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Following up on a panel discussion on energy security, wherein the Secretaries of various energy ministries of the Government of India discussed the future of energy supplies, Brookings India and McKinsey & Company hosted a discussion to examine the demand-side ramifications. Panelists included representatives from government, civil society, academia, and industry: Mr. P.K. Sinha, Secretary, Ministry of Power; Mr. Vijay Chhibber, Secretary, Ministry of Transportation and Highways; Mr. Ashok Sreenivas, Head of Policy, Prayas; Mr. Satish Kumar, Energy Efficiency Ambassador, Schneider Electric; and Mr. Vipul Tuli, Director, McKinsey & Company.
Background and Context
A key factor that underlies questions on how energy demand is anticipated to change in the future is that India’s current demand is low because of economic reasons, and that as the country gets richer, consumption will also increase accordingly. In estimating what “Business as Usual” (BAU) will look like in coming years, two studies provide a starting point. First, the McKinsey Energy Security 2030 analysis defines BAU as a doubling of demand, which would take India to about 1500+ MTOE primary energy, implying a 1 percent annual improvement in energy intensity (energy per GDP). Through aggressive interventions, this demand could potentially be brought down by 10 percent.
Additionally, the Planning Commission has created a 2047 Energy Security Toolkit, which serves as a scenario builder based on aggregation and balancing. The BAU primary energy supply is 1864 MTOE, for a demand of 1229, or about 2/3 of supply. Factoring in “heroic efforts” all around, i.e., for everything in both supply and demand, this scenario builder brings demand down to 897 MTOE (a 27 percent reduction). Supply is similarly reduced, but the level of supply reduction depends on assumptions about carbon capture and sequestration, which consumes enormous primary energy but reduces carbon emissions.
In the context of such studies and surveys, panelists shed light on what they expect BAU to look like in the coming five, ten, and twenty-five years, and recommended policies to improve and shift this number.
Broadly, the panel recognized that a deviation from BAU will be challenging, pointing to several constrains that need to be ameliorated. Overall, the management of demand, it was concluded requires energy efficiency, conservation, and independence from energy usage. Some of the most pertinent points that emerged, centered on:
Pricing and Subsidy Structures:
Panelists raised several concerns with the existing pricing and subsidy mechanisms. One of the most significant recommendations was that we need to take a more integrated view of energy pricing. This is embedded in the much larger need for a more cohesive and comprehensive energy framework. Currently, the pricing of energy is isolated, leading to several distortions and coordination problems. For instance, heavy subsidies on some energy sectors reduce the incentives for using alternative sources of energy. Flat-rate pricing, they noted, leads to greater dependency on petrol, thereby causing the import bill to rise.
Agency and signaling problems in pricing must also be addressed – for example, the person who installs the equipment is often not the person who pays the energy bill.
On the point of subsidies, the panel unanimously concluded that the existing subsidy regime must be reformed in order to promote energy efficiency in the energy demand sector. Existing subsidies have several externalities that need to be ameliorated; for instance, the subsidy on kerosene has tremendous opportunity costs.
In the long run, panelists recommended that the pricing of energy must be market-driven, and cover the costs. In addition, cross-subsidization must be phased-out, and if the government chooses to subsidize some consumer categories, it should pay for this out of its own budget.
Policy versus Ground Reality:
While the broad government tools and policies surrounding energy efficiency are visible, there is an absence of understanding at the ground-level on how these tools should be put to use, and how they should be customized for each sector to achieve efficiency. Currently, there are pools of efficiency that are visible in each sector, but these need to be scaled up.
Representatives of industry noted that while they hear claims about the vast market for energy efficiency, the on-ground market is only a tiny fraction. Businesses find it hard to visualize how they can monetize energy efficiency, and developing a business case for energy efficiency appears more challenging than developing overall policies for achieving efficiency. In light of this, panelists recommended that energy efficiency measures be taken individually for each energy consumption sector.
Unmet and Latent Demand:
There are several gaps in the availability of demand-related statistics, and consequently we lack a complete understanding of what the present demand of energy is. But in addition, there is also a severe shortfall of energy supply. With 30% of the country lacking access to energy, India is steeped in energy poverty, and deliberate policy and government action is required to meet this unmet demand. While speaking about increasing access, panelists also discussed how “electrification” – the process of wiring a village and 10 percent of homes – isn’t sufficient, and explained the need for data on not just a wire but actual supply to the villages.