: 4:23)

So, if we see this, this paper shows the EROI primary and the EROI final. And you can see
over a period of time that the EROI’s have been coming down. And finally, EROI is we are
talking of are of the order of about 30 or so which is also pretty high number.

716
(Refer Slide Time: 4:49)

This is a summary of different studies, EROI estimates and you can see here that the EROI
estimates show for electricity for photovoltaic, the EROI final which we are talking of are of
the order of 6 to 20, again depending on the different kinds of studies and the different kinds
of estimates and assumptions which are there.

(Refer Slide Time: 5:25)

In addition to the EROI there is another EPBT, which is basically energy payback time. So, if
we look at the total amount of embodied energy in let us say a solar PV module, and see how
much time does it take for us to generate that much energy.

So, in the 1970s and 1980s the energy payback periods of photovoltaic was high, which meant
that it would take a large number, large number of years for that energy to pay back and for
any new source which we consider as renewable, we can calculate this and see whether or not
it is viable. So, apart from the EROI, we have another index called the energy payback period.

717
(Refer Slide Time: 6:32)

So, this is from an NREL report, you can see this NREL if you look at this document, it shows
you the kind of energy payback periods for the entire PV system, which is of the order of three
years or less.

(Refer Slide Time: 06:52)

And we can look at this data it happens this way that we put in all the energy in the initial
period, this is when we build the PV cells, balance of systems and then you get the returns over
the years and that is, that is gives you the.

718
(Refer Slide Time: 7:24)

So, when we look at the earliest environmental impact, systematic environmental impact of
photovoltaic, was done by Alsema and you can look at this paper in 2000, start with the raw
materials, go to the material processing, the manufacturing, the use, the decommissioning, as
well as some of it is recycled and then the treatment and disposal.

(Refer Slide Time: 07:39)

And with this, the energy payback periods that were done for rooftop and ground mounted
systems. Of course, this will depend on these solar installations and the efficiencies. And based

719
on this, you can see that these payback periods are of the order of two to three years again
depending on the kind of assumptions.

(Refer Slide Time: 8:00)

You can look at this paper and this will give you based on this, we can also look at the GHG
emissions and you can see, we had seen this in the initial phase where we talked about the chia
identity and we said that, renewables are an option for us to reduce the GHG emissions, we
said, as compared to 1 kg of CO2 /kWh roughly for coal.

When we talk of all the renewables, they are all in the range of 20, 30 grams per kilowatt hour.
And so, this is, these numbers are got from this life cycle analysis, and one may look at this in
a little more detail.

720
(Refer Slide Time: 8:38)

And there is a recent report from the European Union, which talks about the energy payback
period of the recent cells. Again, with different kinds of efficiencies, mono crystals, silicon, if
you see, it turns out to be of the order of about two years. And then the similar things you can
look at multi silicon, cadmium telluride and so on.

(Refer Slide Time: 9:06)

This this also gives you an idea of the total carbon footprint. We have later I will show you
some numbers that we have done for an Indian context on a similar basis.

721
(Refer Slide Time: 9:20)

When we look at the final lifecycle analysis, normally you can actually use your own
calculations, you can do this on with an Excel spreadsheet or you can use MATLAB many,
many of the researchers do use software for LCA and there are a number of software Simapro,
Gabi, some of them are public domain software like open LCA. The advantage of the software
often is also that they have databases which are available for different kinds of materials and
that will reduces the kind of time that you need to make the analysis.

Please also remember that these databases which are there for the embodied energy will have
assumptions, will be based on a certain kind of mix, will depend on the country for which it is
there, so, if you are doing something for India please make sure you know how that when you
use an embodied energy for some materials, find out for which country or context it is there
and is in the Indian context is it going to be similar?

You will find in all of these software you will find that there are multiple criteria which are
calculated including the different kinds of. So, there are different environmental emission
factors which are there and then the emissions are computed, both local, global, so, you can
see that are criteria for global warming which is CO2, N2O, methane, CFC and then this can
be converted into a CO2 equivalent.

And there are ozone depletion criteria’s like CFCs, HCFCs and then there are acidifications,
SOX, NOX, hydrochloric, hydrofluoric acid, eutrophication, and local photochemical smog,

722
all of this, the toxicity, all of these parameters are there and one gets in the one gets a whole
set of multiple criteria.

Now, depending on your application, we have to look at these criteria, see whether they are
beyond the limits, compare the criteria across different options and then take, then look at the
implication in terms of a decision.

(Refer Slide Time: 11:59)

So, in many of these cases. So, basically what happens is this this is from the IEA’s, assessment
LCS, assessment of different sources and you can see what all are the adverse impacts for
different kinds of sources and then these can be quantified one can see what kind of tradeoffs
one can have.

723
(Refer Slide Time: 12:23)

Similar this is the LCA assessment report in terms of this is from the World Energy Council
and you can see that this has the different kinds of CO2 equivalent, tons of CO2 equivalent per
Gigawatt hour. And you can compare the impacts which are there for nuclear, for wind and for
photovoltaics.

There are LCA has been traditionally, has been very useful in seeing for instance, when we
link think in terms of replacing oil, we have been thinking in terms of using biofuels. And there
are number of different sources of biofuels, one can use biofuels based on waste, one can also
have dedicated plantations for biofuels.

And several countries, including US and Latin America have been having large energy
plantations. And sometimes what happens in these energy plantations is one puts in a
significant amount of energy in the in the fertilizers, in the agriculture, in the irrigation, and
when you look at the overall it may or may not be net energy positive. So, there have been
situations where there is a subsidized and so it looks like it is a viable option, it is renewable,
but when you do the numbers, you find that this is net energy negative.

724
(Refer Slide Time: 14:16)

So, this is an example from a report, which is from science, where in the state of California,
they assess that corn-based ethanol is net energy negative and is actually worse than gasoline,
gasoline is the fuel which is used for vehicles in the US.

(Refer Slide Time: 14:16)

And if you look at it, this is the greenhouse gas emissions from gasoline, in terms of equivalent
CO2, equivalent per mega joule of the fuel. And when we look at corn ethanol, there is a direct
emission and then there is an emission which is because of the land use change. And when you
add this up, you can see that this turns out to be a worse.

And so of course, these are interesting because in as we will see, when we talk about policy
analysis. Policymakers usually like to have a solution which is a large-scale solution. So, we
want to have a large amount of Corn Ethanol or we want to have a large amount of Jatropha.

725
And then, because it seems to be renewable, one subsidizes it, but then maybe in some cases,
this does not result in the impact that you expect and you are actually putting in more energy,
you are actually putting in more emissions than you would have done if you just continued
with the gasoline case.

(Refer Slide Time: 16:00)

So, this is now a study for Germany. You can look this is a paper by Kaltschmitt, where a
biofuel rapeseed methyl Ester for transport is calculated and the way it is calculated you can
see the paper to get the numbers, but just to show you what it means is that the total energy that
you are getting per hectare. And this we are looking at plant production including fertilizer,
harvesting, transport, oil extraction, and some percentage is going to, is attributed to the
rapeseed oil which is being used for our fuel.

And then refining esterification, some percentage going to be, this is what I meant when we
talked about the allocation. So, 96% going to this, 4% going to the other byproduct glycerin
and then final transport. So, the total annual comes to about 16,200 MJ/ha and if we look at
this, so, per hectare this is the amount that we will get and this can be compared with the energy
content which we are using for diesel and we can then compare these again in terms of the
emissions.

726
(Refer Slide Time: 17:20)

So, this comparison which was done in terms of primary energies, this is 16.2, 47.1 is diesel,
the CO2 equivalent is 1594, and diesel is 3752. And so overall you can see, they could be in
this it is, it looks like this is a viable option in terms of at least primarily it passes the test of
emissions and energy.

So, let us look at now another example which is from an Indian context, we had carried out
there was a period when the government was very keen on having large scale Jatropha
plantations. And at that time, we thought that it would be worthwhile it would be interesting to
see, so there was the entire map of India you would see that there was a plan to have a large
amount of Jatropha plantations. And one of the things which we felt at that time was that one
needs to analyze and see whether or not this is a viable option.

727
(Refer Slide Time: 18:39)

So, this is the work done by one of our students who was interning in summer and we
compared both Jatropha and another one which is Karanja, Karanja is a seed which is used in
often in south India. You can look at Jatropha or Karanja and we start with the first phase
which is the agricultural cultivation phase. In the agricultural cultivation phase, there is some
energy going into seed bed preparation sowing, there is some fossil energy going into diesel
and electricity and there is energy going into the irrigation and fertilizers and herbicides, so
that is the agricultural cultivation state.

We then take that and transport then transport we are using some fossil and diesel. Then we
have the conversion stage, where you have the cracking, pressing, filtration,
transesterification. And then we have the fossil which is used in vehicle operation stage.

728
(Refer Slide Time: 19:54)

And based on this we calculated using the net energy ratio and net energy ratio this is another
energy output, energy input and in this we do not take we are only taking for the energy input,
we are not considering the energy that is put in with the biomass, we are only looking at only
the fossil input.

So, this net energy for it to be viable, the net energy ratio must be greater than 1. And we can
also calculate what is the mega joules per kilometer of vehicle driven, we can look at also the
costs on a per ton and a per kilometer basis.

(Refer Slide Time: 21:08)

So, when we did this, if you see this we had primary energy which was going in here, primary
energy going at this point and then we head the transportation and cracking stage and for
Jatropha and Karanja. So, we did the life cycle approach and we looked at energy output by

729
energy input, NER greater than 1, the replacement would be viable prima facie, then we have
to look at the economics of course, NER less than 1, replacement not viable.

Then we did the lifecycle cost, then annualize lifecycle cost and calculated. So, we can calculate
based on primary energy, on the renewable energy and secondary so you would like to see.

(Refer Slide Time: 21:47)

And the interesting thing is please look at this graph, these are all 2007 values. You can see
that there are different, there are different kinds of combination depending on the yield and
depending on the nature of the land. So, if you are using fallow land which has relatively low
yields, we are need to put in much more of irrigation and fertilizers and there are situations
where in the case of Jatropha where this is less than 1.

So, the other cases where the yields are higher and we can actually get this is without this is
without the co-product, of course if we are using the co-product, which is and we can actually
market that and that has a value then of course it becomes greater than 1 for all cases, but if we
are not using the co-product which is glycerol, then you see that it depends on the kind of land.

So, if your yield is high then of course we are getting a NER of the 3 and in this case what
happens is that, this is land, which is typically fertile land and so there is an issue of food versus
fuel.

In the wastelands where we are looking at if you put Jatropha, you would find that it is not
viable, we are putting in much more energy than it requires. And then so this is the kind of

730
case, of course, this is the kind of price that we get and the prices was is similar, slightly higher
than the price of the fuel that we are getting ex refinery at crude.

In the case of Karanja, we find that the situation is slightly better that is going to be viable in
all the cases. So, whatever we looked at, we have looked at life cycle analysis, and net energy
analysis, and we have looked at how to apply these and we have looked at a couple of examples.
In the next module, we will take a few more examples to illustrate the use of net energy analysis
and lifecycle analysis.

731
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture 22 P1
Net Energy Analysis – Part 3

We have been looking at net energy analysis and life cycle analysis we continue with that some
examples. Before we do that let me just again tell you about the criteria that we talked of.

(Refer Slide Time: 0:33)

We talked about the energy return on investment EROI. We also looked at the energy payback
period which is E energy payback time EPBT. And then the net energy ratio, similar to the
energy return on investment, net energy ratio NER. Remember in the NER we were not using
the renewable energy resources in this. In addition to this there are two other similar indicators
which will be use, which is also used in literature, one is called the cumulative energy demand.

And this is often done even for products that means we take, let us say we are making steel or
we are making cement, we take the total amount of energy which is required in the over the
lifetime, energy input over the life and divide that by n which is the number of years of life and
the output that we are producing. So, if you looking at the production, M product annual.

So, we will, so you take the cumulative energy over the life side, that is the energy input divide
that by the number of years into the annual production. So, this is called the cumulative energy
demand and we can compare the CED for different process route and see overall whether or

732
not our option is better than the baseline. Similarly, we have what is known as a Carbon
Emission footprint and this will be the total carbon dioxide or carbon emission whichever way
you would like to do that over the lifetime, emission over the life divided by n into M product
annual.

And so, what I will now show you is our examples of net energy analysis that we have done in
the Indian context, these are all based on different student projects, some of them are at the
master’s level, some of them are at the PhD level and so will take, this will give you an idea of
how this analysis can be used for different kinds of context. And at the end we will talk about
what are the advantages and disadvantages of using net energy and life cycle analysis and how
do they compare with the conventional economic analysis.

(Refer Slide Time: 4:14)

So, let us start with an example. This is an example of different, you know many of, many
researchers believe that the future will be with hydrogen and hydrogen is a secondary fuel,
secondary energy source. The key thing is terms of using hydrogen in a transport sector would
be how do we store the hydrogen. So, there are, what we looked at here is the different kinds
of, we can have like you have the CNG compressed natural gas, we can also have compressed
hydrogen storage.

And this will be at high pressures and then we can also look at liquefying the hydrogens, so
that there is volume gets reduced and then you have a cryogenic tank and we could also have
solid state storage, metal hydride and there are number of people who are working on different
kinds of metal hydride, so we can look at magnesium hydride and FeTi hydride and in this we

733
can for a certain amount of distance which we are riding, what is the amount of energy which
is being consumed.

And then direct energy required for travel, energy required to produce and stored the hydrogen,
energy required to produce and store the produce the tank and so we get the total energy
required for the tank. And you can see some methods of storage have relatively less energy that
is required. So, for instance magnesium hydride seems to be better than FeTi hydride and if
one looks at it in the case of the production and storage, in this case you will find that for
cryogenics there is a significant amount of energy required for this storage.

The add on materials is so when we look at the total, it turns out that the FeTi hydride has is
lower than the magnesium hydride even though the energy reduced to produce the tank is lower.
And so that depends on the performance and we can use for an equivalent amount of
performance we can compare. And right now, as it looks like the compressed, the compresses
hydrogen tank seems to be the, from an energy point of view the best option, of course there
are issues in terms of safety and solid-state storage account better for the safety.

(Refer Slide Time: 7:03)

In the case of solar thermal power we have done in the energy analysis for the both parabolic
trough collectors and Fennel reflectors in all of this first what we did is we defined for a
particular amount of output which we require, 50 mega watt plant with a particular amount of

734
output, we defined the different characteristics for a particular location and then calculated the
amount of steam and then the solar field requirement and then the field area.

(Refer Slide Time: 7:45)

And having got that we then calculate it, the dimensions of the modules, module length, module
width, number of modules, the oil volume, the piping volume, receiver volume, the vessel
dimensions and then we have an embodied energy factor for each of these materials. So, you
have the solar field, steel and the glass and the mirrors and then you have the receiver mirror
weight, structure weight, the energy used in this and then we got the energy payback period
and the energy return on investment.

And it turns out that for the parabolic troughs collectors the energy payback period turns out to
be higher than that for photo voltaic, but even then, it is of the order of about little less than 4
years which means that it is, it could be viable because the solar parabolic troughs collectors
last for 25, 30 years.

And so, with the result that even though the economics today of solar thermal does not seem
to be it is little costlier than the conventional, from an energy point of view it you recover your,
the energy investment in less than 4 years. And then the remaining part is basically the
advantage and you are going to get, the NER is going to be greater than 1.

735
(Refer Slide Time: 9:24)

In the case of buildings one can look at different types of, in a building there is a significant
amount of energy which is used in the operations. And one can look at different kinds of
materials if we are using more insulation, we are using phase change materials, the initial
embodied energy of the building can be slightly higher but that can reduce the operating energy.

And so, if you look at a sustainable building you will find that the embodied energy component
as compared to the baseline, share of the embodied energy is slightly higher but the overall
energy gets reduced. And this is another area where there is a very significant scope for
improvement, we can compare different kinds of materials, we can look at what is the embodied
and the operating energy and then calculate this.

Because buildings overall are extremely important, 30 to 40% of the total energy used is
associated with buildings and if we can design the buildings so that the life cycle energy used
is drastically lower then we can use renewables to supply that and we can have a sustainable
solution which is distributed.

736
(Refer Slide Time: 10:44)

So, now I would like to show you some results that we have done for situation where we are
comparing distributed TV, battery and systems and we want to look at different kinds of
batteries which are there and we have done an analysis cradle to gate kind of analysis of the
different types of batteries and try to see what it means in terms of embodied energy.

So, if you look at the batteries, I just like to show you some of the steps involved and how one
goes about this analysis. For more details, you can see the paper which is being written by Jani
on this project. So, we can look at for a particular amount of, we were looking at a particular
amount of electricity which is being generated and if we look at by weight, if you are looking
at 1 kg of a lead acid battery cell, the manufacturing, the battery assembly has anode, cathode,
electrolyte and you can see the amount of different materials which are there.

For each of these again in the case of lead is a question of how much is actually purchased and
extracted and how much is coming from recycled and that share that fraction affects the overall
calculation. Similarly, for aluminium and recycled aluminium. So, these factors can be varied
and based on this the numbers will change and you can see all the different component,
separator, tubular mass, connectors and the assembly of the battery all of that is put into it.

737
(Refer Slide Time: 12:39)

When we look at the overall cell we are PV battery system we are looking at the manufacture
and transport of the PVRA, production and transport of the frame and the array support of the
solar charge controller, the battery, the invertor and then based on this we get for a particular
output we can make this calculation. And this gives us all the different steps in the lifecycle
analysis so that we can get the total amount of energy that we are getting in this system.

(Refer Slide Time: 13:08)

So, if you see this, this is the, this is another picture, is schematic of this which talks to, which
tells us silicon production, PV cell manufacturing, fabrication of the module then frames, the
materials which are there in it. And then we have the batteries and then the installation phase,

738
operating phase and then material recycling and the waste disposal. In this case we just
concentrated on this and we have not added the waste disposal phase.

(Refer Slide Time: 13:41)

So, this is for the, this is the cradle to grave gate. If we wanted to do cradle to grave, we would
have also needed to take the decommissioning and recycling and the transportation of this. So,
in each of this there is materials, there is embodied energy in the materials, there is the
electricity and the energy used which is there.

739
(Refer Slide Time: 14:03)

And just to give you an idea, when we talk about lead or aluminium there are variety of different
sources which give the amount of energy per kg. So, you can see here, the from, this is the what
is known as virgin lead. That means if you are just directly getting from the ore it varies from
22 to 39 different, we view this as 39.1, these are for other context Europe and others we have
taken the location of the mine, the kind of ore that we have, the energy used in that and we got
value of this and the details are there in the paper.

From scrap again, you can see that there is a reasonable range and of course the point to notice
that the energy used from scrap is significantly lower than that in this case. And similarly, in
the case of aluminium, in our case aluminium from ore, the energy, embodied energy is actually
lower than the international number that is because of the current, the basis, the based on our
production and our efficiency of our manufacturing and then this is from the scrap.

740
(Refer Slide Time: 15:31)

Based on this now we get for each of the different batteries, lead acid battery, lithium ion,
nickel metal hydride, nickel cadmium, sodium sulphur, lithium sulphur and we get the material
per kg of the material the manufacturing energy, the recycling energy, the transportation and
then we get the mega Joules per Watt hour of the battery capacity. And you can see that there
is quite a bit of variation in this, lead acid of course seems to be low in terms of the embodied
energy and that is why lead acid is actually quite popular, its initial costs are also low, life is
less and they have environmental impacts.

741
(Refer Slide Time: 16:24)

So, the PV panel numbers, if you see this is the breakup of the starting from quartz, the
metallurgical grate silicon production, and then the solar grate silicon and then and so on. And
then coming into the glass and copper, the frame, aluminium and you can see for each of these
components, there are different energy inputs which have been calculated and you can find
more details in this paper. This gives us finally the kind of values.

(Refer Slide Time: 17:05)

So, if we look at the different batteries when we talk about the batteries, here you can see the
difference in the cycle life, you see lithium ion has much higher cycle life than the lead acid
and then the other one something in between and the life and the efficiencies, specific energy,

742
the energy rating and of course depending on the battery efficiency for a particular requirement
the ratings on the same functional unit and bases you will have different ratings and that is used
for calculations.

(Refer Slide Time: 17:37)

And so essentially this is kind of, so you can see as we said the storage capacity lead acid is
150, lithium ion of is little lower 137 less than 140 and then these others are in that kind of
range. And you can see this is the basis by which we have done these calculations.

(Refer Slide Time: 18:01)

Based on this then we have calculated all the different components, the recycled energy, the
embodied energy, the cost of manufacture and per unit mass of battery. If you see this is how
it gets calculated, you can see the energy densities and you can see lithium ion having the

743
higher energy density, sodium sulphur even higher energy density and then this comes out in
this form.

(Refer Slide Time: 18:32)

So, finally when you look at the numbers this is how the numbers look, we the interesting thing
to see is that per kilo Watt of output which we talked of, this is like the CED which we talked
of, the cumulative energy demand, what is the energy input per kilo Watt hour of output. This
is not including the solar installation which is there, this is only the amount we are using to
make this and you can see that the lead, the lithium ion turns out to be the lowest energy,
embodied energy.

And also, we will find that the battery adds a significant amount of embodied energy to the
total and based on that what happens is that we can calculate, you can see that in some cases
the battery, nickel cadmium the embodied energy is very very high and of course this also takes
into consideration the difference in the lives because this is the final cumulative energy
demand.

And it gives us an idea of, a comparative idea of this, it shows that you know sodium sulphur,
lithium ion seems to be the options which can result in cost effective options. Today they are
costly but they are from a energy view point they are actually seem to be promising. And the
we can also use this as a basis for seeing, if you want to change the process of manufacture,
can we change the process so that this, the energy input actually decreases and it becomes more
viable.

744
(Refer Slide Time: 20:38)

So, you can look at this more details in the paper and when we compare this, now convert it
into the NER and of course we would, higher NER is better. You can see that the lithium ion
NER is of the order of about 7 which includes the PV plus battery plus the power electronics
and seems to be better than the NER of the even the lead acid and but lead acid seems to better
than most of the others.

And you can see the payback period is of the order of about 2, little more than 2 years for lead
acid and lithium ion. This gives you an idea of, you can compare these results with the numbers
that we saw earlier from NREL and from global numbers, you see there are some variance and
that depends on the Indian context as well as the scale at which we make these calculations.

(Refer Slide Time: 21:51)

745
We have also calculated then the embodied, carbon of the batteries and then this can be used
to look at the CO2 options.

746
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology, Bombay
Lecture - 22 P2
Net Energy Analysis – Part 4
When we talked about batteries, most of these, many of these now where you have prototypes,
they are commercial. We want to look at an early stage calculation and how the energy analysis
can be used to actually compare between different options.

(Refer Slide Time 0:34)

So, we talked about hydrogen and the only we can think in terms of making hydrogen viable is if
we can make it from renewable sources. So, current methods of hydrogen production typically
most of it 90 % of hydrogen comes from natural gas from steam methane reforming. One can also
coal gasification and electrolysis mostly it is based on fossil fuels which is not sustainable from
the overall viewpoint. So, we need to look at hydrogen production from renewable energy sources
like wind, solar, biomass.

747
(Refer Slide Time 1:08)

And this study the we are going to talk you about is to look at biological methods of hydrogen
production. These are still at the laboratory scale, where it can operate at ambient temperatures
and pressures. They are expected to be less energy intensive and they have a variety of feed stocks
as carbon source like sugars, lignocellulosic material, waste water and there are several reactions,
there are substrates and bacteria, so you have basically the biological feeds stock something like
C6H12O6 with water giving you hydrogen, CO2 and then another compound. So, this is the
hydrogen we would separate and use.

(Refer Slide Time 1:50)

And we would like to this you can see this is a slightly old paper, it is in 2008. There is comparison
of bio hydrogen production processes. So, what we said is all these processes today are still at the

748
laboratory scale based on what has been done in the laboratories scale and the performance can we
asses and see whether these are likely to be viable and how do they compare from an energy or a
net energy point of view. So, we would like to calculate the NER and see if those NER’s are greater
than 1.

(Refer Slide Time 2:28)

And in order to do that, so the production at commercial level not reported, pretreatment methods
and hydrogen production depends on the feed stocks, which feed stock is viable which is not,
which process is viable, which is not. So, the analysis of different feeds stocks and processes is
necessary before we invest in scaling up the process.

(Refer Slide Time 2:46)

749
And this is the methodology that we have used. We have shown, we were looking at biomass to
hydrogen there are thermochemical methods pyrolysis and gasification larger scale. We are here,
we are looking at the biological processes; biophotolysis, dark fermentation, photo fermentation.
I am not going to go into the details of the process I am just going to illustrate for you the
methodology and some of the results and those who are interested can look at the paper and
associated papers and this can be an area where there, still this is an area where there is a scope for
doing active research.

(Refer Slide Time 3:21)

So, we would look at four different processes dark fermentation, photo fermentation, two stage
fermentation, biocatalysed electrolysis. And we will take an input feeds stock sugarcane juice.

(Refer Slide Time 3:32)

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So, the functional unit that we have defined is 1 kg of hydrogen to be produced at 25o C temperature
and 1 atmosphere pressure. We compare this with a base case of steam methane reforming with
natural gas and we would like to calculate one, two couples of things, one is what is the net energy
ratio output by the nonrenewable energy input, the NER should be greater than 1, also what is the
kg of CO2 equivalent per kg of hydrogen and then the energy efficiency. We have used the LCA
software SimaPro but we can also do this just our own calculations.

(Refer Slide Time 4:10)

And the heat which is being used in the processing we need to produce steam, we used diesel with
90% combustion efficiency. For the electricity we use the Indian electricity mix and this is the
kind of mix and we said that biomass derived CO2 is 100% carbon closure so zero CO2 impact and
we look at natural gas and biogas as well as the residue.

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(Refer Slide Time 4:39)

This is the electricity supply mix that has been assumed in this case.

(Refer Slide Time 4:44)

There are different kinds of, for steam methane reforming as the base case we use natural gas, coal
and these are all the different kinds of inputs which are used for the net energy analysis of hydrogen
forms steam methane reforming which is used as a base case for comparison with these options.

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(Refer Slide Time 5:03)

This one was the dark fermentation. In the case of Photo fermentation, we have the sugarcane mill
to get bagasse then we get photo fermentation which goes to the anaerobic digester to produce
methane and the photo fermentation output is separated using pressure swing absorption so we get
hydrogen. In each of these processes there is some energy input which we quantified.

(Refer Slide Time 5:31)

In the third process that we have is the two-stage fermentation process where again we have milling
and bagasse, we have dark fermentation as well as photo fermentation and then you have anaerobic
digester for methane and pressure swing adsorption for hydrogen.

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(Refer Slide Time 5:47)

In the next process is with biocatalysed electrolysis where we have an anode and a cathode and
bacteria where you have this, this is where you have the electrolysis and a hydrogen is being
produced.

(Refer Slide Time 6:02)

And these are the input data in terms of the electricity used in the sugarcane crushing. And the
production in the dark fermentation, photofermentation, methane to CO2 ratio, the recovery in the
PSA, compressor needs electricity input so we have the isothermal efficiency and then we have

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the loading of the biocatalysed electrolysis, based on this we buildup for each of the process mass
and energy balances.

(Refer Slide Time 6:42)

I am not going to go into details of these and look at the details in the paper and essentially what
happens is that for each these the sugarcane input, electricity input, the ammonia, platinum, the
outputs which are there and for each of these processes we create the inventories in terms of masses
and then we also create energy content.

(Refer Slide Time 6:59)

And then in the case one, the final results without byproduct, with byproduct of course it much
looks better. You can see that in all these cases the CO2 emissions, kg CO2 per kg of hydrogen that

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we have is significantly lower in all the biocatalysed, in the biohydrogen processes and it turns out
that the two-stage process seems to be the best in terms of the CO2 emissions. Similarly, if you
look at the nonrenewable energy use photo fermentation and two stage process look to be similar
while biocatalyzed electrolysis uses much more in terms of energy.

So, this gives us a way a direction in terms of how to move forward, in terms of processes within
the process we can again use it, if you can process model and we can again it to make the
comparison between making a viable process and making a process which can then go to the next
stage where you can do the economics.

(Refer Slide Time 8:16)

This has been, this is, these are the series of charts which have been used by Ashby which has been
proposed by a UK researcher Ashby and this is reported in Allwood et al., you can see essentially
the idea is that when we choose materials we often do that based on the particular application we
choose from a particular set of materials. And people often historically use a particular set of
materials but for some properties it is possible to have a whole host of materials.

So, for instance if you look at ceramics, metals, polymers and we look at let say the property that
we are interested is a Young’s Modulus. So, you can have for a given Young’s Modulus a whole
set of different materials between metals and ceramics and different materials have different

756
amounts embodied energy. Similarly, we can also draw this in terms of embodied CO2 so we can
actually choose a material that uses less energy or less GHG equivalent emissions and this could
be a basis for looking at the sustainable design for the future.

(Refer Slide Time 9:26)

And this is just to illustrate, this is another parameter when we look at strength and so one can
actually create this kind of curves and these can aid the designer in terms of choice of different
kinds of materials and we are now in era where we actually have nano technology and we are
creating designer materials. So, this can be even more useful because we can actually look at
materials with a particular capability which has a low energy footprint, low carbon footprint.

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(Refer Slide Time 10:09)

So, with this I would like to just give you the last example where we are talking of sustainability
analysis where we are looking at combining all of this, the LCA, the thermodynamic analysis
techno economic analysis. We would like to screen different kinds of technologies and compare
them and see what are the prospects for future and this can help us in decision on investments.

So, we look at in the case of life cycle assessment these two criteria we will look at, the cumulative
energy demand and the carbon emission footprint. And in thermodynamic analysis we can look at
the energy efficiency, the exergy efficiency. Exergy is basically the second law of, using the second
law where we convert everything into work equivalent which is exergy.

And then we can look at the primary energy consumption per kg. We can look at the current cost,
future cost and bottom up cost. So, will take an example this is from a PhD thesis done recently
by one of our students where we looked at the possibility of using for zinc which we manufacture
currently using an industrial process using fossil fuels, how can we make the zinc manufacture
process sustainable. So, we have a whole host of different options where we make it zero carbon
and we would like to compare this.

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(Refer Slide Time 11:31)

So, one of the processes that we are looking at is a solar carbothermal reduction where we start
with zinc oxide and the carbon source which could be biomass or coal.

(Refer Slide Time 11:51)

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We have this reaction which is essentially zinc oxide plus carbon giving us zinc plus CO and this
is a carbothermal reaction which we are carrying out at a high temperature. We generate those
temperatures by getting solar thermal concentrated heat and there has been this reactor which has
been there for carbothermal reaction of zinc, 300 kilo Watt reactor, compound parabolic collectors
and this has been done in Israel.

You can see here that on the ground you have these heliostats which are focusing on to a reactor
and this is a beam down reactor which again focuses, this translates it to a mirror and this goes to
reactor which is here and this is getting very high temperatures and you can have, you concentrate
it. This is one reactor which has actually been built and some performance data is available. We
took that performance data and try to analyze what does this process mean if we wanted to
implement this process to manufacture zinc. How would it look like in terms of the energy and the
carbon?

(Refer Slide Time 13:21)

And this is how we calculate this, so essentially what happens is you can look at the multiplicity
of processes, we can have either keep the process as it is zinc oxide, leaching, electrowinning, zinc
metal and we can look at creating this the electricity that we are using and the heat that we are
using get it from renewables that means photovoltage or CSP.

So, there is one possibility which we, the base line example is grid hydrometallurgy where you get
grid electricity or we could have the solar giving you PV electricity and then running the PV
hydrometallurgy or we can have solar thermal CSP, CSP hydrometallurgy and get Zinc and carbon

760
mono oxide or we can do the carbothermal, the thermochemical and the whole host of different
(techno) routes. In each of these we then identify the designed, the reactors and the systems to
produce certain amount of zinc annually and then made this comparison.

(Refer Slide Time 14:45)

I am going to show you just the final results. When we did this, we then calculated, we developed
a sort of sanky or an energy balanced diagram which shows you the different kinds of where all
are the energy flows and the overall kinds of losses and the final output.

So, based on this we can see that the energy efficiency as compared this solar carbothermal and
grid power when we look at solar carbothermal and the PV for the auxiliary load, we have an
option of PV and CSP and grid hydrometallurgy. So, you can see that PV and hydro at the pilot
scale if we one looks at it the PV and hydrometallurgy the existing process and making it PV seems
to be better in terms of an energy efficiency viewpoint.

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(Refer Slide Time 15:49)

However, from a CO2 viewpoint, when we look at the life cycle assessment from the cumulative
energy demands CED and the CEF you can see very clearly that with grid electricity this is the
mega Joules per kg of zinc that we are getting and with PV we can, this reduces very significantly
and CSP also this reduces if we can get the thermochemical route with biomass then we can
actually get somewhat nearer the PV though it is still little higher than the PV.

However, on a CO2 basis you can see very clearly that if we compare a thermochemical process
with biomass, thermochemical process with biomass then it is possible to actually go ahead and
make the thermochemical process with the PV for the auxiliary and the thermochemical process
turns out to be better than the PV hydrometallurgy option. So, this shows us that it is possible to
actually go ahead and we can look at a new renewable base process for zinc. And it is possible
actually that we can modify all the industrial processes so that they become zero carbon.

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(Refer Slide Time 17:47)

There are multiplicity of different possibilities in terms of routes and when we do the initial pilots
and the experiments, one can actually use net energy and life cycle analysis and the carbon
footprint as a bases for making this comparison. Now, what does it look like in terms of
economics?

Now, interestingly of course, when we look at economics these, all these routes that we talk of are
much costlier today. They are costlier by a factor of 10 but it is possible with technology
development and volumes that this cost we can go down significantly in the future.

(Refer Slide Time 18:11)

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So, for instance if we look at it the solar carbothermal with biomass which is the route that we are
looking at is depending on the way you do the estimates about to 1000 to 2000 dollars per ton as
compared to the grid hydrometallurgy commercial one which is order of 300 dollars per ton, of
course this is at the pilots scale, if we make this at the commercial scale and we expect the kind of
cost reductions that are possible then we can actually go ahead and get in that same range.

So, it is possible that we can do this kind of a cost reductions. So, now when you look at net energy
analysis, life cycle analysis; life cycle analysis gives us a way in which we can look at over the
entire life cycle, the environmental impacts and the energy impacts.

Net energy analysis at times what happens is especially in the case of new technologies and when
we are looking at going from the research and the lab scale to the pilot scale or pilot scale to the
before commercialization, it is very difficult to estimate what would be the cost.

In a situation where you have limited information about the cost and there are only one or two
companies which are exploring this, it is important to look at how does a new technology look at
from the point of view of the overall energy that is input, is the NER greater than 1, what is it look
like in terms of the CO2 impact.

So, these are additional tools and techniques available to you which you can use along with the
economic calculation and the emission calculations and that can help in sort of screening and
deciding where it can go. In some cases, if you find that the ratios, the energy numbers and the
cost numbers are almost similar then it is likely that there is no not much scope for reduction or it
needs major break throughs.

In cases like where you find that the energy inputs are much lower but the cost are at a higher
factor it means that with technology development and commercialization it is possible that, that
technology may actually yield better results. So, an energy, net energy analysis can help and direct
some of the choices of new materials, new processes.

And this is something which is being used but not used as much as it could be and this is something
which I hope you will use when you analyze different energy systems and you specially look at
new things coming out to see that they are viable from an overall energy point of view. With this
we will close with this module and we will go to the next module which will be on energy policies
and how we can do policy analysis.

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 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology Bombay
Lecture 23
Energy Policy – Part 1

So, we have seen now all the different modules related to energy resources, economics and
environment. Now we put these all together, to look at energy policy. So, in this module and the
next one we will be focusing on energy policy.

(Refer Slide Time 0:35)

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So, the first question that we should think about is what is an energy policy? The definition of a
policy, and we can look at the Wikipedia definition, says that policy is a principle or a protocol to
guide decisions and achieve some desire rational outcomes.

So, we can in our daily life we can look at different kinds of policies which have been adopted,
policies which have been adopted by the government, policies which have been adopted by
institutions, by the state, by the local authority. And let us look at how do we analyze, what is the
frame work by which we look at different policies.

(Refer Slide Time 1:21)

So, when we talk about policies, we need to understand that what are the decisions involved and
what is the policy trying to impact which kind of decisions. Who are the stakeholders that means
who are the people who are involved in that, in these decisions and who are affected by the policies.
And then based on this what are the discreet policies to impact those decisions and to look at the
stakeholders.

We can then see based on the particular policy what will be the impact on individuals stakeholders,
what will be the stakeholder perceptions? We can set for ourselves some goals related to the
policies. And after setting those goals we can have some quantifiable criteria, and that means these
will be matrix or numbers that we calculate. We can see they could be quantifiable, they could be
qualitative. We can look at that and do an analysis to see whether or not a particular policy is going
to be useful, is going to be good.

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So, in any policy whenever we talk in terms of policies analysis, and especially when we in our
context we are talking of policies related to energy. We can look at list out decisions, the
stakeholders, policies, goals, the criteria and then do the analysis. We can also put down what are
the institutions and the mechanisms, who is going to implement the policies.

(Refer Slide Time 3:06)

So, with this let us try and see if you look at the global energy assessment, the chapter 22 deals
with policies and in that they specify a set of different goals which are usually there for energy
policy. The first 1 is the, is that we want to increase energy access and will talk about this a little
bit more, we try and see what are the kind of, that means we would like the entire population to
have access to energy so that they can have better quality of life. And develop the capacities for
the energy transitions.

With the energy sectors are in transition we are make, having changes and we need to be able to
have the capacity to not get disrupted by these transitions and to be able to cope with these
transitions. And hence energy security we have already seen what is the implication in terms of
security where we want to have reliable energy supplies, so the goal of our energy policy will be
trying to increase the security.

Manage the energy related market powers, so for instance they could be monopolies or oligopolies
and a policy would try to see that you balanced it out. So, that everyone has a fair chance and then
smaller players can also have an ability to compete in the market. Manage the energy resource
endowment, so the resources may be distributed and we want to make sure that these distributions

767
are such that over different generations through the intergenerational equity or we want to look at
how these resources can be managed in an appropriate fashion.

In most of the energy sectors specially when we are looking at the fossil fuels there are adverse
environmental impacts, there are adverse human health impacts and one of the goals of the, of,
when we analyze energy policies is to reduce the environment and human health impacts. We want
to also look at new technologies and accelerate their energy related technological change.

And in some cases for instance when we are talking of maintaining CO2 emissions less than 1.5
degrees, we want to, we have an international agreement, the Paris agreement, we want to
coordinate and implement some of the international energy related policies. So, these are some
sort of listing of possible listing kind of energy goals and one will have some aspects of these or
some combination of these in most of this.

(Refer Slide Time: 06:07)

When we think in terms of energy policies you may want to look at the scope and the elements of
the policy. So, for instance, if you look at your own institution for instance we are thinking in terms
of the IIT Campus. In the case of the IIT Campus we would like to see what are the policies related
to energy.

If we think about it, it is about how we are distributing the electricity within the campus, how we
charging based on the fixed rate is there, do we have renewable sources of energy on the campus

768
and are we having incentives and penalties for energy efficiency and the usage of energy. We can
look at again in the hostels there is LPG being used for cooking, we are looking at the waste, can
we use the waste to generate some of the energy, can we have a sustainable way of doing the
cooking energy?

We can look at what are the elements of transport. For instance, several campuses in our campus
we do not permit students to have motorized transport within the campus. And there could be we
could also have, we have a, we can have an electric vehicle going around the campus, fleet of
electric vehicles. We can look at again in within transport some portion of the area where there is
no vehicles allowed. There are new campuses being built which are completely vehicle free and
these are like walk-able campuses.

So, in each of these when you decide the policies related to a campus, you can decide what are the
goals, the goals to ensure that there is very little environmental impact. Goals are to also provide
the cost effective transportation. We can list out what are all the policy instruments, list out the
challenges, existing institution and the roles, the time horizon and create a framework by which
we are analyze the policy.

So, this is in terms of campus we can go beyond the campus to the region in our case that is that
becomes Powai and we can look at in Powai what kind of policies are there, who is deciding what
are the things? If you are in a rural area we can look at a village and we can see whether that village
has connection to the grid, whether it has a micro grid, whether it has some common areas for
electricity. We can go to the next level where we look at a number of villages in a block and we
can look at a set of policies for the block.

We can look at a city or a region so in the case of Mumbai we can see which are the agencies, what
are the kind of things, should Mumbai have a policy where it is going to have electric charging
stations for instance. What about the air quality in Mumbai and things like that and we can go from
the city to a region to the state Maharashtra, and we can make an energy policy and the plan for
the state.

What is Maharashtra’s policy in terms of net metering? Do we have, if people are connecting photo
voltages to the roof tops, what kind of incentive will be given and we go one step of aggregation
further we can go to the country level at India and we can see a large number of centrally decided

769
policies related to the energy sector. And then ofcourse we can go to the world as a whole where
we can have we are thinking in terms of the IPCC.

We are thinking of the Paris agreements, we have agreements on trade and a whole host of thing.
So we can decide what is the scope, which is the focus look at the different elements and then
analyze the policies.

(Refer Slide Time 9:52)

And I will urge you to think in terms of some real life examples that you are familiar with, list out
some policies and describe the framework for the policy formulation. Who is going to formulate
the policy, how we are going to analyze it, who are the stakeholders, what are the policy goals,
what are the criteria by which you are going to assess the policy, which institutions will implement
it, what is the type of analysis that we should be focusing on and comment on existing policies,
vis-a-vis some new policies with respect to different stakeholders.

You should do this with a specific example then you will get an idea of how this framework works.
Now I will do is I will take you through a few policy examples to illustrate how we can analyze
this framework. But you should try and do this yourself so that you can get an idea of this is logical,
common sense kind of framework but if you list out in the same fashion you will get an idea of
how we can do policy analysis.

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(Refer Slide Time 11:05)

So, in the case of one of the things that we talked of when we talk of policies is how, what are the
instruments? Or what is the way in which we are going to implement policies. So, there are number
of different instruments, so for instance there are regulating instruments for instance where we can
ration, we can provide an emission quota or we can mandate a technology.

So, for instance, we can say that every power-plant will be fitted with some pollution control
equipment and we specify that this is the kind of technology that is mandated or we can say that
different units will have a certain amount of emission quotas. And people can stick within that
quota if they exceed the quota they will be penalized, if they are less than the quota they get an
incentive.

We can also provide performance standards and benchmarks. So, that means if you are emission
or your efficiency is better than a particular thing then that means you have a, and there is a
minimum performance standard that you have to meet and this is often there for instance in the
case of vehicle emissions, we have standards which we have to adhere to which is based on the
different years and which the models have.

We could also have, this is in terms of regulating instruments. We can have implied deregulation
in terms of a emission permit trading and this has been done in European Union. There could be
green certificates, we can have voluntary agreements and then there are this whole set of

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incentives, fiscal and financial instruments, taxes, subsidies or grants. And so there is this
possibility we can either ration or we can provide subsidies or taxes.

(Refer Slide Time 13:03)

To give you an example if we just take a fuel where you have price and quantity and if we see, if
you have the demand at going like this and you have a supply curve. So, in the normal case this
point is Q and this is the equilibrium price Q0, P0. Now suppose so this is let say for a fuel. Suppose
the fuel is subsidize and in the sense, that we are giving a subsidy to the, we are providing a subsidy
to the consumer so if you are providing a subsidy to the consumer there is a product to the producer.

772
We have a subsidy so that means we have a fixed amount per product which would mean that now
S dash, S dash and you can see what happens here this then now with the subsidy, this is Q with a
producer subsidy, right. The demands remain the same. The point increases and if this is a fuel
where this is a fossil fuel, in the case of the subsidy the emission will of course increase. Because
of this now the price also decreases the effective price decreases and this is why are we providing
this subsidy?

We are maybe providing this subsidy from a development goal or from an equity goal and with
the idea that we would like that fuel to be affordable. So, for instance we have a subsidy for
kerosene, we have subsidy for LPG, for cooking gas so that people can afford it. And with the
result that this will result in this kind of a thing. This is where this subsidy is, if this subsidy is
given essentially to the producer.

This is like a producer subsidy and often instead of that we could give this subsidy to the consumer
and if we look at a consumer subsidy which means that the consumer is given a certain amount
and then in the original case this now becomes, this is your D dash and this becomes P consumer
subsidy. So, in both these cases what will happens is that we are producing more than the earlier
case, the equilibrium point shifts and you can see what happen is because we are providing this.
We now have this is the consumer (sub), this is this amount which is subsidize.

So effectively, this is the effective price but we are this much is given as a subsidy. So, the
consumers are paying less than in the earlier case. And in so this is one set of things, if we think
in terms of putting a tax we move in the other direction and we are reducing the amount of the
quantity and then the price also effectively increases. Instead of doing this we could also do this
by rationing and providing the quantity.

The difference in both these cases is that if we ration and provide and fixed the quantity. We do
not know how much that quantity should be and where the market will operate but in effect either
of these are the choices. Either we put it in terms of a target and ration or we put it in terms of a
tax, the subsidy or the tax. In the case of new technologies that we want to get through and where
we want them to initially have a bigger volumes.

773
We can also provide them in terms of a grant and an initial capital subsidy for instance this has
happened in the case of solar for many of these has happened in for wind and happen for the many
of the renewables. So these are in terms of the fiscal and financial instruments.

Another instrument that we had which we talked about earlier when we looked at the economic,
the module on energy economics is that we can have accelerated depreciation and so if you have
an accelerated depreciation it means that we are reducing the tax impact and because of that
effectively it will act like an initial subsidy.

There are many other supportive actions that we may provide in terms of policy instruments often
one of the barriers is because of lack of information, so we can provide dissemination, we can
reduce the transaction cost, we can improve knowledge and market transparency. So, these are
some of the possible policy instruments, there are of course many other policy instruments.

(Refer Slide Time: 19:32)

So, this is from the IPCC report by Perrels. You can see that when we look at the taxes and we can
see what kind of the instruments which are there whether it is a tax subsidy or we fund, research,
development and design we can have regulation in all of this we can substitute the fuels we can
look at energy efficiency, we can change the structure of the production, we can look at new clean
technologies coming in.

774
And then based on that, based on all of this there will be an impact, based on the kind of elasticities
that we have and will result in a change in the kind of emissions which we are looking at. So, if
we can create a model of our system either through an input-output or through computable general
equilibrium or any other model of the economy that is there and we can see when we impact, when
we implement a policy instrument what happens overall.

(Refer Slide Time 20:40)

So this is the way in which there are a large number of different policy documents. In the earlier
years we used to have, in the days of the planning commission we used to have 5 year plans. And
you can take at some of these which will give you an idea of how the planning and implementation
was being done. There was an integrated energy policy report and that is was an attempt in 2008
from the planning commission where the different sectoral approaches were planned to be put
together.

There is also national action plan on climate change, and the national solar mission earlier this is
we call a Jawaharlal Nehru National Solar Mission, the national mission for enhanced energy
efficiency. There are different kind of there was the energy electricity act and the electricity
regulation commission act, ultra-mega power projects, rural electrification policy and then are
intended domestic commitments which we committed to in Paris which is now which we have
signed off and we will discuss some of these in detail. There are this is only a subset of the different
kinds of policies there are many different policy options.

775
(Refer Slide Time 21:54)

So, as we saw we have actually a number of different possibilities we can look at market or
government and in typically we can look at policies implementing through the market or we can
look at a government intervention where we mandate or legislate or we can look at an independent
regulator looking at this. So, there is, these are the option that we have in many of these systems
what will happen is that the market usually has imperfection, so it needs regulation.

And several, at several times the government also intervenes, so it is always a hybrid of all of these
and this is what makes policy analysis and interpretation much more complicated. The problem in
all of this is when we look at a physical system, if I am looking at a heating water and I have an
electric heater, I can measure the temperatures, I can estimate the time I will get exactly, I can
create a model which will exactly replicate and I can decide what kind of, how much heating for
what temperature.

When I look at system which is a physical system, we have energy you have energy supply we
have energy use but there is a behavioral component in terms of individuals and their response is
companys and their responses and the experimentation at that kind of scale whether it is at the
local city, state or country is quite expensive. So, one can creates some mental models, one can
create some mathematical models like we saw the input output models and then we can see what
will be the impacts and this is often done then you try and you compare the policies and then you
try and see, adopt and enact it and then see what happens.

776
And sometimes one makes mistakes in doing the policy because there are unintended impacts of
these policies. For instance, in the Indian context in the initial years when we started on renewables
we started providing an incentive for a capital subsidy for wind machines, we also had a tax benefit
and in some states, we also had sales tax benefit. So, in many cases there was an incentive web,
people installed wind farms in areas where there was not enough sufficient wind.

They relatively low capacity factor and even though there was not much generation, the company
still benefited in terms of all the other benefits which were there. So, this was ofcourse corrected
later on, so that was why at one point we had a overall capacity factor of wind generation in our
country of less than 14 %.

Now that has, that is increasing with the change in the policy. So, what are the criteria to analyze
policy again this is from global energy assessment chapter 22.

(Refer Slide Time 25:18)

We can look at the effectiveness of the policy. Effectiveness will be judged in terms of its ability
to meet the goal that was set. We can look at the economic efficiency, what happens, what is the
in terms of overall economics what is the overall is there is surplus or is there a loss and the
consumer and the producer surplus does it get decreased and overall impact on the GDP or on the
income of the different stakeholders.

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We can look at the administrative feasibility how easy and cost effective is it to implement, is there
a possibility that this will be there will be distortion which will be there. We also want to see what
is the equity impact, equity impact means that how does it affect the poorest of the poor and is it,
is the impact equal across different income classes?

And then of course the equity impact can affect the policy, political acceptability and ofcourse
political acceptability is not is a tricky thing and it depend on the whole host of different things
including perceptions and so that is a tricky point when you are looking at large scale policies
which affect a whole set of population, we need to look at this.

Policy robustness, if there are any changes that we have not anticipated, if anything different
environmental factors change, does the policy results, do the policy results remain the same. Policy
consistency overall when we think in investments and in terms of decisions making, it is important
that over the years we do not keep changing policies.

So that it is difficult to then take decisions, so overall we should try to see that policies are
consistent over different governments, over different kinds of different time periods. So, these are
typically the kind of criteria.

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 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology Bombay
Lecture 23
Energy Policy – Part 2

Let me just give you an example, we talked about one of the things that we talked of in policies
is that first you should look at what are the kind of decisions which we are looking. So, if we
look at the international level, there are international agreements, for instance for the Montreal
Protocol, for the greenhouse gases, for compare chlorofluorocarbons, limiting
chlorofluorocarbons and controlling the ozone layer and that was fairly successful.

(Refer Slide Time 0:49)

And now we have the Paris agreement for the greenhouse gases and the idea is to limit it to
less than the temperature to less than 2o C, and preferably even go towards 1.5. Now, there are
still several issues related to how these are going to be implemented, monitored, what kind of
penalties and other things, but we have moved in this way when these are voluntary agreements.

At the country level, there are several policies for instance should we be providing a kerosene
subsidy, should we providing an LPG subsidy for excess, for electricity, for low income houses,
should we be giving electricity at subsidize or free, for agriculture, should we be providing
subsidy for agriculture, should we be providing a carbon tax.

So as of now there is cess on coal, and recently there was a government notification that there
was a news item in early January saying that there would be the tax on coal is going to be taken

779
away. And it is not yet clear whether that is going to happen but the particular policy. The
pricing, and allowing market to maintain the price or letting administering the price is another
kind of policy measure.

In the Indian context, we have a significant amount of tax on petrol and diesel, which are the
transport fuels. And so that is a big source of revenue for the government. Technology
development, what kind of policies do we have to support and encourage technology
development, at the state level again there are taxes and incentives.

Some of these now has been sort of streamlined and we have this scheme of the GST and the
electricity is still outside the GST. Again, in the state the kind of fund allocation to different
units and districts. In the districts they fund allocation to the blocks, the electrification of
villages, some kind of industrial development, the ration shops and the sanctions of the
quantities.

In the blocks the allocations to the villages, kerosene allocation, industry promotion, marketing
support, gram panchayats, agriculture irrigation scheme, cooperative industry, requests for
ration shops, fuel shops, electricity supply and household of course, the decisions of fuel choice
and device choice. So, these gives you sort of hierarchy of the different kinds of decisions and
the decision making process and one can look at how policies impact and at what aspect they
impact.

(Refer Slide Time 4:06)

There are again some more examples of energy policies, in buildings there are these building
codes. And now we have these ECBC and the TERI-GRIHA where we have codes which will

780
result in energy efficient buildings, we have standards and labelling and the Bureau of energy
efficiency has actually now provided the star rating system by which you can see what is the
performance of different refrigerators or air conditioners or fans.

And sometimes we have preferential tariffs and we did this for solar PV, wind, many of the
renewables that means that when we look at a regulatory state which has a regulatory
commission, if we are getting supply from renewables, we assure a price which is higher than
the average price at which it was happening. And so, we had tariffs of 11 ₹, 12 ₹ / kWh initially
for PV.

Now, of course those tariffs have come down and they are almost cost competitive, but in the
initial years in order to spur and get people to adopt the technology we can have what is known
as a preferential tariff, or also known as a feed in-tariff. And this gives a signal to investors and
developers because then they are guaranteed that kind of tariff. The problem is of course, when
these tariffs come down.

These tariffs which have been agreed for a 25 year period, subsequently, the distribution
companies are not happy with paying that kind of high tariff throughout, but the idea is to
provide an incentive so that the early innovators can get a benefit and then the, that the supply
and the market for that actually grows. Subsidies we have already talked off, soft loans as we
discussed in the financing case, often, we can provide loans which are at very low interest rates
based on certain credit lines, because this is these are some of the technologies that we would
like to see going into the market.

The carbon tax, just like we talked about a tax in the overall scheme, if we tax based on the
amount of CO2, and then that is incorporated as a cost, and that will result in reducing the
emissions and so even in this, it is the question of whether it should be a cap and trade or a tax.
In the case of cap and trade we basically say that totally, this is the amount of emissions and
then we put we put a cap on the emissions from each sector.

Then we have certificates which are provided and people can either pay by the certificates or
pay the penalty if they are beyond the allocated capacity We need to have of course, a
mechanism by which we allocate CO2 factors and in the case of, so we have, we can look at
this as renewable energy certificates, and we talk of certified emission reduction 1 CER is 1
ton of CO2 reduction per year.

781
And then we can have these certificates, we can have trading in the certificates, we can create
a market. So, this this is sort of gives us an overview of some of the different kinds of
mechanisms.

(Refer Slide Time 7:48)

We have already discussed this earlier, this is the example from Kolstad.

(Refer Slide Time 7:49)

782
And this is from a UNEP report which shows you that the same thing which we just now saw.
If we have the supply and demand intersecting, here this is the original point, if we provide a
production subsidy so that the supply curve now shifts here. And then this is the QPS and the
PPS and as a result of this, what will happen is in this is the environment damage increases,
because the quantity of fuel, especially if it is a fuel, which is a fossil fuels, the quantity of fuel
used increases.

And similarly, if we had a consumption subsidy, we move from here to this point, and even in
this point, we find that the environmental damage, so we can do these kinds of analysis in terms
of the impacts of subsidy. So, now let us look at a couple of examples. Let us look at one of
the things that we find is that many of the cities in India are having a problem in terms of air
quality.

And these increases and gets enhanced during the winter and post Diwali we have had
situations where there are serious health impacts including in the capital city of Delhi, last year
in 2019, we had several days where there was a health emergency declared, schools were shut,
people were wearing masks and the pollution control, pollution levels were such that the
upsurge in respiratory diseases.

So, let us look at one of the responses which the Delhi government has had over the years is
the scheme called the odd-even scheme. So, if we want to analyse this policy, the odd-even
scheme basically says that it restricts the vehicles to be operated on the road, on odd days only
vehicles with an odd number plate will be allowed and in even days, the even number plate,
the logic being that this will encourage carpooling, it will reduce congestion and it will reduce
emissions.

So, let us look at try to analyse what is the impact of this policy. There have been a number of
different studies and you can look at the details of the studies. I will just show you some of the
methods of this analysis to illustrate how we can look at the policy analysis.

783
(Refer Slide Time 10:36)

So, in terms of institutions policy framework, the institutions are the Delhi government, the
police, the central pollution control board, we can analyse the changes in the number of
vehicles, we can look at the particulate matter less than 2.5 micron at different locations, we
can look at what happens in terms of inconvenience to people.

(Refer Slide Time 10:56)

The goal is to improve air quality in Delhi during the winter. Multiple stakeholders, the first
stakeholder are the urban residents, and especially those who are living near the roads, the
commuters because we are also seeing whether or not if we, if the commute becomes more
troublesome, vehicle manufacturers if we specify different kinds of emission norms.

Taxis and public transport, public transport can have a spurt in the public transport. There can
be an impact on offices and commercial and schools, police, the method which was odd and
even method is a command and control kind of it is a mandate, which is based on legislation

784
by the government and so the implementation of this would be done by the police and then we
can see the impact in terms of the pollution control board. This is what we talked about.

(Refer Slide Time: 11:58)

And so, the snapshot, there are different kinds of studies which have been done. One of the
studies done by the set of researchers in epic is to look at the 2 phases, phase 1 was from
January 1 to 15 2016 and April 15 to 30. And this is 15 days, 16 days and the days which were
applicable Monday to Saturday, we can look at these were the days when it was there.

(Refer Slide Time 12:30)

The way it has been done is there are two kinds of comparative analysis. One is that we look
at an area like Delhi, where the program is implemented. And we look at a neighbouring area
where the program has not been implemented. And we look at in those time periods before and

785
after the program that means a period when the program was not implemented, and period after
the program was implemented.

So, we get A1 minus B1 is change during the time where the program is implemented. And as
a baseline, we compare that to the area where the program has not been implemented, and A2
minus B2, and we see whether or not and this we are talking in terms of an emission factor PM
2.5 and see whether or not this difference is more than the difference in the other regions, so it
is a fairly simple logical framework.

(Refer Slide Time 13:36)

And you can see now the main monthly concentrations and then the neighbouring area is
Faridabad. And we can see very clearly that these sort of go together, and here it looks like
there is a decrease as compared to Faridabad.

786
(Refer Slide Time: 14:02)

Similarly, if you look at the hour of day for November to December 2015, these two are
together, Delhi and Faridabad in 2015, here there was no odd-even scheme. In the case of
January 2016, these were the days where there is, this is the hours and you can see that there is
a dip as compared to the Faridabad. So, there seems to be some evidence that there is an impact
in terms of this.

(Refer Slide Time 14:34)

There is a, in both these phases, the reduction in cars, is about 21 % and 17 % in the other case,
and this has resulted also in an increase in speeds.

787
(Refer Slide Time 14:51)

Of course, there is a different kinds of vehicles and sources vehicles account for a certain
percentage of it. There is a study by IIT Kanpur and you can look at the details of this.

(Refer Slide Time 15:03)

This study is from an analysis of the travel delay, and you can see that this is the 15 days when
we had the odd-even scheme, you can see that the travel delays are lower than the 15 days after
that and of course, this is this is whether it is, this sort of indicates that there is a reduction in
the congestion in that sense.

788
(Refer Slide Time 15:39)

There are some economic models which have been used and you can look at more details of
this in this paper.

(Refer Slide Time 15:45)

Now, there is a study by CEEW and you can look at this, this a Delhi based think tank and this
reviewed the different kinds of source apportionment studies done by different studies, IIT

789
Kanpur, TERI, Guttikunda and SAFAR. And you can see that the share of road dust industries,
there is a variation between the different studies and so there is an uncertainty in terms of source
apportionment.

(Refer Slide Time 16:20)

If you look at this in terms of the numbers, in terms of PM 2.5, which is the one that we are
most interested in from a health point of view, because those are very small particles, and that
gets into our respiratory tract, transport accounts for between 17.9 to 39 %. And so that is quite
a wide range. So, whether it is 39 % or 18 %, and it will make a lot of difference in terms of
the final impact.

Industries again, in some studies, it is going to as high as 29 % and this is very small and so
this is the kind of thing road dust 18 to 37 %, construction 2.2 to 8.4 %. And there is an
interesting spike which happens, this spike has been attributed to the stubble burning or
biomass burning in the nearby regions in the fields.

And the interesting thing is that the change in the patterns or the policies related to agriculture
and the water use have resulted in a slight shift in the harvesting and because of that, this stubble
which has been burnt in the fields coincides with the winter and has created some of this
problem. Of course, there is an uncertainty in some of this and there are papers.

790
(Refer Slide Time 17:46)

You can look at this paper, Cusworth et al and you can see in this that the effect, this shows
that during a certain period, the effect of the variability which is there and also the effect which
can be attributed to the increase in the stubbles and the emissions caused due to that. This is
something which is still under research, under progress and there is significant amount of
uncertainties.

So, there is scope for you to make a contribution in this area, many of these things for instance
stubble burning is something which is avoidable if you had the right kind of incentives and
policies for instance, we could classify the biomass waste, but the waste come at a particular
point of time. We need to create a mechanisms for taking that waste taking it compacting it,
classifying it, generating energy with it, but these are all things where there is scope for doing
things.

791
(Refer Slide Time 19:02)

There are other countries and cities which have experimented with all kinds of different
policies. The city, the city state of Luxembourg in Europe is planning to have free public
transport from March 2020. An interesting kind of thing because if you look at it from a point
of view of different stakeholders this will ensure that less cars are being taken out.

And this would reduce the emissions and it would of course increase the burden on the public
transport system and we will need to have investments in this. This could, this would mean
taxpayers would have to pay more taxes to meet that, it would make it accessible, public
transport accessible to all, it may help in, so there is a cost benefit in doing this. So, we have to
wait and see what happens.

But it is a very interesting kind of situation and various stakeholders including the
manufacturers of vehicles and others would get impacted in this.

792
(Refer Slide Time 20:16)

This is from a schematic from a master’s thesis, which talks about what is the impact of free
public transport and you can see that the cost of transport would decline. More public transport
users, it can also increase the bicycle and pedestrian use, it would reduce the car usage, it may
also result in pressure on the public transport system where that needs to improve.

And then it will also over time public transport, the costs would go down with the kind of
volumes, long term effects will be reduction in car ownership and in other things which are
there. So, this is in terms of one example where we will looked at the air quality and the
transport system.

(Refer Slide Time 21:06)

793
Let us look at a second example which is our INDC, India’s commitment in the Paris
Agreement, where the goal of course is to limit global temperature rise to less than 2 degrees
to compel global consensus, limit CO2 emissions to provide a voluntary response from India.
There are a variety of instruments which are being proposed and this is not outlined in our
statements to the INDC.

But subsequently, both in the budget as well as separately through the PMO and through the
ministry of new and renewable energy different incentives have been given. Institutions, the
ministry of environment and forest which is essentially responsible for Indian governments
response at the IPCC, the ministry of new and renewable energy, the IPCC and of course, then
the state nodal agencies and the public sector oil, coal, natural gas firms, the NVVN, which is
a new joint venture set up for the solar energy and these are some of the institutions which will
implement this.

In terms of stakeholders, the government is a stakeholder, the general population is stakeholder,

the fossil fuel industry, energy industry is a stakeholder, renewable energy industry and the
financing institutions, the banks and the other financing institutions would also be stakeholders.
So, this gives us an idea, we know what are the goals, we know what are the different kinds of
instruments and the institutions and the stakeholders.

(Refer Slide Time 22:56)

Let us see, you can read Indian representation towards the UNFCC. And it is the statement
talks about our submission actually starts with us Sanskrit shlok and basically saying that we

794
are committed towards going for a sustainable future even though we are not really the main
contributors of this problem. As we saw earlier, our CO2 per unit population is significantly
lower than the world average.

(Refer Slide Time 23:36)

And having said that, in this there is a future scenario which has been built because we have
targeted for this in 2015. We have taken the data for 2014 and we have made a target for 2013.
We have looked at the per capita, GDP increasing and the per capita income also would
increase and we have looked at a per capita electricity demand of about 2500 kilowatt hour per
person per year.

(Refer Slide Time 24:13)

795
And having said that, we then have said and I have talked to you about these commitments
earlier in an earlier module, we are talking of reducing the carbon intensity of GDP by one
third of its 2005 level in 2030. So, that means that, what are the things that will happen because
of this, we can either reduce the carbon intensity of the energy sector, we can also reduce the
energy intensity of our GDP, we can change the structure of our GDP.

We are also committed to creating 40 % cumulative non-fossil power by installed capacity by

2030. And in this we have said that we would expect that we will be getting finance from the
Green Climate Fund and then create an additional carbon sink by planting trees 2.5 to 3 billion
tons of CO2 equivalent through additional tree cover and forest.

We are on track for doing this 40 % cumulative non-fossil power, please remember it is by
installed capacity and we have to add renewables, we have to add nuclear and we have to add
large hydro. And when we look at that, we have made a commitment now to do 175 GW by
2022. And we have now, the Prime Minister has announced higher target going forward.

The carbon intensity has been declining over time and a lot of this is because we have not really
had significant industrial growth. It is been mainly grown with services, we also improving the
energy efficiency. So, we are looking when you look at the climate tracker, there is a global
agency which tracks the commitment of different countries and their progress towards the
INDC, it looks like this is quite possible.

In the last trapping up lecture when we talked about future energy systems, we discuss what
are some of the challenges in sort of moving in that direction, but this is the.

796
(Refer Slide Time: 26:22)

So, what does the carbon intensity depend on we had already discussed that so we can compare
now with the matrix, how will we compare or analyse this? We can look at carbon intensity
2013 versus 2005, and energy intensity 2013 versus 2005. And when we want to compare this,
we would have to have a model of the economy.

We can use an input-output kind of model or you can even use a sort of in the Niti Aayog you
will find that there is already an India energy scenarios framework is there which is an excel
based option which helps you generate scenarios for the future and you can put 2030 as a target
year, try different kinds of options and different kinds of growth rate and see what happens.

We may also want to analyse these by in terms of the equity impact, what will be the impact
on jobs, what is the impact on investments, these are much more tricky and need significant

797
amount of research to see how we can do that. Share of non-fossil by installed capacity and by
generation, this is fairly straightforward to calculate based on what has happened.

Cost of transition is little more difficult to calculate because we have a certain system which is
completely fossil fuel based and we want to move towards renewable future. What does that
mean? That will have some of these plants will get shut down, we have some stranded assets
because for instance coal power plants which are not being dispatched, and we need to pay for
that capital and then we can look at what kind of carbon sink we have created and then.

So, these are different ways in which we can look at the metrics that we talked off and using
these metrics, we can actually look at the INDC that we have proposed and what is our progress
towards this.

(Refer Slide Time 28:41)

There are many different policies which support and create the INDC. So, there is a national
environment policy set up in 2006. National action plan on climate change and most states have
also announced their action plan on climate change. Some of them are in general, some of them
are specific with some quantification, so you can look at your state action plan for climate
change. Try and analyse and see whether it is consistent with the INDC and how much of it is
going to be achieved.

The Energy Conservation Act which has been which has mandated for the bureau of energy
efficiency, a role and where we are doing labelling standards and labelling, a whole host of
different things including energy conservation award. The National electricity policy, there is
a national policy for farmers, the integrated energy policy which was earlier and Niti Aayog

798
now has an again an energy vision. The Perform achieve and trade and I will talk about this a
little more in detail subsequently.

But basically, this is set of policies by which industries, energy intensive industries have to
benchmark themselves and have to set targets in terms of how they can improve their
performance. We have moved from feed in tariffs now to renewable energy certificates and
renewable purchase obligations. RECs and RPOs means that every distribution company has
an obligation to meet a certain percentage of its requirement through renewable purchase or
procurement.

And they can either actually invest in the renewables or they can buy certificates from
companies which are providing renewable energy. So, these are some of the policies there are
many more. So, we can look at the policies and we can look at in different years as compared
to when we started off in 2015. What has been our progress towards these INDC targets, so
this is my idea was to show you how do you analyse the energy policies and provide the
framework.

We looked at the different kinds frameworks with two examples, air quality in the city and the
national commitment towards reducing climate change.

(Refer Slide Time 31:17)

There are other policies in the INDC for instance, which are relevant the some of the recent
ones. The solar parks, the ultra-mega solar power plant, the smart grid mission, green energy
corridor, national mission for energy efficiency I talked to you about standards and labelling

799
and partial risk guarantee fund for energy efficiency, for smart buildings and energy efficient
buildings, the ECBC and Griha and the Smart Cities mission and many more.

(Refer Slide Time 31:47)

And with this, we conclude this first module on energy policies there are some references here.
In the next module we will take on some more examples of energy policy and we will also look
at energy access, nuclear energy, energy efficiency and some ways in which we can have, what
has been done in terms of energy policy in our country and how they can be analysed.

800
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology Bombay
Lecture 24
Energy Policy examples – Part 1

In the previous module we have seen what is meant by an energy policy, we have also seen a
framework to analyse energy policies. And we looked at the air quality in Delhi and the INDC
India's commitment in Paris and try to analyse how we can analyse these policies and how they
are being implemented. We are continuing with this and we would like to like take a look at
some examples of energy policies.

(Refer Slide Time: 0:52)

Let us look at access and as you know, for every country, especially for developing countries,
the issue of access is one of the important energy goals. And that means we would like to
provide affordable access to clean energy to the entire population. And in terms of this in the
Indian context, we want to have clean cooking fuels.

The predominantly the largest chunk of our population still uses solid fuels, biomass
agricultural residues, typically in chulas with very low efficiencies and with adverse
environmental impacts in terms of local indoor air pollution, which causes an impact in terms
of respiratory diseases.

801
So the idea is, can we switch from these solid fuels to more convenient fuels, like LPG,
electricity, can we convert them to modern biofuels? Can we look at solar cooking and then
the question of electrification and we have had very significant progress in terms of connecting
almost the entire, the entire country is now connected to electricity, but several households do
not have connection because of whole host of issues related to income affordability, so rural
electrification is another issue.

(Refer Slide Time: 02:26)

So, when you look at this, we can see that you know, with increasing prosperity, the process of
progress is where we started with initially just using human power, then going to animal power
and then initially going to renewable and natural power with wind and water. And then we
created basically everything started going into the fossil fuel where you can transfer and you
had the centralized grid.

And you had fuels, coal, oil, natural gas and going towards electricity. So, even when we think
in terms of cooking also we start there is this energy ladder, where we go from solid fuels to
gaseous fuels and electricity. And with income, one actually moves towards using more
convenient and cleaner fuels.

802
(Refer Slide Time: 03:24)

What is the definition of energy access? Energy access is a household having reliable and
affordable access to both clean cooking facilities and to electricity, which is enough to supply
a basic bundle of energy services initially, and the idea is that this basic bundle or the level
should keep increasing and then an increasing level of electricity over time to reach the regional
average.

That means the idea is this is the definition by IEA part of the World Energy Outlook 2017
special report on access, the idea is that everyone should have access to clean cooking and
electricity and to meet their basic needs and over time, they should keep increasing to go
towards the regional average local or regional average.

803
(Refer Slide Time: 4:15)

And if you look at this, over the different income classes, when we look at, you know, the
quintiles, quintiles means divide 100 into 5, 20 percentiles that means lowest 20 %, the next
and then and so on. So, we can do that in terms of rural and urban, you can see basically the
difference in terms of this, where you will find that in the context of electricity, the lowest
quintile has a smaller percentage where they are using electricity as the higher income, this
goes to about 79 % in the urban it is almost like 100 % and so on.

So, the fuel mix is very dependent on the income and the lower income households are using
biomass, traditional biomass and maybe kerosene for the lighting.

804
(Refer Slide Time: 5:24)

And so, there have been a number of different policies and schemes. So, in India at the, for
households which are below the poverty line, an electricity connection is in many states
provided free of cost. And this is being given for particular in many cases there is a Bhagya
Jyoti and the Kutir Jyoti scheme.

Wiring, meter, one connection, there is a limit in terms of the connected load to be provided,
but this is almost given sort of free of costs and even the connection costs. So Bhagya Jyoti
scheme and now there is the Pradhan Mantri Har Ghar Sahaj Yojana, in many of these cases
there is an incentive for the initial upfront connection cost and then there is a subsidized
electricity use. However, still the uptake of these some of these there are issues related to that.

805
(Refer Slide Time: 6:22)

We can look at now, if you look at the cooking, you can see this is from a paper by Rabindranath
and Ram Krishna, where you see what happen, what is the implication of looking at different
kinds of efficiency, low efficiency of the stock and the emissions, the health hazard, respiratory
diseases, it also results in global warming.

And there is a also can have more time taken for collection and there is a stress on the biomass
resource. There is a drudgery and then also can result in poor soil quality, there are there are
many different kinds of impacts.

(Refer Slide Time: 07:06)

There different kinds of chulha designs and it is possible. So, this is a conventional kind of
chulha, if you see using solid fuel, there have been improved through the designs which can be
smokeless, which can improve the efficiency and some of these designs are also available in

806
the public domain where anyone can actually manufacture them, there the initial capital cost is
slightly is higher. But then there is an advantage in terms of the efficiency and the health
impact.

(Refer Slide Time: 07:39)

And of course, as we go up this stream, we are looking at kerosene and LPG with much higher
rate at which we are providing the energy or the power, the efficiencies are high and there is
much better controllability in terms of turning up and turn down. This is a sort of kerosene
pressurized kerosene stove and this is an air fire electric air fire.

So, and many of these, in terms of convenience, in terms of efficiency, in terms of emissions,
they are much better.

807
(Refer Slide Time: 08:16)

Some of these chulhas which have been developed have been the estimate for this looks low
smoke Chulha of the costs have been there. And you can see that we are talking in terms of a
couple of thousand rupees and one can think in terms of how to cost this.

(Refer Slide Time: 08:34)

808
In general the access of electricity is linked very clearly with poverty. And this is from the
global energy assessment. You can see many of the Latin American and African countries with
high poverty levels also have less electricity access.

(Refer Slide Time: 08:50)

We have been relatively low pick up, but now we are going towards nearing at least 100 % in
terms of the village connections and slowly going towards 70-80 % in terms of households.

(Refer Slide Time: 09:06)

The other issue which is there is that in many of these cases you will find that the quality of
electricity in terms of number of hours of shortages and the reliability is another index that we
can see.

809
(Refer Slide Time: 09:26)

There are apart from the centralized grid, there are options where we can have essentially
different kinds of micro grids and we can create a license or a licensee or a franchisee, we can
have a parallel license, we can have an off grid collective and there are different kinds of
building business models for this.

(Refer Slide Time: 09:47)

We have had in under these programs, the rural village electrification program, village energy
security program, the recently DDG, which was earlier the RGGVY and we have essentially

810
provided capital subsidy for many of these villages which are remote. And some of these
actually provide almost 90 % of the total project costs as a subsidy.

The difficulty, of course, is that you have to have a mechanism so that subsequent maintenance,
if you have a PV battery system, the battery payment, and so on can be created. Again, there is
even the national solar mission also there is an off grid component where we can look at this.

(Refer Slide Time: 10:40)

You would be surprised to note that for low usage electricity, some of the remote rural areas
for a mobile charging, they pay a significant amount. It is a small amount of electricity that is
required. But if you come converted into per kilowatt hour, you will find that people actually
end up paying quite a significant amount are willing to pay but it is it is for a small amount of
electricity.

As we go up, go down, increase the number of energy services, the first important one is cell
phone charging, then comes lighting, then comes entertainment in terms of TV and cable TV,
and then comes the other things in terms of comfort, fans and refrigerators and so on and so
you can create this kind of a service and demand graph.

811
(Refer Slide Time: 11:37)

And there are different models and we have had a large number of distributed generating
models, some of them are not for profit, some of them are for profits. And there are different
kinds of prices and mechanisms and if you are interested, you can look at this in more detail. I
am not going to cover this.

(Refer Slide Time: 11:58)

In this and in many of these cases what happens is what happens is that there is local
involvement in terms of operation and maintenance. For instance, in the Sunderbans, there was

812
a the collective of the village energy and the village community and they would actually train
people. There was also load limiters so that in case the load went beyond a certain point, and
if that happened a number of times, they would the household would be cut off, there was a
fixed rate.

In some cases there are fixed rates in some cases they are metered. There also we are thinking
in terms of prepaid metering and so, there are a number of different kinds of things.

(Refer Slide Time: 12:41)

And as you can see in terms of the measures, which are the many of these have been
encouraging demand side management or energy efficient operations equipment, because if we
use energy efficient equipment, then the requirement for the PV or the modules, the rating
decreases and in this becomes overall much more cost effective.

813
(Refer Slide Time: 13:07)

So, just to give you some idea, this is for affordable access, this is a small village in
Maharashtra, there is a solar array charge controller battery and AC load.

814
(Refer Slide Time: 13:21)

And if you look at it, you can see that the most of the load is basically in the evening and with
the result that the capacity factor would be low and this would result in high average prices.

(Refer Slide Time: 13:35)

So, it is quite common when you look at some of these, this is these are three biomass gasifier
and PV, the energy costs are of the order of 30 to 40 Rs/kWh. Of course, we have worked out
that if this is the design efficiently, they could be lower they are often oversized, and then that
is because the demand estimation is accurate.

815
(Refer Slide Time: 14:02)

And then, I talked to you about the Sundarbans model where there is a cooperative for the
renewable energy at different kinds of in the Sagar Island, there are 17 micro grids, there is a
West Bengal Renewable Energy Development Agency, there is a power plant operator their
customers and there is a committee of the beneficiaries and this is how it sort of work.

(Refer Slide Time: 14:25)

You can of course, see it when we look at costs of energy, if the load factors are low, the costs
are going to be high and so on. So whenever we talk about these micro grids or isolated grids
if they are linked with only residential load, load factors are going to be low. The way to do

816
this is to add some industry or add some base load or to add telecom towers so that capacity
factors increase and the average the costs of generation.

(Refer Slide Time: 14:57)

We talked in during the financing I talked to you about the Selco example where they have
providing innovations in financing so that they can look at solar home systems.

(Refer Slide Time: 15:10)

The another company which has been doing this is the DESI power which has been aggregating
different kinds of biomass base powers solutions in Bihar and putting this in terms of the total
amount of CO2 savings and so, getting the credit in terms of the certified emission reduction
and then getting it registered under the clean development mechanism, they have also tied up
with the telecom towers.

817
The problem in many of these cases is that, when the grid has come to these locations, at some
points these they have not been able to compete. So, they have also looked at fixed costs in
terms of irrigation pumps and households.

(Refer Slide Time: 15:58)

And husk power on a similar again biomass base power, but they initially started with their
own prize money and they looked at overhead pole wiring, they directly reached the end user.

(Refer Slide Time: 16:12)

And if you see in terms of the usage of for cooking, you look at rural and urban households
over time and you can see that the mix of different kinds of fuels has changed over a period of
time.

818
(Refer Slide Time: 16:32)

You can look at this from the NSSO data which is collected every few years National Sample
Survey, and where you can see, for the income deciles this is plotted the energy consumption,
the end use energy and the total energy. And the interesting thing that you will find is that the
end user energy in the case of urban the total energy actually initially declines and then
increases.

And this decline is because then with the, in the lower income classes, you are using more
traditional fuels and because of that, though the end use energy is keeping on increasing and
because of the poor efficiencies, you can see this kind of mix, this is from paper in 2012.

819
(Refer Slide Time: 17:30)

One can then make a comparison in terms of calculations. Now, it is possible to have modern
biomass based energy systems which will give you actually biomass gasifier based systems
which give you LPG quality fuel and LPG and control.

820
(Refer Slide Time: 17:46)

So, for instance, if you look at this flame, this is a rice, this is based on the gasifier, but it is
firing rice husk and you can see that this flame is just like LPG flame, so this is another thing
which can be done.

(Refer Slide Time: 18:14)

There are the stove designs and this is done by the research group at ISC Bangalore, this is the
Oorja stove which needs pellets like this. Now, what happens here is that this becomes more
efficient, it improves the, reduces the emissions, better from a health impact, but then the
feedstock earlier biomass was just being collected and there was no price.

821
Now this we have marketize and we are now creating this as a market where they will have to
buy these pellets and we need to have this chain, so there is a cost implication of this.

(Refer Slide Time: 18:48)

This is an innovation from the US, it is a biolite stove. And the interesting thing about this
stove is there is a thermoelectric generator. We using the exhausts of the bio of the stove, and
this is used to generate electricity, can run a small fan which caused the induced draft and it
can also charge can be connected to get an LED light or you can charge your cell phone. So,
this is an interesting kind of innovation of course, this will cost more than the normal stuffs.

(Refer Slide Time: 19:25)

822
There are different kinds of biomass based stuffs made by some of the technical NGOs in Pune.
and Compact Biomass Gasifier you can see.

(Refer Slide Time 19:37)

823
And so in all of these we can think in terms of different kinds of subsidy mechanisms. But
when we talk in terms of cooking, it is needed for us to estimate when we think in terms of the
environmental impact and the health impact. And one parameter which is used for this is the
disability adjusted life years. So one disability adjusted life year is thought of as one lost year
of healthy life.

And the sum of these disability adjusted life years across the population, or the burden of
disease can be thought of as a measurement of the gap between current health status and an
ideal health situation where the entire population lives to an advanced stage free of disease and
disability. This source is from the World Health Organization, you can see that this disability
adjusted life year is the year of lost life and the lost days of work.

So what happens is because of disability, if people are not able to work at their full efficiency,
and they have to take leave, so that is one and then if people die at a year which is before their
expected life tenure. And so these are computed again in terms of based on the emissions, the
health impact, respiratory diseases and the number of deaths and then in that population,
statistically the age distribution were impacted, then for each one, the number of years lost and
then that is multiplied by the population.

So, this is something you can get more details both in the World Health Organization as well
as several papers which exist, but this is one way to quantify and in doing this, we can see how
indoor air pollution compares with.

824
For instance, outdoor, air pollution or with actual diseases and their impacts and you find that
it is in most countries, this is a very significant it comes in amongst the top few in terms of the
health impact and this is something where we can see if we have a scheme where we can reduce
the emissions, then we can adjust this and compare.

(Refer Slide Time: 22:23)

So, there is this whole chain as we said emissions, then the exposure and this depends on a
variety of things that means, what is the time activity profile, what is the ventilation of the stove
and the home and what kind of fuel is there, location of the kitchen, gender, age and cooking
habits, demographic variable, and the cultural practices, ethnicity, income and education, fuel
type and stove type, energy market structures, temperature variable, so, there are a whole host
of different parameters, and many of these can be affected by policies.

825
(Refer Slide Time: 22:46)

So, now let us look at taking some of these that means the earlier things that we have done and
make a simple calculation to see what it means when we think in terms of looking at a switch
of fields. So let us consider a poor rural household. It uses 3 kerosene lanterns with the
following data. The cost of the lamp is Rs.100, life is 5 years, annual O & M cost is given as
Rs.20/year.

The usage is 4 hours per day or 20 millilitres of kerosene per hour, price of kerosene market
price has given us Rs. 35/litre. We are given that the kerosene is 82 % carbon by weight,
specific gravity is 0.8, we want to replace it by solar PV lantern capital cost is Rs.550, life 10
years, Rs. 150, battery 2 years.

(Refer Slide Time 23:46)

826
The question that is asked is considering a household that uses kerosene, calculate the annual
cost and the CO2 emissions for each kerosene lantern and the viability of replacement with
solar, user residential discount rate of 60%. So let us look at first household that uses kerosene,
let us calculate the annual cost.

(Refer Slide Time: 24:17)

Annual cost will be and first let us calculate annual kerosene used and annual kerosene use is
going to be there, 3 this is sorry. Let us see for any each of the let us do this first for each one.
Each of these kerosene lanterns is used for 4 hours. Okay and in each hour it is using 20
millilitres, so 4 into 20 by 1000 into 365 days you should calculate this, you will get this as
29.2 litres of kerosene.

So that means, for the household if you are using 3 lanterns, 3 into 29.2 so 87.6 litres, and if
we look at the cost this will be 87.6 into 35 comes out to be Rs 3066. We have also said that
there is a operation maintenance cost of 20 rupees per lamp annually 16 so this comes to
Rs.3126, fairly high amount. If we look at an annual CO2 emissions, let us calculate annual
CO2 emissions.

This will be now we are using 87.6 litres into density 0.8 that is about that is this turns out to
be 70 kgs, and each kg has 0.82 kg of carbon per kg of kerosene into C plus O2 giving you CO2
so 44 by 12, and this turns out to be 210 kg of CO2, annual CO2 we have calculated.

827
(Refer Slide Time: 27:15)

The next question was so, is it viable annual cost and the CO2 emissions. So annual cost is Rs.
3126 and the CO2 emissions is 210 kgs. So, viability of replacement with solar so when we
look at a replacement with solar, we are looking at a total cost is Rs. 700 right, and Rs. 700 is
saving us annually we are saving around Rs. 3000 so the payback period is less than a month,
less than a year and so from that point it may be viable. However, if we now look at it in terms
of it seems to be viable.

(Refer Slide Time 28:09)

Let us look at it in terms of the annualized life cycle cost. If you look at the annualized life
cycle cost of for 1 lamp, this is going to be 100 into capital recovery factor 0.6 and 5 plus 20
plus 29.2 into 35. And if you look at this, you will find that can calculate this as this turns out

828
to be 0.663 is Rs.1108, what is the annualized lifecycle cost for solar? This will be 550 into
capital recovery factor 0.6, 10 years plus 150 which is the battery and we said battery life is
just 2 years.

So, 0.6 and 2 plus we can add in both the cases that the Rs.20 is going to be there. So, this is
550 into 0.6055 plus 150 into 0.985 and this turns out to be Rs.632. If you add Rs.20 to this
which is the O & M, Rs. 652. So obviously, the ALCC seems to be lower, even if we forget
about this cost, that means instead of 1160, there is 1001 it is like 1000 and 652. So, from this
point of view at full cost of kerosene, this does not look to be viable, this looks to be viable,
solar looks to be viable.

(Refer Slide Time: 30:23)

829
If we compute can suppose there is a subsidy on kerosene and it is Rs.18/litre, then this will be
18 into 29.2. So, now this is Rs.525.6 this now, in when it is subsidized it is lower than the
solar so it will not be viable to shift to solar once you have subsidized kerosene. And so, the
question now is calculate the cost of lighting for each solar lamp. And if the model was to have
a lease model calculate the effective monthly payment.

So, for each solar lamp if we look at it in terms of the calculation that we had done, it was 652
divided by 12 which is 560 and 5248 something like 54 or 55 Rs/month. So, that could be a
way in which we could do this. This is of course with the high discount rate. If we calculated
this with a societal discount rate of 10 % then this is going to be much lower because we are
going to do 550 CRF 0.1, 10 plus 150 CRF 0.1, 2 and with the result that this is just going to
be, you can calculate this you will find that this is Rs. 341.

And this is no point I think this is 0.167 and this is 0.1627, this is 0.576. So, if 341 divided by
12, something like Rs. 25, Rs. 26/month. And the advantage then is that this company which
has the government or a public sector company, which has lower discount rate, now needs to
only recover at the rate of Rs.25 /month.

And we can also look at if you see the subsidy that we had, the subsidy per lamp was now Rs.
17 into 29.2. So, you will see that we can also provide that subsidy, if we want to keep that
subsidy constant we can even reduce the we can reduce the initial capital cost by that amount.
And then we can have the we can reduce the lease payments so that means instead in in a
month, we are only paying lower quantity. The advantage there now is that because of the
higher discount rate, the household is not able to upfront pay that initial amount and is now
able to just pay these monthly payments.

So, now the question then is the last part of the question is that would you recommend complete
removal of the kerosene subsidy. And when we think about this the kerosene subsidy is also to

830
provide for kerosene is often useful cooking. And in some of these cases, for instance, if there
is no, if there is a problem in terms of the battery and the solar, there will be an incentive for
this.

There will be what will be the issues in implementation, there is a transaction cost of actually
providing this, we need to provide support for maintenance and what are the disadvantages of
the solar lantern, we have to ensure that the PV modules are kept in the sun, so that they get
charged and then the usage pattern and the discharge.

So, there are we would need to have a hybrid where we still can maintain a certain amount of
kerosene and this, but this gives you an idea of how we can look at policies and we can look at
economic impacts of putting the subsidies. The kerosene subsidy is in incidentally being phased
out, but in most cases where we can calculate you can actually see that the solar subsidy
replacing the kerosene subsidy by a solar subsidy makes a lot of sense.

831
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology Bombay
Lecture 24
Energy Policy examples – Part 2

(Refer Slide Time: 0:21)

Now I would like to talk to you a little bit about energy efficiency, and if you look at energy
efficiency, many of the devices that we talk of for energy efficiency for instance, an energy
efficient motor as compared to the standard motor, you would find that the initial cost of the
energy efficient device is slightly higher. But most of these energy intensive devices, the
operating costs is far exceeds the cost of the initial purchase.

For instance, if you look at a 20 horsepower motor, and the initial cost of a 20 horsepower
motor is just Rs. 45000 and energy efficient motor may be slightly costly to let us say at 60000.
However, the annual cost of electricity to run that motor continuously is about 6 lakhs. And in
the case of the energy efficient motor, this turns out to be 5 lakhs and so, we get much more
than this benefit in terms of doing this.

The problem often is that when you implement a motor, it is one of the loads of the total. So,
we never track what is happening in terms of the benefit that we are getting. And this is one of
the difficulties which happens when this. So many of these whether you look at incandescent
lamps, boilers, the energy, the operating cost far outweighs the cost and that is why we would
like to look at it from a lifecycle point of view.

832
(Refer Slide Time: 01:47)

So, this is from a German study which shows that how do we remove the obstacles for energy
efficient motors and there are a whole set of different policies which can be done. So, there are
in the case of motors, there are these original equipment manufacturers, for instance, in textiles
and many of these industries, they buy the process equipment where the electric motors are
part of the equipment.

So, in this if we can have voluntary agreement, standards and labelling, then in the case of the
buying by the large industry, there are consultants and then there again labelling, information,
subsidies and duties, campaigns for replacing inefficient equipment.

Again, the information, auditing, environmental taxes, create incentives for new product
development, marketing by motor manufacturers so that you can have the energy efficient
motor being the major stream where people rework their entire manufacturing and then the cost
differential will also come down. So, there are a whole host of things and these kinds of analysis
can be done for almost all the energy efficiency options.

833
(Refer Slide Time 3:03)

Now let us look at the last another example, before we do that, let me look at the another energy
efficiency example. I talked to you about the perform, achieve and trade and this was a scheme
which was launched by the Bureau of energy efficiency and the idea was the large energy
intensive industries were targeted as designated consumers.

There were discussions with each of these stakeholders and for all of them, the total amount of
energy which is being used was calculated, the specific energy consumption that means the
energy consumed per unit of product was calculated, and there were set targets in terms of how
much they should reduce the specific energy consumption.

Now in this, the problem which was there is the whole industry has a set of different kinds or
there are small players, there are large players, there are efficient players, there are inefficient

834
players, there are older companies and plants and there are the new and efficient plants. And
so, the idea was that the target was distributed amongst the whole segment in a certain way and
this was done through a set of so for each of these, there was a consultation document and a
process.

(Refer Slide Time: 04:25)

So, in the case of cement, we are looking at each of these the output was put in terms of tons
of cement, fertilizer, it was developed in terms of tons of urea. So, the energy use per ton of
urea, energy use per ton of cement, energy use per ton of crude steel, sponge iron, aluminium,
molten aluminium, pulp paper, fabric, yarn, caustics soda, electricity.

(Refer Slide Time: 04:58)

835
You can look at the document for further details. So, for instance, if there are a number of
clients and the last 3 years of data was collected with their average production and their energy
consumption and then amongst these plants, the total consumption was taken. And the best
plant was taken as the relative SEC; Specific Energy Consumption, which is the lowest was
taken as 1. And correspondingly, the others were divided in terms of the ratio of the specific
energy consumption.

So, the plant which had the highest and if this had, let us say, 40 %, higher specific energy
consumption, whatever target was set overall, this would have a higher target of 1.4x, while
the plant which had 1 would have only x. We add this up and then the total target was put in
terms of a percentage and then attributed divided against amongst the each of these plans, so
that there was a differential target with the ones which were more inefficient having to set a
higher target compared to those which are already more efficient.

(Refer Slide Time: 06:22)

And in this, the idea is that there would be designated consumers, there would be a nodal
agency, which would audit and specify what is the consumption and monitor this. And then
there would be an exchange and the registry and the market regulator would be the bureau of
energy efficiency.

836
(Refer Slide Time: 06:37)

So, the idea was that everyone would have over 3 years cycle a target. If you achieve your
target, that is fine if you overachieve, you get a certificate which you can trade and sell. If you
under achieve, you either buy the certificate or you pay a penalty and this is how this was sort
of propose.

(Refer Slide Time: 07:00)

The steps were that steering committees were created and structure this was approved, it was
approved by the cabinet and sectoral committees were appointed, baseline data was collected,
and then rules and notified and designated consumers.

837
(Refer Slide Time: 07:17)

So, for instance, if you look at an iron and steel plant, you can look at the different kinds of
processes, the total energy input, electricity, solid fields, all of them put into an equivalent term
and then divided by the production output to get the specific energy.

(Refer Slide Time: 7:30)

So, the idea was that it was not feasible to do define a single norm. And each unit would have
would be targeted based on its past performance and its specific energy consumption within
the band of all the units in that sector. And so then, if you see this, the ones which are gold will
only have to save 1.5 % on a three year basis, the ones which were inefficient will have to go
as high as 7.5 % and so, this is the way in which this happens.

838
(Refer Slide Time: 08:09)

Just to give you an idea the specific energy spread for instance, in the pulp and paper sector,
you can see there is a wide range of specific energy consumption of these in 17 units. And you
can see then the targets have been set accordingly.

(Refer Slide Time: 8:30)

These have been clustered based on the type of feedstock or the type of product and then targets
have been set.

839
(Refer Slide Time: 08:41)

So, as I told you earlier, we have this possibility of if we meet the target is fine. This is the
baseline, this is the target. If we are below the target means that means we overachieved, we
get certificates for this amount. If we under achieve we can either purchase the certificates or
pay the penalty and the penalty was twice the amount of cost that would have been incurred if
you had done that saving.

(Refer Slide Time: 09:15)

And then this the many issues verification by energy auditors, specific energy consumption
and the normalization factors, so this has been implemented in a certain way. The next phase
is happening where this is being broadened and deepened and the question the market is also

840
market has not yet developed, but the first stage of doing this has happened and this has
increased at least the awareness in terms of the energy consumption in the industrial sector.

(Refer Slide Time: 09:46)

Another set of we talked about the renewable energy certificates very similar to the PAT. Here
what has happened is earlier, we used to have this preferential tariffs where we got for
renewable energy, we would give preference in terms of a higher feed in tariff. Now, instead
of this, now the idea is that the electricity is sold at the distribution company as the price at
which it would normally be bought and you get a certificate saying that we have generated x
megawatt hours of renewable energy, renewable electricity.

And that renewable electricity can be sold to obligated entities which will meet the renewable
purchase obligations. And this has sort of there was the idea was that this these certificates will
be traded, but unfortunately, the supply and demand matching of this was not there so it was
actually just hovering around the floor and there was not much movement on this. But this is
as things progress, the renewable energy certificate mechanism may work.

841
(Refer Slide Time: 10:56)

So, the idea in this is that these RECs will be going to the power exchange and the second load
is to SLDCs, the renewable energy generators and obligated entities can work on it.

(Refer Slide Time: 11:09)

We talked to you when we discuss financing, we looked at this mechanism where we were
talking in terms of leasing and I talked to you about this example of Ahmedabad Electricity
Company where you had the manufacturer actually leasing the capacitors and getting paid from
the electricity bill.

842
(Refer Slide Time: 11:34)

And similar kind of concept was adopted in the scheme for the compact fluorescent lamp,
Bachat Lamp Yojana and the idea in this was that lamps would the prices of lamps will be
brought down, and it was of course based on the fact that the CRs would be sold at a price.

(Refer Slide Time: 11:55)

The earliest concept of the energy service called company actually dates back to James Watt
and his steam engine at that time. So, this was the idea is that we have this concept, where an
energy service company comes in and says that you continue to you are now paying a certain
amount for your energy, we will come in and we will you continue to pay you, pay a little less.

843
So, you save let us say 10 %, we will implement energy efficiency as a service and we will
charge you for that and so percentage of the savings will come to us, you benefit because you
are getting a lower bill, we benefit because we are getting a profit out of it. So, this kind of
concept has been tried and this was earliest was in James Watts, where he says we will leave a
steam engine free of charge to you.

We will install these and take over for 5 years the customer service. So, the whole operating
risk is with this is especially true for a new industries and it is steam engine, we guarantee you
that the coal for the machine costs less than you spend at fodder on the horses which do the
same work. So earlier it used to be horse driven mechanical work and everything we require is
that you give us a third of the money that you save.

So, one third and two third, one third coming to James Watts Company and two thirds going
to the company. So, this is the concept of the energy service company. Somewhat successful
in the Indian context, not that successful because many of the industry the energy service
company has to get the financing and do a lot of these risks.

(Refer Slide Time: 13:52)

Now, let us talk about the last example and that is about nuclear. We will talk about nuclear,
as you may know, everyone usually has a view on nuclear, some many people are positive in
terms of Nuclear, some people feel that there are problems with nuclear. In the case of nuclear,
from a carbon point of view, it is a low carbon option and it does not have any emissions in
terms of CO2 or local emissions.

844
However, the problem is with radiation and these are usually large plants and there is a
containment areas and the problems are with public acceptance, problem in the case of
accidents. And in the case of accidents, there is a very low probability of an accident, but if the
accident occurs, there is a very high probability of damage. So, the question is from a societal
viewpoint, how do you analyse that and how do you compare this.

There are safety risks both in terms of the fuel cycle and the power plant. There are also
problems in terms of nuclear waste disposal of high level waste and problems in terms of
proliferation, weapons and missiles materials, the advantages in terms of climate change, and
there are some issues related to cost, costs are quite high in the case of nuclear.

So, let us just look at some of the things and there are some estimates of the costs of damages
to persons goods and environment.

(Refer Slide Time: 15:25)

And these are in the two accidents, the Fukushima and the Chernobyl accident, these were the
kind of damages 187 billion euros and 450 billion for Chernobyl. Now, one of the issues which
has been there in terms of policy has been the liability laws, we had this agreement, which was
the called the 123 agreements.

845
So that we can actually be part of the nuclear suppliers group and so that foreign companies
can supply. And the question was, should we be limiting the liability, so these are the kind of
operator’s liabilities and the limiting.

(Refer Slide Time: 16:10)

And in the case of in the case of India, we signed an agreement where the operator liability
limit is to 1500 crores. Operator shall have a right to recourse the nuclear incident, so the
supplier liability is limited and only the operator will have a right to recourse whether nuclear
incident has resulted is a consequence of an act of the supplier or his employee, which includes
supply of equipment or materials with patent or latent defects or substandard services. So, only
if this is proved then only there will be a liability and this liability was limited.

(Refer Slide Time: 16:44)

846
And so, the idea was in the Indo-US deal was that there is a nuclear liability fund with an
insurance cover. And the idea was this insurance premium will come from the electricity supply
price, which means of course that it will cost it will result in an increase in the electricity use
increase in the electricity costs.

(Refer Slide Time 17:03)

We have had in recent times, which have been there Kudankulam, Tamilnadu, you can see
2000 megawatts at about 17,000 crores. Jaitapur in Ratnagiri district, French about 9.3 billion
US dollars, fairly high in terms of the cost.

(Refer Slide Time: 17:26)

847
Now what has been happening is over a period of time because of these perceptions and this
the Japan for instance had a significant amount of nuclear generation and based on the problem
and the Fukushima accident there has been a setback in terms of nuclear generation in Japan.

In most of the countries the regulation has mandated more controls, and also many of the power
plant nuclear generators are not functioning, are not increasing the number of equipment.

(Refer Slide Time: 18:22)

So, the costs unlike in the case of solar and wind, where you see a learning curve and the costs
have been declining, you can actually see in many of these cases, the US average and the French

848
average that the capital cost has been increasing and this is because of more regulations, more
stringent mechanisms and control mechanisms.

And you can see that this is the range minimum to maximum and this is the kind of thing. Of
course, people are talking in terms of more inherently safe nuclear reactors. And there are
people are also talking in terms of breakthroughs in nuclear, both in terms of smaller reactors
and there is also research going on nuclear fusion. In our context we have been looking at now
thorium as a feed stock.

But the whole issue in the case of nuclear is a question of addressing the perception and the
reality of risks and putting seeing whether this is societally acceptable, or whether there are
options. But this could be one of the cases where we can look at nuclear to meet some of the
base loads. With this, we conclude this section on energy policy. We have looked at different
examples.

We have talked about the framework for policies, we have looked at different kinds of policy
instruments and different metrics. We have looked at air pollution, we have looked at our Paris
commitments, we have looked at access cooking, energy efficiency, PAT and the nuclear
agreements. So, you can look at many other different policies which are being launched by the
government and also at the international level.

And you can try and put all the components that we have learned in this course to analyse these
policies, and then also you can propose what would be the appropriate policies for different
contexts.

849
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology Bombay
Lecture 25
Revision Paper – Part 1

In this module we will look at the solutions of the revision paper, the second revision paper, I
hope you been able to solve these, these are actually the questions are all related to whatever
we have done in the course and so that we just go over it quickly.

(Refer Slide Time: 0:38)

The first question is comment on whether the following good services bads are rival non-rival
excludable, non-excludable, public, private explain your answer. And so, we will start with the
first one biogas plant.

850
(Refer Slide Time: 00:57)

So, when you look at a biogas plant, a biogas plant is manufactured by a company it is supplied.
It is sold at a price and if someone uses the plant, it will not be available to someone else. So
basically, this is very clearly this is going to be rival as well as excludable, it is sold only once
price has been paid. And so, this is very clearly this is a private good, now just look at the next
one, the eastern freeway.

The Eastern freeway is a road in the city of Mumbai connecting the suburbs to the main hub,
then going all the way up to CST and this is a this is a freeway there is no toll being charged.
So, in a sense if now in this case in the case of road if there are if there are many cars coming
on it there would be congestion. So, if we say that there is no congestion, then this can be this
will be non-rival.

Someone using the freeway does not affect the ability of someone else to use the freeway. If
you think of congestion, then it could be rival and since it is being made free, we are not. It is
non-excludable and this can be treated as a public good. We could change the rules and if you
have told then it is excludable, if we are looking at a congestion then it could also be rival, but
in this case, we can consider it as a public good.

C) is urban air pollution, this is a big problem in most cities in the in India now. And if we look
at this in a sense someone is breathing the polluted air does not affect someone else's ability to
breathe that polluted air. So, essentially this is non-rival and generally this is also going to be

851
non-excludable. Of course, now people are putting air purifiers and looking at ways in which
one can actually remove this so that could change, so this is what public bad.

And that is why, since it is a public bad, the normal rules of market are not very good at
controlling this and then we need to have regulation, we need to have different kinds of
methods. Now let us look at the last one, here this is cable television. In cable television, this
is actually going to be non-rival. And in general, again, depending on the bandwidth there no
congestion, you are watching cable television does not affect someone else's ability to watch it
and you have these set top boxes.

So, only if you pay the charge you are going to be able to get the channel, so it is excludable
and this is private good though it is non-rival. So, with this we look at it, so you can just
summarize whatever we have done in the course related to private goods and public goods and
these examples you illustrate this. So, let us move forward with the next part of the question
1e).

(Refer Slide Time 5:48)

And this question says IITs charge 2 lakhs per year as annual fees to students for undergraduate
education while the full cost of IIT education is about 6 lakhs per year. It may be a little more
than that but for the point of view of this question we just put it as 6 lakhs per year. There is a
proposal to recover the full costs of IIT education from the undergraduate students.

Consider a society with a 1 % families containing IIT students with the proposal pass the Pareto
condition. So, the currently the students are paying 2 lakhs and the increase in fees would be 6
lakhs. So, if we look at a Pareto condition, the percentage of families, the families who are with

852
students, who are currently doing the education, they would not be there, they would not bear
condition their utility would decrease because they would have to pay an additional amount.

(Refer Slide Time: 06:59)

So, it will clearly not pass the Pareto condition. Others would not be affected but if we increase
this, the existing students would their utility would decrease and hence that would not pass the
Pareto conditions. Then the second thing is would it be based on the prior to compensation
principles? Now, the compensation principle would not be, would not apply in this case,
because possibly with this additional money which is coming in maybe the rest of the society
will have to pay less.

But then there is no way in which they can compensate or provide the 1 % of students with the
difference in this amount. So, it will not pass a compensation principle either, not pass the
compensation test. Now suppose the next part of the question is, if the society has to pay an
equal tax to bear the cost or recover the full costs from the students.

So, these are the two options, so clearly 99 % of the population would not want to even though
the amount would be less, they would not want then increase in the taxes for education. The 1
% would of course say that an equal tax can bear the cost. So, from a voting point of view, the
solution will be get an option where an equal tax to bear the cost will lose and the full cost
would be borne from the students because it is only 1 %.

Now the last part of the question is, provide an economic argument justifying continuing the
subsidized fee. So, if we look at higher education, typically as a public good and if we look at
the products of that education resulting in an enhanced income for society, and every graduate

853
from the IITs based on the income that they are going to earn over the, over their lifetime and
their career and the taxes that they pay to the government.

So, from an economic viewpoint, the enhanced ability to earn will compensate for the
subsidized fee. The second thing is that in general, we can, they will all be also thinking in
terms of creating new knowledge and providing an opportunity for all, so that means every
individual has this opportunity and depending on their abilities, they can get through this and
then they can upgrade their abilities and then they can contribute to society.

And in many cases, the graduates would actually also create employment and create. This, of
course, is a debatable issue, but in many cases, you will see that a lot of literature talks about
higher education actually being a public good, and this is something which benefits society in
the long run. So, the other option, of course, is to provide loans but depending on the average
income and taking a large amount of loan for education becomes a barrier for several families
and this has an equity impact, let us move ahead to the second question.

(Refer Slide Time: 11:20)

The second question is a standard supply demand curve which we had also solved it in the
when we had done that module. If you look at this, this is a supply curve for coal in a country
is given as P is equal to 2500 plus 5Q, demand curve is given as 8500 minus 10Q where P is
the price in rupees per tonne. Q is the quantity in appropriate units in million tons annually.
Plot the supply and demand curves, determine the equilibrium price and quantity, what is the
consumer surplus and producer surplus, show these on the plot.

854
What is an externality in the case of coal production, list some of the externalities if the
government decides to impose a carbon tax on all the coal sold, that means 500 rupees per
tonne of coal, show the new equilibrium point? Is the tax efficient, does it result in a change in
the total surplus? What could be the justification for the carbon tax?

(Refer Slide Time: 12:28)

So, let us start with the first thing is that let us draw the quantity on the x axis and price on the
y axis. And if we look at this, and the sub demand curve will be given as let us take this is the
D, this is 8500 minus 10Q and so this is 8500 and the supply curve is, so let us say somewhere
here 2500 plus 5Q. This is the point of intersection., this is the equilibrium quantity, equilibrium
price.

855
And these points, this is the consumer surplus because this is the price paid is P 0 but at 0
quantity the demand we are willing to pay so much, so this is the consumer surplus and this
one is the producer surplus., this is consumer surplus, producer surplus, this is the total surplus,
so this is what we have done.

We can calculate this let us just calculate from the equation. Let us put down 2500 plus 5Q is
equal to 8500 minus 10Q. So, we get 15Q is equal to 6000 by 15, 400 units, let us say million
tons. What is the price, price is going to be 2500 plus 5 into 400 and this comes to 4500 rupees
per ton?

(Refer Slide Time: 15:35)

So, we can go back to this and write down, this is 4500, this one is 400. Yeah, this is 850. Okay,
so now we have done this, show these on the plot, what is an externality? An externality is
basically something which come influences the utility of a consumer or the production function
of a producer without its own permission. So, in the case of coal production, what are the
externalities that we have?

Well, we have the in the mining, there would be a lot of dust and there would be a lot of land
modification. And in the case of there would be also pollution in terms of the both air quality
as well as water. And so, these are the kind of things and then the use of coal, when we look at
it will have carbon dioxide and we have new emissions.

856
So, these are some of the externalities and if the government decides to impose a carbon tax on
all the coal sold, incidentally there is already a carbon cess today and it is probably around 400
rupees per ton. So, we have said here, suppose there is a carbon tax of 500 rupees per ton, how
would the equilibrium change and is the tax efficient.

So, what this would mean is that if you look at the supply curve, for every time we are adding
another 500 So, this will now start from 3000 and we would have it as something which would
be, should be parallel to this So, now this will be the new point new point is Q dash and P dash.
We can calculate this let us calculated by looking at how much will this be.

(Refer Slide Time: 18:36)

We can, 3000 plus 5Q is 8500 minus 10Q, so 15Q is 5500, Q is 5500 by 15, 367 million tons.
What has happened is, we have now the equilibrium point has shifted and we are now reusing
less amount of coal and the price now is 3000 plus 5 into 2100 by 3, which comes out to be
4833 rupees per ton. So, now we have shifted from the earlier case where we had the price of
the initial equilibrium point was 4000 sorry 400 million tons and 4500, and this has shifted to
367 million tons and 4833.

857
(Refer Slide Time: 20:12)

So, if we go back to the figure that we had, this is 367, this is 4833. Now, if you look at the
total surplus, you will see that the total surplus has decreased. So, the tax of course, is not
efficient from that point because the total surplus has decreased from an economic viewpoint.

However, the justification is that if we look at the cost of carbon and the social cost of carbon
and incorporate that, then you will find that overall there is a benefit because we are reducing
the CO2 and then the benefit to society offsets the loss which is there for the consumers and the
producers.

And so, the justification for the carbon tax is that we would like to see that we use, we reduce
the total CO2 emissions, and then we are trying to give a disincentive for using coal which has
a high carbon content. So, this is, this was the calculation for the second problem. And now let
us move on to the next problem.

858
(Refer Slide Time: 21:45)

So, the here we are looking at, consider a decision being taken in your hostel so that we can
invest in a flower garden between two wings. Now, the way this works says that the hostel has
a large number of 300 residents, out of which 100 residents are willing to pay a little more,
they have a marginal willingness to pay P is equal 200 minus 2Q because they can have a direct
view of the garden.

While the other residents can if they are passing by will see it but they do not have it from their
room. So, the 200 residents have a marginal willingness to pay which is less, 60 minus 3Q,
where Q is the number of flowering plants and P is the willingness to pay in rupees, marginal
costs of supply of a flowering plant is constant at ₹150, so at ₹150 you can buy one plant and
then put it in the garden.

So, the question is how many plants should be put in the garden, so we want to sketch the
aggregate demand and supply curves and determine the optimal number of flowering plants.
And then we the question further asked is this a Lindahl equilibrium, is this feasible to
implement, what are the difficulties in implementing the Lindahl equilibrium?

So, now, this is a public good and the supply though is something where there is a price for the
supply, but the good of having a garden is something which is non-excludable and it is a private
good, but the question is how much of that public good should we be providing.

859
(Refer Slide Time: 23:35)

And when we look at this, if we try to sketch this, if we look at the marginal willingness to pay
and P and the quantity Q, you will see that individual, the individuals who are, have a direct
view of the garden have a marginal willingness to pay, P is 100 minus 2Q. So, this will go on
to when it becomes 0 beyond so that will be 50, so we can just join this. This is the individual
demand curve and there are 100 such individuals.

For the other set those who are not having a direct view of the, it will start from 60, P is equal
to 60 minus 3Q, so, it will go on till 20. And here N2 is equal to 60. The demand, the supply
the curve will be shown clearly as a straight line at 150.

Now, here what happens is that we aggregate based on the number of for the plants which are
there, at any value of Q, we can find out how much people are willing to pay from these two
curves. So, when it is between 0 and 20, you will have sorry the N2 is equal to 200. So, these
200 people will be willing to pay from here and 100 people So, we can take any point here and
just take the values which will be here and multiply so we will get.

860
(Refer Slide Time: 26:01)

If it is it, if 0 let us just write this as 0 less than Q less than equal to 20, what will happen is the
total willingness to pay aggregate demand curve P will be 100 into 100 minus 2 Q plus 200
into 60 minus 3 Q. So, this is 1000 10000 minus 200 Q plus 12,000 minus 600 Q equal to
22000 minus 800 Q. So, if we look at this, this is the total amount that we are willing to pay,
this is going on from, so it will start from 22000 and then come down when Q is equal to 20.
This will be P will be 22000 minus 16000, so this is going to be 6000.

(Refer Slide Time: 27:59)

So, wha.t will happen here is that when we do this curve, the aggregate curve P, it starts from
22,000 and then we go to when we take 20 and let us take 50. In the case of this, 22 then 6 let
us say 6000, this is the aggregate demand curve.

861
(Refer Slide Time: 28:40)

From here onwards from 20 to the next point it is only going to be equal to P is equal to 100
into 100 minus 2Q because all those the remaining the this set of individuals are not willing to
pay anything beyond 20, it is only going to be this. So, when we look at this, this is going to
be equal to 10000 minus 200. Now, if the supply price here is 150, so if we put this as 150 then
this is going to be equal to 9850 is equal to 200Q, Q is 9850 by 200 So, we round it off to the
smallest whole number, it comes to about 49.

(Refer Slide Time: 30:11)

862
So, this we have a line here, which is the demand curve which is 150. And this is actually
intersect, it will intersect almost at this point. So, this is if you draw it proportionately, you will
find that this is the value which we stay. So, this is now the question which has been asked is,
is this a Lindahl equilibrium?

Yes, it is a Lindahl equilibrium because we are asking individuals, what is their willingness to
pay and then we are aggregating that is this feasible to implement, it is difficult to implement,
one is because there is it is difficult to get the demand curves of the individuals, stated demand
curves accurately. There is an incentive to understand the willingness to pay because you enjoy
the quality, but you will pay based on your based on the marginal willingness to pay, so others
may be getting a better share.

So, basically, the issue is the difficulties in implementing the Lindahl equilibrium is the ability
to assess the individual demand curves and point that there is an incentive for individuals to
understate their willingness to pay so, that actually end up not paying this. But it theoretically
Lindahl equilibrium is an interesting concept. And there is this whole issue in terms of when
we try to price a public good or a public bad, these are the kind of problems. So, this is what
we have solved in this question.

863
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology Bombay
Lecture 25
Revision Paper – Part 2

(Refer Slide Time 0:21)

Now, let us look at the third question, this question is the inverse demand curve which we have
solved earlier and you can see in this case, if we look at this question the inverse demand curve
for a fossil fuel is given as Pt is 5 minus 0.6 qt, assume that the costs of extraction are 0, initial
reserves R0 is 50 and d is 10 %. What is the price elasticity of the demand for this function
when qt is equal to 4?

(Refer Slide Time: 01:14)

864
So, this is straightforward, q t is equal to 4 we can find out what is Pt, Pt is 5 minus 0.6 into 4
is 2.6 and dp by dq is minus 0.6, so the elasticity is dq by q by dp by p, p by q. and just substitute
the values, this is going to be 2.6, q is 4 and this is minus 0.6. So, it is minus 2.6 by 2.4 minus
1.083%. Negative is obvious because if the price increases, the quantity will decrease, of
course, if you will get the absolute value it will be 1.08.

So, this is the first part of the question, the price elasticity of the demand a), then determine the
time part of extraction for a mining industry under pure competition.

(Refer Slide Time: 02:31)

So, we can we have derived this in the module. So, at Pt is equal to a, qt is equal to 0. So, Pt is
equal to 5 is P0 1 plus d raise 2 t 1.1 raise to T, where T is the time when the reserve gets
exhausted. So that means P0 will be 5 by 1.1 raise to T, Pt is 5 into 1.1 t minus T that is Pt. So,
qt will be a minus b pt. So, qt will be 5 minus 0.6, Pt is 5 minus 0.6 qt.

So, 5 into 1.1 raise to T minus t is 5 minus 0.6 qt. So, qt is 5 by 0.6 minus 5 by 0.6, 1.1 raise to
t minus T. Now only thing we need to determine is the value of capital T and that is there in
the next question when does the resource get exhausted once we do that we can actually solve
for this.

865
(Refer Slide Time: 04:33)

We had derived based on the geometric progression that we had we had derived this expression
T is equal to b R 0 by a by 1 plus d 1 minus 1 plus d raise to T. So, what we will get is T is
equal to 0.6 into 50 by 5 plus 1 by 0.1 into 1 minus 1.1 raise to T, 6 plus 10 1 minus 1.1 raise
to T. So, you can do this iteratively, start with a value of t then calculate it, get the next value
until it gets converge and you will get T approximately equal to 13.1 year.

So, when you substitute this what we will get is qt, qt is 8.33 into 1 minus 1.1 t minus 30 and
if you look at that, I have just plotted it for you, you can see that it starts, extraction part starts
from here and it closes down at about the 13th year and the total area total sum of all of this is
50 million tons R0.

866
(Refer Slide Time: 06:23)

The next question is, would the time part of extraction of a monopolistic mining industry be
different? The answer is obviously yes and we have seen the reason for this. The here the since
it is a monopolistic mining industry, if it controls the quantity, the price will get changed. So,
if it releases less amount, it will have a higher price. So that means that it would try to maximize
its revenue, so that we have the total marginal revenue in different intervals increasing by the
discount rate.

(Refer Slide Time: 7:06)

And as a result of it qualitatively what would happen is that if you look at this, this is the
competition qt versus time competitive market and if you had a monopoly, this is you would it

867
will go for a larger amount of time. So, essentially what happens is that because it has a
incentive to this is a monopolistic case, monopoly. So, qualitatively the time taken would be
more, the time actually comes out to be 2 b R 0 by a as compared to the earlier case.

Well, here we are not asking for this to be, we have not asked for this to be calculated you
could calculate it and see that you would get to instead of 13 years you would get something
like 20 years, it would last and so, that the idea is that, because it has an incentive, it can get a
higher price initially by releasing less into the market, the overall revenue that it gets is more
and so the monopoly actually tries to increase its total returns.

And in the process, of course, the utility of the consumers is affected. What is the effect of a
higher discount rate on the path of extraction? Well, if you have higher discount rate, if you
look at it what would happen is that the price would increase at the discount rate and we would
try to if you the discount rates are higher we will try to extract more initially as compared to in
the future, and so that that is what would happen.

(Refer Slide Time: 09:27)

You would have and if we had a higher discount rate this would last less. So, this is d 1, d 2 so
with this week, this is very similar. This is exactly what we had covered in the portion where
we were looking at non-renewable resource economics.

868
(Refer Slide Time: 10:09)

Let us move ahead to the next question, and this question is this is question number. The
question number in is this is 3 f) A holiday resort is located in a remote area and it is a popular
tourist destination, industry sets up a coal based power plant adjacent to it. This holiday resort
files a case in court to acquire property rights for having clean air specified, air quality to
restrain the power plant from polluting the air and affecting its business.

If there are no transaction costs and there is complete information from an economic viewpoint,
comment on the possible impact of the court judgment viz whether the plant power plant wins
the case gets the right to continue polluting the air or the resort wins the case acquires property
rights, so clean atmosphere, similar to the point when the whole plan power plant did not exist.
Assume that the power plant meets the pollution norms clearly explain your answer.

So, in this case, this is the classic course theorem. There are two options, one is the power plant
obtains the right that it meeting the polluting, it is meeting the norms of environmental norms
and it can continue to pollute. Even so, in such a case, what would happen according to this is
that if the tourist destination, the holiday resort has a loss in terms of the foregone revenue.

And if there is a certain cost in terms of cleaning up the pollution of the power plant, and the
cost of the total lost revenue is more than the cost of the holiday resort could actually pay the
power plant to make the controls pollution controls and have a cleaner atmosphere so that that
would be the kind of thing. But in case the power plant wins the case, in case the holiday resort
wins the case and the power plant has a loss because it has to shut down then the power plant
can compensate the holiday resort for the loss and continue to generate its electricity.

869
So, it will depend on what is the loss, whichever economically whichever is more based on that
the calculation of who is winning the case will not affect the economic judgment and will not
affect the viability. The final solution will be from an economic viewpoint, if there are no
transaction costs is independent of the judgment which is happening, because if we look at the
same industry owning the holiday resort and the power plant an optimal solution will be that,
which will give you the maximum benefit.

Of course, from an equity point of view, there may be different issues but this is the classic
case of the course theorem, if there are no transaction costs, the property rights, whoever owns
the property rights, the economic decision would be the same, whether the property rights are
owned by the holiday resort, or by the power plant, so this is a revision of the Coase theorem.

(Refer Slide Time: 13:54)

Let us look at the 4th question, 4th question is, a developer has bid for a wind farm of 250
megawatts, a tariff of rupees 2.8 kilowatt hour for a period of 25 years, capital cost is 1400
crores. If the O and M cost is 0.2 rupees per kilowatt hour and the annual capacity factor is 30
%, determine the internal rate of return on the investment, show a few steps and obtain an
approximate answer.

Developer is being offered a loan of 700 crores with an interest rate of 10 % and a tenure term
of 10 years, calculate the annual loan repayment amount, determine the rate of return on the
equity, show the cash flows, form the equation for the IRR and show how you would calculate,
should the developer up for the loan? So, if you look at this, this is very similar to the question

870
that we had solved in the class. So, if we look at this the 250 megawatts annual capacity factor
is 30 %.

(Refer Slide Time: 14:58)

So, 250 megawatts into 0.3 into 8760 is the total amount of generation in megawatt hours and
if the O and M cost is, so this is 250 into 0.3 into 8760, if we just calculate this, it is going to
be this is 657000 megawatt hour. And if the O and M cost is 0.2 rupees per kilowatt hour, then
the O and M cost is going to be 0.12 into 10 raise to 3 into 657000 rupees. Then when we look
at the,

871
So, the developer is being showed few steps, we have asked determine the internal rate of
return. So if the entire payment is being made by the developer, then it is going to be minus
1400 crores is the, this is the payment, C0 is 1400 and annually we are getting 2.8 rupees into
657000 into 10 raise to 3, this is rupees if you are dividing it by if you want to get it in crores
this will be divided by 10 raise to 7.

So, this is the amount that we will get and if we look at this, 10 raise to 3, 2.8 into 657, 2.8 into
657 divided 10, get this as 183.96 crores. We have also, actually we will be paying an O and
M cost of 0.2. So, instead of this we can take this as multiplied by 2.8, so 2.6 is what we are
going to get.

So, we are going to get 170.8 crores each year so, this is 170.8 and the IRR that we will get
will be will set the present value 1400 plus 170 .8, 1 plus R raise to k and this is for 25 years,
set this is equal to 0 and then we can solve this for the IRR.

So, in a similar way, we can get the value of the internal rate of return for the loan of 700 crores
without interest rate of 10 % and tenure term of 10 years, we will just get the annual loan
repayment is going to be I 1 plus I least 2 N L, 1 plus I raise to N L minus 1, interest rate is 0.1,
1.1 raise to 10. So, you can calculate this and then this will be multiplied by 700 to get the
annual loan repayment.

(Refer Slide Time: 20:11)

So, in the case of in this case the value is going to become instead of 1400, we will get now we
are only paying 700 crores and here we are going to get back 170.8 and instead and we are
paying out the annual loan repayment. So, this is very similar to the problem that we have

872
solved in the module when we did this. I will upload for you the excel sheet which gives you
the complete solution and you can cross check your numbers with this.

(Refer Slide Time: 21:01)

Let us go to the last question, and this is a simple input-output calculation that we had done.
So, the transactions in a state economy using electricity and industry so there are two sectors,
there is an electricity sector and there is industry sector. So, if we look at it, the electricity to
electricity is 800 million rupees, electricity to industry is 900 million rupees and the final
demand is 1500 million rupees, industry to electricity is 1000 and industry to industry 1200,
the final demand for the industry is 3000.

So, if there is a society with this 2-sector economy, we want to calculate the total sectoral
outputs and the direct technical coefficient that is the A matrix.

873
(Refer Slide Time: 22:04)

So, let us start by writing down the sectors as E and I. E, I and the final demand and then total
output. And here we can have another payment sector and then we have the total output. So
here we have given that this is 800, this is all in million rupees, this is 900 and this is 1500
right. So, we can add this up and we get 1700 plus 1500, this is 3200, this is given to you as
800 plus 1000.

Now this total must add up to 3200, so 1800, 3200 minus 1800 will be 1400. Now in this case
this is 1000, 1200 3000 that means 4200, 5200 we add this up and we get 5200 and this comes
to 5200, so this is 2100 and this is 3100. Now this remaining, final demand for the payment
sector, this value should be given to you if you want to complete the table, let us say that this
was given as 1500.

Then when we add this up, this is let us look at this, we can now add this up 1400, 4500, 6000
is this total, so, this total comes out to be 14400. Now, the question which has been asked is
total sectoral outputs, total sectoral outputs of E is 3200 million tons, this is the first answer,
and for the industry is 5200 million tons. Then let us calculate the A matrix. So, when we talk
about the A matrix we are going to just divide.

A matrix is going to be electricity. This is the this is the destination sector per unit of electricity
output that means 800 by 3200 and this is going to be 900 by 5200, 1000 divided by 3200 and
this is 1200 divided by 5200. So, these values, the A matrix turns out to be 0.25, 0.1731, 0.3125,
0.2308. What do A 12 and A 22 signify? So, A 12 is the amount of electricity used per unit of

874
industrial output that means, rupees per rupee of industrial value and electricity intensity of the
industrial sector.

And the A 22 is the industrial output which is being used for the industrial sector itself and that
is the amount of industrial output which is used in this so that that is what it means.

(Refer Slide Time: 22:53)

Let us look at the next question is to compute the Leontief inverse matrix L.

(Refer Slide Time: 28:05)

So, that is we can to I minus A and you find that this is 0.75 minus 0.1731 minus 0.3125 and
L is I minus A inverse, you can just use the formula, which we had done and then you will get
this as 1.471, 0.331, 0.598, you can see the diagonal elements are greater than 1. So, now the

875
question which was asked is if the final demand increases by 5 %, final demand for electricity
remain the same, compute the changes in the total output of both the sectors.

So, if the final demand for industry increases by 5 %, final demand was 1500. The final demand
for industry increases by 5 %, and the final demand for, this is the final demand for the
electricity sector, 1500 remains unchanged, so, the initial thing was 1500 and 3,000, this will
now change to final demand will now change to 1,500 and 5 % 1.05 of 3000 will become 3150
right, 10 % is 300 so this is. So, if this is the case now, we want to find out what is what will
be the change in the overall.

(Refer Slide Time: 30:45)

So, what we can do is that we have already calculated the Leontief inverse and if we now
multiply the Leontief inverse with the final demands, we can then get what will be the values
for, we can multiply this 1.471, 0.331, 0.598, 1.434 into 1500, 3150 so that we can get what
will be the values of x. And once you do this, then, you can see that the final table that we will
get will be of this.

(Refer Slide Time: 31:21)

You will have electricity, industry, get this and then we can multiply the totals, we can get the
totals and multiply them and 937.2, 1500, 3150, you can cross check this answer. You get the
values of x and then once you get the values of x we can multiply by the A matrix to get these
coefficients and then we can get the values which is there. So, the changes in total output are
calculator in this form 3249.7 and 5415.2 that is the value which is there.

876
(Refer Slide Time: 32:29)

Then the question which is asked is if the average price of electricity is 4 rupees per kilowatt
hour what is the electricity intensity in industry? Let us take the original table that we had.

(Refer Slide Time: 33:11)

877
The original table we got a value as the industry, electricity intensity in industry that means the
amount of electricity used in industry per unit, this was 900. We had the value of 900 million
rupees of electricity for a total output of industry of 5200 million rupees, industrial output.

So if we take 900 and divide by 4 that is the price of electricity rupees per kilowatt hour, we
get this as 225 million kilo watt hour or this will be to 225 into 10 raise to 3 megawatt hour so
the intensity will be to 225 into 10 raise to 3 megawatt hour divided by 5200 million rupees,
so this is megawatt hour per million rupees, 1000 can be cancelled, 2250 by 52 is the answer
that we are going to get, 2250, it comes to 43.3.

And then what are the limitations with, main limitation is the fact that the relationships are
linear, and the coefficients are static. As things change over a long period of time, these
coefficients would also change and so that is the main limitation.

(Refer Slide Time: 35:48)

The last question that we have is what is net energy analysis? Net energy analysis essentially
looks at different choices from an energy viewpoint. So, we try to see what is the total amount
of energy required in creating a product including all the materials and the energy required for
that. When we talk about net energy required for the biofuel, we have to start from the
agriculture and write down all the steps in creation of the bio biofuels, right.

From the farm to the process where you have the biofuels, esterification and others and then to
the use, and we write down the entire chain, if you look at your notes with that figure is
available and in each case, depending on the yield, we would calculate how much energy per

878
unit of fuel and then make that comparison. So, with this, we complete the solution of this
paper. You can compare your answers with these answers and then see how you have fared.

879
 Energy Resources, Economics and Environment
Professor Rangan Banerjee
Department of Energy Science and Engineering
Indian Institute of Technology Bombay
Lecture 26
Future Energy Systems

So, we come to the end of the course, we have looked at various aspects related to energy, the
energy resources and the way to do economic calculations and the environmental impact. In all
of this we have done a number of tools and techniques, we have also looked at different ways
in which one can do the analysis. We have also looked at analysis, the qualitative perspective
and try to put everything together.

So, in this last module, I would like to discuss with you what will be the future of energy system
So, as we have seen in the past, there have been many changes in the energy systems. And we
talk in terms of the transitions that have been made in the energy systems. We are also going
to look at, what are the future energy systems going to look like, what are the transitions that
we are going through, what are the drivers of those transitions, and whether it is in India or in
the world?

What kind of challenges and opportunities do future energy systems throw up? So, just before
we look at the future, let us look at some things from the past. Let us look at some what do we
mean by a transition now, as we know, an energy system transition often involves not just the
transition in the technology, but it also has impacts in the society at large. So just to give you
an example of a transition that has already happened in the past, is a transport transition.

880
(Refer Slide Time: 02:17)

So this is an image which is quite a famous image. It is an image of us street in New York in
Manhattan, it is one of the busiest streets in New York and this is in 1900s. If you look at this
image, and you can see that in this image, all of these each of these vehicles are all horse driven
carts and this was the predominant form of transport.

In this there is only one, we just show you this. There is only one ICE engine, this is the petrol
driven car, there is one car in all of this and the rest of it is all horse driven and this is April
1900. The same street in Manhattan 10 years later a little more than that 1913 March, and you
can see over here, all of these are most of them are 40s, these are the ICE engine driven, petrol
driven cars. And on one corner you can see there is one horse driven cart in this.

So, you can see a transition where rapid transition has happened over a period of a decade,
there has been a shift in the private transport from horse driven carts to ICE engine driven
petrol driven, engine driven cars. And we now are looking at similar kinds of transitions where
we are going from off from petrol and the diesel based ICE engines, maybe to electric vehicles,
maybe to biofuel fired vehicles, maybe to hydrogen fuel fired vehicles.

881
(Refer Slide Time: 04:12)

So let us look at in what were the transitions in the past. So in India and many other countries
of the world, we have made a transition from traditional fuels to modern commercial fuels,
mainly fossil. We have also had significant investment in large centralized energy supply and
distribution infrastructure, and centralize the interconnected electricity grid, which is there now
it connects all parts of our country and every single village is now connected to that grid.

We have a large Hydro and coal based thermal power plants and the focus has always been on
supply growth. Most of this growth happened through public sector and government
investments. What are now the drivers for the energy transitions going into the future?

(Refer Slide Time: 05:00)

882
The first most important driver is the challenge of climate change, where we are trying to now
maintain the global temperature rise, less than 2 degrees, or preferably less than 1.5 degrees.
All countries have made commitments in Paris and then there is a global move away from fossil
fuels. Today 70-80 % of the energy sources are from fossil and so the transition has to be away
from fossil to renewables and maybe some amount of nuclear.

We have also seen one of the biggest drivers has been there has been significant drops in the
prices of solar PV and wind. And there has also been reduction in prices of shell oil and natural
gas with the result that several countries which were oil importers have become oil exporters.
In the Indian context, we have had success in public procurement of LEDs, of fans, and there
have been rapid decline in prices.

And this has resulted in us believing that this could be a model by which we can try and spur
growth, where we can ensure volumes and reduce prices and make things affordable. And there
is also big disruptive change in terms of internet of things, there are technology developments,
where we can have intelligent sensors and control at relatively low costs. And this can result in
actually having a large number of distributed systems which are controlled, managed,
monitored. So these are essentially the drivers for the energy transitions going into the future.

We should remember that the energy sector if you want to make changes in the sector, we will
be changing, lifestyles will be changing, businesses, some businesses will, there will be
disruptions, some of the existing businesses will disappear. And this will obviously mean some
implications of cost and some implications in terms of there will be losers and gainers. And so
we need to think in terms of this transition being less painful.

And so to give you an idea of these transitions and possible futures, we will take some of the
salient features from the World Energy Outlook. The World Energy Outlook is produced by
the International Energy Agency every year and I am going to show you some slides from the
IAS World Energy Outlook 2019.

883
(Refer Slide Time: 8:05)

So the first slide that you can see here shows the change in energy demand. Now, these are
based on the IEA’s projections, the change in energy demand and average annual GDP growth
rate by region. In this there are two scenarios, there is a stated policy scenario which means
that we start with whatever are the existing policies that the countries and the regions have
stated.

And then there is another scenario which is an aggressive scenario which is a sustainable policy
scenario. So, in the stated policy scenario based on the existing policies of the different
countries, if we look at the change in energy demand over the time period 2018 to 2040, this is
a report in 2019 so 2018 is the base here and we are looking forward to about couple of decades
further, which is 2040.

And we can see very clearly in this there is coal, oil gas, low carbon sources. And you can see
that there is a reduction in the coal and oil in almost in the European Union and in the United
States and in Japan. However, in most of the developing countries, including India, Africa,
Middle East, Southeast Asia, these are going to increase the overall Mtoe. You can see that in
the world, the growth is propelled by the additional demand required by China, India, Africa
and some amount from Southeast Asia and Middle East.

These countries the US and European Union have sort of plateaued and their growth is going
to, they will not contribute to increases. However, they are all, the existing base, they start off
from a very high base. And we also if you look at the growth rates, in this case, this report uses
a slightly a growth rate slightly higher than 5 %, 6 % growth rate for India and slightly lower

884
growth rate for China, Africa and you can see and there are positive growth rates for Japan, US
and EU.

But the energy requirement, most of these cases have declined significantly. In the Indian
context, there is a significant projected increase and the economic growth in the developing
economies if you see the growth rates are much faster, higher than the growth rates of the
developed countries and this will result in an increase in the overall energy requirement of the
world.

And so clearly the centres of demand have shifted and growth is all in the developing countries.
And the focus then is on how the developing countries will make the transition, make the
growth and provide the energy services that we need for development, yet try to do this
sustainably and that is a big challenge.

(Refer Slide Time: 11:17)

So if we look at it, the IEA basically says there are no single or simple solutions to reach the
sustainable energy goals. We start with first that if you look at the current trend in terms of the
emissions from 2010 to 2018, and you project that into the future, this is the trajectory that we
have if you see, this is the growth trajectory of the CO2 emissions. Now, if we try to see, you
can have a variety of different options, with the stated policy scenario, we can still have a we
will go below the current trends because of the policy that we have put in place for the National
Development commitments of Paris and the and the local national commitments.

And but in order to go to the Sustainable Development scenario, we have to go much-much

below this and this is the biggest challenge. If we look at it, these are some of the possibilities,

885
we can do this through a combination of energy efficiency, renewables and then fuel switches
and carbon capture and utilization.

So, this is on an overall macro scale and you can see this is the kind of pathway which is
required, this is the projected current trend. If the policies that we have put in place work then
we can go down by so much, even then the CO2 emissions would increase. But if you want to
really make it sustainable, we have to go for aggressive efficiency renewables and fuel switch
and CCS.

(Refer Slide Time: 13:07)

If you look at this, this is now broken down into different sub-components and the IEA report
gives details about how these could be achieved. So there are a host of different policies and
technologies that can be adopted in every sector to keep the climate targets within reach, and
to look at a 1.5 degree stabilization. And so this is sort of a time frame till 2050 where these
options can help us reach sustainable energy goals and this is not going to be just renewables,
or just efficiency, it is a whole combination of different things.

886
(Refer Slide Time: 13:47)

In the stated policy scenario, you can see that different countries will have different proportions
of share in the new capacity additions and you can see in this you can see in the Indian context,
a significant amount of share from renewables both wind, PV and Hydro and you can see that
the largest chunk, more than 60 to 70 % of the new additions will all be renewables.

And this is based on the projections, this is similar kinds of details are there for most of the
other countries of the world. And so that is an interesting kind of trend that we need to keep in
mind.

(Refer Slide Time: 14:41)

887
The other issue which is there is that what is the carbon dioxide intensity of the electricity
generation? And if you look at India, we are one of the relatively higher CO2/kWh. And we
can see that over time, we expect that to be going down, in the stated policy scenario it can go
down by about a factor of 2, so we can go down to about 400. And in the sustainable
development scenario, we can see that we have to go down even more and less than 200.

And so based on this, this also shows us the dimensions and the total amount of emissions
which are there in each of these countries. So, the sustainable development scenario of course,
results in a far lower carbon intensity of the electricity sector. Now this is that will also affects
the transition which we talked off, if we are going to move from ICE engines to electric
vehicles. The CO2 savings will depend on what is the carbon intensity of the electricity sector.

(Refer Slide Time: 16:02)

The other issue which will be there is that today a large part of our energy comes from coal.
And in India this is particularly true so what would happen is that we are trying to see the
reducing CO2 emissions from the existing coal fired capacity and you can see that in the stated
policy scenario, this is the amount of reduction which will be the, and then in the sustainable
development scenario, it would be even higher.

So, some of this would be where you would retire the existing plants, existing plants earlier
and then we can also rework the plants or retrofit them to make them feed them with CCS,
convert them into combination of hybrid with renewables and these are some of the issues. So,
the coal sector will be in deep transition and many of the existing plants would actually have
to be phased out or modified.

888
(Refer Slide Time: 17:17)

The growth of, the other issue which will be there is that if you look at the electricity demand,
there is a significant growth in the electricity demand. And of course, in the stated policy
scenario, it will go up by about 200 % of its existing value in the sustainable development
scenario because of efficiency, this is going to be lower, but even then there is a reasonable
amount of growth.

There will be because we are having a higher share of renewables there will be a need for
flexibility in the system, and flexibility of the system will mean that because we will have
variable renewables in our supply, we should be able to quickly ramp up, ramp down, shut
down certain plants and be able to adjust and these flexibility would mean that we would need
to invest in either demand side management or storage and that might add also to the costs.

889
(Refer Slide Time: 18:22)

Now let us look at the electric vehicles and let us look at the comparison of electric vehicles
with the ICE engine vehicles. So if we look at this, you can see that these red dots are the
current emissions of ICE engine vehicles in different countries. And you can see the Indian
ICE engine vehicle per kilometre, roughly about 150 grams of CO2/km. And with the
improvements in the ICE engine vehicles, this where that can go.

In the case of electric vehicles, currently depending on the electricity mix of the grid, the CO2
emissions are actually slightly higher than the ICE engine vehicles. And that is an interesting
kind of point to think about. Of course, when we talk of shifting from ICE engines to electric
vehicles, this will definitely reduce the local emissions, but on the global emissions, the
reduction or non-reduction depends on the intensity electric intensity of the power, the carbon
intensity of the electricity mix

And since Indian, the Indian electricity sector is predominantly based on coal, this results in
this factor. In the future of course , depending on how the mix changes, it can actually go away,
when the sustainable development scenario it would be much lower than this. But this transition
comparison between ICE engine and electric vehicle depends very significantly on the
electricity mix.

And need not necessarily this transition need not necessarily increase result in a reduction in
the CO2 emissions. So that is a point to be noted that today, if we look at this, it might actually
result in a slight increase in the CO2 emissions. But with the grid becoming more renewable,
in future that would not be an issue.

890
(Refer Slide Time: 20:42)

In the stated policy scenario for different countries, you can see in 2018, this is the overall in
the total primary energy demand. We see that in India about a little less than 20 % is from
renewables. This includes large hydro, in 2040 that could be more than 40 % of the total. Of
course, this is one particular scenario which has been developed by the IEA, there could be
other scenarios, you can even think in terms of 100 % renewable scenario.

(Refer Slide Time: 21:14)

Now, one of the issues in this is that in the grid, when we look at the grid over a period of time,
what will happen is the CO2 intensity of the grid would keep changing. And that will depend
on essentially the if we have a large amount of renewables as is projected to happen in the
future with solar PV during this sunshine hours the CO2 intensity of the grid would be actually
quite low.

891
And you can see the different kinds of shapes of the grid for India and Europe, the CO2 intensity
versus time. So, depending on at what time you are looking at, the CO2 intensity would be
different. Let me illustrate this issue of what happens when we have a high renewable
penetration in the electricity sector?

(Refer Slide Time: 22:13)

So we start with the projections from Niti Aayog. As part of its energy plan, you can see that
there is a projection for 2040 business and usual scenario and ambitious scenario with a
significant amount of renewables.

(Refer Slide Time: 22:25)

892
So what we did was, we took a, made a simple aggregate model, where we looked at a base
year, the year for which we have all the data, where we had the load profiles. We also had data
on the wind variability, the wind at different hours of the day and different seasons and the
similarly solar installation.

We also had existing installed capacities by different categories coal, hydro and solar, wind
and then using this we then projected for target year with some growth rate, took the load
profile and projected it, demand growth rates, solar and wind capacity growth rates, Hydro and
nuclear installed capacity growth rates and way variability in the demand. With all of this we
then and the kind of constraints which are there we obtained the future demand for different
days and by hours, daily monthly and seasonal.

And then we try to allocate based on the capacity, based on thermal, hydro and renewables
tried to fill the load curve so that hydro actually met all the sudden requirements, all the ramping
as far as possible whenever we need fast ramping up or down, that would be allocated hydro
for those parts. Then we based on this we found out after removing hydro and solar and wind,
what is the residual load curve which has to be met by the thermal generators.

Then we saw what is the ramp rate and is it possible for the thermal generators to be able to
meet those ramp rates. We then calculated the cost of electricity, the PLF, the ramp rates,
emissions and then we also found out the necessity of storage.

(Refer Slide Time: 24:39)

So we just illustrate this in terms of, we projected from the existing curve the demand curve
for the country as a whole in January 2040 this is for a typical day, and we have it R by R.

893
Based on this then we looked at this is what hydro could do. And then there was a we have
subtracted the PV and the wind and then we got the residual.

So, this is the different field of load curves as based on this, we then got that this is the amount
of, this is the requirement from the rest of the system from the thermal generation and we can
see based on this, we can look at the slope of this and that gives us the ramp rate. And so that
will give us what is the kind of ramp rates which we are getting and this was above the order
of 30 GW/hour and we can see what it means also on a plant by plant bases.

(Refer Slide Time: 25:34)

When we look at this, if we increase the share of solar and wind, we get to a point where the
solar, the solar and wind that is generated, the electricity generated from solar and wind is more
than the electricity required during that time period. And so then this becomes negative, this
area under the curve, if we shade that is the requirement for storage. So, as we go further and
further we can see how much every additional unit on solar and wind has to actually go through
storage before it is used in some other section.

894
(Refer Slide Time: 26:19)

So, this is giving us the final renewable generation, the generation by different sources and this
kind of analysis can help us see that as we go for more than this 35 %, 40 % a certain percentage
by generation, then every single amount of every megawatt hour of electricity additionally that
is generated from PV has to go through storage and then be used at some other time period.

And so, that will depend on what is the cost of storage and even with pumped hydro, it adds to
another ₹ 5 or ₹ 6/kWh and so that will you that is one of the challenges when we think in terms
of going for large scale 100 % renewable schedule. We will also need to look at variability on
a short time frame and that has certain issues. Suddenly if we had cloud cover, say in certain
regions, the PV output may drop.

We need to be able to have other sources which can quickly ramp up and meet that requirement
and so, the rules of the game for the electricity power sector will completely change. And this
is something where there is a lots of there is a lot of scope for doing research and finding
optimal solutions.

895
(Refer Slide Time: 27:53)

Another issue which we should think about when we talk about the transitions. When we started
the solar mission, India was a net exporter of PV, but today what has happened is that we are
importing a large part more than 80 % of our modules are imported and most of it is imported
from China.

(Refer Slide Time: 28:19)

So this has some, just to give you an idea Module Manufacturing Capacity in 2016 was about
5300 MW, which was operational out of 6800 MW installed. Actual production was only an
average of 1330 MW. So it is a very low capacity utilization because we are unable to compete
with some of these large Chinese companies. 88 % of our domestic supply is imported and 84
% is from China and this also accounts for a very large amount of import bill.

896
Similar things are there for this at the cell level. So when we think in terms of future transitions,
we need to be able to see what are the things that we can do in terms of technology to try and
see that in India we are able to make and we are able to compete and we have the technology
and we are providing the supply and it helps our economy and we get also the jobs and the
economic benefits out of this.

(Refer Slide Time: 29:34)

Most of our renewable strategy has been with the large centralized mode. It is possible, of
course , to think in terms of small decentralized energy. And one of the things which can be
done is we can think of each house as a prosumer where it generates its own energy and maybe
supplies additional energy back to the grid.

So we have this whole, this whole concept of passive houses and zero energy buildings and
energy plus buildings. And if we do this, then we can actually transform the way our energy
sector looks because we can have a large number of small houses which are prosumers, which
are also producing their own energy also supplying to the grid, and the grid is there as a backup.

897
(Refer Slide Time: 30:31)

We had an interesting initiative from our students where the students participated in the Solar
Decathlon. This is our student team, Team Shunya, it was the first Indian team in the Solar
Decathlon finals. The challenge in the Solar Decathlon is to design, fabricate, and implement
a completely fully functional solar house, running only on solar energy.

So this house that you see here is a 680 ft2 house with 5 kW of PV on top, some solar thermal
on top, phase change materials. And this was designed and the building was fabricated in the
IIT campus, it was dismantled shipped and rebuilt on Versaillies in France in 2014 June and
then this was during the competition and it was shipped back and it has been rebuilt on the IIT
campus as a demo building.

The focus here is first to design it so that the energy intensity is low, use passive concepts,
reduce the total requirement for energy then provide renewables on top. And these can be done
in a way where they could be cost effective, and we can reduce the operating energy of the
building.

Similar kind of concept, this is a larger one, which was our team in the Solar Decathlon China,
this is a 1800 ft2 house G+1. And in this we also had the requirement of charging an electric
vehicle to meet the transport requirements. And these you can see are the images of the student
teams which were available. So, one of the possible things is that we may move away from the
large centralized energy systems to a hybrid with distributed energy systems, backed up by a
grid, which provides reliability and supply.

898
The current systems and trends seem to be in favour of large, continuing the large centralization
with for instance, we have a solar power plant which is almost 700 MW at one place. We have
large areas of land under solar PV and because from a business point of view, it is much easier
to do this in a centralized fashion.

However, it is possible that if the incentive structure and the technologies work in a way where
we can go for a large number of small distributed systems, rooftop systems integrated and along
with maybe electric vehicles and public transport, the energy systems that we can see in the
future can be quite different. We can look at almost every industry or every product that we
make, and it should be possible to make these products with much less energy and also possible
to make them with almost zero carbon footprint. And that could be another part of the transition.

So, we are looking at transitions in the electricity sector, we can look at transitions in the
transport sector. So mainly going to be electric vehicles, hydrogen vehicles, biofuels vehicles,
public transport, biking and walking and trying to redesign the buildings, cities, workspaces
and then the transitions in cooking, we are going to go from solid fuels which are being used
traditionally to modern renewables.

And we may have LPG and modern renewables as part of it. And then the transitions in the
industry where we try to make the industrial products where they are using less energy, redesign
them and combine them with zero carbon and carbon capture and storage. There are many
different ways in which technologies can evolve and we have seen in literature, a large number
of possibilities in terms of different scenarios, energy systems are linked very clearly with
development and with the society.

And all these transitions involve some amount of costs, some amount of penalties and problems
for individuals. And the winners and losers may also be different. In all of this, it is also likely
that there will be a need for some behavioural change, we may need to do things differently in
order to ensure that our futures are sustainable and that we can actually continue to provide
energy access reliably and provide the energy services that are required to maintain the future
of our generation and future generations.

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So, in all of this, as we saw there is there are many dimensions of sustainability. There is the
issue of centralized versus decentralized. We know that energy transitions are imminent, we
need to assess the impacts of these transitions in terms of equity that means equality, inequality,
income, quality of life. And all of this gives opportunities for technology development, R&D
jobs, alternate strategies, innovation.

And as we saw, this is a socio-technical problem. The stranded assets which are there for
instance, coal based power plants, may cause regional imbalances, may result in jobs lost and
we need to work this out and work out solutions that make this transition manageable and also
ensure that we are able to go through in terms of looking at not going beyond the climate change
tipping point.

And so with this, we come to the close of this course. Please feel free to look at all the references
and if you have any queries, please do post them on the forum. And we hope that you have
enjoyed and learned about the tools and techniques needed to analyse energy systems. And we
hope that you will be using these in your professional career and in terms of looking at different
policies and different energy systems and development of energy systems. Thank you.

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