ENERGY AND ENVIRONMENT

1. Introduction

Energy is involved in all life cycles, and it is essential in agriculture as much as in all other
productive activities. An elementary food chain already shows the need for energy: crops need
energy from solar radiation to grow, harvesting needs energy from the human body in work, and
cooking needs energy from biomass in a fire. The food, in its turn, provides the human body with
energy.

Intensifying food production for higher output per hectare, and any other advancement in
agricultural production, implies additional operations which all require energy. For instance: land
preparation and cultivation, fertilizing, irrigation, transport, and processing of crops. In order to
support these operations, tools and equipment are used, the production of which also requires
energy (in sawmills, metallurgical processes, workshops and factories, etc.).

Major changes in agriculture, like mechanization and what is called the "green revolution", imply
major changes with respect to energy. Mechanization means a change of energy sources, and
often a net increase of the use of energy. The green revolution has provided us with high yield
varieties. But these could also be called low residue varieties (i.e. per unit of crop). And it is
exactly the residue which matters as an energy source for large groups of rural populations.

Other sectors of rural life require energy as well. The provision of shelter, space heating, water
lifting, and the construction of roads, schools and hospitals, are examples. Furthermore, social
life needs energy for lighting, entertainment, communication, etc. We observe that development
often implies additional energy, and also different forms of energy, like electricity.

Energy is a scarce resource, at least for some groups of people in some places and, maybe, for
the world as a whole. A rational use of energy is then necessary for economic and environmental
reasons. This applies to agriculture as much as to any other sector of the economy. A key to the
rational use of energy is the understanding of the role of energy. The following sections aim to
help understand energy in agriculture and rural development.

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2. Energy and power

Energy and power are related but totally different concepts. A tank of petrol contains a certain
amount of energy. We can combust this petrol in a certain time period, that is, we convert the
energy of the petrol into mechanical energy, perhaps to power a car. The power is the energy
produced per unit of time. The combustion process can be fast or slow. In the case of faster
combustion, more power is produced. Obviously, the tank will be empty sooner in the case of
high power production than in the case of low power production. If power is energy per time
unit, then energy is power multiplied by time period. For Instance, if an oxen delivers a certain
amount of power, then after a certain time period it will have delivered a certain amount of
energy, i.e. the power times the time period.

Unit of Energy =Newton-meter (N-m) or Joules (J)

Unit of Power = N-m/s or J/s or Watt (W)

3. Forms of energy
Energy can exist in various forms. Examples are:
1. Radiation energy: the radiation from the sun contains energy, and also the radiation from a
light or a fire. More solar energy is available when the radiation is more intense and when it is
collected over a larger area. Light is the visible part of radiation.

2. Chemical energy: wood and oil contain energy in a chemical form. The same is true for all
other material that can burn. The content of chemical energy is larger the larger the heating value
(calorific value) of the material is and, of course, the more material we have. Also animate
energy (delivered by bodies of human beings and animals) is, in essence, chemical energy.
Furthermore, batteries contain chemical energy.

3. Potential energy: this is, for example, the energy of a water reservoir at a certain height. The
water has the potential to fall, and therefore contains a certain amount of energy. More potential
energy is available when there is more water and when it is at a higher height.

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4. Kinetic energy: this is energy of movement, as in wind or in a water stream. The faster the
stream flows and the more water it has, the more energy it can deliver. Similarly, more wind
energy is available at higher wind speeds, and more of it can be tapped by bigger windmill
rotors.

5. Thermal energy or heat: this is indicated by temperature. The higher the temperature, the
more energy is present in the form of heat. Also, a larger body contains more heat.

6. Mechanical energy, or rotational energy, also called shaft power: this is the energy of a
rotating shaft. The amount of energy available depends on the flywheel of the shaft, i.e. on the
power which makes the shaft rotate.

7. Electrical energy: a dynamo or generator and a battery can deliver electrical energy. The
higher the voltage and the current, the more electrical energy is made available.

4. Primary Energy Sources

1. Biomass. We distinguish between: woody biomass (stems, branches, shrubs, hedges, twigs),
non-woody biomass (stalks, leaves, grass, etc.), and crop residues (bagasse, husks, stalks, shells,
cobs, etc.). The energy is converted through combustion (burning), gasification (transformation
into gas) or anaerobic digestion (biogas production). Combustion and gasification ideally require
dry biomass, whereas anaerobic digestion can very well take wet biomass. Fuel preparations can
include chopping, mixing, drying, carbonizing (i.e. charcoal making) and briquetting (i.e.
densification of residues of crops and other biomass).

2. Dung from animals and human excreta. The energy is converted through direct combustion
or through anaerobic digestion.

3. Animate energy. This is the energy which can be delivered by human beings and animals by
doing work.
4. Solar radiation, i.e. energy from the sun. We distinguish between direct beam radiation and
diffuse (reflected) radiation. Direct radiation is only collected when the collector faces the sun.
Diffuse radiation is less intense, but comes from all directions, and is also present on a cloudy
day. Solar energy can be converted through thermal solar devices (generating heat) or through

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photovoltaic cells (generating electricity). Direct beam solar devices (whether thermal or
photovoltaic) would need a tracking mechanism to have the device continuously facing the sun.

5. Hydro resources, i.e. energy from water reservoirs and streams. We distinguish between:
lakes with storage dams, natural heads (waterfalls), weirs, and run-of-river systems. Hydro
energy can be converted by waterwheels or hydro turbines.

6. Wind energy, i.e. energy from wind. Wind machines can be designed either for electricity
generating or for water lifting (for irrigation and drinking water).

7. Fossil fuels, like coal, oil and natural gas. Unlike the previous energy sources, the fossil
energy sources are non-renewable.

8. Geothermal energy, that is, the energy contained in the form of heat in the earth. A
distinction is made between tectonic plates (in volcanic areas) and geopressed reservoirs (could
be anywhere). Geothermal energy is, strictly speaking, non-renewable, but the amount of heat in
the earth is so large that for practical reasons geothermal energy is generally ranked with the
renewables. Geothermal energy can only be tapped at places where high earth temperatures come
close to the earth's surface.

This list only contains primary energy sources. These are the energy sources which are present in
our natural environment. Secondary energy sources, like batteries, are not included here.
We observe that the primary energy sources are not the ultimate sources of energy. For instance,
animate energy comes from biomass, whereas biomass energy ultimately comes from the sun.
Apart from geothermal and nuclear energy, all our so-called primary energy sources have
ultimately got their energy from the sun!

5. Energy flows
As we have seen, generating and utilizing energy means converting energy from one form into
another. Often, intermediate steps are Implied. The energy flows through a number of forms, as
well as conversion steps, between the source and the end-use. The costs increase accordingly.
We distinguish between primary, secondary, final and useful energy.

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An example is an energy flow which is related to charcoal. Here, the primary energy form is
wood. The wood is converted into charcoal in a charcoal kiln. Charcoal is the secondary form of
energy, and it is transported to the consumer. What the consumer buys at the market place is
charcoal, and this is called final energy. The consumer eventually converts the charcoal into heat
for cooking. The heat is the useful energy.

Another example of an energy flow is: primary energy in the form of a hydro resource,
secondary energy in the form of electricity at the hydro power station, final energy in the form of
electricity at a saw mill, and useful energy in the form of shaft power for sawing.

ENERGY TECHNOLOGY EXAMPLES

Primary coal, wood, hydro, dung, oil, etc.
Conversion power plant, kiln, refinery, digester
Secondary refined oil, electricity, biogas
Transport/Transmission trucks, pipes, wires
Final diesel oil, charcoal, electricity, biogas
Conversion motors, heaters, stoves
Useful shaft power, heat

Figure 1. Energy flow

Primary energy is the energy as it is available in the natural environment, i.e. the primary source
of energy.
Secondary energy is the energy ready for transport or transmission.
Final energy is the energy which the consumer buys or receives.
Useful energy is the energy which is an input in an end-use application.

Note that useful energy is almost invariably either in the form of heat or in the form of shaft
power. For a few end-uses (e.g. communication equipment), electricity is the form of useful
energy.

Note that in some cases the primary energy is at the same time the secondary, and even the final
energy (c.f. wood gathered for cooking purposes, or animate power for pulling). The breakdown
of primary to useful energy is relevant, because with each conversion step some energy is lost. In
order to reduce costs and avoid unnecessary losses, we will always aim at eliminating
unnecessary steps in the flow of energy.

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6. Key energy trends in India

Demand

India has been responsible for almost 10% of the increase in global energy demand since 2000.
Its energy demand in this period has almost doubled, pushing the country’s share in global
demand up to 5.7% in 2013 from 4.4% at the beginning of the century. While impressive, this
proportion is still well below India’s near 18% current share of global population, a strong
indicator of the potential for further growth. Expressed on a per-capita basis, energy demand in
India has grown by a more modest 46% since 2000 and remains only around one-third of the
world average, slightly lower than the average for the African continent (Figure 1.1). One reason
is that a significant part of the Indian population remains without modern and reliable energy:
despite a rapid extension of the reach of the power system in recent years, around 240 million
people in India lack access to electricity.

The widespread differences between regions and states within India necessitate looking beyond
national figures to fully understand the country’s energy dynamics. This is true of all countries,
but it is particularly important in India, both because of its size and heterogeneity, in terms of
demographics, income levels and resource endowments, and also because of a federal structure
that leaves many important responsibilities for energy with individual states. For example,
figures for residential electricity consumption per capita (for those with access to electricity)
show a broad range between the area with the highest levels, in Delhi – the only part of India
with consumption higher than the non- OECD average – and other states (Figure 1.2).
Residential electricity consumption (for those with access) remains far below the world average

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and is ten-times lower than OECD levels. Average residential consumption in Bihar, at around
50 kilowatt-hours (kWh) per capita per year, is consistent with an average household use of a
fan, a mobile telephone and two compact fluorescent light bulbs for less than five hours per day.

Energy demand has almost doubled since 2000, but this is slower than the rate of economic
growth over the same period (Figure 1.3). This is due in part to the shift away from bioenergy3
consumption in the residential sector, the rising importance of the services sector in the Indian
economy and increased policy efforts directed at end-use energy efficiency. As a result, it took
12% less energy to create a unit of Indian GDP (calculated on the basis of purchasing power
parity [PPP]) in 2013 than was required in 1990. The amount of energy required to generate a
unit of GDP (PPP basis) in India is slightly lower than the global average. Even so, much energy
is lost or used inefficiently, notably in the power sector because of the generation technologies
used, the poor state of the transmission and distribution infrastructure and the relatively low
efficiency of end-use equipment. Significant untapped energy efficiency potential remains across
the entire energy system, which could help temper the further growth in energy consumption.
Almost three-quarters of Indian energy demand is met by fossil fuels, a share that has increased
since 2000 because of a rapid rise in coal consumption and a decreasing role for bioenergy, as
households move away from the traditional use of solid biomass for cooking (Figure 1.4). Coal
now accounts for 44% of the primary energy mix (compared with under a third globally) –
mainly because of the expansion of the coal-fired power generation fleet, although increased use
of coking coal in India’s steel industry has also played a part. The availability and affordability
of coal relative to other fossil fuels has contributed to its rise, especially in the power sector.
Demand for bioenergy (consisting overwhelmingly of solid biomass, i.e. fuelwood, straw,
charcoal or dung) has grown in absolute terms, but its share in the primary energy mix has
declined by almost ten percentage points since 2000, as households moved to other fuels for
cooking, notably liquefied petroleum gas (LPG).

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Oil consumption in 2014 stood at 3.8 million barrels per day (mb/d), 40% of which is used in the
transportation sector. Demand for diesel has been particularly strong, now accounting for some
70% of road transport fuel use. This is due to the high share of road freight traffic, which tends to
be diesel-powered, in the total transport use and also to government subsidies that kept the price
of diesel relatively low (this diesel subsidy was removed at the end of 2014; gasoline prices were
deregulated in 2010). LPG use has increased rapidly since 2000, reaching over 0.5 mb/d in 2013
(LPG is second only to diesel among the oil products, pushing gasoline down into an unusually
low third place). The rise in LPG consumption also reflects growing urbanisation, as well as
continued subsidies. Natural gas makes up a relatively small share of the energy mix (6% in

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2013 compared with 21% globally). It is used mainly for power generation and as a feedstock
and fuel for the production of fertilisers, although it also has a small, but growing role in the
residential sector and as a transportation fuel. Hydropower, nuclear and modern renewables
(solar, wind and geothermal) are used predominantly in the power sector but play a relatively
small role in the total energy mix.

Energy demand had traditionally been dominated by the buildings sector (which includes
residential and services) (Figure 1.5), although demand in industry has grown more rapidly since
2000, overtaking buildings as the main energy user in 2013. In the buildings sector, a key driver
of consumption in both rural and urban areas has been rising levels of appliance ownership,
especially of fans and televisions, and an increase in refrigerators and air conditioners in urban
areas over the latter part of the 2000s. As a result, electricity demand in the buildings sector grew
at an average rate of 8% per year over 2000-2013. The share of bioenergy in the buildings sector
(mostly the traditional use of biomass for cooking and heating) has declined from 75% of the
sector’s total consumption in 2000 to two-thirds in 2013, as electricity and oil products have
gained ground.

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Industrial energy demand has almost doubled over the 2000-2013 period, with strong growth
from coal and electricity. Large expansion in the energy-intensive sectors, including a tripling in
steel production, is one component. Nonetheless, consumption levels of cement and steel are still
relatively low for a country of India’s size and income levels: consumption of cement is around
220 kilograms (kg) per capita, well behind the levels seen in other fast-growing economies and a
long way behind the elevated levels seen in China in recent years (up to 1 770 kg per capita). The
agricultural sector, though a small part of energy demand, is a key source of employment and
since 2000 has accounted for roughly 15% of the increase in total final electricity demand as
more farmers obtained electric pumps for irrigation purposes.

Over 90% of energy demand in the transport sector in India is from road transport. The country’s
passenger light-duty vehicle (PLDVs) stock has increased by an average of 19% per year since
2000, rising to an estimated 22.5 million in 2013, with an additional 95 million motorbikes and
scooters (two/three-wheelers). Yet ownership levels per capita are still very low compared with
other emerging economies and well below ownership levels of developed countries (Figure 1.6).
Poor road infrastructure is a major constraint to broader vehicle ownership; according to the
World Bank, one-third of the rural population lacks access to an all-weather road, making car
ownership impractical – even in cases where it is affordable (World Bank, 2014).

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Electricity

The provision of electricity is critical to India’s energy and economic outlook and is a major area
of uncertainty for the future. The country’s electricity demand in 2013 was 897 terawatt-hours
(TWh), up from 376 TWh in 2000, having risen over this period at an average annual rate of
6.9%. Electricity now constitutes some 15% of final energy consumption, an increase of around
four percentage points since 2000. As with all other demand sectors, further rapid growth is to be
expected: around one-sixth of the world’s population in India consumes about one-twentieth of
global power output. With continued economic expansion, expanding access to electricity,
urbanization, an ever-larger stock of electrical appliances and a rising share of electricity in final
consumption, pressures on the power system will persist and increase.

The situation varies from state to state, but higher tariffs paid by commercial and industrial
consumers are typically not enough to offset the losses arising from subsidies to residential and
agricultural consumers, despite efforts to raise retail rates in recent years. The consequent
financial problems faced by local distribution companies are often exacerbated by shortfalls in
subsidy compensation payments due from state governments and by poor metering and
inefficient billing and collection, creating a spiral of poor performance, inadequate investment,

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high transmission and distribution losses and regular power outages. This is a key structural
weakness for the energy sector as a whole.

On the supply side, India has some 290 gigawatts5 (GW) of power generation capacity, of which
coal (60%) makes up by far the largest share, followed by hydropower (15%) and natural gas
(8%). The mix has become gradually more diverse: since 2000, almost 40% of the change in
installed capacity was non-coal. This is reflected also in the figures for generation, which show
how renewable are playing an increasingly important role (Figure 1.7). But, despite the increase
in generation, India faces a structural shortage of power. For residential consumers, this
constraint is most evident during periods of peak demand, typically in the early evenings as
demand for lighting, cooling and other appliances surges (with the result that, where they can
afford it, households often invest in small diesel generators or batteries and inverters6 as back-
up).

Industrial consumers are also affected by unreliable and unpredictable power supply: around half
of the industrial firms in India have experienced power cuts of more than five hours each week
(FICCI, 2012). Elevated end-use industrial tariffs, allied to unreliable supply, lead many
industrial and commercial consumers to produce their own electricity, using back-up diesel
generators or larger plants (albeit not utility-scale). Energy-intensive industries, such as steel,
cement, chemicals, sugar, fertilizers and textiles are key auto-producers, with cement producers,
for example, estimated to produce around 60% of the electricity that they consume. This capacity
has been growing steadily and is often coal-fired, relatively inefficient compared with utility-
scale generation units and under-utilised (many companies need less electricity than their captive
plants can produce, but there are obstacles to feeding this excess power into the grid). The
increased use of captive generators, both at household and industrial levels, often worsens local
air pollution.

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The solution to India’s electricity dilemma is not only to raise average tariffs and add more
capacity (although both will be essential over time), but also to deal with inefficiencies and
bottlenecks. Although there is an overall shortage of power, utilisation rates in coal-fired plants
have actually fallen considerably in recent years, down from a peak of almost 80% in 2007 to
around 64% in 2014. The decline has been even more dramatic in the case of gas-fired power
plants, which ran less than a fourth of the time on average in 2014 (CEA, 2014b). In some
instances, particularly for gas plants supplying periods of peak demand, the financial situation of
the distribution companies has meant that plants are not being called upon when needed. Another
reason for low load factors lies with fuel supply problems, including shortages and quality issues
in the case of coal (although the situation has improved in 2015, due to efforts to fast-track the
approval of mines and increase oversight of production) and lower than anticipated domestic gas
production, for which comparatively expensive liquefied natural gas (LNG) has not been a
substitute in most cases (though the recent decline in the price of LNG has made imports more
attractive).

The situation is not helped by the low efficiency generation technologies that prevail across
much of India’s existing fleet (meaning that more fuel is required to generate a unit of power).
Over 85% of India’s coal plants use subcritical generation technology, and the average efficiency
of India’s coal-fired fleet is just under 35%, below that of China or the United States. Poor coal
quality (high ash content) and the relatively high ambient temperatures in India also play a role
in lower efficiency levels. In some cases, generation has also run below capacity due to a lack of
available transmission capacity. The creation of a national grid (the five regional grids were
interconnected by end-2013) and continued progress in inter-state and inter-regional links has

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been and remains critical, given that resources and capacity for power generation are often not
located close to the main centers of demand. Despite steps to encourage investment, including
private investment, in transmission projects, expansion of the network has generally lagged
behind that of generation; projects face numerous obstacles, notably over clearances. In 2011, the
Central Electricity Authority (CEA) estimated that over 120 transmission projects were held up
because the developer was unable to secure the necessary land and rights-of-way.

Access to modern energy

India has made great strides in improving access to modern energy in recent years. Since 2000,
India has more than halved the number of people without access to electricity and doubled rural
electrification rates. Nonetheless, around 240 million people, or 20% of the population, remain
without access to electricity (Table 1.1). The population without access is concentrated in a
relatively small number of states: almost two-thirds are in two populous northern and north-
eastern states, Uttar Pradesh and Bihar. In large swathes of India, including the majority of
southern states, electrification rates are already well above 90%. Of the total without access, the
large majority – some 220 million people – live in rural areas where extending access is a greater
technical and economic challenge. In urban areas, electrification rates are much higher, but the
quality of service remains very uneven, especially in India’s large peri-urban9 slum areas that are
home to around 8.8 million households (National Sample Survey Office, 2014b).

India’s rural electrification programme, the Rajiv Gandhi Grameen Vidyutikaran Yojana
(RGGVY), was launched in 2005 and aimed to provide electricity to villages of 100 inhabitants
or more and free electricity to people below the poverty line. The effective implementation of
RGGVY has faced several challenges and there are strong variations in outcomes between states,
as well as questions over the definition of access.
In July 2015, RGGVY was subsumed within a new scheme, the Deen Dayal Upadhyaya Gram
Jyoti Yojana (DDUGJY). The main components of this scheme are the separation of distribution
networks between agricultural and non-agricultural consumers to reduce load shedding,
strengthening local transmission and distribution infrastructure, and metering. Among the issues
that have held up progress with electrification is the need to find local solutions adapted to the

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specific circumstances of the remote settlements without access, and a variety of problems in
securing authorisation for the necessary projects (e.g. land acquisition and rights-of-way for
transmission lines and roads).

Aside from those without electricity, India also has the largest population in the world relying on
the traditional use of solid biomass for cooking: an estimated 840 million people – more than the
populations of the United States and the European Union combined. There is a host of issues
associated with the traditional use of solid biomass for cooking, including the release of harmful
indoor air pollutants that are a major cause of premature death, as well as environmental
degradation as a result of deforestation and biodiversity loss. The government has made a major
effort to address these issues, primarily through the subsidised availability of LPG as an
alternative cooking fuel (see section below on energy prices).

Energy Production and Trade

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Fossil fuels supply around three-quarters of India’s primary energy demand and, in the absence
of a very strong policy push in favour of alternative fuels, this share will tend to increase over
time as households move away from the traditional use of biomass. This high – and potentially
growing – reliance on fossil fuels comes with two major drawbacks. India’s domestic production
of fossil fuels, considered on a per-capita basis, is by far the lowest among the major emerging
economies (Figure 1.8), meaning that India has a structural dependence on imported supply. In
addition, combustion of coal and oil products contributes to pressing air quality problems in
many areas, as well as to global greenhouse gas (GHG) emissions.

Coal
India has the third-largest hard coal reserves in the world (roughly 12% of the world total), as
well as significant deposits of lignite. Yet the deposits are generally of low quality and India
faces major obstacles to the development of its coal resources in a way that keeps pace with
burgeoning domestic needs. In 2013, India produced almost 340 million tonnes of coal
equivalent (Mtce), but it also imported some 140 Mtce – roughly 12% of world coal imports
(61% from Indonesia, 21% from Australia, 13% from South Africa). With a view to limiting
reliance on imports, the government announced plans in early 2015 to more than double the
country’s coal production by 2020. The coal sector in India is dominated by big state-owned
companies, of which Coal India Limited (CIL) is the largest, accounting for 80% of India’s

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output. CIL has an unwieldy structure and is characterised by poor availability of modern
equipment and infrastructure, an over-reliance on surface mining and very low productivity from
a very large workforce. Around 7% of national production comes from captive mining, i.e. large
coal-consuming companies that mine for their own use; private companies are not at present
allowed to mine and market coal freely, though there are now some moves to open the coal
market. At present, more than 90% of coal in India is produced by open cast mining. This
method has relatively low production costs and is less dangerous than deep mining, but has a
large, adverse environmental footprint in the form of land degradation, deforestation, erosion and
acid water runoff.

Among the other problems facing the Indian coal sector is a mismatch between the location of
hard coal reserves and mines, which are concentrated in eastern and central India, and the high-
demand centers of the northwest, west and south. A tonne of coal must travel on average more
than 500 kilometers (km) before it is converted to electricity, straining the country’s rail network.
There are also challenges related to the quality of the coal reserves. Most of the hard coal has
low to medium calorific values and high ash content. The low heat value means that more coal
must be burned per unit of electrical output, leading to higher local emissions. The ash content
increases the cost of transporting coal, is corrosive and lowers the efficiency and load factor of
coal-fired power plants. In addition, most power plants are designed for a specific coal quality; if
not available, operators may choose to blend different coal types, which can adversely impact the
performance of the power plant, as the properties of blends can vary widely.

The difficulty in expanding coal production in recent years has been related to a number of
factors, including delays in obtaining environmental permits, land acquisition and rehabilitation
and resettlement issues, infrastructure constraints (limited transport capacity to connect mines,
dispatch centers and end-use destinations), insufficient coal-washing facilities to remove the ash
and technological limitations (notably for underground mining). Other questions concerning
future supply have arisen as a result of a Supreme Court decision in 2014 to annul the award of
almost all of the coal blocks allocated since 2003 on the grounds that these awards had not been
made on a transparent and competitive basis, although this has also opened an unexpected
opportunity for the government to reform the coal sector in order to comply with the judgement.
Two successful rounds of bidding have already been held to re-allocate some blocks and there is
a possibility that private companies may be invited to participate in future rounds.

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Oil and oil products

India is one of the few countries in the world (alongside the United States and Korea) that rely on
imports of crude oil while also being significant net exporters of refined products (Figure 1.9).
Domestic crude oil production of just over 900 thousand barrels per day (kb/d) is far from
enough to satisfy the needs of 4.4 mb/d of refinery capacity. The output from the refinery sector,
in turn, is more than enough to meet India’s current consumption of oil products, at around 3.8
mb/d (with the exception of LPG, for which India imports about half of domestic consumption).
India has relatively modest oil resources and most of the proven reserves (around 5.7 billion
barrels) are located in the western part of the country, notably in Rajasthan and in offshore areas
near Gujarat and Maharashtra. The Assam-Arakan basin in the northeast is also an oil-producing
basin and contains nearly a quarter of total reserves. Despite efforts to bolster oil production,
including the opening of India’s upstream sector to non-state investors, the sector has
underperformed. Key impediments to investment include the complex regulatory environment
(including uncertainty over contract terms and pricing arrangements), and a resource base that is
still not well-explored and appraised. The upstream is still dominated by a few state-owned
companies: about two-thirds of crude oil is produced by the Oil and Natural Gas Corporation
Limited (ONGC) and Oil India Limited (OIL) under a pre-liberalisation nomination regime.
Most of the remaining production comes from joint ventures with the national oil and gas
companies and from blocks awarded under successive licensing rounds held under the New
Exploration Licensing Policy introduced in 1999. By contrast, the refining sector continues to
strengthen. India has almost doubled its refining capacity in the last ten years and has added
more than 2 mb/d of new capacity since 2005, with strong private sector participation from
companies such as Reliance and Essar (India is now fourth in the world in terms of total refining
capacity, behind only the United States, China and Russia). India’s refinery assets include the
largest refinery in the world, Reliance’s Jamnagar complex, with over 1.2 mb/d of throughput
capacity (more than India’s domestic crude production). These capacity additions have given
India a surplus of refined products, as the growth in oil product demand growth, even at an
impressive 4.2% average annual rate, has been slower than the capacity boom.

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The refining capacity expansion, along with stagnant domestic crude oil output, means that India
has become the third-largest crude oil importing country, behind the United States and China,
with about 3.7 mb/d of import requirements (overall, India must import feedstock to meet 80%
of its refinery needs for crude oil). The majority of ports that handle imported crude oil are
located on the western side of India to accommodate oil tankers from the Middle East (the largest
source of imports), Latin America and Africa. India has sought to diversify its sources of supply,
especially as disruptions have plagued several of its suppliers such as Iran, Libya and Nigeria.
The government announced in March 2015 a strategic aim to reduce reliance on imported crude
by as much as 10% by 2022. The fall in the price of crude oil has also offered a cost-effective
opportunity to build up emergency stockpiles of crude. With the expected completion of
additional storage facilities for the strategic petroleum reserve expected in late 2015, India will
have a combined storage capacity of about 37 million barrels, or roughly ten days worth of crude
imports.

With refinery output exceeding total demand by roughly 1 mb/d, India is a net exporter of all
refined products except LPG. India has been an important supplier of diesel to Europe and a
regular supplier of transport fuel to Asia-Pacific and Middle Eastern countries. Its exports come
mainly from the private sector refiners Reliance and Essar, while the public sector refiners
supply the domestic market. Growing product exports from India have contributed to refinery
capacity rationalization in both European and Asia-Pacific markets, as India’s more modern,
privately owned refineries, which are capable of efficiently processing Middle Eastern oil into
high quality products, were able to gain market share from less complex refineries in Europe and
Japan.

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Natural gas
Natural gas has a relatively small share (6%) of the domestic energy mix. Optimism about the
pace of expansion, fuelled by some large discoveries in the early 2000s, has been dashed by
lower than expected output from offshore domestic fields. The main onshore producing fields are
in the states of Assam in the northeast, Gujarat in the west and Tamil Nadu and Andhra Pradesh
in the south. Some of the most promising areas are offshore, including the Krishna Godavari
basin off the east coast. The production record in recent years has been strongly affected first by
the start of production at the much-awaited KG-D6 offshore field in 2009, and then by its faster
than expected decline because of reported subsurface complexity. This has contributed to an
overall decrease in Indian gas output since 2011. Production of conventional gas reached 34 bcm
in 2013 and was supplemented by LNG imports via four regasification terminals. The majority
state-owned gas company, GAIL, is the largest player in the midstream and downstream gas
market.

In addition to conventional gas resources, India also has large unconventional potential, both
from coalbed methane (CBM) and shale gas. Commercial production at scale is still some way
off, although CBM activity is starting to gain momentum, with a number of private companies,
including Reliance and Essar, stepping up their involvement. In the case of shale gas, the
government approved in 2013 an exploration policy that allows the two national companies –
ONGC and OIL – to drill for shale resources in their existing blocks. However, upstream gas
development in India continues to face a number of significant hurdles: a key issue is the price
available to domestic producers.

Hydropower
India has significant scope to expand its use of hydropower: its current 45 GW of installed
capacity (of which over 90% is large hydro) represents a little under a third of the assessed
resource. Much of the remaining potential is in the north and northeast. A further 14 GW are
under construction, although some of these plants have been delayed by technical or
environmental problems and public opposition. If developed prudently, hydropower can bring
multiple benefits as a flexible source of clean electricity, and also as a means of water
management for flood control, irrigation and domestic uses. It can also enable variable
renewables to make a greater contribution to the grid. However, its development has lagged well
behind thermal generation capacity, leading to a consistent decline in its share of total electricity

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output. Capacity additions and generation have routinely fallen short of the targets set in
successive government programmes, while the objective of bringing in private investors has
likewise proved difficult to realise.

High upfront costs, the need for long-term debt (which is quite limited in India’s capital markets)
and consequent difficulties with financing have been a major impediment to realising India’s
hydropower potential. Much of the potential is in remote areas, necessitating new long-distance
transmission lines to bring power to consumers. Adequate and efficient project planning and
supervision is another hurdle, notably the challenge of evaluating and monitoring environmental
impacts (including long-term water availability and potential seismic risks), ensuring adequate
public involvement and acceptance, and assessing the effect of multiple projects (often in
different states) on individual river systems. Some hydropower projects have faced very long
environmental clearance and approval procedures, as well as significant public opposition arising
largely from resettlement issues and concern over the impact on other water users. Some of these
concerns can be reduced by undertaking small-scale projects: India has an estimated potential 20
GW of small hydro projects (up to 25 megawatt [MW] capacity) (MNRE, 2015). As of 2014, 2.8
GW of small hydro (less than 10 MW) had been developed. Such projects are particularly well-
suited to meet power requirements in remote areas.

Bioenergy
Bioenergy accounts for roughly a quarter of India’s energy consumption, by far the largest share
of which is the traditional use of biomass for cooking in households. This reliance gives rise to a
number of problems, notably the adverse health effects of indoor air pollution. India is also
deploying a range of more modern bioenergy applications, relying mainly on residues from its
large agricultural sector. There was around 7 GW of power generation capacity fuelled by
biomass in 2014, the largest share is based on bagasse (a by-product of sugarcane processing)
and a smaller share is cogeneration based on other agricultural residues. The remainder produce
electricity via a range of gasification technologies that use biomass to produce syngas, including
small-scale thermal gasifiers that often support rural small businesses. Although modern
bioenergy constitutes only a small share of energy use at present, Indian policy has recognised –
with the launch of a National Bioenergy Mission – the potential for modern bioenergy to become
a much larger part of the energy picture especially in rural areas, where it can provide a valuable
additional source of income to farmers, as well as power and process heat for consumers.

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Biofuels are another area of bioenergy development in India, supported by an ambitious blending
mandate, dating back to 2009, that anticipates a progressive increase to a 20% share for
bioethanol and biodiesel by 2017. Implementation has thus far been slower than planned: the
present share of bioethanol – mostly derived from sugarcane – remains well under 5% and
progress with biodiesel has been even more constrained. The main concern over biofuels – and
some other forms of bioenergy – is the adequacy of supply: land for biofuels cultivation can
compete with other uses, as well as requiring water and fertilisers that may be limited and is
required in other sectors.

Wind and solar

From a low base, modern renewable energy (excluding hydropower) is rapidly gaining ground in
India’s energy mix as the government has put increasing emphasis on renewable energy,
including grid-connected and off-grid systems. Wind power has made the fastest progress and
provides the largest share of modern non-hydro renewable energy in power generation to date.
India has the fifth-largest amount of installed wind power capacity in the world, with 23 GW in
2014, although investment has fluctuated with changes in subsidy policies at national and state
level. Key supporting measures have included a generation-based financial incentive (a payment
per unit of output, up to certain limits) and an accelerated depreciation provision. A scheme of
renewable purchase obligations also exists, requiring that a certain percentage of all electricity
should be sourced from wind, solar and other renewables, but the operation of this scheme has
been undercut (and not enforced in some cases) by the financial state of many distribution
companies.

Solar power has played only a limited role in power generation thus far, with installed capacity
reaching 3.7 GW in 2014, much of this added in the last five years. However, India began to put
a much stronger emphasis on solar development with the launch in 2010 of the Jawaharlal Nehru
National Solar Mission, the target of which was dramatically upgraded in 2014 to 100 GW of
solar installations by 2022, 40 GW of rooftop solar photovoltaics (PV) and 60 GW of large- and
medium-scale grid-connected PV projects (as part of a broader 175 GW target of installed
renewable power capacity by 2022, excluding large hydropower). The dependence of national
targets on supportive actions taken at state level is underlined by the fact that four states
(Gujarat, Rajasthan, Madhya Pradesh and Maharashtra) account for over three-quarters of
today’s installed capacity. Rooftop solar also has the potential to become a more important part

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of India’s solar portfolio, particularly where it can minimise or displace expensive diesel-
powered back-up generation.

While the promise is undeniable, renewable energy faces, like other energy source, structural,
governance and institutional challenges. Though costs for solar and wind are declining, in most
cases the technologies do not yet warrant investment in India (as in most other countries) without
some form of subsidy. Fiscal incentives and policy support are strong at the moment, but this is a
source of uncertainty, especially when juxtaposed with the financial difficulties faced by local
distribution companies that are often obliged to absorb the extra cost. The need for land and
additional transmission and distribution infrastructure (which India is trying to address via the
concept of “green energy corridors”) could likewise constrain progress. Given the priority in
Indian policy to develop the domestic manufacturing sector, the outlook is also contingent to a
degree on the local availability of equipment, such as solar panels and wind turbines, where India
has lost ground to lower cost producers. In China, for example, the cost of locally produced solar
modules and cells is 25-50% lower than in India.

Nuclear power
India has twenty-one operating nuclear reactors at seven sites, with a total installed capacity
close to 6 GW. Another six nuclear power plants are under construction, which will add around 4
GW to the total. The operation of the existing nuclear fleet has been constrained in the past by
chronic fuel shortages, in 2008 the average load factor was as low as 40%. This constraint was
eased after India became a party to the Nuclear Suppliers’ Group agreement in 2008, allowing
access not only to technology and expertise but also reactor parts and uranium. The average plant
load factor rose to over 80% in 2013.

Though the current share of nuclear power in the generation mix is relatively small at 3%, India
has ambitious plans to expand its future role, including a long-term plan to develop more
complex reactors that utilise thorium – a potential alternative source of fuel for nuclear reactors.
India has limited low-grade uranium reserves, but it has the world’s largest reserves of thorium:
developing a thorium fuel cycle will though require a range of tough economic, technical and
regulatory challenges to be overcome.

The nuclear industry in India is also subject to the broader challenges that are facing the
worldwide nuclear industry, including project economics, difficulties with financing and the

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implications of the Fukushima Daiichi accident in Japan for public acceptance of new projects.
India has struggled to attract the necessary investment and to gain access to reactor technology
and expertise, with the Civil Liability Nuclear Damage Act of 2010 widely seen as deterring
potential suppliers (especially Japanese and US companies). However, the United States and
India reached an understanding on nuclear liability issues early in 2015 that may facilitate US
investment in Indian nuclear projects.

Factors affecting India’s energy development

Economy and demographics
The pace of economic and demographic change is a vitally important driver of India’s energy
sector. Since 1990, India’s economy has grown at an average rate of 6.5% a year, second only to
China among the large emerging economies, and two-and-a-half-times the global average (if
both these countries are excluded). This propelled India beyond Japan in 2008, to become the
third-largest economy in the world, measured on a PPP basis. India alone has accounted for over
9% of the increase in global economic output since 1990.

In the period since the early 1990s, the poverty rate (measured as the proportion of the
population making less than $1.25/day in PPP terms14) fell by more than half, from almost50%
to less than 25%. In the eight years 2004-2011, more than 180 million people in India were lifted
out of extreme poverty. Despite this progress, income per capita is still low and a gap has
emerged between India and its counterparts among the BRICS (Brazil, Russia, India, China and
South Africa). Though starting off at similar levels in the early 1990s (in PPP terms), average

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income per capita in China is now more than double that in India (Figure 1.10). Furthermore,
although extreme poverty has been reduced, income inequality has increased in India, with the
poorest quartile of society earning a smaller share of total income than they did in 1990.

The services sector has been the major driver of growth in India’s economy, accounting for
around 60% of the increase in GDP between 1990 and 2013. This is rooted both in a robust
increase in the supply of services but, crucially, also in the increasing share of high-value
segments including financial intermediation, information and communications technology, and
professional and technical services, which have enabled total factor productivity in the services
sector to more than double. However, despite its dominant share in the economy, the services
sector employs only around one-quarter of the labour force. The agricultural sector, with less
than 20% of GDP (compared with just over 35% in 1990), continues to account for around half
of total employment (Figure 1.11).

The services-led growth that India has enjoyed since the early 1990s differs from the path of
economic development in many other countries, since it was not preceded by an initial strong
push from the manufacturing sector. The government has expressed its intention to re-balance
the economy and in 2014 announced the “Make in India” initiative, with the intention of
increasing the share of manufacturing in GDP to 25% by 2022, creating 100 million jobs in the
process. The extent to which this objective is realised will affect India’s energy development in
two ways. First, mining, oil and gas, renewables and power generation have all been identified as
clusters for industrial development, so any success will have implications for energy supply.
Second, any change in the share of industry in the economy, and the materials-intensity of future
economic growth, will have profound effects on the levels of energy demand. Urbanisation and
the build-up of a manufacturing base, including the necessary energy infrastructure, will require
significant inputs from the basic materials industry, including steel, cement and chemicals, which
are all highly energy-intensive.

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Since 1990, India’s population has grown by over 380 million people, a number greater than the
total population of the United States and Canada together. This includes a near-doubling of the
urban population, reflecting the transition away from agricultural employment. Population
growth is expected to remain high; India is set to overtake China as the most populous country in
the world before 2025 (UNPD, 2015). India’s large and growing population is often regarded as
one of its major assets; it is relatively young, with almost 60% (around 700 million people) under
the age of 30, a large and potentially very vibrant workforce. The large domestic market can also
act as a natural driver for economic growth, with levels of private consumption currently around
two-and-a-half-times as large as exports. The flip side of this demographic dividend is the likely
strain on the country’s infrastructure and resources. Water stresses that are already evident in
some regions will be exacerbated and create new challenges in relation to food and energy
security, and there will be a need to create one million new jobs each month to absorb the new
entrants to the labour market.

Policy and institutional framework

The direction that national and state policies take, and the rigour and effectiveness with which
they are implemented, will naturally play a critical role in India’s energy outlook. Clarity of
vision for the energy sector is difficult to achieve in India, not least because of the country’s
federal system and complex institutional arrangements. However, the drive for a more coherent
and consistent energy policy has been a long-standing priority, typified by the Integrated Energy
Policy 2008, the National Action Plan on Climate Change and the co-ordination efforts of the
Planning Commission (now the National Institution for Transforming India, [NITI Aayog]), all
aided by consistent improvements in the quality of Indian energy data (Box 1.3). An energy
scenario modelling exercise has also been launched, the India Energy Security Scenarios,

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overseen by NITI Aayog.15 More recently, the submission of India’s Intended Nationally
Determined Contribution (INDC) on 1 October 2015 was a milestone in both India’s energy and
its environmental policy.
India shares the overarching aim of energy policy throughout the world: to provide secure,
affordable and universally available energy as a means to underpin development, while
addressing environmental concerns. The administration in place since 2014 has given greater
definition to many aspects of energy policy, while also seeking to give more rights and
responsibilities to the individual states. Some key aspects of the emerging energy vision are:

1. A commitment to the efficient use of all types of energy in order to meet rapidly growing
demand. In the power sector, the decision to increase the target for renewables to 175 GW by
2022 (including the expansion of solar generation capacity to 100 GW) has attracted a lot of
attention; but there is also, for example, a volumetric target for India to produce 1.5 billion
tonnes of coal by 2020. Efficiency gains as well as production increases underlie India’s energy
security objective of reducing reliance on fossil-fuel imports by 10%.

2. A sharpened focus on achieving universal access to modern energy, including the objective of
supplying round-the-clock electricity to all of India’s population. This is being accompanied by a
reorientation of energy subsidy programmes, away from price controls and towards financial
payments to the most vulnerable parts of society.

3. A drive for market-oriented solutions and increased private investment (including foreign
investment) in energy, both through some energy-specific reforms (e.g. to licensing regimes) and
via a general drive to simplify and deregulate the business environment.

4. A pledge to pursue a more climate-friendly and cleaner path than the one followed thus far by
others at corresponding levels of economic development. India’s INDC includes the twin energy-
related commitments to increase the share of non-fossil fuel power generation capacity to 40%
by 2030 (with the help of transfer of technology and low cost international finance) and to reduce
the emissions intensity of the economy by 33-35% by the same date, measured against a baseline
of 2005.

Achievement of these aims is naturally contingent on the broader political and institutional
context. India is a federal, democratic country in which regional and local politics and

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governments play a very important role, via the 29 constituent states and 7 union territories (their
role is reflected in the bi-cameral national parliamentary structure, where the lower house,
elected by direct popular vote, sits alongside an upper house, representing the states and
territories). The constitution divides power between the central and state governments, as well as
defines a category of subject areas for which there are concurrent responsibilities. The central
government has exclusive competence over inter-state trading and commerce, as well as mineral
and oil resources, nuclear energy and some national taxes, e.g. on income. States have
jurisdiction over water issues and land rights, natural gas infrastructure, and many specific areas
of taxation, e.g. on mineral rights or the power generation capacity to 40% by 2030 (with the
help of transfer of technology and low cost international finance) and to reduce the emissions
intensity of the economy by 33-35% by the same date, measured against a baseline of 2005.

Achievement of these aims is naturally contingent on the broader political and institutional
context. India is a federal, democratic country in which regional and local politics and
governments play a very important role, via the 29 constituent states and 7 union territories (their
role is reflected in the bi-cameral national parliamentary structure, where the lower house,
elected by direct popular vote, sits alongside an upper house, representing the states and
territories). The constitution divides power between the central and state governments, as well as
defines a category of subject areas for which there are concurrent responsibilities. The central
government has exclusive competence over inter-state trading and commerce, as well as mineral
and oil resources, nuclear energy and some national taxes, e.g. on income. States have
jurisdiction over water issues and land rights, natural gas infrastructure, and many specific areas
of taxation, e.g. on mineral rights or the consumption or sale of electricity. Concurrent powers
include electricity and forestry, as well as economic and social planning, and labour relations.

India’s federal structure puts a premium on constructive relations between states and the central
government, but also risks duplication and inconsistent decision-making. The model being
promoted by the new administration is one of co-operative federalism, which involves increased
devolution in certain areas (e.g. a higher regional share of hydrocarbon revenues in some cases)
as well as a wider set of regional responsibilities (e.g. for timely implementation and approval of
the state-level clearances required for investment projects). There is also a greater accent on
tailoring policies and resource use, particularly in the power sector, to the specificities of
individual regions and states. Maintaining independent regulatory bodies, free of political

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interference (for example, as envisaged in the 2003 legislation reforming the power sector), is a
challenge at all levels.

The risk of fragmented decision-making also applies at the national level itself, as there is no
single body charged with formulating and implementing a unified energy policy. India has
several ministries and other bodies, each with partial responsibility for aspects of energy policy
and the related infrastructure (Figure 1.12). Effective co-ordination has been improved by the
appointment of a single Minister for Power, Coal, New and Renewable Energy, although the
individual ministries themselves continue to exist as separate entities. The institutional structure
requires constant effort – not always successful – to achieve co-ordination and resolve disputes.

Energy prices and affordability

Expenditure
The relationship between income levels, energy prices and energy expenditure is fundamental to
the evolution of India’s energy system. As one would expect, energy consumption increases with

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income, with the wealthiest 10% of the population accounting for around a quarter of all
household energy expenditure, although the poorest segments spend a greater proportion of their
income on energy. But the level of consumption and the fuel choice are also affected by location:
household expenditure on energy is, on average, almost two-and-a-half-times higher in urban
centres than in rural areas, and the most affluent among the urban population spend more than
eight-times as much on energy as the poorest, whereas in rural areas they spend four-and-a-half-
times as much (Figure 1.13).

The expenditure pattern across the income groups reflects both an increase in energy
consumption as people become more affluent and a switch in fuels, away from bioenergy and
kerosene and towards LPG and electricity. In urban areas, spending on bioenergy and kerosene
decreases drastically higher up the income groups. Bioenergy and kerosene account for almost
60% of energy expenditure among the poorest income group, but only roughly 1% among the
wealthiest group in which 85% of energy expenditure is for electricity and transport fuels.

The pattern is different in rural areas. Here, spending on bioenergy increases as income increases
(for all but the wealthiest 20%), driven by a rise in consumption, but also because the poorer
segments of society typically collect fuelwood rather than pay for it, an inclination that gradually
decreases with increasing levels of wealth. The pattern of expenditure of the most affluent decile
in rural areas is significantly different from that of lower income groups, resembling the switch
that is observed in urban centres, albeit in a more limited way. Across income levels, rural

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spending on electricity accounts for around 20% of energy expenditure (compared with almost
40% in urban areas). Rural expenditure is constrained by a lack of access, particularly among the
poorest segments of rural communities.

Energy prices
India has made significant moves towards market-based pricing for energy in recent years:
gasoline (in 2010) and diesel (2014) prices have both been deregulated, and successive
governments have made efforts to ensure that electricity and natural gas prices better reflect
market realities. End-use electricity tariffs for most consumers nonetheless remain below the cost
of supply. Reform of kerosene and LPG pricing has been much slower, reflecting the role that
these fuels play in providing lighting and cooking fuels to the poorest segments of society. As a
major consumer and importer of oil, India has also been one of the main beneficiaries of the fall
in the oil price since 2014.

Diesel is the most widely consumed petroleum product in India, accounting for around 40% of
total oil product consumption. In 2002-2010, the price of diesel was, on average, 70% that of
gasoline and this price gap widened when gasoline prices were deregulated in 2010. Price
differentials have recently lessened with the removal of diesel subsidies, resulting in diesel
consumption flattening as consumer preferences shift towards gasoline (Figure 1.14). During the
period in which transport fuels were subsidised, the benefits accrued disproportionately to the

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wealthiest strata of society: prior to the deregulation of diesel prices, the bottom two income
deciles benefited to the tune of 20 Indian rupees (INR) per capita per month on average from
subsidies, while the top two deciles received around INR 120 per capita per month (Anand,
2013). Where subsidies to oil product consumption remain, as in the case of LPG, the
government is committed to make them more efficient: the “Aadhaar” system, coupled with
recent efforts to spread banking service access to all, will increasingly allow the authorities to
make a monetary payment directly to eligible consumers, after they have purchased gas cylinders
at market prices. The government also launched a “Give it up” campaign to encourage the
wealthiest consumers to abandon their LPG subsidy. As of September 2015, over three million
Indians had voluntarily given up the subsidy.

The Indian gas market consists of two segments: for domestically produced gas, the price is
defined by the government, as are the priority uses (city gas for households and transport,
fertiliser plants, grid-connected power plants) which are entitled to gas at this lower price. After
a long debate, in October 2014 the government introduced a new pricing formula, linked to a
basket of international prices and applicable to most domestically produced gas; this resulted in a
price increase from the earlier $4.2 per million British thermal units (MBtu) to around
$5.6/MBtu, although this has since come down because of the subsequent fall in the reference
prices. The new arrangements have kept the price in a range acceptable to domestic gas-
consuming sectors, but many gas-producing companies argue that they do not offer sufficient
incentive to bring forward new investment in exploration and production in India, particularly in
offshore blocks (see Chapter 3). Imported LNG is available at contracted prices that can be
significantly higher; there have been proposals to pool LNG with domestically produced gas to
make it more accessible to domestic users as well as a subsidy scheme to increase consumption
of imported LNG in the power sector.

As noted in the electricity section, average end-use electricity tariffs in India do not adequately
reflect the cost of electricity supply, with government subsidies covering a part of the gap and
the rest being absorbed as losses by state-owned distribution utilities (Figure 1.15). According to
national policy guidelines, the state electricity regulatory bodies are supposed to set tariffs within
a 20% range of the average cost of supply, but this is rarely the case. As of 2010-11, with the
exception of three states (Gujarat, Maharashtra and West Bengal), average tariffs for consumers
were less than 80% of the cost of supply.

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The consumption changes spurred by the recent increase in diesel prices relative to those of
gasoline reflect the conventional wisdom that higher prices can act as a brake on demand,
spurring consumers to switch fuels, reduce their consumption or opt for more efficient
technologies. The inverse relationship, where low tariffs lead to inefficient use of both electricity
and water, is evident in the agricultural sector, which accounts for more than one-fifth of final
electricity consumption but only 8% of revenue for the utilities.

Social and environmental aspects

Local air pollution
Rapid economic growth and urbanisation create a number of pressures on communities and the
wider environment. These can originate from the need to meet growing demand for energy and
minerals that increase competition for land, water and other resources, as well as the polluting
by-products of the subsequent growth. India is burning more fossil fuels and biomass than it has
at any other time in the past, releasing more pollutants, including fine particulate matter and
sulphur and nitrogen oxides, into the air.

In addition to the problem of indoor air pollution linked to the traditional use of biomass as a
cooking fuel, the deteriorating air quality in growing urban centres is becoming an alarming
issue for India (Figure 1.16). Of the 124 cities in India for which data exist, only one,
Pathanamthitta), meets the World Health Organization guideline for Particulate Matter (PM)
concentrations. Delhi exceeds this guideline by fifteen-times. India has 13 of the world’s 20

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most-polluted cities and an estimated 660 million people in areas in which the government’s own
national air quality standards are not met. It is estimated that life expectancy, as a result, is
reduced by 3.2 years for each person living in these areas.

Land
The welfare of India’s rural population, which is 850 million strong and accounts for almost
70% of the total population, is closely linked to the amount of land they have available for
productive use. Land acquisition for public or private enterprises wishing to build infrastructure,
from roads and railways to power plants and steel mills, is therefore an issue fraught with social
and political sensitivity. Legislative changes introduced in 2013 introduced stringent procedural
requirements for land acquisition, defining compensation payments and rehabilitation and
resettlement benefits and stipulated that potential developers in the private sector would need to
secure the consent of 80% of affected families in the case of land acquisition (70% for
acquisitions by public-private partnerships). There have since been attempts to amend this
legislation, but finding an appropriate balance between the drive to push ahead with
infrastructure projects, on the one hand, and the rights of local communities, especially farmers,
on the other, is proving difficult. In the absence of a resolution to this issue, obtaining the
required statutory clearances related to community rights, environmental protection and
sustainable development has been a major cause of delay. At end-2014, infrastructure projects
valued at around 7% of GDP were stalled for these reasons (OECD, 2014). Projects in the energy
sector are particularly susceptible to delay: detailed analysis of projection applications showed

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that the clearance process for some 40-60% of projects in thermal power, hydropower, coal
mining and nuclear power sectors went beyond the statutory time limits.

Water
High rates of population and economic growth, along with highly inefficient patterns of water
use in the agricultural sector, are putting severe strain on India’s water resources. With
renewable water resources of some 1 130 cubic metres per capita in 2013, India has now passed
the defined threshold for “water stress” (1 700 cubic metres per capita). This has major
implications for the energy sector: more than 70% of India’s power plants, for example, are
located in areas that are water stressed or water scarce (WRI, 2014) and India’s warm
temperatures and the poor quality coal used in the bulk of its power plants add to their cooling
requirements. Global climate change could exacerbate these stresses.

Around 90% of India’s water withdrawal is for use in agriculture and livestock, often extracted
by tube wells powered from the grid and drawing from groundwater reserves. Subsidised
electricity tariffs for agricultural users and a lack of metering have led to hugely inefficient
consumption of both electricity and water: in 2010, more water was withdrawn in India for
agricultural use alone than for all purposes in China. A number of national and state-level
initiatives have sought to encourage more efficient water use, via metering, tariff reform (linked
to more reliable supply) and changes to agricultural practices. Plans to introduce more efficient
equipment, including solar-powered groundwater pumps, while relieving some pressures on the
grid, could reduce incentives for water conservation unless they are accompanied by the
introduction of systems that use water more efficiently, such as drip irrigation networks.

Carbon-dioxide emissions
India’s CO2 emissions can be seen through two lenses. Calculated on a per-capita basis,
emissions are extremely low, standing at just one-quarter of China’s and the European Union’s
and one-tenth the level in the United States (Figure 1.17), while India also accounts for only a
small share of cumulative historical GHG emissions. On the other hand, India is the third-largest
country in volume terms of CO2 emissions in the world, behind only China and the United
States. Heavy dependence on coal for power generation and the use of inefficient subcritical
plants to burn it push up the carbon intensity of India’s power sector to 791 grammes of carbon
dioxide per kilowatt-hour (g CO2/kWh), compared to a world average of 522 g CO2/kWh.

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Investment
Since 2000, we estimate that investment in energy supply in India has increased substantially,
reaching almost $77 billion on average since 2010 (Figure 1.18). The power sector absorbs the
largest share, spurred by the rapid increase in demand as encouraged by the liberalisation agenda
launched by the landmark Electricity Act in 2003. Maintaining a rising trend in infrastructure
spending, especially energy sector spending, is a major government policy priority. India’s
government aims to increase investment in infrastructure (broadly defined, including
communications, road, rail and energy networks, as well as social areas such as schools and
hospitals) to 8.2% of GDP, from roughly 7.2% in 2007-2011. More than a third of this $1 trillion
in infrastructure spending is to go to electricity, renewable energy, and oil and gas pipeline
projects, with around half from private investment.19 Relieving infrastructure bottlenecks,
particularly those related to poor road and rail infrastructure, inefficient ports and unreliable
electricity supply, is widely recognised as essential to meet India’s economic growth and
development ambitions (IMF, 2015).

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As the Indian government has recognised, public funds sufficient to support the necessary
investment projects in the energy sector cannot be taken for granted, in the face of increasing
competition from other areas of public spending (including healthcare, pensions, education, etc.).
So meeting the country’s investment needs will require the mobilization of increasing amounts
of private capital, including foreign direct investment (FDI). Access to such investment
opportunities by the private sector though is uneven across the Indian energy economy and a
number of broader impediments to attracting investment persist, such as the complex regulatory
environment, in relation to which the World Bank has ranked India 142 out of 189 countries in
terms of ease of doing business. Despite these impediments, India’s vast potential puts it high on
the list of prospective destinations for foreign investment, ranking third behind China and the
United States. Furthermore, 2014 saw a significant increase in FDI inflows, which rose by 22%
compared to the previous year, to a total of over $34 billion (UNCTAD, 2015). Preliminary
numbers for FDI in 2015 show a further substantial increase.

Since the late 1990s, steps have been taken to deregulate the oil and gas sectors, notably
successive bidding rounds held under the New Exploration Licensing Policy, which have been
open to a range of private players. However, these two sectors remain dominated, in practice, by
a handful of state concerns and the process of opening the coal sector to private investment is
only just beginning. The power generation sector has been open to private participation for some
time and the government has offered a range of fiscal incentives to increase the attractiveness of
projects. Since 2006, 6 GW out of every 10 GW of net capacity added to the grid has been

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financed by private investors, whose share of generation has increased quickly, to reach more
than one-third of the total (Figure 1.19). Private sector involvement in the distribution side of the
power system is much more limited. Presently the distribution utilities are largely state-
controlled and administered, and the priority given to regional social sensitivities often
contributes to the under-recovery of costs across the sector.

Projecting future developments

The projections for the India energy outlook presented in the following chapters are derived by
means of the same overall analytical approach used in the World Energy Outlook 2015, but with
additional analysis to draw out the policy choices facing India and their implications. The
primary focus throughout is the New Policies Scenario – our central scenario – which takes into
consideration both existing policies and regulations as well as India’s announced policy
intentions, such as the targets for renewable and coal and the push to provide universal, reliable
electricity access. A cautious view of the pace of implementation is taken throughout the New
Policies Scenario, meaning that in the case of India, government targets and objectives are not
always reached. This is not a judgement of the feasibility of the government’s ambitions or its
commitment to them, but reflects our view of the real-life constraints – including regulatory,
financial and administrative barriers – that have to be faced. Given the uncertainty that is
inherent in long-term projections, we refer in this special focus to a number of alternative
scenarios and cases for India, alongside the New Policies Scenario.

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Economic and population growth

India’s changing economy is a fundamental driver of its energy development to 2040. In the New
Policies Scenario, average annual growth remains at 7.5% until 2020, before slowing gradually
to around 6.3% per year by the 2030s. For the entire period to 2040, India’s economy grows at a
faster rate than any other in the world, by an average of 6.5% per year. By 2040, the economy is
over five-times its current size (Figure 1.20). Nearly $1 in every $5 of additional economic
output generated in the global economy over the projection period comes from India, leading to a
four-fold increase in GDP per capita.

The economic growth path for India is higher than that in the World Energy Outlook-2014, by
0.4 percentage points a year, reflecting both a revision of purchasing power parity calculations in
2014 by the International Comparison Program (and subsequently by the International Monetary
Fund) and the methodological change adopted by India itself in early-2015. These changes,
which affect the base year, mean that the economy today is 36% larger than calculated under the
previous methodology. The effect of economic development on the pattern of energy use is not
limited to size and the rate of growth, but includes changes to its composition (Figure 1.21). In
the New Policies Scenario, though rising less rapidly than targeted by the government, the share
of industry in GDP (which includes manufacturing, construction and the extractive industries)
does increase over the coming decades, pushed higher by a policy and demand-driven expansion
of the manufacturing sector, the “Make in India” initiative. The share of services likewise
expands, both at the expense of agriculture.

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Population growth and changes in the population dynamics is another key driver of energy
trends. India is already the second-most populous country in the world, with more than 1.25
billion people in 2013. Despite the population growth rate to 2040 slowing to almost half the
average rate in 1990-2012 (from 1.6% to 0.9%), growth remains strong enough for India to
overtake China as the world’s most populous country by 2025, with India’s population rising to
1.6 billion by 2040. Almost all of the net growth in the Indian population is absorbed into India’s
cities: the 315 million increase in India’s urban population is roughly equivalent to the entire
population of the United States today. The urban share of the total population rises from less than
a third to 45%, and means that, at 715 million, there are more people living in cities in India in
2040 than there are in the United States, Japan and Mexico combined. The pattern of
urbanisation that India follows has critically important implications for the evolution of its
energy consumption.

Energy prices
Energy prices in these projections are largely derived from the international price trajectories
described in the Introduction and scope. They vary according to the scenarios under
consideration (the Indian Vision Case shares the same international energy price assumptions as
the New Policies Scenario). These price assumptions feed through into India’s domestic prices,
albeit with important qualifications that depend on national policies. The domestic prices of all
oil products, except LPG and kerosene, are assumed to be linked to international prices, and
those of LPG and kerosene converge towards the international price, reflecting the assumption
that policy interventions affecting the price levels of these products are replaced by targeted
direct payments to the most vulnerable.

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In the case of natural gas, the domestic price level is a weighted average of the price for imported
LNG (which, in the New Policies Scenario, remains relatively low over the medium term before
rising back to over $9/MBtu in 2020 and almost $13/MBtu by 2040) and the assumed price paid
to domestic producers. The latter evolves in line with the new pricing formula introduced in
October 2014, which produces a gradually increasing trend; but we assume that this formula is
modified to provide a greater incentive for domestic output (this reflects a generic assumption in
our modelling that import-dependent countries make efforts to stimulate domestic production
and reduce import dependence). Similarly, in the coal sector, we assume a gradual convergence
between domestic and international prices in India, driven both by rising domestic mining costs
and by the increasing use of marketbased instruments to determine prices. In the case of
electricity, we assume continued preferential tariffs for certain groups (agricultural consumers,
low-income groups) but that, over time, the average end-use tariff reaches a level that
remunerates in full the costs of supply, including a reasonable rate of return (accompanied by
financial restructuring of the state distribution companies). This reflection of India’s policy
intentions is a necessary long-term condition for the sound functioning of the electricity market.

Policies
India is undergoing a rapid social and economic transformation, in which strong economic
growth, a burgeoning middle class and large-scale urbanisation underpin broader development.
Indian policy-makers face the twin challenges of meeting the growing energy requirements to
fuel this transformation, while also ensuring that growth is equitable, its fruits shared fairly
among India’s vast population. As a result, energy security imperatives, including quality,
resilience and diversity of supply, but also issues of access, poverty alleviation and affordability
are assured to form the foundations of Indian energy policy-making. In terms of the energy mix,
India is seeking to balance its development needs with the need to increase the share of low-
carbon sources in the energy mix. Its vision provides a continued, important place for coal,
alongside a strong push in favour of renewable sources of energy, particularly solar and wind
power.

For this special report, we have conducted an extensive review of India’s existing policies,
regulations and programmes affecting the energy sector, as well as its announced intentions,
assessing in each area the record of past achievement and what this might mean for the prospects
and speed of future progress. The way that policies shape our projections is discussed in more

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detail in the chapters that follow. Table 1.2 is a summary of India’s domestic policy objectives
and assumptions that are taken into account in the New Policies Scenario.

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