WORKING PAPERS SERIES

JULIAN SIMON CENTRE FOR POLICY RESEARCH

October 2002

Renewable Energy Sources in India

IS IT VIABLE?

Sutanu Guru

Liberty Institute
J-259, Saket, New Delhi 110 017 Tel: 91-11-6528244 Fax: 91-11-6532345 Email: liberty@nda.vsnl.net.in Website: www.libertyindia.org

 2002 Liberty Institute

The views expressed are that of the author, and do not necessarily reflect that of Liberty Institute. Published by Barun Mitra on behalf of Liberty Institute, E-6, Press Apartments, Patparganj, Delhi 110 092.

Renewable Energy Sources in India: Is It Viable?

Sutanu Guru

Introduction
Promoting freedom from Fossil Fuelsbut the time is running outsoon, there will be nothing left to burn on the earth but earth itself.1 This is the new take on freedom and green activism for energy consumers and policymakers in India, courtesy the Indian Renewable Development Agency (IREDA), whose website forecasts a fiery death for planet earth. IREDA is merely following the enduring fashion of modern times, one of global green activism and a strongly held belief in the coming era of a new energy revolution.2 In this twenty-first century coup, clean and green renewable energy sources will soon banish dirty and polluting fossil fuels into the trashcan of history.3 Some are even convinced that a new messiah will do to renewable energy what John D. Rockefeller did to oil and Bill Gates is doing to computers! 4 This global fever is now entrenched firmly in the Indian policy-making establishment. By the time the Y2K virus slipped into oblivion in 2000, renewable energy sources accounted for 2,000MW of installed capacity in Indias power generation sector. This works out to about two percent of the total electric power generation capacity in the country. The Ministry of Power has now set very ambitious targets for the renewable sector; the capacity is slated to go close to 11,000 MW, or, more than five percent of the total electric power generating capacity in India.5 Look at the renewable ambitions from another angle. During the 1990s, the average annual addition to capacity was about 150MW. In the next ten years the average annual addition to capacity is slated to leapfrog five times to about 750MW.6 How realistic are these ambitious targets?

http://www.ireda.nic.in The official website of Indian Renewable Energy Development Agency carries this message on the home page. Full text of the message is: Promoting Freedom from Fossil FuelsPromoting renewable energy business in billions for millionsGreen Power CrusaderPromotes Clean Technologies. IREDA invites your participation in the renewable energy movement.... but the timeearth itself. 2 Thousands of reports, research-cum-policy papers, books and media articles have repeated this claim in one way or other. The first to trigger the perennially elusive gold rush for renewable sources was Limits to Growth: A Report for The Club of Romes Project on the Predicament of Mankind, Donnela Meadows, Dennis Meadows, Jorgen Randers and William Behrens III, 1974. Another book that provides an insight into the renewable movement is The Poverty of Power: Energy and Economic Crisis, Barry Commoner, 1976. The most influential series to have sustained the renewable movement are annual reports titled State of the World, by World Watch Institute. 3 Following accepted wisdom, this paper refers to coal, oil and gas as fossil fuels. The cast of renewable energy sources is long: ranging from hydroelectric to wind energy to hydrogen fuel cells. This paper excludes nuclear and large hydroelectric projects from the list of renewable sources as they have been forever exiled by green activists, sometimes drawing more opposition than even king coal! In India, the government has decreed that hydroelectric projects upto 25MW fall in the small-is-beautiful category. Till the end of 1999, only projects upto 3MW came under the renewable category. See: Annual Report: 1999-2000 Ministry of Non-Conventional Energy Sources (MNES), Government of India. Also excluded from the ambit of this paper are still emerging renewable sources like tidal, wave, fuel cells and the like as they do not play a role in the policy makers strategy of renewable energy growth. (MNES). 4 Read: Energy for a New Century, Christopher Flavin, World Watch, March/April, 2000. 5 See: Blue Print for Power Sector Development, 2001, Ministry of Power (MOP), Government of India. 6 Almost all the significant capacity additions during the 1990s came from the wind energy sector, with a cumulative capacity of 1200MW by 2000. In the next ten years too, wind energy is slated to add 6000MW to electric power generation capacity in the country. 3

Sifting hard data from hopes, and reality from dreams might just burst the renewable bubble that is being inflated in India. It has already burst in other countries that made a fetish of using renewable energy sources as the preferred feed for electric power generation.7 Just what is the reality?
Renewable sources of energy cannot play a key role in Indias power sector in the next ten years, without consumers and the economy paying a very high opportunity cost.8

This paper sets out to prove the validity of this hypothesis. Section One examines factors that made renewable energy so attractive in the 1970s. Section Two traces the emergence and growth of renewable energy sources in India from the 1970s to the current status as a developed industry. Sections Three and Four provide specific reasons and data to show why renewable sources cannot play a significant role in Indias electric power sector. Section Three lays bare the inherent technological hurdles faced by electric power systems using renewable sources while Section Four attempts to demonstrate how, once subsidies and other freebies are factored in, renewable sources turn out to be a far more expensive proposition than conventional fossil fuels. Section Five provides a birds eye view of the many monetary, fiscal and other incentives offered to renewable energy sources in India. The final section outlines the inevitable policy conclusions and recommendations offered by the analysis of the preceding sections.

Section One

Why a Renewable Revolution is always Round the Corner

Worldwide fossil fuel reserves are not going to disappear tomorrow, next week, or next year, as periodically forecast by green activists. In India, proven reserves of coal should last more than five hundred years. The Middle East has no monopoly over oil and gas reserves, with other sources accounting for more than seventy percent of supplies. Commercial exploration using private capital could lead to huge oil and gas discoveries in India. Political conflicts through the eighties and nineties in oil and gas supplying regions have not resulted in high prices. Rather, prices have declined steadily, in real terms. New technologies have resulted in dramatic reduction in pollution and environmentally damaging emissions from fossil fuel based plants generating electric power in developed countries particularly in coal. They are readily available for use in developing countries. Gas and combined cycle technology using gas are emerging as the cleanest and cheapest source of electricity for the future. They will play a key role in reducing carbon emissions, an area of concern for global warming.

By the early eighties, it was estimated that by various bodies that wind energy will contribute about ten percent to total electric power generation capacity by 2000 while solar energy could contribute as much as twenty percent. In reality, the two sources combined together did not contribute even half a percent by the end of 1990s. See: The Increasing Sustainability of Conventional Energy, Robert Bradley, Cato Policy Analysis No: 341, 1999. World Watch Institute had forecasted that renewable energy (particularly wind) could contribute about ten percent of electric power generation capacity by 2000 in Spain. In reality, the total contribution of all renewable sources was less than two percent. 8 Higher opportunity costs to the consumer would simply mean higher prices of electricity if renewable sources were imposed on them through mandates. For the economy, the thousands of crores diverted to promoting renewable energy sources mean less funds for other sectors. 4

 Despite optimistic forecasts to the contrary, non-combustion based renewable sources of energy contribute less than one percent of electric power generated in the world. In India, it is a healthier less than two percent. One may call them the trinity that blesses the always imminent renewable energy revolution in the world: dwindling fossil fuel reserves, energy security and external polluting costs of fossil fuels. They are routinely invoked, singly or in tandem, to prove to hard-nosed sceptics that the world, including India, has no choice but to opt for a renewable tomorrow. Is the rationale behind promoting renewable energy sources based on facts? Fossil Fuels: GoingGoing Gone? Tomorrow next week next month next yearnext decadein the foreseeable futurethe deadlines sounding the knell of fossil fuel reserves have been habitually extended. But the horizons are always extended.9 Confirmed estimates by the end of twentieth century reveal that proven reserves of oil would last forty-four years, gas reserves will be around for seventy or more while coal reserves would last two hundred and twentyone years.10 A single example will illustrate how wrong these alarming predictions have been: In the Persian Gulf, estimated reserves in 1944 were twenty-one billion barrels. Cumulative production from 1944 to 1993 was one hundred and eighty-eight billion barrels, nine times the 1944 estimate, and remaining reserves in 1993 were six hundred and thirtythree billion barrels, thirty-two times the 1944 estimate.11 Oil and gas reserves in India may not generate a lot of excitement. Current estimates show total oil reserves of 5.7 billion barrels, enough to last a dozen years or so at the present levels of consumption. Gas consumption, at 0.795 trillion cubic feet already exceeded production in 2000.12 Should alarm bells be ringing in India? Not so quickly. Recent international studies indicate that no more than a quarter of Indias twenty-six secondary basins have seen serious exploration activity. These include offshore basins covering about 3,80,000 square kilometres and on shore basins covering 13,40,000 square kilometres. It has been estimated that these untapped basins may well contain thirty billion tonnes of reserves, five times the current figure, thereby extending the projected depletion date by more than fifty years13 (See Table 1). Table 1: Oil and Coal Reserves in India* Proven Reserves Indicated Reserves Years to Last 5.7 billion barrels 30 billion tonnes 60 billion tonnes 82 billion tonnes 211 billion tonnes 300 billion tonnes

Fuel Oil Coal**

** Includes coking and non-coking coal. Source: Annual Reports, 2001, Ministry of Coal and Ministry of Petroleum & Natural Gas. Firm estimates of natural gas not available

The first organized and scientific study to forecast that mineral resources will be depleted to the point of extinction was made by The Limits to Growth, the Club of Rome and Massachusetts Institute of Technology (MIT) study which came out in 1974. Eighteen years after most of the studys forecasts were proving way off the mark, a revised repeat was released in 1992: Beyond the Limits: Confronting Global Collapse, Envisioning a Sustainable Future, Meadows et al. 10 See: Soft Energy versus Hard Facts: Powering the Twenty First Century, Jerry Taylor and Peter Van Doren, in Earth Report 2000:Revisiting the True State of the Planet, edited by Ronald Bailey and The Increasing Sustainability of Conventional Energy, Robert Bradley Jr., Cato Policy Analysis no 341, 1999. 11 Taken from Soft Energy versus Hard Facts, Taylor and Doren, page 122. 12 See: Hydrocarbons Vision 2025, Directorate General of Hydrocarbons, Government of India. 13 See: An Energy Overview of India, EIA, USA, http://www.fe.doe.gov/international/indiover.html 5

But more than oil and gas, it is reserves of coal that put India in a very comfortable position. Proven reserves of coal in the country are in excess of eighty-one billion tonnes, while the total reserve position swells to more than two hundred and eleven billion tonnes if indicated and inferred reserves are added. In fact, India is the third largest coal producer in the world after China and USA.14 So much for conventional fossil fuels such as oil, gas and coal. The depletion date for fossil fuels extends beyond another three hundred years or so if unconventional fossil fuels like Orimulsion, natural bitumen, tar sands and oil shale are taken into account.15 Today, one prominent study estimates that six trillion barrels of recoverable conventional petroleum exist today (a reserve of approximately two hundred and thirty-one years given present consumption) and another fifteen trillion barrels of unconventional petroleum is recoverable given favourable economics. Given present consumption, that would give us two hundred and thirty-one years of conventional petroleum and eight hundred and eight years of petroleum reserves of all kinds.16 The comfortable reserves position is reflected in the long-term price trends of fossil fuels, which have declined in real terms since the 1970s. In fact, fossil fuel prices in real terms are lower now than they were in the 1940s.17 The conclusion: Fossil fuels are not disappearing in a hurry. Ergo, whats the hurry in imposing renewable sources of energy on consumers when the markets are not ready to accept them? The Myth of Energy (In)security Renewable energy activists cite disrupted supplies of oil during the 1970s and the capacity of a few oil rich nations to hold the world to ransom as alleged market failures which could be rectified by investing in a future with renewable energy sources. It all started in 1973 when member countries of the Organization of Oil Exporting Countries (OPEC) delivered the first oil shock to importing countries by threatening embargoes and raising crude oil prices three-fold. This was repeated in 1979 when oil prices were raised a further four times. Along with the world India too was a victim, with inflation going well above double digits in the immediate aftermath of the oil shocks.18 Add political volatility and conflicts in the Middle East, and the possibility of sustained oil supply disruptions suddenly looked frighteningly real. The spectre of energy insecurity gave new respectability to terms like self-reliance and import substitution in countries like India.19
14 15

See: Annual Report: 2001, Ministry of Coal, Government of India. Orimulsion became the fourth fossil fuel in the mid-1980s when technological improvements made Venezuelas reserves of tar like substances commercialVenezuelas reserve equivalent of 1.2 trillion barrels exceeds the worlds known reserves of crude oil See The Increasing Sustainability of Conventional Energy, Robert Bradley Jr., 1999. It has been calculated that these sources will become viable when oil prices go upto and remain steady at thirty US dollars a barrel. In the first week of July 2002, India was importing crude oil at twenty-five US dollars a barrel. 16 See: Soft Energy versus Hard Facts, Taylor and Doren, page 121. The paper has cited Resources as Constraint on Growth? William Nordhous, American Economic Review, April 1974 and Facing the Elephant: Oil Market Evolution and Future Oil Crises, Michael Lynch. The reserve estimates are from Energy Information Administration, 1997. 17 See: The Increasing Sustainability of Conventional Energy, Robert Bradley, 1999. 18 Inflation rates after the two oil shocks of 1973 and 1979 were thirteen percent and nineteen percent respectively in India. See: Economic Survey, 1983, Government of India. 19 While self-reliance and import substitution were development mantras used since the fifties, they acquired a new sense of urgency in five-year plans. Companies and policy papers started giving annual report cards on import substitution. See: Economic Survey, 1985 and Sixth Five year Plan: Perspective Paper, Planning Commission, 1980. 6

Energy security demanded that nations looked for alternative sources of energy, the most promising being renewable sources. No wonder, the renewable energy movement really took off in the 1970s. How Fossil Fuel Supplies Became Secure But were importing nations facing an energy insecurity? Subsequent events have proven these fears wrong. In fact, the Gulf War of 1990-91 created a very temporary ripple in energy markets worldwide; and that too, nothing on the scale seen in 1970s. By the 1990s, the portfolio of oil suppliers had widened and diversified considerably, with OPEC no longer holding all the aces. In fact, presently, OPEC countries in the Middle East account for less than a quarter of oil exports. Besides, increasing integration of global energy markets has largely cushioned the impacts of political and civil conflicts in the region. India too is no longer dependent on OPEC countries to the extent it was earlier, though oil imports account for more than a fifth of the total import bill of the country. The signing of longer-term contracts for firm deliveries in the future is also reducing the vulnerability to price fluctuations. In addition, policy-makers are encouraging intensive exploration activities in hitherto untapped areas by attracting private capital. One estimate has already indicated that reserves are poised to go up five times to more than thirty billion tonnes.20 Finally, India holds a trump card in the form of huge reserves of coal. In any case, the presence of an energy insecurity would have ultimately meant higher prices for imports of oil. On the contrary, in the last thirty years, real prices of oil have actually declined all over the world.21 Are renewable energy sources in a position to offer electric power at rates lower than or competitive with fossil fuels? The answer is that they have failed in the last three decades. Where is the logic, then, in imposing renewable energy sources on consumers by forcing them to pay substantially higher prices? On Adding External Costs of Fossil Fuels It is often argued that fossil fuels and electric power generated by them is not as cheap as suggested by traditional costing methods. Fingers point towards the damages caused by fossil fuels on the ground land degradation, deforestation, and defiling of rivers and in the air harmful emissions of sulphur, nitrogen, and carbon; leading to adverse health effects and global warming. The logic is that if a monetary value were put to these external costs, it would then turn out that renewable sources are not so expensive, after all.22 There are some who claim that if external costs are factored properly, electric power from wind energy will be cheaper than that from coal or gas.23 Reducing Emission Levels While value judgements may vary, there now seems to be a consensus that electric power generation using fossil fuels particularly coal leads to emissions that cause global warming. There also seems to be a consensus on the need to de-carbonise the energy chain as
20 21

See; An Energy Overview of India, EIA, USA, http://www.fe.doe.gov/international/indiover.html See: Renewable Energy Sources: Not Cheap, Not Green, Robert Bradley Jr., Cato Policy Analysis no 280, 1997. 22 See: Renewable Energy Comes of Age, Christopher Flavin and Seth Dunn, November, 2000 in http://www.peopleandplanet.net Also dealing extensively with the external costs of fossil fuels is: State of the World, 1998, World Watch Institute. 23 See: Annual Review: 2001, American Wind Energy Association. According to estimates made by the association, wind energy in ideal sites generates electric power at two to three cents per kilowatt-hour, less than the actual costs for coal and gas. 7

much as possible.24 However, there is as yet scientific consensus on what extent carbon emissions lead to higher temperatures and how harmful global warming is really.25 In any case, developing countries like India are not obliged to implement emission norms prescribed by the now famous Kyoto Protocol.26 Before global warming through carbon emissions became the politically correct cause to espouse, it was the adverse health effects of sulphur and nitrogen emissions from electric power plants that caused most concern. Have these concerns been addressed? A look at emission patterns and trends in the biggest polluter USA would be instructive. One study estimates that electricity generation increased by fourteen percent between 1989 and 1996 even as sulphur emissions declined by eighteen percent while nitrogen emissions went up a mere three percent. This was largely due to a fifty percent increase in the scrubbing of coal by high-tech pollution control technologies and a fifty percent drop in the sulphur content of coal.27 These are the emission issues which concern India. But while lagging behind USA, electric power plants using fossil fuels have initiated steps to reduce sulphur and nitrogen emissions. Practically all plants operated by the National Thermal Power Corporation (NTPC) now have pollution control mechanisms, which have reduced sulphur emissions by nearly forty percent.28 The problem of high ash content in Indian coal is also being addressed with thirty washeries being set up to clean coal before they reach power plants in the 1990s. In addition, imports of cleaner coal amounted to twenty-five million tonnes by the end of 1990s.29 No doubt there is a way to go but recent trends illustrate how sulphur and nitrogen emissions can be reduced in India. Gas Emerging as the Cleanest Fuel In the 1990s, gas has emerged as the cleanest fuel, thanks to new combined cycle and co-generation technologies. Electric plants using combined cycle units could end up reducing emissions by fifty to ninety percent in most cases.30 (See Table 2) Table 2: How Gas Reduces Emissions Gas Reduction in emission* Sulphur Dioxide 99% Nitrogen Oxides 81% Carbon Dioxide 58% Particulates 95%
* Percentage reduction in emission if gas is used instead of coal to generate electricity Source: Renewable Energy: Not Cheap, Not Green, Robert Bradley Jr, Cato Policy Analysis, No. 280, page 27
24

See: Economist, July 6, 2002, Survey on Energy and Environment and Leader on Coal; The Weakening Grip of King Coal, Christopher Flavin, World Watch, 2000 25 See: A Stunning Regulatory Burden: EPA Designating CO 2 as a Pollutant, Mark Mills, 1998, The Risks of Disrupting Climate, Molly OMeara, World Watch, 1997; Sound and Fury: The Science and Politics of Global Warming, Patrick Michaels, Cato Institute, 1992, Can Increasing Carbon Dioxide Cause Climate Change?, Richard Lidzen, 1997; Impacts of Kyoto Protocol on US Energy Markets and Economic Activity, EIA, USA, 1998, cited in The Increasing Sustainability of Conventional Energy, Robert Bradley Jr., 1999 26 The Kyoto Protocol obliges signatories (mostly developed countries) to reduce global greenhouse emissions by an average of 5.2 percent from 1990 levels in the 2008 - 12 period. 27 Annual Energy Review, EIA, USA, cited form The Increasing Sustainability of Conventional Energy, Robert Bradley Jr. 28 See: Annual Reports: 2000 and 2001, NTPC 29 See Annual Report 2000, Ministry of Coal, Government of India. 30 See: Renewable Energy: Not Cheap, Not Green, Robert Bradley Jr., Cato Policy Analysis No 280, 1997 http://www.cato.org/pubs/pas/pa-280.html 8

Clearly, natural gas and new combined cycle technologies have gone a long way to reduce emissions. From virtually zero in the mid 1980s, electric power capacity using gas has shot up to more than 3,500MW by the late 1990s.31 The Ministry of Power estimates that electric power capacity using gas as the base fuel could go up to 25,000MW by 2012.32 Do Renewable Sources Become Cheaper? Will the additional costs involved in pollution control and reduced emissions make electric power from fossil fuels more expensive than renewable sources? Not at all, as evidence from the 1990s would suggest. Reducing emissions of nitrogen oxides and sulphur dioxide by seventy-five percent below 1997 levels (the most common proposal) would increase electricity prices by about one percent, too little to trigger a shift from coal or natural gas to renewable energy. The Energy Information Administration (EIA) notes that while scrubbers, selective catalytic reduction and selective non-catalytic reduction can be expensive, they generally are not costly enough to make existing coal fired plants uneconomical33 A one percent increase in the price of fossil fuel fired electric power would leave renewable sources at least fifty percent more expensive than fossil fuels. In some cases, the renewable sources would continue to be more than thrice as expensive as fossil fuels. It obviously makes economic sense to invest in pollution control technologies than in new power plants using renewable energy. On Removing Carbon Subsidies from Fossil Fuels Green energy activists insist that carbon emissions, which lead to global warming, are a form of subsidy provided to fossil fuels. Once these subsidies are removed, renewable energy would become cheaper than fossil fuels.34 How does one remove the carbon subsidy element from fossil fuels? Carbon dioxide emissions are the intended outcome of oxidizing the carbon in fuel to obtain energy. There is thus no avoiding, or cleaning up carbon from the fuel sourceThere are thus only three ways to (significantly) reduce carbon emissions: regulate CO2, raise the price of carbon fuels to discourage use, or offer non-carbon alternatives.35 Just how much would these steps cost? If reduced carbon emission norms suggested by the Kyoto Protocol are rigidly mandated, electricity prices in USA would increase by forty-three percent by 2010 compared to levels in 1999. This translates into a carbon tax of two hundred and eighteen US dollars per household in 2010.36 Can Indian consumers afford to pay such carbon taxes if policy-makers follow a path of rapid de-carbonization of energy? The answers would be obvious at least to those who would trade-off ambiguous concerns about global warming and opt for economic growth

31

See Hydrocarbons: Vision 2025, Directorate of Hydrocarbons, Ministry of Petroleum and Gas, Government of India. 32 See: Blue Print for Power Sector Development, MOP, 2001. 33 From: Evaluating the Case for Renewable Energy: Is Government Support warranted?, Jerry Taylor and Peter Van Doren, Cato Policy Analysis No 422, 2002. The data has been taken from the study: Analysis of Strategies for Reducing Multiple Emissions from Power Plants, EIA, USA, 2001 34 See: Energy for a New Century, Christopher Flavin, World watch, 2000; State of the World 1998, World Watch Institute 35 See: A Stunning Regulatory Burden: EPA Designating CO2 as a Pollutant, Mark Mills, 1998, cited in The Increasing Sustainability of Conventional Energy, Robert Bradley. 36 Figures based on study: Analysis of Strategies for Reducing Multiple Emissions from Electric Power Plants, EIA, USA, 2001, cited in Evaluating the Case for Renewable Energy: Is Government Support Warranted?, Jerry Taylor and Peter Van Doren. 9

and a sustained supply of affordable energy. Yet, enthusiastic supporters seem determined to see India emerge as a renewable energy super power.

Section Two

India As A Renewable Energy Super Power

India is the leading country in Asia and one of the leading countries in the world in generating electric power through renewable energy sources The Ministry of Non-Conventional Energy Sources (MNES) is the only one of its kind in the world India is the fifth largest wind energy producer in the world Only a fraction of the total potential of renewable energy sources has been utilized in India.

With an installed capacity of 1080MW of wind power, India now ranks fifth in the world after Germany, USA, Denmark and Spain and has earned recognition as a new Wind Superpower in the State of World 1998 World Watch Institutes Report.37 That just about sums up Indias achievements since 1980 in the development of renewable energy sector, and the self-congratulatory attitude it has adopted. In at least three areas wind, solar and biogas/mass India can be proud of keeping pace with global trends. To give a few examples: Sugar mills are using bagasse their waste to generate more than 250 MW of electricity. Annual sales of Tata-BP Solar, a joint venture of the Tata group and BP Solar of USA, a subsidiary of British Petroleum, have crossed two billion rupees, with an annual target of ten billion rupees not looking distant anymore.38 Muppandal is a cluster of seven villages in Tamil Nadu. This little known area boasts of 400MW of installed capacity through wind energy, the highest concentration of wind farms in Asia and the third highest in the world.39 Similiguda, a small hamlet of seventy-five households in Orissa had fortune smile on it as the MNES adopted it for a project under National Bio-mass Gasifier Programme. All the seventy-five households and the streets now have electricity.

How Renewable Energy Spreads Wings in India Sporadic research and efforts to promote renewable energy sources continued during the 1950s and 1960s. However, it was the oil shocks of 1973 and 1979 which galvanized the Government of India into taking aggressive steps to promote renewable energy. The first major step was the creation of a Commission of Additional Sources of Energy in 1980. This was followed by the formation of the Department of Non-Conventional Energy Sources in 1982.40 This department spent allotted funds in doling out improved stoves, solar cookers and heaters, and setting up demonstration projects entirely financed with government and/ or aid money. In 1987, the Government set up the Indian Renewable Energy Development Agency (IREDA) to channelise funds towards the renewable sector.

37 38

See Annual Report 1999-2000, MNES, page 56-58. See http://www.bpsolartata.com. 39 Source: Tamil Nadu Energy Development Agency. 40 See: http://www.teriin.org/renew/overview.html 10

In 1992, the Government changed tracks and set up a new Ministry of NonConventional Energy Sources (MNES). The new buzz was encouraging private sector investments in the renewable sector. By the end of 1990s, this strategy appeared successful as more than eighty percent of energy from renewables was generated in the private sector. By 31st March 2001, IREDA had cumulative loan sanctions of forty-six billion rupees and disbursements worth twenty-one billion rupees.41 India Emerges as a Super Power There is no doubt that the government has succeeded in creating electric power generation capacities through the renewable route in a sustained manner (See: Table 3). Table 3: Renewable Energy*: Annual Capacity Additions** in 1990s Source 1993 1994 1995 1996 1997 1998 12.50 61.00 235.00 382.00 67.00 56.00 Wind 0.15 0.12 0.10 0.11 6.50 5.00 Solar 3.00 5.00 22.00 37.00 45.50 48.50 Bio-mass 12.00 5.50 25.00 7.50 11.00 28.00 Small Hydro

1999 143.00 5.00 63.50 33.50

Source: Ministry of Non-Conventional Energy Sources (MNES) *Solar includes solar PV and solar thermal, biomass includes co-generation, and waste to energy and biomass gasifier, small hydro implies systems up to 3MW ** Figures in MW

Success has been most visible in wind energy, followed by small hydro and bio-mass. By 31st December 2001, installed capacities in wind amounted to 1507MW; it was followed by 1423MW in small hydro42 and 358MW in biomass. These figures start looking more impressive when one compares them with the performance of other countries in installing renewable energy based electric power generation capacities. (See: Table 4) Table 4: Installed Capacity of Renewable Energy: A Comparison in 1999 (in MW)43 Country Renewable Total Installed Sources Capacity 2.00 108.00 India 0.50 294.00 China 17.00 795.00 USA 1.00 229.00 Japan 2.00 13.00 Denmark
Source: EIA International Energy Annual, 2000

Yet, all these MW figures look like chicken feed when you compare them with the actual potential identified by the MNES. The installed capacity, as a percentage of the potential, ranges from one to ten percent (See Table 5).
Table 5: Renewable Energy Capacities: Potential and Installed 44 (till April 2000 in MW)

Source
41 42

Potential

Installed

See: http://ireda.nic.in/vsireda/milestones.htm Till end 1999, small hydro projects upto 3MW were considered renewable and came under the ambit of MNES. Subsequently, projects upto 25MW have been transferred to the renewable sector. See Notes: 7 43 See State of World, 1998, World Watch Institute 44 See: Annual Report 2000-2001, MNES; Indias Energy Security, TERI, 2000; Renewable Energy in South Asia, World Energy Council, 2000 11

Wind Solar Bio-mass Small-Hydro

Source: MNES, 2001

45,000.00 50,000.00 21,000.00 10,000.00

1167.00 57.00 255.00 217.00

Undoubtedly, it is these staggering figures which have prompted policy-makers to be confident that renewables will yield close to 11,000MW of electric power capacity in the ten years beginning 2002.45 Does all this hectic activity mean that renewable energy has come of age in India? Are renewable energy sources all set to gradually replace the dirty fossil fuels in electric power generation? The answer to both questions is a resounding No. As the next two sections demonstrate, renewable technology is still primitive compared to fossil fuels and the costs continue to be prohibitively high.

Section Three

Renewable Energy Sources: Climbing the Technology Mountain

Renewable energy technologies are still primitive compared to fossil fuels. While fossil fuel plants deliver hundreds of megawatts from a single site, renewable energy sources are still struggling in the realm of kilowatts. Renewable energy sources are not perennial as mistakenly perceived; wind and solar energy are intermittent while bio-mass and small hydro supplies are finite. While fossil fuel based electric power plants deliver capacity utilization ranging from seventy to ninety percent, the best that renewable energy sources can deliver is thirty percent. Only combustion plants (with their emission problems) can deliver sixty to seventy percent.

Just as the automobiles followed horses and computers displaced typewriters, so can the advance of technology make todays smokestacks and cars look primitive, inefficient and uneconomical. The challenge of the next decade is to accelerate this incipient energy revolution.46 The challenge is formidable indeed for renewable technologies which, compared to fossil fuel technologies, remain primitive, inefficient and uneconomical. It has been thirty years or so since the renewable energy revolution was flagged off. Yet, when it comes to generating electricity, the technology resembles that of manual typewriters than modern personal computers. Modern utilities are quite familiar with demand patterns for electric power: a base load level where huge amounts of electricity need to be supplied twenty-four hours a day and a peak load level when supplies have to be suddenly, and quickly, ramped up. In between the two falls what may be called the intermediate load level. The problem with renewable sources is that technology prevents them from supplying either base load or peak load levels of consumer demand. Even intermediate levels are a big challenge.47
45 46

See: Annual Report 2000-2001, MNES; Blue Print for Power Sector, MOP, 2001. Read: Renewable Energy Comes of Age, Christopher Flavin and Seth Dunn, November 2000, http://www.peopleandplanet.net 47 In their daily operations, modern utilities experience three levels of demand: base load, peak load and intermediate. The first level is the most common and utilities depend on sources capable of continuously 12

Once this fundamental fact is accepted, it would be difficult to refute the contention that renewable sources can at best be fringe players in the electric power industry of a modern economy. Small may be beautiful, but is it enough? A single large combined-cycle gas plant can produce more electricity than all the wind and solar facilities in the United States combinedthe 1875MW Teesside plant in England produces more electricity each year than the worlds millions of solar panels and 30,000 wind turbines combined...48 Closer home, the 2,100MW coal fired plant of National Thermal Power Corporation at Korba in the new state of Chhattisgarh generates more electricity than all the capacities installed under wind, solar and bio-mass energy. Quite simply, renewable energy sources are no match for fossil fuels when it comes to average installed capacity of a single plant (See Table 6). The installed capacities of renewable sources look puny when compared to fossil fuels, no doubt. But compare them to electric power requirements and the gap looks even wider. It would require a hypothetical use of more than three million solar PV plants to generate enough electricity for Delhis needs. The situation looks a little better as one moves to other renewable sources, but one conclusion is inescapable. It will be a long time before a renewable energy plant delivers the kind of megawatts that a modern electric power industry is used to.
Table 6: Average Capacity of Power Plants: Fossil Fuels and Renewable Sources (in MW)

Energy Source Coal Gas Wind Solar Bio-mass Small-Hydro*

India 200.00 100.00 0.50 0.25 20.00 1.50

USA 272.00 63.00 1.00 0.35 32.00 25.00

Source: MNES, 2001 and Energy Information Administration, USA, 2000

* In India, small hydro was defined as power plants up to 3MW; in USA, it is up to 10MW.

Modern bio-mass might well be the only non-hydro source of renewable energy which can boast of respectable installed capacities. Theoretically, it is possible to set up electric power plants with installed capacities in excess of 200MW using bio-mass as the feed.49 However, large bio-mass plants would face the same land degradation, transportation,

supplying large amounts of electricity. Coal, and nuclear plants are the most widely used by utilities for this purpose. Renewable sources simply cannot satisfy base load demand in any modern utility. Peaks come into play when there is a sudden surge in demand, for instance a hit summer day in Delhi when a large number of air conditioners are switched on. In this scenario a lot of extra electricity is needed immediately, a task beyond the capabilities of renewable plants. Even the intermediate level where fluctuations are comparatively lower is a tall order for renewable energy plants because they cannot react quickly to changing demand levels. See: Energy Choices in a Competitive Era: The Role of renewable and Traditional Energy resources in Americas Electric Generation Mix, 1995, Resource Data International. 48 See: The Increasing Sustainability of Conventional Energy, Robert Bailey, 1999, Cato Policy Analysis No 341. 49 See: World Energy Assessment: Energy and the Challenge of Sustainability, World Energy Council, 2000. 13

pollution and emission problems faced by coal plants.50 In India, if one excludes bagassebased co-generation plants, the average capacity will not exceed even 1MW. Who Said Renewable Sources Last Forever? A lot of enthusiastic proponents of renewable sources tend to forget or ignore the fact that they may be forever, but intermittently so. Storage is another big problem with renewable sources.51 The problem with the sun is quite apparent: it has a nasty habit of setting every day! If you depend purely on sunlight to generate electricity for your home, it goes without saying that candle-lit dinners will become the norm! Co-generation technology is gradually appearing in the market, but not in a manner that can store sunlight on a sustained basis.52 Like the sun, wind energy too has problems of blowing hot and cold at the whims of mother nature! A lot of effort has gone into identifying the ideal sites for wind energy plants in India. But imagine a scenario where a utility is taking power from a wind energy farm in Tamil Nadu. What if the breeze stops blowing and it remains tranquil for the next twelve hours? This peculiar trait of wind energy which it shares with solar compels utilities not to rely on it.53 Even in the case of bio-mass, the supply is neither perennial nor available close to the site of a large electricity generating plant which uses bio-mass as the feed. One would need to transport huge quantities of bio-mass from distant places and store them just the way it is done in the case of coal-fired plants. Just imagine transporting and storing millions of tonnes of garbage! Industrial wastes like bagasse too are seasonal and need back-up supplies of fossil fuels to be able to generate electricity throughout the year.54 Small in Size, Smaller Amounts Delivered One cannot fault a casual observer for being impressed with the large capacities installed in the wind energy sector. But how much electricity does that capacity deliver at the end of the day? In India, capacity utilization averaged less than fifteen percent by the end of 1990s.55 Save combustion plants using bio-mass, all renewable energy sources suffer greatly in comparison with fossil fuels. (See: Table 7) The effect of low capacity utilization on the actual amount of electricity generated becomes evident. For every kilowatt (kW) of installed capacity, conventional power plants produce 4,000 to 7,000kWh of electricity annually. Wind plants manage 2000 to 2500kWh per year and solar PV plants are lucky to generate 750-1500kWh every year.56
50

See: Energy as an Obstacle to Living Standards, Srilatha Batliwalain Energy as an Instrument of SocioEconomic Development, UNDP, 2000; Energy for Tomorrows World: Acting Now, 2000, World Energy Council. 51 See: Energy Choices in a Competitive Era: The Role of Renewable and Traditional Energy Resources in Americas Electric generation Mix, 1995, Resource Data International. 52 See: Soft Energy Versus Hard Facts: Powering the Twenty First Century, Jerry Taylor and Peter Van Doren in Earth Report 2000: Revisiting the True State of The Planet. 53 See: The Use of Wind Energy in India: Lessons Learnt, Victor Mallet, 2000; Energy Technology Fact Sheet, Division of Technology, Industry and Economics, United Nations Energy Program, 2001, http://www.uneptie.org/energy ; Energy Technologies for the 21st Century, World Energy Council, 2001. 54 See: Renewable Energy and Environment: A policy Analysis for India, Ravindranath, Monga, Natarajan and Rao. 55 See: Indian Renewable Energy Development Project, in View Point, April 2000, The World Bank Group, http://www.worldbank.org/astap/ 56 See: Energy Choices in a Competitive Era: The Role of Renewable and Traditional Energy in Americas Electric Generation Mix, 1995, Resource Data International. One indicator of availability (of electricity) is a 14

Table 7: Capacity Utilization (in percentages): Fossil Fuels and Renewable Energy Sources

Source Coal Gas Wind Solar Bio-mass Small Hydro

India* 50 75 65 80 10 15 15 20 25 35 55 65

USA 75 - 85 85 - 95 20 - 25 20 - 30 60 70 65 85

Source: MNES and Energy Information Administration, USA *There is wide variation in capacity utilization levels in India. For example, some coal-fired plants in Bihar have a capacity utilization of less than 30 %; some solar plants have a utilization of less than 10%. The levels have been taken as average indicators for India.

Suddenly, the promising figures revealed by installed capacities become depressingly low levels of power generation. Take the case of wind energy, the largest contributor to electricity supply from renewable sources in India with installed capacity of more than 1100MW. Whats more, wind energy is scheduled to add 6000MW more to capacity in the next ten years.57 Going by an average rate of fifteen percent capacity utilization, the 1100MW of installed capacity generated 1650gigawatt-hours of electricity. A single coalfired plant with an installed capacity of 250MW would have generated more electricity. Need one say more? Why Electricity Grids are Wary of Renewable Sources Low capacities, lower capacity utilization rates and irregular supplies in the case of renewable energy sources can play havoc with electricity grids. Reliance on renewable sources to supply base load and peak load levels of demand can lead to frequent, and crippling grid failures.58 All power plants, whatever the fuel, need to draw electricity from the grid to start operations. Grids have no problem with that if power plants, once they start operating, continue a regular supply of electricity. But what if power plants need to restart operations? In Tamil Nadu, for instance, the norm for wind energy farms is to draw no more than thirty percent of the total wind energy generated from the grid. However, the withdrawal from the grid has often exceeded sixty percent, causing considerable problems.59 In fact, the global trend for electricity generated from renewable sources like wind, solar and bio-mass has been to remain off-grid, or stand-alone projects delivering electricity to households, buildings, isolated communities and industry for captive use. A recent study

plants capacity utilization ratenew coal plants typically achieve capacity utilization in the range of seventyfive to eighty-five percent. Bio-mass agricultural waste plants may also experience somewhat lower capacity factors due to the seasonality of certain fuel stocksutilities employ intermittent wind and solar generation according to seasonal and even daily statistical probabilities, but cannot predict availability with absolute certainty. Capacity utilization for these technologies falls below thirty percent. 57 See: Blue Print for Power Sector Development, MOP, 2001. 58 See: Energy Choices in a Competitive Era: The Role of renewable and Traditional Energy resources in Americas electric Generation Mix, Resource Data International, 1995; Energy for Tomorrows World: Acting Now, World Energy Council, 2000. 59 See: Gone With The Wind, Mridula Chhetri, Down To Earth, June 1999. 15

has indicated that more than eighty-five percent of electricity generated from these renewable sources has been for captive consumption.60 There have been some new arguments offered by green activists who say that it is better for consumers and the economy to be supplied power by fringe players. Their logic is that the top heavy and centralized system of utilities feeding entire regions or nations should be replaced by a more democratic and decentralized structure where the emphasis is on stand-alone, local grids.61 While noting that this carries the small is beautiful logic to its logical conclusion, this paper prefers to stick to the reality of large power plants, large utilities and national grids. The obvious question: If renewable energy sources are condemned by technology to remain fringe players, how can they play a key role in Indias electric power industry?

Section Four

Renewable Energy: How Free Actually Comes at a Premium

The capital costs of renewable energy plants are very high primarily because of large land requirements, the need for back-up plants using fossil fuels and investments in transmission infrastructure. The advantage of free raw material costs for renewable energy sources is more than wiped out by poor economies of scale and low levels of capacity utilization. Renewable sources of energy do not provide access to cheap electric power to poor rural communities as claimed. Either the government gives the power away entirely free, or villagers end up paying as much as eight rupees per kWh of energy. Captive power plants using renewable energy sources do not save on costs. They are an additional financial burden for industries and would not come into being if power supply was regular and there was no load shedding.

Renewables are a nearly unlimited supply of energythe trouble is that new renewables cannot compete with conventional energy sources or replace them without large subsidiesnew renewables (mostly wind, solar, geo-thermal and small hydro) are unlikely to play a significant role in a strategy of diversification aimed at energy availability between now and 2020.62 The price at which an electric power plant can supply electricity depends principally on two factors: the capital costs of the plant (including investments in land, machinery and civil works) and running or operational costs (including salaries and raw material costs). Needless to say, the higher the two cost elements, the less competitive, the source will be. Renewable sources take a beating on both fronts.

60

See: Indian Renewable Resources Development Project, Viewpoint, April 2000, The World Bank group, http://www.worldbank.org/astap , Annual Reports: 1999-2000 and 2000-2001, MNES; Energy Technology Fact Sheet, Division of Technology, Industry and Economics, UNEP, http://www.uneptie.org/energy ; Over View of Renewable Energy Sector, TERI, http://www.teriin.org/renew/overview.htm ; A Perspective on Renewable Energy, Amulya K.Reddy, International Energy Initiative, 2001. 61 See: Energy as a System of Socio-Economic Development, UNDP, 2000. 62 See: WECs Energy Goals for 2020, Energy for Tomorrows World: Acting Now, World Energy Council, 2001. This comprehensive report makes estimates of global energy requirements and their relationship with the issue of sustainability. 16

High Capital Costs of Renewable Energy More than eighteen thousand villages in India still need to be electrified, many of them in remote areas far from the grid. Save a few demonstration projects entirely bankrolled by the government, why have rural communities not installed renewable energy projects which could light up these villages? The capital costs are too high, way beyond the capacity of even small businessmen to finance, forget about impoverished rural communities. Renewable energy sources usually fail to deliver economies of scale, resulting in high capital costs.63 Except wind energy, capital costs of all other renewables are far higher than fossil fuels (See: Table 8).
Table 8: Capital Costs of Power Plants in USA by Energy Source

Fuel Source Gas: Combined Cycle Coal Wind Bio-mass Solar Thermal Solar PV

Capital Cost ($) 445.00 1092.00 983.00 1732.00 2946.00 4252.00

Source: Evaluating the Case for Renewable Energy: Is Government Support Warranted?, Jerry Lewis and Peter Van Doren, Cato Policy Analysis, 341, 2000.

It is a little difficult to make accurate estimates of capital costs in India as the figures vary significantly from site to site. One study conducted on behalf of IREDA has calculated costs without taking into account the various subsidies, interest reliefs and tax breaks provided to them (See: Table 9).
Table 9: Capital Cost of Renewable Energy in India

Fuel Source

Wind Small Hydro Bio-mass Solar PV

Cost (in crore Indian Rupee per MW) 34 36 34 25 30

Source: IREDA estimates. The study admits that the estimates are merely indicative

The current capital cost of a coal-fired plant Indias most widely used source of electric power averages four crore rupees per year. Now, it should be obvious that technology for the renewable sources particularly wind and solar comes from Europe and North America. More important, capital costs in India, even if import duties are considered to be zero, cannot be lower than those in the USA. Common sense economics can easily explain the high capital costs of renewable energy plants:

63

See: Energy For Tomorrows World: Acting Now, World Energy Council, 2000, New renewables face some specific environmental concerns at the local level, but their main concerns are economic. The explanation for this is the high front end cost of renewables and the cost of the necessary back up because the installations are mostly sparse, and the supplies are, for the most part, intermittent. 17

The land required per MW of renewable energy is very high. Estimates range from ten to eighty acres per MW. A fifty MW wind energy plant could well capture more than twenty square miles of land, at least fifty times more than a coal-fired plant.64 Every renewable energy plant needs a back-up unit, which uses fossil fuels. Naturally, capital costs go up by that factor. The most ideal sites for renewable energy plants are invariably located far from consumers in remote areas. Huge investments in transmission lines are required to make renewable power available to consumers through the grid. One reason why wind farms seem to have done well in Tamil Nadu is their proximity to consumers.65

Looking at both sets of figures, it becomes clear that wind energy is the only source, which appears to be able to compete with fossil fuels like coal when it comes to capital costs. This also explains why wind energy holds the largest share of capacities installed in the renewable energy sector. But what about operational or running costs? When the Fuel is Free, But There is a persistent myth about renewable energy, which simply refuses to go away: wind, sunlight, biomass and river water dont cost anything. On the other hand, fossil fuels like oil, gas and coal have to be purchased by doling out cash. Ergo, it should be cheaper to produce electricity from renewable sources. As the last three decades of renewable movement have shown, there is a lot more to the cost of electric power than just raw material prices. And it is these factors which have conspired to price renewable energy out of electricity markets. Numerous studies have been conducted to arrive at an estimate of operational costs of electric power plants using renewable energy sources. One problem they have all faced is the sheer range of costs, which can vary from two to ten rupees per kilowatt-hour for wind energy. The studies share one more thing: they all report higher renewable costs than fossil fuels (See: Table 10).66

Table 10: Levelized Cost of Renewable Energy in USA Source Cost (in cents per kWh) 5.0 6.4 Wind 7.3 8.7 Bio-mass 17.3 Solar Thermal 37.0 Solar PV: Residential 51.7 Solar PV: Utility Scale
Source: Evaluating the Case for Renewable Energy: Is Government Support Warranted, Jerry Lewis & Peter VanDoren, Cato Policy Analysis no 422, 2002. For explanation of levelized cost, see footnote

64

See: Renewable Energy: Not Cheap, Not Green, Robert Bradley Jr., Cato Policy Analysis 280, 1997. Cited from Power Surge: Guide to the Coming Energy Revolution, Christopher Flavin and Nicholas Lenssen, 1994, pp 91-92. 65 See: Front Line, April, 2002. 66 Levelized costs are calculated by dividing the capital and marginal costs of a plant (discounted to Net Present Value) by the total output. 18

This particular study, conducted by the Department of Energy, the USA also mentions the fact that transmission costs need to be added. More important, the costs given in the table are from ideal sites for renewable energy plants. Actual costs for non-ideal sites will be considerably higher. Table 9 does not provide the cost of fossil fuels; neither does it provide an insight into costs in developing economies like India. Combining the results of two separate studies conducted by Resource Data Inc, USA and United Nations Energy Program (UNEP), we can do precisely that (See: Table 11).
Table 11: Electric Power Costs: Estimates By Fuel Source

Fuel Source Wind Bio-mass Solar PV Solar Thermal Coal Gas

* In cents per kWh

Cost* in USA** Cost Globally*** 6 57 11 6 10 30 30 50 20 8 15 4 35 4 24

** Source: Resource Data International, 1995 *** Source: Energy Technology Fact Sheets prepared by the United Nations Energy Program, 2001

At forty-eight rupees to a US dollar, the minimum renewable costs work out to two and a half rupees per kWh for Wind, three rupees per kWh for bio-mass, four rupees per kWh for solar thermal and ten rupees per kWh for solar PV. Though not given in the table, UNEP estimates the minimum cost of small hydro to be two and a half rupees per kWh. The average rate at which electricity was sold to consumers at the retail stage (after taking into account additional costs of transmission and distribution costs) was less than the costs mentioned above.67 Some studies have been made for India too, particularly by MNES and IREDA. But their estimates seem to be consistently lower than what the actuals should be. For instance, an IREDA estimate in 1997 puts wind energy costs at one and a half rupees per kWh. Now, UNEP estimates of wind energy costs (two and a half rupees per kWh) are based on the assumption that capacity utilization of wind energy plants is twenty-five percent. In India, the average is less than fifteen percent. No other element of cost plant, machinery, maintenance, back-up fuel etc is lower in India. Clearly, one can safely presume that renewable energy costs in India would at least mirror the estimates of UNEP, if not higher than that. Coming back to the zero raw materials cost myth, what explains the high costs actually reported by renewable plants? Common sense economics, again: Extremely low capacities mean renewable plants cannot reap economies of scale. Extremely low capacity utilization levels mean that the per unit cost of output is very high. Irregular supply of fuels mean that money has to be spent on back-up supplies of fossil fuels. These factors completely overshadow the benefits offered by the availability of renewable energy sources. No wonder, despite repeated predictions of an imminent renewable energy revolution, it is always round the corner!
67

See: Blue Print for Power Sector Development, MOP, 2001. 19

But We Are Helping Poor Consumers by Reducing Costs of Access to Electric Power

Another line of argument often trotted out is that renewable sources of energy help the deprived and the poor people get access to electricity. To give two examples: Similiguda, a small hamlet of seventy-five households in Orissa had fortune smile on it as the MNES adopted it for a project under the National Bio-mass Gasifier Programme. Hitherto cut from electricity, bio-energy now lights up all houses and streets in the village.68 In a cluster of villages in the Sunderbans delta of Bengal, a World Bank funded solar PV project has enabled villagers to not only reject noisy and polluting diesel gensets, but also lower costs of electricity.69 Why not replicate these success stories all over India and solve the countrys power problem? The answers are in common sense economics: In Similiguda village, the government is providing free electricity to the village. What would be the cost involved if similar demonstration projects were transplanted to all eighteen thousand villages of India which remain to be electrified? Even selective power subsidies to farmers and poor consumers have led to a virtual collapse of Indias electricity sector. Would anyone in their senses recommend such a route to provide electric power to Indian villages? The poor villagers in the Sunderbans delta of West Bengal actually end up paying about eight rupees for every kWh of electricity they consume. What an achievement! Poor villagers are supplied renewable electric power at a price that is more than five times what is paid by their fellow-citizens in urban areas! But We Help Small Industries Save Production Costs This is yet another variation on renewable energy sources being projected as ministering angels. Green energy activists have showcased numerous examples of how renewable sources have helped small-scale units all over the country lower energy costs even as they increase production. We will consider just a few of them:70 Modern Roofings Limited, an Andhra Pradesh based company which makes asphaltic roofing sheets, installed a bio-mass gasifier plant to replace diesel gensets. Energy costs came down from ten and a half lakh rupees annually to three lakh sixty thousand rupees. A rice mill in Andhra Pradesh is saving more than one lakh thirty-five thousand rupees per year on energy costs after it installed a 100kW gasifier plant to replace diesel gensets. Dalmia Cements, a cement manufacturing company, claims to have saved millions of rupees in energy costs after it set up wind energy farms in Tamil Nadu.71 At the first glance, these examples do show how renewable energy sources have saved costs for industries. But a deeper look shows how the savings are actually illusory. Why do industries install gensets and captive plants using renewable or fossil energy? It is simply because they do not get enough power to run their plants. Power cuts, load shedding and grid failures are common occurrences all over India. After all, peak level power
68 69

See: Annual Report 1999-2000, MNES. See: India Renewable Resources Development Project, View Point, April 2000, The World bank Group, http://www.worldbank.org/astap/ 70 See: Annual Report 1999-2000, MNES. 71 See Dalmia Cements web site. 20

shortages in India have been consistently exceeding twelve percent.72 If power was available in plenty and if load shedding was not a norm, why would industries invest in captive power plants? Renewable energy based captive power plants make sense only if they can supply power at rates cheaper than utilities, after taking into account capital costs. Since that is not possible, the way out for India is not to invest in renewable plants or diesel gensets for that matter but improve power supply. This point is particularly significant in India. More than eighty-five percent of renewable energy capacity is for captive consumption. If power sector reforms do improve the supply of electricity, the entire economic rationale for these renewable plants would collapse. The fact is renewable energy sources whatever the argument or logic offered by green activists deliver electric power at rates which are far higher than fossil fuels. Further, if subsidies were withdrawn it is very likely that the role of renewable energy sources in the electric power system would come to an end.

Section Five

The Renewable Energy Revolution: Will it Collapse without the Life Support of Subsidies?
Renewable energy projects get one hundred percent accelerated depreciation in one year; fossil fuel projects get one-third the benefit. Renewable energy projects get a five-year income tax holiday. Nothing of that kind is offered for fossil fuel projects. In some renewable energy projects, the grant, subsidy and easy loan component equals the total project cost. A majority of wind energy projects have come up mainly to cash in on the tax breaks. Electric power generation is a secondary and often neglected priority. As much as eight crore rupees is given as capital subsidy in the co-generation field with a maximum capacity of 20MW. Fifty percent of the capital cost of an electric power plant using sewage is doled out as a free grant. Up to twenty-two and a half crore rupees is to be doled out as capital grant for small hydro projects in the north eastern states and Sikkim. Various studies estimate that American taxpayers have spent twenty-five to forty billion US dollars to enable renewable sources of energy to get a one and a half percent market share. If more aggressive steps are taken to push the market share of renewables to six percent by 2020, the annual subsidy burden could exceed fifty billion US dollars.

The funding agency for renewable energy sources in India IREDA, proudly claims that it has received international assistance in excess of two thousand crore rupees till 2000 and has sanctioned cheap loans to the tune of four thousand six hundred crore rupees till end 1999.73 The agency also claims that it has lent a helping hand to the green cause by preventing the use of almost one million tonnes of coal (India consumes close to four hundred million tonnes of coal a year)! Yet another study estimates that the Government of
72 73

See: Blue Print for Power Sector Development, MOP, 2001. See: http://www.ireda.nic.in 21

India had spent more than three thousand crore rupees during the 1990s promoting wind energy.74 It is difficult to estimate the exact amount of government largesse that has been going into the renewable energy sector over the years in India. Yet, a few showcases do illustrate the utter dependence of renewable energy projects on grants, subsidies, tax breaks and other mandate.
How Sugar Mills Generate Electricity Cheaper Than Electric Power Plants75 One of the most successful bio-mass projects in India is a co-generation project in Karnataka where a sugar mill has installed a 22MW electric power plant which uses the waste product bagasse as the fuel source. The first co-generation project in Karnataka to evacuate power through the grid, the forty-four crore forty lakh rupee plant generates captive power at rates, which are lower than what the sugar mill was paying the electricity board in Karnataka. How did this miracle occur? The project was helped along the way by: A thirty crore rupee term loan from IREDA at concessional interest rates. A grant of three crore eighty-four lakh rupees (eight lakh US dollars) from USAID. Financial assistance of three crore rupees from IDBI. Interest subsidy of two crores seventy-six lakh rupees from MNES. Accelerated depreciation of one hundred percent for the plant in the very first year. A twenty-five lakh per MW subsidy by the state government for evacuated power to the grid. 18MW of the capacity is earmarked for the grid, implying a total annual subsidy of four and a half crore rupees.

In the first year itself, the total amount of dole given to this forty-four crore rupee project works out to about twenty crore rupees. At what rate can NTPC generate power if bestowed with similar blessings?

We have not raised some other pertinent questions in the box on sugar mills and cogeneration: The renewable component in this case comes into force only when sugar mills crush sugarcane after the harvest; i.e. twice a year at most for a total of just a few months. Fossil fuels run the plant during the larger part of the year.76 Bagasse also has alternative uses in newsprint and paper manufacturing, for instance. The opportunity cost of the alternative use has not been factored. But the sugar mill in Karnataka and the largesse it receives in the name of promoting clean energy pales in comparison to some more ambitious projects lined up in the renewable energy sector.

74 75

See: Gone With The Wind, Mridula Chettri, Down To Earth, June, 1999. See: Annual report: 1999-2000, MNES, pp 82. 76 See: Energy Technology Fact Sheet, United Nations Energy Program, 2001: some agricultural wastes are available only during certain times of the year and may have to be stored if they are to be used as a continuous fuel. This can be difficult, expensive and require special equipment or storage facilities. An alternative to storing biomass is to use other fuels, such natural gas, during these periods. This may allow a more efficient, continuous and profitable operation, but will also usually increase the projects capital cost. 22

How To Generate Solar Energy Using Naphtha77 This is a truly ambitious project and a showpiece of co-operation between the state Government of Rajasthan, the Government of India, the World Bank and the Government of Germany getting together to strike a blow to renewable energy. The project in question is a 140MW Integrated Solar Combined Cycle (ISCC) power plant with a solar component of 35MW and a combined cycle power plant of 105MW in Jodhpur district in Rajasthan. The combined cycle plant will use naphtha as the fuel, and a back-up plant of 35MW will also lend a helping hand when the sun is not shining. The total cost of the project works out to eight hundred and seventy-one crore rupees a hefty capital cost of six crore thirty lakh rupees per MW while a stand-alone naphtha based plant will cost less than four crore rupees a MW. The trick here is how the project is being financed to make it viable. The Government of India will provide a grant of fifty crore rupees. The Government of Rajasthan will pitch in with an equity contribution of fifty crore rupees and a loan component of two hundred crore rupees. The World Bank through its Global Environment Facility will grant four crore ninety lakh US dollars 49 million, or two hundred and thirty-five crore rupees. The Government of Germany will add a cheap long-term loan of twenty-five crore Deutsche Marks or five hundred crore rupees.

Total aid in terms of grants and easy loans works out to close to one thousand crore rupees for an eight hundred and seventy-one crore rupee project! Most of the time, the green and clean show case project will be running on naphtha, a dirty oil based fuel, which negates all that green activists stand for. That is simply because the sunlight wont be around at the convenience of green activists. Of course, economists would be more concerned with the opportunity cost of using one lakh seventy thousand tonnes each year of naphtha in this solar energy project!

Green energy activists defend such subsidies, grants and tax breaks by saying that renewable energy industries are in their infancy and need a helping hand during the early stages of their development (it is a different matter that renewable energy doesnt seem to have grown out of infancy for the last three decades!).78 The problem is that such doles usually end up attracting investors who dont care much about electric power generation, as long as they can cash in on the subsidies and the tax breaks. This is what happened with wind energy in the mid-1990s in India.

77 78

See: Annual report: 1999-2000, MNES, pp 75-76. See: The Increasing Sustainability of Conventional Energy, Cato Policy Analysis No. 341 and Renewable Energy: Not Cheap, Not Green, Cato Policy Analysis No 280, Robert Bradley. 23

Wind Energy: How To Generate Cash Without Generating Electric Power79 In 1995-96, 382MW of electric power capacity using wind energy was installed. The next year, capacity additions fell to 169MW and then crashed further to 55.8MW by 1998-99. Most of this rise and fall of wind energy was seen in Tamil Nadu. What happened? Blame former Finance Minister P. Chidambaram for this debacle, for imposing a minimum alternate tax on incomes in 1997. All renewable energy projects are allowed one hundred percent accelerated depreciation in the first year itself, compared to a third for fossil fuels. In Tamil Nadu, companies like Madras Cement, Tamil Nadu Newsprint and Paper Limited, Twentieth Century Finance Corporation Limited and dozens of others used this break to emerge as tax-free companies. A company that would otherwise need to pay, say, two crore rupees as income tax would simply install wind energy capacity worth the same amount, claim accelerated depreciation and end up paying absolutely no tax. This resulted in new wind capacities in Tamil Nadu shooting up from 50MW in 1993-94 to 281MW by 1995-96. By 1998-99, when this tax shelter had vanished, new capacities crashed to 17.5MW in the state. Latest figures show that new capacities during 2001-02 had again risen modestly to 45MW, nowhere near the magic figures reached in the heydays of 1995-96. Did MNES learn its lessons from Tamil Nadu? Public statements coming from the Ministry would prompt Yes as the answer. But, it looks like investors have discovered a new wind energy paradise in Maharashtra. From 50MW during 1999-2000, new capacities skyrocketed to 210MW in the state by 2001-02. And what kinds of companies have joined the green cause by setting up wind farms in Maharashtra? Some of them are Tata Finance (whose primary business is lending and borrowing money), Bajaj Auto (which makes two wheelers), Goverdhan Pan Masala (the name is self-incriminatory!), Ellora Time Private Limited (which makes watches) and Nishkalp Investment. Studies conducted by Tata Energy Research Institute (TERI) and MNES had found that more than three fourths of the wind energy capacity in Tamil Nadu generated less than one fourth of the electric power. Will it be any different in Maharashtra?

It would be wrong to think that such subsidies, grants, tax breaks and mandates are sparingly given, and only for a limited period of time in India. As Table 12 below indicates, government largesse to renewable energy is comprehensive, widespread and highly attractive.

79

See: Gone With The Wind, Mridula Chettri, Down To Earth, June 1999; Economics of Wind Power, TERI, 1998; For latest statistics, see: http://www.windpowerindia.com 24

Source Wind

Solar

Bio-mass

Small Hydro

Table 12: How Government Encourages Renewable Energy Cash Benefits Direct Tax Benefits Indirect Tax Benefits No Cash hand-outs to One hundred percent Zero to five percent private projects accelerated depreciation customs duty Capital and interest Five-year tax holiday Excise and sales tax subsidy exemptions Capital and interest One hundred percent Concessional import duty subsidies for community accelerated depreciation Excise and sales tax relief projects Five-year tax holiday Cash subsidies for grid links Cash grants to NGOs One hundred percent Import duty exemptions Central subsidy to self accelerated depreciation for select projects employed entrepreneurs Five-year tax holiday Sales & excise duty Capital and interest exemptions subsidy for co-generation plants Grants for power from sewage Five lakh rupees for site One hundred percent Import duty exemptions study to promoters accelerated depreciation for select projects Upto twenty-two and a Five-year tax holiday Sales and excise duty half crore rupees grant in exemptions North East Two crore rupee per MW grant for upgrading Capital subsidy of fifteen thousand rupees per kW hour in North East Interest subsidy of seven and a half percent

It is very difficult to make an estimate of the total amount doled out by largesse to renewable energy projects in India. Estimates could range from five thousand crore to twenty-five thousand crore rupees. There can be little doubt, though, that largesse is allpervasive in the sector. However, quite a few studies have been conducted by organizations to calculate the extent of government largesse in the USA and even the financial impact if governments aggressively promote renewable energy. One of them was conducted by the World Energy Council in 2000 while preparing an action plan for energy by the year 2020. If policy-makers do give in to pressure from green activists and take steps to increase the share of renewable energy by a further two to three percent than their expected share of three percent by 2020, the annual subsidy bill will be in the range of sixty to eighty billion US dollars.80 This study concludes that renewable energy already enjoys a subsidy of three cents per kilowatthour of electric power generated.

80

See: Energy Technologies for Tomorrow: Acting Now, World Energy Council, 2000. 25

Calculating the Real Costs of Installing 10,600MW through Renewable Energy How much will it actually cost to install about 11,000MW of electric power generation capacity using renewable energy sources? It is very difficult to arrive at an accurate estimate. Nevertheless, we can make a close approximation. Two things need to be kept in mind here. First, we assume one fourth capacity utilization for renewable energy plants in India (the actual figures are lower) and three fourths for NTPC plants (a recorded fact). In effect, 3MW of capacity installed in the renewable energy sector is equivalent to 1MW from NTPC; or, 31,800MW of renewable capacity will deliver the same amount of electricity as 10,600MW of NTPC capacity. Second, factoring in all tax breaks, subsidies and other freebies, we assume that the per MW cost for a renewable energy plant is six crore rupees fifty percent more than that in NTPC (that is a conservative estimate)81 At six crore rupees per MW, the total cost of Indias ambitious ten year renewable energy plan works out to one lakh ninety thousand eight hundred crore rupees. For the same amount of money, NTPC can set up 47,770MW of electric power capacity. One can argue that costs per MW for renewable energy wont actually be so high since installing back-up power plants/turbines/generators, which use fossil fuel, compensates the extremely low capacity utilization. But then, if the lions share of electric power from a renewable plant is to be generated through fossil fuels, why continue with the charade of renewable energy?

Another study was conducted by Resource Data International in 1995. The study concluded that if policy-makers in USA aggressively promoted renewable energy sources in a manner that they were subsidized to the tune of fifty percent (the point at which some renewables might come close to fossil fuels in terms of costs) by 2010, the cumulative cost to tax payers would be two hundred and ten billion US dollars.82 Yet another study finds that it has cost American taxpayers between thirty and forty billion US dollars over the last twenty-five years to promote renewable energy, resulting in a total share of one and a half percent.83

What do all these figures indicate? At the end of the day, despite all the hype and state patronage over the last three decades, renewable energy sources could chalk up a mere one to two percent share of the electric power industry. More important, most of these installed capacities are merely on paper because of extremely low capacity utilization. Most important, the cheapest renewable energy source is at least fifty percent more expensive than fossil fuels when it comes to generating electric power.

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Costs per MW for wind energy based plants may be comparatively lower: say four crore rupees as claimed by many. But, out of the planned 11,000MW in capacity, more than 4,000MW will come from solar, bio-mass and small-hydro, where capital costs as well as the subsidy element is much higher. 82 See: Energy Choices in a Competitive Era: The Role of Renewable and Traditional Energy Resources in Americas Electric generation Mix, 1995, Resource Data International. The subsidy intensification scenario posits a fifty percent subsidization of renewable energy. Under this extremely aggressive scenario, renewables generation grows from 75 billion kWh in 1995 to 450 billion kWh in 2010. For comparison, this level of generation is roughly one-fourth of todays coal fired generation, three fourth of todays nuclear generation or one hundred and ten percent of todays gas generation. Using current levelized costs as a basis of comparison, to achieve this level of generation, the cumulative subsidies would total US $ 203 (1995$) between now and 2010. 83 See: Soft Energy versus Hard Facts: Powering the Twenty First Century, Jerry Taylor & Peter VanDoren, Earth Report 2000. 26

Section Six

Is there a Message here for Policy-makers in India

Without doubt, the debate about the alleged superiority of renewable energy sources will not stop even if some hard facts as the paper has attempted to are pointed out. For three decades, green energy activists seem to have refused to accept a growing body of evidence, which has cut the very foundations of their argument. Fossil fuel reserves have not run out by 1999 as predicted. Well, they will, very soon. Renewable energy continues to be far more expensive than fossil fuels after three decades of promotion? But they are an infant industry, you see. India cannot afford not to take advantage of its vast coal reserves? But what of global warming and the eventual destruction of planet earth? Dont poor people also deserve the benefits of cheap energy provided by fossil fuels? But that is not sustainable! It is well beyond the scope of this paper to pursue these arguments with green activists who have made up their minds. But there are some important messages here for policy-makers. Particularly so because the tendency is for a level-headed analysis of Indias options in the energy sector to be swept away by the global renewable fever. A few basic messages are: It does not make any sense to integrate renewable energy with the electric power system, as it exists in India today. It would be wiser to leave renewable energy sources where they are at the fringes of Indias electric power industry. It would be advisable for policy-makers to calculate the opportunity cost of investments, or subsidies in the renewable energy sector. It would be cheaper, in the long run, to provide electricity to rural communities through the conventional fossil fuel route than through renewable energy sources. Given the fact that India is exempt from the norms of the Kyoto Protocol when it comes to green house emissions, it would be foolhardy to initiate steps to move away from coal fired thermal plants at least in the medium term. At a time when serious efforts are being made to reform the electric power sector letting market signals have a greater say, creating subsidy and grants driven islands of renewable energy would go against the grain. A decentralized and democratic electric power system where large plants and national grids give way to stand-alone off-grid systems may become a reality in the distant future, as many green activists hope. Meanwhile, it would be wiser for policy-makers to let developed economies conduct such risky experiments. Finally, bowing down to the wishes of green activists and placing obstacles in the growth path of conventional electric power supply would directly contradict the poverty reduction goals of policy-makers. At the end of the day, all economics and policy-making boils down to the issue of trade-offs. As any social scientist knows, in real life and in democracies, the trade-off is often between the lesser and the greater evil. What are the evils in this case? Fossil fuel based electric power does pollute and may even cause global warming. On the other hand, more than five hundred million people are deprived of a regular and reliable supply of electric power, primarily because of shortages. The only way they can get access to electric power at affordable rates is if supplies increase in a sustained manner. The only affordable way this can be done is through fossil fuels, pollution notwithstanding.

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India can reduce but never eliminate pollution the way green activists want to, if electric power supplies are to be increased. Stubborn insistence on pollution control at any cost would mean continued power shortages. Remember, the rich can always buy generators and inverters.

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