Economic Issues- Energy Security: Energy Intensity, efficiency and reforms

Energy intensity is a measure of Output of an economy in relation to per unit consumption of power. This will tell us about energy efficiency of an economy. It is known that energy needs of an economy is proportional to its size. So normally higher the size of economy, higher the energy consumption.
       It is obvious that it’s better to keep energy consumption at minimum by adopting energy efficient technologies. This is inherent part of good economics as it calls for maximum output by consuming minimum resources. This will reduce electricity bills of households, industry and of government too. This in turn will result in higher disposable Incomes, increased savings, capital formation and higher demand. It will save disproportionate investment of capital in power sector, which could be used for other more appropriate ends.
Energy, as we know, has huge environmental costs. So not saving energy where we can is dangerous. Saving energy results in avoiding emissions of millions of tons of greenhouse gasses annually. If this is not enough, then finally fact that conventional resources are depleting fast leaves no room for complacency over this issue.
       Different countries have different Energy Intensity and it depends upon wide range of factors such as technology, share of particular sector in Economy, Government’s investment in power infrastructure. If share of service sector is more in GDP, then energy intensity will be lower. Governments all over the world intervene in this issue by making policies toward efficiency. It is hence, hard to compare energy intensity of two economies as determinants are different. But still there are always lessons that can be learnt and energy efficiency Policy and technology can be imported and replicated in domestic economies. In this context India has borrowed heavily from western countries like USA and Germany. India’s energy intensity has come down rapidly in past couple of decades and this fall continues. This is mainly because of following reasons

1. LPG reforms in 1991 made private sector the dominant player in the economy. In pre LPG era there was widespread inefficiency and power sector was no exception. Private sector have to compete and continuously innovate/improve itself to lower the costs to remain competitive. This is true even more for international competition for e.g. when we say Indian products are expensive than Chinese products, then high power costs in India is one of the major factor. Indians buy one of the most expensive power globally and this is even truer if we compare per capita income with per capita energy costs. This too has forced consumers to keep their consumption low, be it industry or households. And consequently per capita consumption in India is extremely low.

2. Another reason for India’s energy intensity is high GDP growth on back of services. In manufacturing sector energy input is higher because of processes involved which are dominantly energy consuming.
But most contentious issue in decreasing energy intensity is of affordability. Energy efficiency options are expensive and it is hard to convince a user of traditional energy methods to switch over to new one. This is possible only if he is made understand benefits which will accrue to him on the investment.
However, increase in demand is unavoidable. Still significant proportion of Indians doesn’t have access to electricity. Universal electrification is major part of Inclusive growth which aims to provide decent standard of living to all. Hence, increase in investment in energy is obviously desirable and unavoidable.
In this backdrop, we know energy resources are limited and this is big challenge and opportunity simultaneously. It is opportunity in sense that vast amount of infrastructure is yet to be built. This provides us opportunity to adapt to new challenges. 70 % of all buildings which will be there by 2030 are yet to be built. So, new commercial and civil buildings should be more energy efficient. In contrast developed countries have already conventional infrastructure in place and they need to modify it, which is bigger challenge
Having said this, it is extremely hard to seize this opportunity as energy efficiency is costly for e.g. CFLs are expensive and so are energy efficient air conditioners and refrigerators. This matters across households and industries.
More specifically for industries, it is hard to adapt to new technology. This adaptation disrupts the ongoing production and consequently costs involved are higher. Costs in addition to expensive equipments include losses of production foregone. So industry needs to be provided with existing examples of successful and beneficial application of new technologies.
Another issue is of split incentives. Costs and benefits of adopting energy efficiency accrue to different people. A builder for example, if spends more money on energy efficiency, then there is no guarantee that customer will pay him more price compared to non-energy efficient building.
Energy efficiency policy of government tries to overcome these problems by intervention and support. Energy efficiency scenario is quite dynamic and developments are fast. Then key decision is choice of technology which is main medium of intervention and support. This problem was conceived by government and Energy Conservation Act was passed in 2001.

1. It introduced standards and labels.

Labeling program in India was developed in consultation with US experts who have similar program in their country. This program is aimed to let consumer take more informed decision while purchasing any energy consuming appliance. Under this program star ratings are done on equipments such as fans, motors, geysers, bulbs, ACs , refrigerators, transformers etc.( 12 appliances were recommended). Initially this was kept voluntary and companies started labeling to project their product better than others. Over time people started relying on these ratings and appliances with good ratings attracted more customers and fetched higher prices and finally energy ratings became brands in them self. This came out as signal to manufacturers that consumers are willing to pay for energy efficiency and started investing to improve energy efficiency. This is determined by ‘payback period’ which means in how many years incremental costs of energy efficient products will be recovered by additional savings. Products which are of shorter payback period are more in demand. (High electricity prices helped a lot in this).
Latter in 2010 government made labeling of 4 products compulsory. These are ACs, Tube lights, Frost free refrigerators and Distribution Transformers. India recently took another step in the quest towards energy efficiency with the launch of three landmark energy-saving initiatives i.e.

a) Design Guidelines for Energy- Efficient Multi-Story Residential Buildings
b) Star Ratings for diesel gensets and
c) Star ratings for hospital buildings.
1st government building to get 5 star rating is ‘International Centre for Environment audit & sustainable Development’ near Jaipur. This was setup by CAG last year and seeks to establish global center for excellence to improve accountability and governance in area of environment & sustainable development.

1. Concept of designated Consumers was introduced

Industries have most of the time limited finance and while pursuing energy efficient options, remain in dilemma that – Whether it is better to invest this amount in capacity addition?
In any industry in India there is ‘energy variation’ which means that some units are quite energy efficient and some are quite inefficient in same industry (say cement sector). Difference between two extremes (Efficiency vis a vis inefficiency) is due to factors such labor based production or capital based production, up gradation of technology, new vs old plants etc.
It is big challenge to bring inefficient units at par with efficient ones as this transformation will be costly and might force them to shut down, which is undesirable. Bureau of Energy Efficiency attempts to address this problem. It designates energy inefficient/intensive units as ‘ Designated Consumers’ and these units are required to follow ‘energy norms’.
Under this a target of reduction of Energy Intensity for an industry is fixed. This target is percentage
reduction in power consumption of a unit in relation to output. For inefficient firms target is higher than efficient firms. Any inability achieve target will attract some penalty. Under Energy Conservation Act it is mandatory for a ‘designated consumer’ to appoint an ‘Accredited Energy Auditor’ and ‘Energy Manager’
This received further impetus with introduction of ‘National Enhanced Mission of Energy Efficiency’ under NAPCC which introduced concept of ‘Perform, Achieve and Trade'(PAT). Under this initiative ‘Energy Saving Certificates’ are issued to those units which achieve more target than what is mandated. These certificates are tradable and can be brought by units who were unable to achieve their targets. On getting sufficient certificates, they are deemed to have achieved their targets. This creates incentives for reduction beyond targets while letting other units to escape burden, also reducing targets to levels fixed by government.

2. Demand side management

a) Agriculture demand side management
Agricultural pumps are most inefficient and widely used electrical equipments in India. Here 36 % of overall energy saving potential in India is available. So BEE initiated program of ‘market based intervention’, by supplying energy efficient pumps based on PPP model. This replacement will also unlock huge market for industry.
b) Municipal Demand Side Management
Here BEE supports urban local bodies to adapt to energy efficient and clean technologies in areas like drinking water supply and street lightning.

3. Energy Efficiency Building Code

a) Code sets minimum energy standards for ‘new’ Commercial buildings which have connected load of more than 100 KW.
4. b) Also there is (star) labeling program initiated for three categories of commercial buildings – Day use office buildings, BPOs, Shopping Malls. Efficient buildings are expected to fetch premium prices in comparison to normal buildings (as it happened in electrical appliances). Energy efficiency in buildings is ensured by special architecture designs which take into cognizance windows, ventilation, wall configurations etc. For this government took lead by first making many of its own buildings efficient. Also government supports training of architects for their capacity building in the field.
These measure of government address new buildings, but what about existing buildings? For existing buildings government is promoting ‘Energy Performance Contracting’.

What is Energy Performance Contracting?
Suppose you own a building and are interested in renovating it for energy efficiency. This need money for investment that you don’t have or even if you have money you don’t want to take risk. You can overcome this problem by contracting out this job to an agency, who will invest all the money without charging you. When renovation (or installation of new equipments) is complete, they will get a portion of energy cost saved by their investment for a certain period. Such agencies are known as ‘Energy Service companies’.
Again as already stated that existing building owner will ask for successful examples before taking this step. So government is pursuing this in its own building and 1st such project was completed in ‘Rashtrapati bhavan’ which resulted in saving of 22-23% of energy and this fact can be used as marketing card by such companies. But this concept has yet not picked up in India.            Read More »

IAS World, an institute for Civil Services Examination (CSE), has moved into its new spacious and well equipped premises from 26th November 2011.



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