V I C E C H I E F O F T H E D E F E N C E F O R C E

Securing India’s Energy Future Colonel Devindar Kumar, Indian ArmyOctober 2012

This paper was developed by the author while attending the Defence and Strategic Studies Course at the Centre for Defence and Strategic Studies at the Australian Defence College in 2011.

CENTRE FOR DEFENCE AND STRATEGIC STUDIES

DEFENCE AND STRATEGIC STUDIES COURSE

COURSE MEMBER: Colonel Devindar Kumar

SUBJECT TOPIC: Securing India’s Energy Future

SYNDICATE: 1

DUE DATE: 18 November 2011

WORD COUNT: 10985

STATEMENT OF AUTHORSHIP:

I certify that this material is the result of my own research and writing, except where

otherwise acknowledged, and that this work in whole or in part has not been

submitted to the Centre for Defence and Strategic Studies as part of any other written

work, nor has it been submitted to any other university or institution as part of any

academic unit or program for any reward.

PUBLICATION

I am not interested in having this paper considered for publication by the CDSS.

Signature: …………………………………….

Date Submitted: 18 November 2011

ii

Table of Contents

Introduction...............................................................................................1

Chapter I: India’s Energy Context .........................................................5 Current and Future Energy Context...........................................................................5 Strategic Direction ...................................................................................................11 Energy Security Challenges.....................................................................................13

Chapter 2: Policy Recommendations and Financial Implications.....16

Section I: Whole-of-government Approach.............................................................16 Recommendation 1...................................................................................17

Section II- Reduce Energy Imports..........................................................................18 Transition to Natural Gas.........................................................................18

Pursue an Informed Nuclear Policy .........................................................21

Implement an Integrated Renewable Energy Policy................................23

Other Sources of Energy..........................................................................26

Accelerate Domestic Exploration ............................................................27

Recommendation 2...................................................................................28

Section III– Reduce Energy Dependence on West Asia..........................................29 Recommendation 3...................................................................................33

Section IV– Ensure Security of Energy Critical-SLOCs.........................................34 Capable Navy...........................................................................................35

Strengthen Regional Cooperation ............................................................36

Build Up Strategic Petroleum Reserves (SPR)........................................37

Recommendation 4...................................................................................37

Section V - Improve Energy Efficiency and Energy Conservation.........................38 Recommendation 5...................................................................................40

Section VI –Reform Government Policies and Increase Private Investment ..........41 Government Control and Pricing Policy..................................................41

Develop Infrastructure with Enhanced Private Sector Participation .......43

Recommendation 6...................................................................................45

Section VII - Address Environment Challenges......................................................46 Recommendation 7...................................................................................47

Section VIII: Financial Implications........................................................................48

Conclusion ...............................................................................................50

Abbreviations ..........................................................................................52

Bibliography ............................................................................................54

Securing India’s Energy Future1

“Energy Security ....: an assured access to energy resources, at affordable prices, to

obtain sustainable economic growth rates and economic development”2

Introduction

India faces formidable challenges in meeting its energy needs. Prime Minister

Manmohan Singh identified energy security as one of the major challenges to the

national security of India.3 Although energy security forms only a part of the limiting

factors affecting the successful and bountiful future of India as it faces potential

‘superpower’ status, it is significant enough to restrict the nation’s growth, security

and overall development in a globalised world.

Energy security has been defined by numerous agencies, however for the purpose of

this Security Policy Paper (SPP), the definition as promulgated by the Indian Planning

Commission has been accepted. The Indian Planning Commission4 defines energy

security as: “We are energy secure when we can supply lifeline energy to all our

citizens irrespective of their ability to pay for it as well as meet their effective demand

for safe and convenient energy to satisfy their various needs at competitive prices, at

all times and with a prescribed confidence level considering shocks and disruptions

that can be reasonably expected”.5

1 This paper was finalised before the Australian Prime Minister’s announcement to review the issue

of uranium sale to India. 2 Talmiz Ahmad, ‘Geopolitics of West Asian and Central Asian oil and gas: Implications for India’s

energy security’, in Ligia Noronha & Anant Sudarshan (eds.), India’s Energy Security, Routledge, Oxon, 2009, p. 64.

3 Manmohan Singh, ‘PM’s Valedictory Address at the Seminar on the Occasion of Golden Jubilee of National Defence College’, Prime Minister’s Office, Press Information Bureau, Government of India, 22 October 2010, retrieved 15 September 2011, <http://www.pib.nic.in/newsite/erelease.aspx?relid=66514>.

4 The Planning Commission was set up 1950 and is responsible for assessing all the resources of the country, augmenting deficient resources, formulating plans for the most effective and balanced utilisation of resources and determining priorities, for more details see, Government of India, Planning Commission, Planning Commission, retrieved 20 October 2011, http://planningcommission.nic.in/index.php.

5 Government of India, Integrated Energy Policy: Report of the Expert Committee, Planning Commission, New Delhi, 2006, p. 54, retrieved 27 September 2011, <http://planningcommission.nic.in/reports/genrep/rep_intengy.pdf>.

2

According to the Planning Commission, India has to grow at a rate of eight to ten

percent, over the next 20 years,6 ‘in order to eradicate poverty and meet its human

development goals’.7 India’s economic growth is directly linked to its capabilities to

ensure unrestricted energy supplies. Rapid economic growth has offered employment

opportunities to the growing population resulting in rapid urbanisation which puts

additional strain on energy resources;8 it is estimated that approximately 590 million

people will live in Indian cities by 2030.9 The total number of cars per 1000 people is

estimated to increase from 10 in 2009 to over 100 in 2035, which will lead to a

quadruple increase in oil demand in the transport sector.10 The electricity demand per

capita is also estimated to treble by 2035.11 India’s appetite for energy will

continuously increase (it is estimated to more than double by 2035 (Figure 1))12 for it

to sustain a high economic growth rate and cater for the energy demands of its rising

population.13 Infrastructure too will need to increase three to seven times, by 2031, to

facilitate this.14

In 2006, the Government of India enunciated its energy strategy in the ‘Integrated

Energy Policy’ (IEP) which was approved in 2009. The IEP identifies the energy

security challenges confronting India and suggests policies to be implemented to

overcome them. Although the Government clearly understands the challenges, it has

not been able to totally prevail over them.

India is currently facing a number of energy security challenges, the gravity of which

will increase in future as the demand for energy outstrips supply. As limited

6 Government of India, Integrated Energy Policy, p. xiii. 7 Government of India, Integrated Energy Policy, p. xiii. 8 Cities account for 75 percent of global energy consumption, see Charles K Ebinger, ‘Securing the

Future’, The Financial Express, 03 October 2011, retrieved 30 October 2011, <http://www.financialexpress.com/news/securing-the-future/854712/0>.

9 Ebinger, ‘Securing the Future’. 10 International Energy Agency (IEA), World Energy Outlook 2011, International Energy Agency,

Paris, 2011, p. 82. 11 International Energy Agency, World Energy Outlook 2011, p. 82. 12 Tanvi Madan, Energy Security Series: India, The Brookings Foreign Policy Studies, November

2006, p. 9, retrieved 20 September 2011, http://www.brookings.edu/~/media/Files/rc/reports/2006/11india_fixauthorname/2006india.pdf>.

13 Annual growth rate of Indian population is about 1.9 percent over the last two decades, see Anant Sudarshan & Ligia Noronha, ‘Contextualizing India’s energy security’, in Ligia Noronha & Anant Sudarshan (eds.), India’s Energy Security, Routledge, Oxon, 2009, p. 8.

14 Ahmad, ‘Geopolitics of West Asian and Central Asian oil and gas’, p. 68.

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indigenous resources will not be sufficient to meet India’s burgeoning energy

demands, its dependence on the importing of oil, gas and coal will continue into the

foreseeable future (currently 35 percent of India’s commercial energy needs are

imported).15 India will have to persist with energy imports from West Asia, given the

large reserves located in the region. However, the volatility of the area creates

uncertainty about energy supplies and also causes fluctuations in global prices, which

adversely affects the economy. The extensive use of fossil fuels creates an adverse

affect on the environment and India will come under severe pressure from the world

to reduce its carbon emissions. The numerous agencies and ministries involved in

India’s energy policy complicate and undermine the approach towards energy

security.16 Extensive subsidies and overregulation by the Government discourage

private investment in the energy sector.

The challenges associated with energy security thus require to be addressed by the

Government, by adopting a sustained and focused whole-of-government approach. An

overarching organisation would help meet the challenge of coordinating the activities

of all agencies engaged in the energy sector, backed by well-planned policies. Oil and

coal dependence must be reduced by increasing use of natural gas, nuclear energy,

hydro-energy and renewable energy sources. The dependence on West Asia can be

reduced by securing long-term energy contracts in Africa and the Central Asian

Republics (CAR). To reduce energy demand, energy efficiency and energy

conservation measure must be strictly enforced. The Government also needs to relax

its control over the energy sector and refine its investment policy to attract private

investment into the sector.

The aim of this SPP is to recommend policies that will help India mitigate some of the

challenges in order to secure its future energy needs. The paper will analyse the issue

of energy security by first examining the current energy position to identify the major

energy security related challenges confronting India. Thereafter, these will be

15 ‘2011 India Energy Handbook’, PSI Media Inc, Las Vegas, 2011, p. 4, retrieved 20 October 2011,

http://www.psimedia.info/handbook/India_Energy_Handbook.pdf. 16 Joachim Betz and Melanie Hanif, ‘The Formation of Preferences in Two-level Games: An

Analysis of India’s Domestic and Foreign Energy Policy’, German Institute of Global and Area Studies (GIGA), Working Paper no. 142, July 2010, p. 15, retrieved 20 October 2011, < http://www.giga-hamburg.de/dl/download.php?d=/content/publikationen/pdf/wp142_betz-hanif.pdf.

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analysed individually to determine specific policy recommendations. Despite the fact

that policy makers and politicians are aware of the energy security challenges and

numerous policies have been issued to address them, the recommendations made in

the paper are aimed at invigorating Government efforts in energy security

policymaking and, in a number of cases, build on the current commitment.

5

Chapter I: India’s Energy Context

Current and Future Energy Context

India is the third largest energy consumer in the world. Although India constitutes 17

percent of the world population, it uses only 5 percent of global energy.17 According

to International Energy Agency (IEA), Indian total primary energy demand is

estimated to increase from 669 million tonnes of oil equivalent (mtoe) in 2009 to 1464

mtoe in 2035 (Figure 1).

Figure 1: World Primary Energy Demand18

17 Rekha Krishnan, ‘India’s energy security: imperatives for change’, Energy Security Insights, The

Energy and Resources Institute (TERI), vol. 4, no. 4, October-December 2009, p. 2, retrieved 31 October 2011, <http://bookstore.teriin.org/docs/newsletters/ESI_Octoberl-December%202009.pdf.

18 International Energy Agency, World Energy Outlook 2011, p. 81.

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According to the IEA, coal, oil, gas and biomass will continue to be India’s major

energy source in future (Figure 2). Although, experts in India see gas as the

cornerstone of India’s future energy policy, oil will remain the primary means of fuel

for the rapid increase in cars19 on Indian roads and coal for electricity generation.20

280

159

495 9 2

165

669

434

202

82

17 18 9

184

945

618

356

154

48 30 36

220

1464

0

200

400

600

800

1000

1200

1400

1600

Coal Oil Gas Nuclear Hydro Other Renewable Biomass andWaste

Total

Energy Sources

in m

toe

2009 2020 2035

Figure 2: India’s Primary Energy Demand 2009-203521

Organic oil reserves, which account for only 0.4 percent of the world’s oil reserves,22

are likely to last for eight years at current consumption and 33 years at current

production levels.23 The demand for oil, which is likely to increase by 3.4 percent

annually (from 3.3 million barrels per day (mb/d) in 2010 to 7.4 mb/d in 2035)24 is

widening the gap between oil demand and domestic oil supply (Figure 3). India

produces 35.4 million tonnes (mt) or 0.9 percent of the world’s total oil production

19 According to The Energy Research Institute (TERI) approximately 200 million cars will be plying

on Indian roads by 2030, see Shebonti Ray Dadwal, ‘An Energy Crisis in the Making? : India’s Policy Options’, in NS Sisodia & C Uday Bhaskar (eds.), Emerging India: Security and Foreign Policy Perspectives, Institute for Defence Studies and Analyses, New Delhi, 2005, pp. 311-312.

20 Charles K. Ebinger, ‘A Faltering BRIC: The Energy Landscape in New Delhi and Mumbai’, The Brookings Institution, Foreign Policy Trip Report no. 31, 14 September 2011, retrieved 20 October 2011, < http://www.brookings.edu/reports/2011/0914_india_energy_ebinger.aspx>.

21 International Energy Agency, World Energy Outlook 2011, p. 596. 22 Madan, Energy Security Series: India, p. 1. 23 Nitya Nanda, ‘Trading in the world energy market’, in Ligia Noronha & Anant Sudarshan (eds.),

India’s Energy Security, Routledge, Oxon, 2009, p. 51. 24 International Energy Agency, World Energy Outlook 2011, p. 107.

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while it consumes 3.8 percent or 148.5 mt of oil,25 which underscores the dependence

on oil imports. Oil imports are likely to rise from 76.4 percent (2010-11 figures) to

80.5 percent in 2016-17 and are estimated to reach 92 percent in 2035.26 India

currently imports 74 percent of its crude oil from countries in West Asia.27

Figure 3: Projected Oil Demand and Share of Imports: 2010-203528

India’s proven gas reserves are 1.12 trillion cubic metres which is 0.6 percent of the

world proven reserves,29 and these are likely to last 32 years at current production

levels.30 The demand for gas (Figure 4) is likely to increase by 4.5 percent annually,

from 59 billion cubic metres (bcm) in 2009 to 186 bcm in 2035.31 The gas imports are

25 Bhupendra Kumar Singh, ‘India’s Energy Security: Challenges and Opportunities’, Strategic

Analysis, vol. 34, no. 6, November 2010, p. 799, retrieved 20 October 2011 <http://www.tandfonline.com/doi/pdf/10.1080/09700161.2010.512473>.

26 Government of India, Faster, Sustainable and More Inclusive Growth: An Approach to the 12th Five Year Plan, Planning Commission, New Delhi, August 2011, p. 40, retrieved 20 October 2011,

<http://planningcommission.nic.in/plans/planrel/12appdrft/appraoch_12plan.pdf>; International Energy Agency, World Energy Outlook 2011, p. 92;

27 Krishnan, ‘India’s energy security: imperatives for change’, p. 2. 28 International Energy Agency, World Energy Outlook 2011, p. 92. 29 Singh, ‘India’s Energy Security: Challenges and Opportunities’, p. 799. 30 Madan, Energy Security Series: India, p. 12. 31 International Energy Agency, World Energy Outlook 2011, p. 159.

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estimated to increase from the current 19 percent to 28.4 percent by 2016-17.32 Gas is

primarily used for power generation and for manufacturing fertilizers.33

Figure 4: Projected Natural Gas Demand and Share of Imports: 2010-203534

Although India’s coal reserves are estimated to be around 58,600 mt (fourth largest in

the world),35 its low quality and poor infrastructure have led India to import coal.36

Indigenous coal reserves are likely to run out in 40 years, if production grows at five

percent per annum.37 The demand for coal is estimated to increase 3.1 percent

annually, from 399 million tonnes of coal equivalent (mtce) in 2009 to 883 mtce in

2035 (Figure 5). India’s coal imports are estimated to increase from the current 19.8

32 Government of India, Faster, Sustainable and More Inclusive Growth: An Approach to the 12th

Five Year Plan, p. 39. 33 Madan, Energy Security Series: India, p. 12. 34 International Energy Agency, World Energy Outlook 2011, p. 92. 35 Madan, Energy Security Series: India, p. 12. 36 Betz & Melanie Hanif, ‘The Formation of Preferences in Two-level Games’, p. 11. 37 Government of India, Integrated Energy Policy, p. xxii; Madan, Energy Security Series: India, p.

14; Nanda, ‘Trading in the world energy market’, p. 51.

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percent to 22.1 percent by 2016-17,38 and by 2020 India will become the world’s

largest coal importer.39

Figure 5: Projected Natural Gas Demand: 2010-203540

India is eight largest consumer of hydroelectricity in the world.41 It exploits only

31,000 megawatt (MW) of hydro-power out of its total potential of 150,000 MW.42

The hydro-energy share of power capacity is estimated to increase from the current

10.31 mtoe (imports constituting 4.6 percent) to 14.85 mtoe (imports constituting 3.5

percent) by 2016-17.43

India has 19 operational nuclear reactors, while six more are under construction.44 The

nuclear energy share is estimated to increase from the current 6.86 mtoe to 9.14 mtoe

in 2016-17; although India is poorly endowed with uranium.45 The renewable energy

38 Government of India, Faster, Sustainable and More Inclusive Growth: An Approach to the 12th

Five Year Plan, p. 40. 39 International Energy Agency, World Energy Outlook 2011, p. 69. 40 International Energy Agency, World Energy Outlook 2011, p. 92. 41 Madan, Energy Security Series: India, p. 12. 42 Madan, Energy Security Series: India, p. 12. 43 Government of India, Faster, Sustainable and More Inclusive Growth: An Approach to the 12th

Five Year Plan, p. 40. 44 International Energy Agency, World Energy Outlook 2011, p. 451. 45 Betz Joachim and Melanie Hanif, ‘The Formation of Preferences in Two-level Games’, July 2010,

p. 11.

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share is estimated to increase from the current 0.95 mtoe to 1.29 mtoe in 2016-17.46 It

is estimated that by 2035, India is likely to generate 20 percent of its power from

renewable energy sources.47

To view the data in its real-life context, 25 percent of India’s population48 or 57

percent of India’s rural households have no access to electricity.49 India’s current

power generation capacity is around 159.64 gigawatt (GW) and the power

requirement by 2031 is estimated to be 800 GW.50 Coal is used for generating 53.3

percent of power and is followed by hydroelectricity which constitutes 24.7 percent

(Figure 6). In addition there are also power cuts which are 13.3 percent at peak

requirement.51 100 million households (more than 75 percent of India’s rural and 22

percent of its urban households) have no access to modern forms of energy and are

dependent on biomass for household needs including cooking.52

Figure 6- India’s Installed Power Generation Capacity53

46 Government of India, Faster, Sustainable and More Inclusive Growth: An Approach to the 12th

Five Year Plan, p. 40. 47 International Energy Agency, World Energy Outlook 2011, p. 79. 48 International Energy Agency, World Energy Outlook 2011, p. 478. 49 Mitali Das Gupta, ‘Energy security and climate change: why we should be concerned with

converging lifestyles’, Energy Security Insights, The Energy and Resources Institute (TERI), vol. 2, issue 4, February 2008, p. 11, retrieved 20 October 2011, http://bookstore.teriin.org/docs/newsletters/Engery%20Sec%20Insights%20March_08%20Final.pdf>.

50 Singh, ‘India’s Energy Security: Challenges and Opportunities’, p. 800. 51 Singh, ‘India's Energy Security: Challenges and Opportunities’, p. 800. 52 Gupta, ‘Energy security and climate change: why we should be concerned with converging

lifestyles’, pp. 11-12; Krishnan, ‘India’s energy security: imperatives for change’, p. 3. 53 Singh, ‘India's Energy Security: Challenges and Opportunities’, p. 800.

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2035

Coal50%

Oil29%

Gas12%

Nuclear4%

Hydro2%

Renewable3%

2009

Coal55.6%Oil

31.5%

Hydro 1.8%

Gas 9.7%

Nuclear 1.0%

Renewable 0.4%

To summarise, India’s energy needs are estimated to rise at 3.1 percent annually for

the period 2009 to 2035, which is the fastest in the world.54 Fossil fuel will continue

to dominate the energy sector, although the share of renewable energy sources and

nuclear energy will increase in future (Figure 7). India does not possess sufficient

energy resources and this scarcity will result in increased import dependency,

primarily from West Asia. This also implies that India will have to ensure the security

of its Sea Lines of Communications (SLOCs) which facilitate its energy imports.

There is an extreme shortage of power and the country is predominantly dependent on

coal for power generation which is having adverse effects on the environment.

Figure 7: India’s Energy Mix: 2009-203555

Strategic Direction

There are a number of ministries in the Government (for example, power, coal,

petroleum and natural gas, and renewable energy) and other government agencies

(like the Planning Commission and Department of Atomic Energy) which are looking

after different energy resources. A number of energy related policies have been issued

by these ministries/agencies. However, for the purpose of this paper, the strategic

direction has been derived from the IEP, the overarching energy policy, and the

54 International Energy Agency, World Energy Outlook 2011, p. 81. 55 International Energy Agency, World Energy Outlook 2011, p. 596.

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approach set out in the Twelfth Plan, effective from 2012 to 2017, which is the

Government’s latest policy document.

The IEP lays down the vision for securing India’s energy future in the short, medium

and long term. The policy recommends a number of changes relating to energy

pricing, production, regulatory structures and security.

For the energy sector the Government’s twin objectives set out in the Twelfth Plan are

the provision of adequate availability of energy for faster economic development; and

providing access to energy in rural areas and to the urban poor.56 As per the strategic

guidance on energy as highlighted in the Approach Paper, India’s energy supplies will

have to grow at a rate of 6.5 percent annually for India to grow at 9 percent GDP.57

The Government is sensitive to its import dependency on petroleum and coal and it

plans to continue developing new nuclear power plants. The efforts made to improve

the power situation in previous plans have been inadequate, hence the initiatives made

in the Eleventh Plan (2006-11) needs to be supported financially through the private

sector, in the Twelfth Plan. The transmission and distribution (T&D) losses in the

power sector have been attributed to poor governance and lack of implementation of a

proper regulatory structure. The Government proposes reforms on an extensive scale

to promote private investment in transmission and electricity generation. Although

steps have been taken to de-regulate oil price, the prices of other energy resources like

coal, power and gas are still controlled by the Government. In the long term, the

Government is proposing to align the domestic energy prices with the global price

trends.

The Government, over the years, has issued comprehensive guidance on energy

security, however it has not been able to achieve what it has set for itself due to lack

of coordination and consistent delays in implementing policies. The guidelines issued

56 Government of India, Faster, Sustainable and More Inclusive Growth, An Approach to the 12th

Five Year Plan, p. 39. 57 Government of India, Faster, Sustainable and More Inclusive Growth, An Approach to the 12th

Five Year Plan, p. 40.

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in the IEP and the Approach Paper is very similar, indicating the non-implementation

or delay in implementing the recommendations of the IEP be implemented.58 For

instance the power reforms have been delayed due to regulatory issues between the

central and state governments.59 Setting up of a National Energy Fund (NEF) to

finance research and development (R&D) in the energy sector has been approved;

however it is yet to be set up. The IEP in its recommendations does not cater for

sufficient safeguards against the threat to the environment. The IEP is also silent on

the issue of development of infrastructure to match the increased energy supplies. On

the positive side the Government has been able to achieve some progress on the IEP

goals, like substantial efforts are being made to promote renewable energy and new

nuclear power plants are being built (although the Government has not yet been able

to adopt a comprehensive nuclear energy policy).60

While the factual content of the previous two sections is important to any

understanding of Indian energy security situation, the next section will highlight the

challenges it has brought to the fore.

Energy Security Challenges

Although India’s future energy security challenges lie both on the demand and supply

side, a large part resides with the Government, which predominantly controls it. This

results in bureaucratic issues and skewed policies, thus discouraging whole-hearted

participation by the private sector. The number of ministries/agencies engaged in the

energy sector increases the complexity and the apprehensions held about energy

security.

58 Government of India, Mid Term Appraisal, Eleventh Five Year Plan, 2007-12, The Planning

Commission, 2011, p. 19, retrieved 20 October 2011, <http://planningcommission.nic.in/plans/mta/11th_mta/chapterwise/Comp_mta11th.pdf>; Deepa Badrinarayana, ‘India’s Integrated Energy Policy: A Source of Economic Nirvana or Environmental Disaster’, Environmental Law Reporter, vol. 40, no. 10708, July 2010, p. 10710, retrieved 20 October 2011, < http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1636049##>.

59 Badrinarayana, ‘India’s Integrated Energy Policy: A Source of Economic Nirvana or Environmental Disaster’, p. 10710.

60 Badrinarayana, ‘India’s Integrated Energy Policy: A Source of Economic Nirvana or Environmental Disaster’, p. 10710.

14

The Government has domestic and international compulsions which slow down the

reform process and prevent it from taking hard decisions. The Government cannot

totally do away with subsidies and is also required to exercise some control over the

price of energy commodities, as it directly affects the poor.61 However, this

discourages the private sector (whose predominant focus is economic and not social)

from entering the energy sector. The Government, without effective private

contribution, is incapable of securing India’s energy needs. International pressures too

create challenges for the Government, for instance the US pressure aimed at

discouraging India to deal with Iran and Myanmar for energy business.

The high imports and almost stagnant domestic crude oil production implies large

outflow of foreign exchange.62 India’s energy import bill, in terms of percent of GDP,

is the highest amongst the G20 nations.63 The Government is pursuing laying gas

pipelines from a number of Asian countries, however, due to political and other

reasons it has not been successful in implementing even one. Energy imports

highlight the need to create port and other infrastructure at both ends for the

movement of energy resources.64 The overdependence on West Asia increases India’s

vulnerability to disruptions and price fluctuations which have the potential to directly

affect the economy. Growing global energy demand has led to severe competition

amongst the major economies in securing their future energy needs from the finite

resources available.

India is moving towards using nuclear energy as a major source of energy; however

setting up nuclear plants and meeting its nuclear fuel requirements continue to remain

as major challenges. Although, India is blessed with a high potential for hydro-power

generation, the capabilities are not being optimally exploited. The increasing

awareness of environmental damage caused by extensive use of fossil fuels may

impact on their supplies, where source countries may decline to export their energy

61 Approximately 30-40 percent of the Indian population lives below the poverty line. 62 Krishnan, ‘India’s energy security: imperatives for change’, p. 3. 63 Ebinger, ‘A Faltering BRIC: The Energy Landscape in New Delhi and Mumbai’. 64 Ritu Mathur, ‘The role of energy efficiency and renewable energy in enhancing energy security:

challenges and opportunities’, The Energy and Resources Institute (TERI), vol. 3, issue 3, October-December 2008, p. 3, retrieved 13 October 2011, < http://bookstore.teriin.org/docs/newsletters/Energy%20Security_Oct_DEC08.pdf>.

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resources to preserve the global environment. Use of improper/unorthodox energy

resources,65 besides having adverse effects on the health of the people using the said

resource, also impacts on the environment.66 The Government has issued guidelines

on energy efficiency and conservation; however the implementation of these is not

forthcoming.

To summarise, the major energy security challenges confronting India are: lack of an

integrated approach towards energy security; excessive dependence on fossil fuels

leading to imports for which the country is over reliant on West Asia; large

dependence on energy imports makes the SLOCs vulnerable to interdiction; poor

implementation of energy efficiency and conservation measures leads to wastage;

increased use of fossil fuel is likely to increase the international pressure on climate

change issues; and limited participation of the private sector due to excessive

government control on the energy sector. The next chapter will analyse various

energy security related challenges and recommend policy initiatives which the

Government needs to include in its overall energy security strategy.

65 These include fire wood, cow dung cake and crop residue; 500,000 people, who use these sources

of energy, lose their life every year in India and a substantial amount is spent by the women to collect biomass, see Neha Mishra, Ruchika Chawla & Leena Srivastava, ‘Towards effective petroleum subsidies’, The Energy and Resources Institute (TERI), vol. 3, issue 1, April 2008, p. 5, retrieved 13 October 2011, < http://bookstore.teriin.org/docs/newsletters/Energy-Security-3(1).pdf>.

66 Krishnan, ‘India’s energy security: imperatives for change’, p. 2.

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Chapter 2: Policy Recommendations and Financial Implications

Considering the present and future energy context it is evident that India faces severe

energy security challenges which need to be addressed in a holistic manner. This

chapter will analyse these challenges in the context of the current government

initiatives to determine specific policy recommendations for the Government. To

address India’s energy security issues, the following seven recommendations, are

proposed:-

Recommendation I –Apply Whole-of-Government Approach.

Recommendation II- Reduce Energy Imports.

Recommendation III – Reduce Energy Dependence on West Asia.

Recommendation IV – Ensure Security of Energy-Critical SLOCs.

Recommendation V – Improve Energy Efficiency and Energy Conservation.

Recommendation VI – De-regulate Government Control and Relax Investment

Policy.

Recommendation VII – Address Environmental Challenges.

Section I: Whole-of-government Approach

The Government’s strategic direction has been enunciated by numerous contrasting

policies; however there is no overarching energy strategy which coordinates the issue

of energy security holistically. All the ministries have their independent vision

statements, for instance ‘The Hydrocarbon 2025 Report’, issued by the Ministry of

Petroleum and Natural Gas, focused only on the oil and gas.67 Lack of a coherent

energy strategy can be attributed to the non-availability of an overarching energy

organisation.

India will only be able to secure its energy future if it can successfully implement the

laid down policies in a cohesive, coordinated and timely manner. The numerous

agencies/ministries dealing with different energy resources use different sets of

67 Madan, Energy Security Series: India, p. 33.

17

energy data thus hampering the adoption of a cohesive and coordinated approach to

energy security.68 The policies on pricing, energy production and tax subsidies all

differ across different energy sources. In addition energy security challenges require a

coordinated and cohesive response from a number of non-energy related ministries

like the Ministry of External Affairs (MEA), Ministry of Science and Technology for

R&D, Ministry of Road Transport and Highways, Ministry of Railways and Ministry

of Environment.

The Government needs to elevate energy security to within the national security

architecture. Adopting a sustained and focused whole-of-government approach to

address future energy challenges is considered essential, given the complexity of the

issues and involvement of a number of ministries. As the first step to achieve the

integration, the Government needs to create an ‘Energy Ministry’ or ‘Energy Council’

to coordinate all matters pertaining to energy security.69 The new organisation would

help coordinate energy-related issues within ministries (energy-related ministries) and

between ministries (with other ministries which have energy-related issue overlaps).

However, until such time as an agency of this type is formed, the Indian Planning

Commission needs to take the overall lead.

Recommendation 1: Apply Whole-of- Government Approach

elevate energy security to form part of national security architecture;

apply a whole-of-government approach to address energy security challenges;

and

create an ‘Energy Ministry’ or an ‘Energy Council’ having overarching

control over various energy related ministries/departments.

68 Government of India, Mid Term Appraisal, Eleventh Five Year Plan, 2007-12, The Planning Commission, 2011, p. 18, retrieved 20 October 2011, <http://planningcommission.nic.in/plans/mta/11th_mta/chapterwise/Comp_mta11th.pdf>; Ganesh, ‘The Idea that People Can’t Afford to Pay for Energy is a Myth’. 69 In 1992, a central energy ministry did exist but it was later divided it into a number of different

ministries, see Bertz, Joachim & Melanie Hanif, ‘The Formation of Preferences in Two-level Games’.

18

Section II- Reduce Energy Imports

The shortage of indigenous energy resources and the rise of energy demand will drive

India to increase energy imports in the future. Environmental factors and import

dependency on coal may create uncertainty in its supplies from countries which may

restrict export of coal as part of their climate change policies. In order to minimise the

vagaries of over-dependence on oil and coal, India needs to diversify its energy-mix

and also explore own territory for new oil and gas finds.

Transition to Natural Gas

New discoveries of gas fields are rising while the discovery of new oil fields is

declining.70 In order to reduce consumption of oil and coal, India needs to gradually

transition to natural gas. However, there are a number of domestic and international

issues which need to be addressed for India to successfully increase the usage of gas.

On the domestic front, although gas has been discovered at a number of locations in

India, the government policies lack coherence in terms of its pricing and usage in

sectors other than power, for instance fertilizers.71

India has initiated a few international pipeline projects within Asia. In 2010, India

signed two agreements for the Turkmenistan-Afghanistan-Pakistan-India (TAPI)

pipeline. India, which has been discussing the Iran-Pakistan-India (IPI) pipeline since

the last decade and a half, has of late shown renewed interest in the project.72 India is

also engaging Myanmar for transhipping gas through a Myanmar–Bangladesh-India

pipeline, and engaging Oman for an Oman-India sub-sea pipeline (Figure 8).

However to date, not a single project has been successfully implemented. The main

reason for non-implementation of gas pipelines are political differences between

parties, although security and commercial issues and the additional regional factors

also contribute to the delay in the projects.

70 Michael T. Klare, ‘Navigating the Energy Transition’, Current History, January 2009, p. 28,

retrieved 20 October 2011, < http://relooney.fatcow.com/SI_Routledge-Oil/0-Important_19.pdf>. 71 Krishnan, ‘India’s energy security: imperatives for change’, p. 3. 72 Madan, Energy Security Series: India, p. 77.

19

Figure 8: Proposed Pipelines: Turkmenistan–Afghanistan–Pakistan–India; Iran–

Pakistan–India; and Oman-India73

The IPI pipeline was delayed due to a number of reasons: disagreements over the gas

price with Iran and the transit fee with Pakistan; and India’s indecision due to the

risks involved, given the security environment prevailing in Pakistan and

Afghanistan.74 The role of the US in discouraging India from entering into an energy

agreement with Iran is also instrumental in the delay.75 As a result of India’s

indecision, Iran and Pakistan have decided to move forward with the project without

India.76 The Myanmar-Bangladesh-India pipeline was held up due to Bangladesh’s

linking the project with its desire to obtain transit rights to Nepal and Bhutan through 73 Dadwal, ‘Can the South Asian Gas Pipeline Dilemma be Resolved through a Legal Regime?’, p.

760. 74 Madan, Energy Security Series: India, p. 80; Narayani Ganesh, ‘The Idea that People Can’t

Afford to Pay for Energy is a Myth’, The Times of India, 04 October 2011, retrieved 05 November 2011, <http://articles.timesofindia.indiatimes.com/2011-10-04/edit-page/30242008_1_energy-pricing-hydropower-nepal>.

75 Charles K Ebinger, Energy & Security in South Asia: Cooperation or Conflict?, Brookings Institution Press 2011, p. 12; Ganesh, ‘The Idea that People Can’t Afford to Pay for Energy is a Myth’.

76 Madan, Energy Security Series:India, p. 80.

Proposed Oman-India pipeline

20

India.77 In addition, the mechanisms for protecting the interests of all the parties do

not exist (for instance contracts, concessions and treaties). There is no agreed legal

framework to regulate activities and this can lead to delays and cost escalation.78

There are some major issues with regard to the gas pipelines, although they can all be

resolved. The Government has to pro-actively engage all concerned nations to resolve

all political and other issues and create formal treaties and legal frameworks in order

to move forward with the projects. The Indian energy relationship with Iran79 and

Myanmar needs to be protected while dealing with the US. The Indian government

must work out the security arrangements for these pipelines with the Governments of

Pakistan and Afghanistan. India also needs to consider buying gas from Bangladesh,

given the improvement of relations between the two neighbouring states.80 On the

domestic front, India needs to create a gas grid within the country and needs to reform

its gas policies and gradually reduce subsidised sale to the fertilizer and power sectors

and move towards market-driven prices.

South Asia is ideally located to act as a bridge between West Asia and East Asia.

Creation of an energy grid in South Asia, connecting the suppliers and the consumers

will have major economic benefits for the region and will also help meet the energy

demands of the South Asian economies. India through the South Asian Association

for Regional Cooperation (SAARC) needs to push for establishing a regional energy

grid in South Asia. The pipeline grid and other related infrastructure can be created

through loans from the Asian Development Bank (ADB). The pipelines would be laid

through various countries in the region, including Afghanistan, Pakistan and

Bangladesh, who would get a transit fee, thus making them stakeholders in the

security and functioning of the grid. The grid’s overall coordination could be

77 Mahendra K. Lama, ‘Cross-border power trading in South Asia: emerging new paradigms’, The

Energy and Resources Institute (TERI), vol. 3, issue 2, July 2008, p. 11, retrieved 13 October 2011, < http://bookstore.teriin.org/docs/newsletters/Engery%20Sec%20Insights%20july_08.pdf>; Madan, Energy Security Series: India, p. 80.

78 Shebonti Ray Dadwal, ‘Can the South Asian Gas Pipeline Dilemma be Resolved through a Legal Regime?’, Strategic Analysis, vol. 35, no. 5, September 2011, p. 760, retrieved 24 October 2011, < http://www.tandfonline.com/doi/pdf/10.1080/09700161.2011.591251>.

79 Madan, Energy Security Series: India, p. 19. 80 Ganesh, ‘The Idea that People Can’t Afford to Pay for Energy is a Myth’.

21

undertaken under the auspices of the SAARC, thus relieving the smaller nations of

any fears from India.

Pursue an Informed Nuclear Policy

India along with other major energy consumers like China, Japan and South Korea

are emphasising the use of nuclear energy to conserve fossil fuels, diversify

energy sources and improve energy process and ensure fuel supply stability. The

Indo-US civil nuclear deal and the Nuclear Suppliers Group’s waiver in 2008

helped India enter into civil nuclear deals with several countries. India has

announced its nuclear expansion program which highlights a 15-fold increase over

the next 20 years, from the current 4,500 MW (accounts for three percent of the

total energy consumed) to about 62,000 MW by 2032, estimated to account for 20

percent of the total energy output.81

Although, nuclear energy offers a number of benefits, currently it is not a cost-

effective option. Expenditure on safety, disposal of radio-active waste and

management of old plants are some of the additional costs associated with nuclear

energy. However, given the depleting fossil fuel reserves and with renewable energy

still in its infancy, nuclear energy remains a major source of energy for large energy

consumers like India and hence needs to form a significant part of India’s energy-

mix. India, therefore, needs to issue comprehensive nuclear policy in conjunction

with the country’s overall energy strategy.82

Over the years India has gained adequate technical capabilities in the field of nuclear

energy field and is also being supported by a number of countries in setting up nuclear

power plants. Although, India has limited uranium of its own, it has entered into

uranium supply arrangements with a few countries including Russia, Kazakhstan,

81 Arvind Gupta, ‘India’s Nuclear Energy Programme: Prospects and Challenges’, Strategic Analysis,

vol. 35, no. 3, May 2011, p. 373, retrieved 20 October 2011, < http://www.tandfonline.com/doi/pdf/10.1080/09700161.2011.559963>.

82 Manmohan Singh, ‘Excerpts of Address by the Prime Minister at the Combined Commanders’ Conference’, Prime Minister’s Office, Press Information Bureau, Government of India, 03 September 2010, retrieved 15 February 2011, <http://www.pib.nic.in/newsite/erelease.aspx?relid=65696>.

22

Namibia and Mongolia.83 However, to meet its long term uranium requirements, India

needs to secure a steady supply of uranium from uranium-producing countries,

including Australia. Australia, which holds 38 percent of the known global uranium

reserves, has declined to sell uranium to India, since the latter is a non-signatory to the

Nuclear Non-Proliferation Treaty (NPT).84 India needs to engage Australia

proactively by explaining its position on the signing of the NPT and how the sale of

uranium hinders the goal of building a strategic partnership between the two nations.

The growing strategic relations with the US could be explored by India to push its

case for a uranium deal with Australia.

India, given its huge energy demands is an attractive market for setting up of nuclear

power plants and has entered into various cooperation agreements with several

countries including Russia and France.85 Considering Japan’s expertise in the field of

nuclear energy, India needs to engage its help on civil nuclear cooperation.86

India holds 31 percent of the world’s thorium reserves and aims to gradually shift

from fast breeder reactors to thorium-breeder reactors.87 Although a number of

countries have abandoned their efforts on thorium-breeder technology, India, which is

currently working on the technology, needs to continue doing so to achieve self-

reliance in the field of nuclear energy. The Government also needs to create a friendly

public opinion towards nuclear power, given the recent domestic resistance to the

83 GG Pamidi, ‘Energy Security – A Strategic Imperative for India’, Journal of the United Service

Institution of India, vol. CXLI, no. 583, January-March 2011, p. 91. 84 The Liberal government under Prime Minister John Howard agreed in principle to sell uranium to

India in 2007, however, the Labor government which came into power later, under Prime Minister Kevin Rudd re-imposed the ban, see Dennis Rumley, ‘Australia and the New Geopolitics of Energy’, Future Directions International, p. 9, 12 August 2010, retrieved 15 October 2011, < http://www.futuredirections.org.au/files/1281593373-FDI%20Strategic%20Analysis%20Paper%20-%2012%20August%202010.pdf>.

85 Russia is engaged in building a number of reactors and India has signed a framework agreement with France in 2010 for sourcing two reactors with an assured uranium supply to fuel them, see Gupta, ‘India’s Nuclear Energy Programme: Prospects and Challenges’, p. 377.

86 Rajiv Narayan, ‘The NSG exemption and possibilities for nuclear commerce with India’, The Energy and Resources Institute (TERI), vol. 4, issue 1, January-March 2009, p. 18, retrieved 13 October 2011, < http://bookstore.teriin.org/docs/newsletters/ESI-Jan-March%202009%20.pdf>.

87 Brahma Chellaney, Asian Juggernaut: The rise of China, India and Japan, Harper Business, New York, 2010, p. 133.

23

construction of the Kudankulam Nuclear Power plant in the aftermath of the nuclear

accident at Fukushima in Japan.88

Implement an Integrated Renewable Energy Policy

The current shortfall in electricity supply is likely to continue in future, considering

the rapid growth of India’s population. Presently 65 percent of electricity, which is the

main consumer of energy resources, is being generated using coal, gas and oil (Figure

6)89 and in future too the fossil fuels would remain the main energy source until

renewable energy sources become viable. India has an extensive renewable energy

potential, however only a small fraction of this has been tapped,90 for instance, India

has exploited only 20 percent of its total hydro-energy potential.91

The Government has announced several policies to promote renewable energy. It has

set a target of using renewable energy sources to generate 20 percent of the generation

capacity by 2020.92 India plans to increase its solar energy production by 1000 MW

every year with a plan to generate 20 GW of solar power and set up 30 ‘solar cities’

by 2022.93 Wind energy is the fastest growing renewable source in India and a

cumulative capacity of 10,900 MW has already been set up so far with a total

potential for 65,000 MW. In 2009, India also became a member of the International

Renewable Energy Agency (IRENA), a German initiative, which will assist India in

gaining expertise and knowledge in the renewable energy field.

88 India is building a US$ 3.5 billion Kudankulam Nuclear Power Plant, in the Southern state of

Tamil Nadu, in conjunction with Russia’s Atomsexport. Out of the two 1GW reactors proposed to be built, the first reactor is due to start commercial operations in December 2011. However, since the last few weeks the locals of the area supported by a few state political parties have protested against the construction of the plant in the aftermath of the Fukushima accident, see Amy Kazmin, ‘Nuclear protests put India on back foot’, Financial Times, London. 15 November 2011, retrieved 16 November 2011, http://www.ft.com/intl/cms/s/0/491c396a-062c-11e1-a079-00144feabdc0.html.

89 Krishnan, ‘India’s energy security: imperatives for change’, p. 3. 90 Paul Curnow, Lachlan Tait and Ilona Millar, ‘Financing Renewable Energy Projects in Asia:

Barriers and Solutions’, RELP, vol. 1, 2010, p. 108. 91 RV Shahi, ‘India’s Strategy Toward Energy Development and Energy Security’, Ministry of

Power, Government of India, p. 7, retrieved 20 October 2011, < http://www.powermin.nic.in/whats_new/pdf/INDIA'S%20STRATEGY%20TOWARD%20ENERGY%20DEVELOPMENT.pdf>.

92 Ebinger, ‘A Faltering BRIC: The Energy Landscape in New Delhi and Mumbai’. 93 International Energy Agency, World Energy Outlook 2011, p. 388.

24

Although the Government has set up an ambitious plan for tapping renewable source

of energy, there are a number of challenges which need to be addressed in order to

meet its renewable energy objectives. The long term efficacy of renewable sources

would depend upon the socio-economic development of the country and the

technological abilities to compete with other energy options. Renewable energy

projects are capital intensive and require an upfront capital expenditure, unlike

conventional energy projects. Approximately 75 percent of the cost of energy

generated from wind turbines arises from upfront capital cost, as compared to the gas

power plants where approximately 70 percent of the cost of energy generated arises

from ongoing costs like fuel.94 In addition the renewable energy projects are

susceptible to weather conditions thus increasing the risk. The lack of connecting

links between renewable projects and the state transmission grids also delays the

implementation of projects.95 The risks involved in the renewable energy sector

discourage private players from entering the field. In the wind energy sector, India fell

from being the world’s fourth largest producer of wind energy to fifth, thus showing

lack of urgency in achieving set targets.96

The lengthy procedures for licensing, the dependence on technology and insufficient

financial support act as obstacles to increasing the share of renewable energy in

India’s energy mix. There is also a clear lack of coordination between the various

government departments and different state governments on renewable energy. State

governments have different policies for renewable energy projects and most of them

are skewed in favour of public sector units which discourage the entry of private

players. The manufacturers of renewable energy technologies like solar photo-voltaic

cells and wind turbines have been facing problems with quality control and meeting

international standards.97

94 Curnow, Paul, Lachlan Tait and Ilona Millar, ‘Financing Renewable Energy Projects in Asia:

Barriers and Solutions’, p. 103. 95 Ebinger, ‘A Faltering BRIC: The Energy Landscape in New Delhi and Mumbai’. 96 Shebonti Ray Dadwal, ‘India’s Renewable Energy Challenge’, Strategic Analysis, vol. 34, no. 1,

January 2010, p. 3, retrieved 20 September 2011, http://www.tandfonline.com/doi/pdf/10.1080/09700160903354948.

97 Dadwal, ‘India’s Renewable Energy Challenge’, p. 3.

25

The Government needs to issue on priority a comprehensive ‘Renewable Energy

Policy’, which has been sitting on the drawing boards for quite some time.

Considering the fact that currently, renewable energy is not as cost effective as the

coal based power generation, the Government needs to devise and issue incentives to

boost the renewable energy sector and create an enabling environment to make the

sector attractive for the future. Incentives like tax relief; waiving of import duties on

renewable energy technology; fixing higher purchase price for electricity generated

from renewable energy sources;98 and simplification of the licensing policies will

attract private participation in the sector. Government needs to design and support

relaxed financial policies to meet the high initial cost of renewable energy technology

and the need for upgrading for production of cost-effective and efficient renewable

energy. The State Governments have to be mandated to follow national policies which

are fair to both public sector units and private players. The Government also needs to

reduce the dependency on imported technology, by coordinated R&D projects which

at present are fragmented amongst the numerous agencies. The Government needs to

increase awareness of renewable sources of energy and communicating the

advantages of using renewable sources of energy to its population.

India needs to tap its own vast hydro-power potential as well as buy hydro-power

from its neighbours in South Asia. Given India’s vast potential for generating hydro-

power, India needs to set up new hydro-power projects in India’s North and North-

East. The community will have to be educated on the importance of these projects as

their construction would involve displacement of people who need to be adequately

compensated with the allotment of new land and employment in such projects.

Nepal has a 83,000 MW capacity for producing hydro-power, while it uses only about

600 MW.99 India needs to work out a power-buying arrangement with Nepal where

Indian state/private companies can build the hydro-power plants and buy 40-45000

98 Cost of one unit of electricity from coal based plant is Rs 1.70/unit, for wind energy it is Rs

3.50/unit and Rs 12/unit from solar, see Deepa Jainani, ‘Use energy efficiently to fight climate change: BEE officials’, The Financial Express, 25 August 2011, retrieved 20 October 2011, < http://www.financialexpress.com/news/use-energy-efficiently-to-fight-climate-change-bee-official/836718/0>.

99 Ganesh, ‘The Idea that People Can’t Afford to Pay for Energy is a Myth’.

26

MW of power from Nepal.100 Although this would involve displacement of

population, this can be worked out with an adequate compensation package built into

the deal itself. There has been a similar power buying arrangement with Bhutan which

has caused a major increase in Bhutan’s per capita GDP101 and the situation in Nepal

could be similar. There is further potential for setting up of hydro-power plants in

Bhutan, which India needs to pursue. India also needs to consider the hydro-power

generation capacities existing in Bangladesh to augment its power supplies. Such

regional cooperation, which boosts economic development will be enduring and help

build good relationships between the countries of South Asia.

India has set up a National Bio-fuel Coordination Committee, under the Prime

Minister to devise and implement its Bio-fuels policy. India plans to blend up to 20

percent of ethanol and bio-fuels, with petrol and diesel respectively, within a decade.

Incentives for tax relief and fixing of a minimum purchase price of the produce will

have to be done to encourage growth of bio-fuel crops. However, the reduction in land

area presently being used for growing food crops to cultivate bio-crops will impact on

national food security. The Government could consider offering Government and

forest waste land; it has 50 million hectares of wasteland and 34 million hectares of

forest land which can be used to cultivate bio-fuel crops and safeguard food

security.102 Comprehensive bio-fuels guidelines need to be incorporated in the

proposed renewable energy policy.

Other Sources of Energy

The Government also needs to consider unconventional fossil fuels including shale

gas and coal-bed methane, to supplement its energy needs. The potential reserves of

850 bcm of coal-bed methane, 600 million tonnes of shale oil and about 6000 trillion

cubic metres of gas hydrates103 are new possibilities being added to India’s resource

pool. The Government needs to adopt newer technologies like coal gasification and

100 Ganesh, ‘The Idea that People Can’t Afford to Pay for Energy is a Myth’. 101 Ganesh, ‘The Idea that People Can’t Afford to Pay for Energy is a Myth’. 102 Madan, Energy Security Series: India, p. 52. 103 Shebonti Roy Dadwal. `Energy Security: India’s Options’. Strategic Analysis. IDSA. Jul 1999. p.

669, retrieved 20 October 2011, < http://www.ciaonet.org/olj/sa/sa_99das02.html>.

27

mining of coal-bed methane. India also needs to emulate China by developing its

own coal-to-liquid (CTL) process to convert coal to synthetic gas and diesel fuel.104

Accelerate Domestic Exploration

The Government has not been able to completely explore indigenous oil and gas

fields (only 22 percent of the sedimentary basins have been explored).105 Experts

believe that India’s potential reserves are located in deepwater and the public sector

companies lack the technology to explore the potential areas. Therefore attracting

investment from domestic and foreign oil companies become a key component to

domestic supply diversification.106 To encourage the private sector in exploring oil

and gas, the Government has initiated the ‘New Exploration and Licensing Policy’

(NELP), however, due to tax and policy issues private participation remains low.107

The Government’s decision to withdraw a seven-year tax holiday on natural gas

production has not gone down well with the private players.

The Government has to encourage large-scale public and private participation to

explore new sources of oil, gas and other energy sources. A large number of

incentives and tax benefits, and a level playing field for private players with no

preferential treatment to state owned companies, will attract major national and

international participation in the energy sector. In addition, timely investment and

application of requisite recovery techniques would assist in sustaining old and

depleted fields.

104 Chellaney, Asian Juggernaut: The rise of China, India and Japan, p.126. 105 Ebinger, ‘A Faltering BRIC: The Energy Landscape in New Delhi and Mumbai’. 106 G Parthasarathy & Nimmi Kurian, ‘Enhancing India’s energy security options’, Pacific and Asian

Journal of Energy, vol. 12, no. 1, 2002, p. 74. 107 Singh, ‘India’s Energy Security: Challenges and Opportunities’, p.802.

28

Recommendation 2: Reduce Energy Imports

The Planning Commission/Energy Ministry to determine a balanced energy-

mix to comprise oil, gas, coal, nuclear and renewable energy sources and

implement policies rigorously to prevent slippages.

Ministry of Petroleum and Natural Gas to:

o gradually shift from oil to gas;

o in conjunction with MEA continue to work towards overland gas

pipelines from Iran, Turkmenistan, Myanmar and Bangladesh; pursue

establishment of a South Asia Energy Grid through the SAARC; and

o encourage domestic exploration for oil and gas.

Department of Atomic Energy to issue a comprehensive nuclear energy

policy on priority.

MEA to re-engage Australia to secure uranium supplies.

Ministry of New and Renewable Energy to:

o issue an integrated renewable energy policy;

o develop additional hydro-power plants in India and work out hydro-

power buying arrangements from Nepal, Bhutan and Bangladesh; and

o exploit the potential of bio-fuel and other sources of energy like shale

gas and coal-bed methane.

29

Section III– Reduce Energy Dependence on West Asia

Any instability in West Asia, which holds 65 percent of oil and 34.4 percent of gas

reserves,108 has consistently affected the international energy market. India imports

oil from more than 24 countries109 and almost two-thirds comes from five countries;

all located in unstable regions (Figure 9).110 The enduring problems including the

recent pro-democracy protests in Egypt, Yemen, Bahrain and Libya and the US-Iran

confrontation111 are all signs of instability in the region - potentially disrupting energy

supplies and causing major price rises of crude oil and gas. Price increases will have

a direct effect on India’s trade and fiscal deficit.112 India, therefore, needs greater

diversity of energy sources.

Figure 9: India's Crude Oil Import (2009)113

108 GS Khurana, ‘Indian Ocean in India’s Security Calculus’, in NS Sisodia & C Uday Bhaskar (eds.),

Emerging India: Security and Foreign Policy Perspectives, Institute for Defence Studies and Analyses, New Delhi, 2005, p. 197; Ahmad, pp. 66-68.

109 Government of India, Integrated Energy Policy, p. 59; Madan, Energy Security Series: India, p. 15.

110 US Energy Information Administration (EIA), Country Analysis Brief: India, EIA, 2010, retrieved 18 September 2011, < http://www.eia.doe.gov/cabs/India/Oil.html >; Madan, Energy Security Series: India, p. 15.

111 Dadwal, ‘An Energy Crisis in the Making? : India’s Policy Options’, p. 308; Ahmad, p. 81. 112 Madan, Energy Security Series: India, p. 15. 113 Singh, ‘India's Energy Security: Challenges and Opportunities’, p. 802.

30

A pro-active approach to identify and secure exploration rights in other oil and gas

producing countries (in the CAR, Latin America and Africa),114 will help India reduce

its large dependency on West Asia and the conduct of ‘oil diplomacy’115 or ‘energy

diplomacy’116 is considered essential.

Africa accounts for 9.6 percent of the world’s proven oil reserves, 7.9 percent of the

world’s total natural gas and 3.9 percent of the world’s proven coal reserves.117 It is

estimated that Africa has 350.5 mt of surplus crude oil on offer annually. Currently

the Indian public sector and private sector companies are engaged in sourcing energy

resources from Sudan, Libya, Nigeria, Egypt and Madagascar. Although India has

embarked on the road to acquire oil resources in Africa (15.7 percent oil supplies are

sourced from African countries),118 its experience has been mixed due to the political

upheavals in various countries, rising insecurity in the region and growing

competition with other countries seeking a share of the surplus oil. CAR has an

estimated reserve of 2.7 percent of world’s oil reserves and 7 percent of gas reserves,

mainly in three countries, Kazakhstan, Turkmenistan and Uzbekistan. India has

entered into a gas supply arrangement with Turkmenistan and has signed a

Memorandum of Understanding for oil and gas exploration with Uzbekistan where an

Indian company is building facilities to produce liquefied petroleum gas (LPG).119

The growing demand for oil and gas resources by China and India has increased

competition between the two giants and this has driven global energy prices.120 India,

now imports 76 percent of its oil and China imports 40 percent and their needs for

imports will grow in coming years.121 Competition between China and India to secure

114 Jyotsna Bakshi, ‘India and Central Asia: Policy Review and Projecting into Future (2005-2025)’,

in NS Sisodia & C Uday Bhaskar (eds.), Emerging India: Security and Foreign Policy Perspectives, Institute for Defence Studies and Analyses, New Delhi, 2005, p. 242.

115 Madan, Energy Security Series: India, p. 45. 116 ‘This [energy diplomacy] consists of substantial, pro-active and multifaceted engagements across

the world to promote India’s energy security interests’, see Ahmad, p. 68. 117 Ruchita Beri, ‘Prospects of India’s Energy Quest in Africa: Insights from Sudan and Nigeria’,

Strategic Analysis, vol. 34, No. 6, November 2010, p. 897, retrieved 20 October 2011, < http://www.tandfonline.com/doi/pdf/10.1080/09700161.2010.512486.

118 Singh, ‘India's Energy Security: Challenges and Opportunities’, p. 802. 119 Nivedita Das Kundu, ‘Geopolitical and Economic Significance of Central Eurasia: Indian

Perspective’, Indian Foreign Affairs Journal, vol. 5, no. 3, July-September 2010, p. 330. 120 Chellaney, Asian Juggernaut: The rise of China, India and Japan, p. 92. 121 Chellaney, Asian Juggernaut: The rise of China, India and Japan, p. 97.

31

long term exploration/supply contracts with a number of African states has

demonstrated serious rivalries. India currently is losing out to China in the direct

bidding wars and hence needs to align its energy policy to its foreign policy.122 Lalit

Mansingh, former Foreign Secretary of India has said, ‘Energy Security has become a

national priority and must, therefore, feature at the top of the foreign policy

agenda’.123

Direct competition with China has not made much headway because of the large

amount of money which China uses to back its proposals in addition to large amount

of aid to these countries.124 It is no secret that China artificially increases its offer to

outbid its competitors, and thus winning most of the contracts.125 China has energy

interests in most of the energy-producing countries in Africa.126 China sources 16

percent of its total oil imports from Angola and not surprisingly is its largest aid

donor.127 In contrast India may not be able to adopt a similar mode of operation,

given its relatively smaller coffers. In addition, the Indian public-sector companies

have limited autonomy in decisions related to overseas investments as government

control on these companies at times results in delays due to slow clearances/approvals

for projects.128 Investment beyond US$ 75 million requires approval by the cabinet

committee on economic affairs. On the other hand, Chinese companies are fully

supported by the Chinese government and have a free flow of funds readily available

to take timely decisions.

122 Chellaney, Asian Juggernaut: The rise of China, India and Japan, p. 97. 123 Lalit Mansingh, ‘Foreign Policy Imperatives for a Post-Nuclear India’, in NS Sisodia & C Uday

Bhaskar (eds.), Emerging India: Security and Foreign Policy Perspectives, Institute for Defence Studies and Analyses, New Delhi, 2005, p. 50.

124 Madan, Energy Security Series: India, p. 44. 125 Chellaney, Asian Juggernaut: The rise of China, India and Japan, p. 108. 126 For instance, Angola, Nigeria, Chad, Gabon, Congo, Ethiopia, Zimbabwe and Equatorial Guinea,

see Chellaney, Asian Juggernaut: The rise of China, India and Japan, p. 107. 127 Chellaney, Asian Juggernaut: The rise of China, India and Japan, p. 107. 128 For instance, in 2004 Oil and Natural Gas Corporation Videsh Limited (OVL) lost out to China in

acquiring energy assets in Equador when the Indian Government did not allow it to raise its bid of US $ 1.4 billion; in December 2005 the Government blocked OVL from acquiring a 45 percent stake in a Nigerian company on security grounds the a Chinese company picked up the stake, see Madan, Energy Security Series: India, pp. 42-43; OVL also lost to Chinese companies for energy deals in Sudan and Angola, see Singh, ‘India's Energy Security: Challenges and Opportunities’, p. 803.

32

India needs to develop a long-term strategy for securing its energy needs from

Africa/CAR. Rather than selectively engaging resource rich countries to secure its

needs, India, like China, needs to engage all resource rich countries, thus widening

choices. India needs to broaden its criteria from identifying only those nations which

have an exportable surplus and relatively close proximity to India to considering other

geo-political, historical or socio-economic factors.129 The current tempo achieved

with select countries in the energy sector needs to be strengthened by timely and

satisfactory execution of present commitments. India also needs to use its diplomatic

arm to exploit fleeting opportunities that are offered due to a sudden change in the

geo-political situation like Sudan after the referendum and Libya after the fall of

Gaddafi.

India needs to support its government-owned companies and make them

internationally competitive to compete with other international companies. India also

needs to expand its relations beyond its energy needs. India should attach attractive

inclusive growth proposals, as part of its energy bids in order to secure contracts in

the competitive environment. Diplomatic, informational, military and economic

(DIME) initiatives like investment to develop infrastructure; employment generation;

development in the fields of information technology and education; and military

cooperation,130 will strengthen Indian bids. Simultaneously, India needs to engage

China and other economies to joint bids for energy contracts, rather than competing

against each other.

129 Krishnan, ‘India’s energy security: imperatives for change’, p. 4. 130 Military training assistance to Kazakhstan in 2002, Nigeria in 2005 and Uzbekistan in 2006 are a

few examples where India has employed its military in countries where it had energy interests, see Madan, Energy Security Series: India, p. 49.

33

Recommendation 3: Reduce Energy Dependence on West Asia

Planning Commission/Energy Ministry in conjunction with MEA to:

develop a long-term strategy for acquiring equity oil and gas assets overseas;

conduct ‘Oil Diplomacy’ to engage all major energy source countries to

secure long-term energy contracts;

engage China and other major economies to work out a mechanism for

joint bidding and development of energy resources in Africa/CAR; and

support both financially and diplomatically, the private and state run

companies to make them internationally competitive.

34

Section IV– Ensure Security of Energy Critical-SLOCs

“Till such time as we are dependent on fossil fuels we must have the capability of

safeguarding the security of the sea lines of communication”131

India is ideally located, geographically, to meet its energy needs. However, limited

SLOCs in the Indian Ocean Region (IOR) (Figure 10), and the necessity for

‘uninterrupted navigation through the Straits of Hormuz’,132 continue to remain

critical for India’s energy needs.133 Any future conflict with its adversaries will have

adverse affects on India’s imports, which are facilitated by the SLOCs in the IOR.134

Figure 10: Energy Supply Routes135

India’s dependence on energy imports by sea through the various choke points in the

Indian Ocean has increased over the last few decades. 74 percent of India’s oil 131 Manmohan Singh, ‘PM’s Valedictory Address at the Seminar on the Occasion of Golden Jubilee

of National Defence College’. 132 M Hamid Ansari, ‘Imperatives of Indian Policy in West Asia’, in NS Sisodia & C Uday Bhaskar

(eds.), Emerging India: Security and Foreign Policy Perspectives, Institute for Defence Studies and Analyses, New Delhi, 2005, p. 251.

133 Ansari, p. 251; Khurana, ‘Indian Ocean in India’s Security Calculus’, p. 199; Ahmad, p. 71. 134 GS Khurana, ‘Security of maritime energy lifelines: Policy imperatives for India’, in Ligia

Noronha & Anant Sudarshan (eds.), India’s Energy Security, Routledge, Oxon, 2009, p. 117; Monika Chansoria, The Tale of the Asian Twin Tigers: China’s Quest for Regional Dominance in the India-China Context, Centre for Land Warfare Studies, New Delhi, Article No. 1466, 07 January 2010, retrieved 27 September 2011, <http://www.claws.in/index.php?action=details&m_id=467&u_id=28>.

135 Curzon, String of Pearls, retrieved 10 September 2011,

<http://cominganarchy.com/2010/10/22/string-of-pearls/comment-page-1/#comment-395207>.

Trade Routes Chinese Developed Ports

35

imports are sourced from the Persian Gulf region which is far greater than that for

China or the US, which source 58 percent and 20 percent respectively. India gets its

liquefied natural gas (LNG) mainly from the gulf countries, including Qatar, while

China buys from Australia, Malaysia and Indonesia. This heavy reliance on one

particular geographical area has made India vulnerable to disruptions in its energy

supplies.

China’s forays into the Indian Ocean, besides being aimed at checking India’s rising

influence in the area136 also make Indian ships, transiting the SLOCs, vulnerable to

interdiction.137 The potential exploitation of land routes for energy supply through

unstable Afghanistan and Pakistan is fraught with serious risks. Threats from pirates

and armed robbers also exist in the region, in particular, off the Somali coast and the

Gulf of Aden.138

Therefore, energy security needs to be part of India’s strategic thinking and military

planning.139 India needs to ensure that its energy-critical SLOCs are secure and free

from intervention, from both state and non-state actors. A capable Navy,140 good

relations and regional arrangements (for patrolling and joint exercises)141 with all

nations having a stake in the IOR,142 would help India in keeping its SLOCs secure. In

addition India also needs to consider enhancing its Strategic Petroleum Reserves

(SPR) capacities.

Capable Navy

To meet the conventional and non-conventional threats, the Indian Armed Forces, in

particular the Indian Navy has to guard not only the SLOCs, but also the energy

infrastructure both onshore and offshore. The development plans of the People’s 136 Khurana, ‘Indian Ocean in India’s Security Calculus’, p. 202. 137 Khurana, ‘Security of maritime energy lifelines: Policy imperatives for India’, p. 115. 138 Khurana, ‘Security of maritime energy lifelines: Policy imperatives for India’, p. 112. 139 Chellaney, Asian Juggernaut: The rise of China, India and Japan, p. 136. 140 Khurana, ‘Security of maritime energy lifelines: Policy imperatives for India’, p. 119. 141 Khurana, ‘Indian Ocean in India’s Security Calculus’, pp. 204-206. 142 C Raja Mohan, ‘Energy security and Indian foreign policy’, in Ligia Noronha & Anant Sudarshan

(eds.), India’s Energy Security, Routledge, Oxon, 2009, p. 134; Khurana, ‘Indian Ocean in India’s Security Calculus’, p. 207. Khurana, ‘Security of maritime energy lifelines: Policy imperatives for India’, p. 119.

36

Liberation Army Navy (PLAN), besides military reasons are also aimed at securing

China’s energy supplies in the IOR. In addition Chinese development of a series of

ports in the Indian neighbourhood (also referred to as China’s String of Pearls policy)

has military implications for India. The historical animosity between the two

countries; the growing Chinese interest in the IOR; and Indian energy vulnerability,

have all driven the rapid modernisation plans of the Indian Navy. Over the years, the

Indian Navy has demonstrated its capabilities to patrol and protect the sea trade in the

IOR.143 India, therefore, needs to continue developing its naval capabilities to secure

its national interests including energy security.

Strengthen Regional Cooperation

In addition to the development of its Navy, India is also working with key littoral

states in the IOR as well as players from outside the region like the US and Japan, to

help monitor activities at the vulnerable choke points in the IOR. However, India

needs to specifically develop and build long-term relations/tie-ups with countries

which are better located geographically to influence these choke points; Iran on the

Strait of Hormuz; Singapore, Indonesia and Malaysia on the Strait of Malacca;

Djibouti and Eritrea on the Bab el-Mandab; South Africa and Mozambique near the

Cape of Good Hope. A cooperative arrangement between China and India will

safeguard their energy interests and will also be a step in the direction of improving

relations between the two Asian giants. Japan, like India has a high stake in the region

to meet its energy needs. Japan is Iran’s largest trading partner and consumes 22

percent of Iran’s oil exports.144 India must endeavour to improve its ties with Japan;

strong ties with India also enhance the security of Japan’s energy supplies through the

Indian Ocean.

143 In 2003 as part of Operation Sagittarius, the Indian Navy provided escorts to high value US cargo

from Japan to Afghanistan passing through the Straits of Malacca; Chellaney, Asian Juggernaut: The rise of China, India and Japan, p. 139.

144 Chellaney, Asian Juggernaut: The rise of China, India and Japan, p. 141.

37

Build Up Strategic Petroleum Reserves (SPR)

To prepare for short-term disruption to oil supplies, caused by crises or sudden price

increases, the Planning Commission suggested creating a 90 day reserve by 2013,145

however the Government has agreed to create a 15 day reserve only,146 which it is

building and is likely to be completed by December 2012.147 In addition India also

has access to 35-40 days of refined products.148 Considering the security environment

in the Indian sub-continent and the security situation in West Asia, the requirement of

creating a 90 day reserve (same as the US reserves) is considered essential and is

recommended to be created within a decade.149 Although the creation of the SPR

would entail large expenditure on infrastructure and would have to be afforded

suitable protection, the reserves will provide India with the safeguards against any

disruption or sudden spurt in energy prices.

Recommendation 4: Ensure Security of Energy Critical-SLOCs

Ministry of Defence in conjunction with MEA and Energy Ministry to:

o continue working towards developing Indian naval capabilities to

safeguard both defence and energy security interests; and

o enhance regional cooperation by working out a mechanism, for joint

patrolling and safety of energy supplies in the SLOCs, with other nations

including Japan and ASEAN nations.

Planning Commission/Energy Ministry to work towards building up a 90

days SPR over the next 10 years.

145 C Uday Bhaskar, ‘Developments in North Africa and West Asia: strategic implications’, The

Energy and Resources Institute (TERI), vol. 6, issue 2, April-June 2011, p. 5, retrieved 13 October 2011, < http://bookstore.teriin.org/docs/newsletters/ESI%20Volume%206%20Issue%202.pdf>.

146 Madan, Energy Security Series: India, p. 53. 147 Press Trust of India (PTI), ‘India to have strategic oil reserves by Oct 2011’, The Times of India,

15 April 2010, retrieved 20 September 2011,< http://timesofindia.indiatimes.com/business/india-business/india-to-have-strategic-oil-reserve-by-October-2011-/articleshow/5811837.cms>; India also maintains 45 days of petroleum products reserves, see Parthasarathy & Nimmi Kurian, ‘Enhancing India’s energy security options’, p. 75.

148 Madan, Energy Security Series: India, p. 53. 149 Madan, Energy Security Series: India, p. 53.

38

Section V - Improve Energy Efficiency and Energy Conservation

The Government has issued numerous policies and conducted public awareness

campaigns to conserve energy and improve energy efficiency in all sectors. However,

the results achieved are far from satisfactory. The main reasons for unsatisfactory

results in the power sector emanate from subsidisation of power which does not

discourage energy wastage. In addition there are losses in T&D of electricity due to

old and poorly-maintained grids. According to the Planning Commission, India

suffers a loss of Rupees (Rs) 70,000 crores ($AUS 14 billion) annually on electricity

distribution inefficiencies and wastage. The State Governments are managing these

losses through bank loans. The electricity tariffs have not been raised in the last ten

years in some states. Poor regulatory methods have not been able to check and reduce

power theft.

In the transport sector, the non-availability of efficient public transport system leads

to increased use of private vehicles. Although the 12th Plan aims to develop an

efficient public and freight transport system, it will take time to develop and cover the

entire country. In the building sector too the Government has not been able to enforce

the laid down energy conservation initiatives. Although the Energy Conservation

Building Code (ECBC),150 for construction of new buildings, has been notified, only

two states have made them mandatory.151 India also lacks the access to good

technology for the various energy resources and this hampers achievement of energy

efficiency.

Energy conservation measures, big or small, involving all sections of the society, need

to be strictly enforced. Experts estimate that India can save up to 20 percent of energy

150 The objective of ECBC is to reduce the baseline energy consumption by implementing efficiency

measures in buildings, see Mili Mazumdar & Priyanka Kochar, ‘Energy efficient building design: contribution to energy security’, The Energy and Resources Institute (TERI), vol. 4, issue 4, October-December 2009, p. 16, retrieved 13 October 2011, <http://bookstore.teriin.org/docs/newsletters/ESI_Octoberl-December%202009.pdf>.

151 Montek Singh Ahluwalia, ‘Deputy Chairman’s Remarks at 56th Meeting of the National Development Council (NDC)’, at Vigyan Bhavan, New Delhi on 22nd October, 2011, retrieved 01 November 2011, http://planningcommission.nic.in/plans/planrel/56NDC/DCH_speech_56NDC.pdf.; Gupta, ‘Energy security and climate change: why we should be concerned with converging lifestyles’, p. 13.

39

if it manages wastage.152 Energy conservation has to be inculcated into the national

psyche. This can be done by creating awareness in the society and by providing

access to suitable options that allow energy conservation. Power thefts need to be

checked by enforcing strict legal and regulatory actions like streamlining of billing

and collection procedures. The losses in T&D of energy need to be reduced by

improving the energy grids and transmission system. Applying different rates of

power during various times of the day, as implemented by a few countries, could be

considered. Energy conservation initiatives undertaken by the Government have to be

strictly enforced in the residential and construction sectors. As per estimates, 90

percent of India’s commercial buildings of 2030 do not exist today,153 hence the

importance of embracing bold and enforceable energy efficiency standards.

Similarly stringent fuel efficiency standards need to be applied to new vehicles

coming onto the roads. In addition the Government needs to explore the viability of

using hybrid and electronic vehicle technology in the private vehicle category. Oil

dependency in the public transport sector can be reduced by switching over to

Compressed Natural Gas (CNG), as has been done in Delhi. The improvement in

mass transit systems in all cities will reduce the use of private vehicles. Railways will

need to be increasingly electrified and the roads improved. Initiatives such as

changing the 400 million incandescent bulbs all over the country with compact

fluorescent lamps (CFLs) will save 6,000 to 10,000 MW of power.154 The

Government also needs to increase its focus on technological research to innovate and

develop better technologies, like the clean coal technology, better technologies in

nuclear power generation, in oil recovery programs and conversion of natural gas into

liquid,155 for which NEF needs to be set up on priority.

152 Ganesh, ‘The Idea that People Can’t Afford to Pay for Energy is a Myth’. 153 Ebinger, ‘Securing the Future’. 154 Gupta, ‘Energy security and climate change: why we should be concerned with converging

lifestyles’, p. 13. 155 Madan, Energy Security Series: India, p. 18.

40

Recommendation 5: Improve Energy Efficiency

Planning Commission/Energy Ministry to:

launch public awareness initiatives to inculcate energy conservation

amongst the masses;

in the power sector: reduce the power losses; adopt innovative power pricing

to reduce consumption;

create a legal and regulatory framework to mandate energy conservation

initiatives;

increase focus on R&D; set up the NEF on priority; and

in conjunction with Ministry of Road Transport and Highway to:

o accelerate its efforts to develop public transportation system in all

cities; and

o enforce vehicle fuel efficiency safeguard guidelines; adopt new

vehicle technology like hybrid technology and electric vehicle.

41

Section VI –Reform Government Policies and Increase Private Investment

Government Control and Pricing Policy

To provide cheap and affordable services, India has been following a policy on

subsidising the costs of electricity, diesel, gas and kerosene oil.156 In the current year’s

budget, the Government has proposed a subsidy of Rs 23,640 crores (AUS$ 4.7

billion) which is 16.47 percent of the total subsidy bill (Figure 11).157

Figure 11: Details of Subsidies158 (Rs 1 Crore = AUS$ 200,000)

156 Ebinger, ‘Securing the Future’. 157 Government of India economic policies update - Details of Subsidies, 158 Government of India, Data for use of Deputy Chairman, Planning Commission, Planning

Commission, Government of India, 01 November 2011, p. 16, retrieved 03 November 2011, www.planningcommission.gov.in.

42

The subsidies cause a large amount of wastage and thus cause a major hindrance to

efforts to improve energy efficiency and conservation.159 In addition the government

is losing billions of dollars while providing these subsidies.160 Industry has to pay

higher tariffs to offset the subsidies which make India increasingly expensive to

operate in.161 The benefit of electricity subsidies is being exploited by rich farmers

and landowners due to the flawed current policies.162

The price control on petroleum products reduces profitability and thus discourages

private players from entering the energy sector.163 In 2010, the government did carry

out modest pricing reforms, including de-regulation of petrol prices and increasing the

prices of gas for industrial use.164 However diesel, kerosene oil and gas, which have a

direct impact on the living standards of the poor, still attract large subsidies.

The government needs to review its policies on subsidies and also needs to reform its

policy on pricing of energy. Since most of the subsidies are directed at the

weaker/poorer level of society, a gradual deregulation policy needs to be pursued.

Alternatively, innovative ideas to reduce subsidies need to be adopted, as well as

ways to ensure that the subsidy benefits go to the right people. For instance, provision

of cash allowance or issue of a smart card to households who are authorised these

subsidies in lieu of gas or kerosene oil; and providing subsidy on diesel to the freight

and passenger carriers only, could be considered. The Government also needs to move

towards linking the prices of all energy commodities to the global market prices to

make the sector attractive for private investment.

As per estimates 75 percent of India’s energy assets and infrastructure is operated by

state-owned companies.165 The coal industry is dominated by the Coal India Limited

(CIL), a state owned monopoly and world’s biggest coal company, which produces

159 Betz Joachim & Melanie Hanif, ‘The Formation of Preferences in Two-level Games’, p. 21. 160 Ebinger, ‘A Faltering BRIC: The Energy Landscape in New Delhi and Mumbai’. 161 Ebinger, ‘A Faltering BRIC: The Energy Landscape in New Delhi and Mumbai’. 162 Ganesh, ‘The Idea that People Can’t Afford to Pay for Energy is a Myth’. 163 Ebinger, ‘A Faltering BRIC: The Energy Landscape in New Delhi and Mumbai’. 164 Ebinger, ‘A Faltering BRIC: The Energy Landscape in New Delhi and Mumbai’. 165 Madan, Energy Security Series: India, p. 28.

43

more than 80 percent of India’s coal.166 Government control of the coal sector and

failure to improve infrastructure limits the domestic coal production and leads to

increased reliance on expensive imported coal.167 In the oil and gas sector there are a

few significant private players like Reliance Industries (private companies control

about 13 percent of India’s oil production and one-fifth of its gas production),168

however the state-owned companies, like the Oil and Natural Gas Corporation, Oil

India Limited and the Indian Oil Corporation, play the most important role. The

power generation sector too is in the hands of state-companies like the National

Thermal Power Corporation, National Power Corporation and the National Hydro-

electric Power Corporation.169 Due to limited competition from private players, the

state-owned companies are not pushed towards improving their efficiency and are still

not competitive internationally. They are also hampered by the subsidies and price

control by the Government.

Lack of a proper government policy mechanism, like auctions, for allotment of coal

mining licenses to private players is a major barrier in the deregulation of coal sector.

Privatisation will lead to improved efficiencies and reduction in costs. The

government therefore needs to de-regulate the coal sector and further reform the other

sectors to encourage entry of new players into the sector and increased participation

from the existing players.

Develop Infrastructure with Enhanced Private Sector Participation

Unless the Government’s energy policies are supported financially, they will either

fail or be overly delayed. There is a massive requirement for funds to: sustain the

existing policies; implement new policies, for R&D and for improving the energy

related infrastructure. The electricity grids and the transmission lines are old and

inefficient; resulting in average transmission losses of 34 percent (a good electricity

166 Aditya Birla Money, ‘Coal India Ltd. (CIL)- A play on de-regulation’, 24 June 2011, p. 1,

retrieved 20 September 2011, <http://www.adityabirlamoney.com/Uploads/ResearchRpts/Coal%20India%20-%20Initiating%20Coverage%20240611_11_2806110911.pdf>; Betz, Joachim & Melanie Hanif, ‘The Formation of Preferences in Two-level Games’, p. 10.

167 Ebinger, ‘A Faltering BRIC: The Energy Landscape in New Delhi and Mumbai’. 168 Madan, Energy Security Series: India, p. 31. 169 Betz, Joachim & Melanie Hanif, ‘The Formation of Preferences in Two-level Games’, p. 10.

44

grid loses about 6 percent).170 The gas infrastructure pipelines are also poorly

distributed throughout the country. The road and rail infrastructure is also under

heavy strain and besides causing delays in carriage of energy resources from

ports/mines to their load centres, it is also high on costs.171

The Government has to afford a high priority to develop the energy-related

infrastructure to support the energy reforms, for which private investment is essential.

Private participation in the energy sector is not forthcoming due to the government

control over prices of energy commodities and subsidies. Currently very few Indian

private companies are involved in construction of refineries and transport

infrastructure; however, more companies, both Indian and foreign, need to be

attracted to participate in the energy sector. The Government has to create a

supportive investment climate (such as delivering good governance and regulatory

reforms) for the private sector investment to increase.172 The current investment

policy needs to be relaxed to facilitate cross investments between the energy

exporting and importing companies.173 Additional incentives, in terms of tax relief

and cheaper loans for participation in the energy sector also need to be considered.

170 Ebinger, ‘A Faltering BRIC: The Energy Landscape in New Delhi and Mumbai’. 171 Ganesh, ‘The Idea that People Can’t Afford to Pay for Energy is a Myth’. 172 International Energy Agency, World Energy Outlook 2011, p. 101. 173 Singh, ‘India’s Energy Security: Challenges and Opportunities’, p. 803.

45

Recommendation 6: De-regulate Government Control and Relax Investment Policy

Planning Commission/Energy Ministry in conjunction with relevant energy

ministries/agencies to:

de-regulate coal sector and initiate additional reforms in oil and gas sectors

to encourage private participation;

gradually de-control all energy commodity prices and link them to the

market driven prices;

review the current subsidies on energy and devise an innovative subsidy

policy; and

in conjunction with the Ministry of Finance review the Investment Policy so

as to encourage large-scale private investment in the energy sector.

46

Section VII - Address Environment Challenges

The increased pressure on India, from the global community, to cap emissions of

greenhouse gases (GHG) and to reduce the carbon footprint poses a major challenge

to India’s energy security.174 India currently has one of the lowest emissions per

capita largely due to low total primary energy supply (TPES) per capita (Figure

12);175 however as the energy consumption increases the emissions will also increase

commensurately. The carbon dioxide emission is estimated to increase from 0.9

billion tonnes to 5.8 billion tonnes in 2031.

Figure 12: Global CO2 Emissions Per Capita (source World Energy Outlook: 2011)

174 Ravi Kumar Batra, ‘Natural gas pipelines: Geopolitics, affordability, security dimensions’, in Ligia

Noronha & Anant Sudarshan (eds.), India’s Energy Security, Routledge, Oxon, 2009, p. 87. 175 International Energy Agency (IEA), IEA Scoreborad 2011- Implementing energy efficiency policy:

Progress and challenges in IEA member countries, International Energy Agency, Paris, 2011, p. 26.

47

In view of the increasing pressure from the developed nations to cut down on carbon

emissions,176 India has set a target of achieving 20 percent reductions in CO2 intensity

by 2020 (as compared to 2005 levels).177 The major environment challenges can be

addressed by reducing use of fossil fuels and transition to alternate fuels. However,

renewable energy development is still in its infancy and its development will take

time and a large amount of investment.178 In the Indian context the easy availability of

coal makes it the most used energy source and it will remain so till 2031-32.179 Use

of coal with old technologies and the lack of Carbon Capture and Storage (CCS)

capable power plants have direct environmental implications.180

India will have to transition to renewable sources of energy and promote cleaner use

of coal to be able to achieve the 20 percent CO2 emission reduction target. The

Government has to incorporate clean coal technology and CCS-capable power plants

in its energy policy. India while making efforts to procure cleaner technology from

other countries also needs to increase its investment in R&D in order to develop

indigenous innovative and clean technologies. Provision of affordable and good

technology in rural areas, where almost 100 million households still use biomass as

energy for day to day chores, will address indoor pollution and health issues.

Recommendation 7: Address Environmental Challenges

Planning Commission/Energy Ministry in conjunction with all the energy

related ministries/agencies to:

import clean technologies to reduce GHG emissions;

facilitate R&D to innovate/invent new technologies to obtain clean energy;

and

spread environmental awareness amongst the masses.

176 Dadwal, ‘India’s Renewable Energy Challenge’, p. 1. 177 International Energy Agency, World Energy Outlook 2011, p. 53. 178 Michael T. Klare, ‘Navigating the Energy Transition’, Current History, January 2009, p. 26,

retrieved 20 October 2011, < http://relooney.fatcow.com/SI_Routledge-Oil/0-Important_19.pdf>. 179 Government of India, Integrated Energy Policy, p. xiii. 180 Ebinger, ‘A Faltering BRIC: The Energy Landscape in New Delhi and Mumbai’.

48

(Billion US$ in year-2010)

Gas 266

(12%)

Oil203(9%)

Coal87

(4%)

Biofuels16

(1%)

Power 1631 (74%)

Section VIII: Financial Implications

The policy initiatives recommended in this SPP will have a significant financial

implication. Although the regular budgetary allocations cater for the planned

expenditure on the energy sector, a detailed analysis by various agencies is

recommended to be done to assess the future financial requirements for

implementation of the policies.

India requires a total of AUS$ 2.2 trillion (at 2010 rates) to build the energy related

infrastructure over the period from 2011-2035 (Figure 13)181 The power sector

expenditure includes: an amount of AUS$ 999 billion for construction of new power

plants (coal, gas, oil, nuclear, hydro, biomass, wind, geothermal and solar); and AUS$

632 billion for T&D infrastructure (AUS$ 111 billion for transmission and AUS$ 521

for distribution).182 In addition the Government will have to cater for unrestricted flow

of funds for the R&D in the energy sector. The Government roughly requires an

amount of about AUS$ 100 billion a year, from 2011 to 2035, to secure its future

energy needs.

Figure 13: Cumulative Investment in Energy-supply Infrastructure, 2011-2035

181 International Energy Agency, World Energy Outlook 2011, pp. 98-99. 182 International Energy Agency, World Energy Outlook 2011, pp. 98-199.

49

To meet the financial requirements, the Government will have to tap all government

and private sources, both domestic and international. The Government will have to

resort to obtaining loans from various international agencies, like the World Bank, the

International Monetary Fund and the ADB for the construction of the trans-national

gas pipelines and other infrastructural development projects. On the domestic front,

the Government will have to prevail over the domestic financial institutions to provide

loans to private companies, engaged in energy projects, at attractive rates of interests.

The Government should endeavour to save a minimum of 50 percent (approximately

AUS$ 2.4 billion annually) from the existing subsidies bill and this money is

recommended to be diverted for R&D in the energy sector. The Government also

needs to reduce the large losses (AUS$ 14 billion a year) in the T&D of power and

aim to cut them to the minimum and the savings are recommended to be re-invested

in the power sector.

In addition, the Government needs to consider levying a nominal energy tax, on the

rich society, on various luxury/expensive goods and cars; and on petrol (from private

car owners). Government should also bring out innovative schemes to collect money

for the energy sector. For instance sale of power bonds (with a healthy rate of interest

and income tax rebate) is likely to generate large amount of funds. In the overall

analysis, the Government’s objective of providing affordable lifeline energy to all its

citizens is contingent on its ability to raise the funds required to implement the

recommendations.

50

Conclusion

India has been successful in achieving high economic growth in the first decade of the

current century. However, its capacity to sustain a similar rate of economic growth

will be contingent upon the ability to secure its energy needs. While analysing energy

security concerns, this SPP contends that India faces formidable challenges given the

magnitude of its future energy requirements and would require a sustained and

focused whole-of-government approach to mitigate them. The paper has analysed

these challenges and has proposed specific policy recommendations that need to be

addressed with perseverance and vitality.

Growing energy requirements and limited domestic energy resources will drive India

to increasing energy imports. The nation cannot depend on a sustained supply of oil

from West Asia, given the instability in the region which leads to frequent price

fluctuations. India and China are dependent on the SLOCs in the IOR and as the

PLAN forays into the Indian Ocean for energy security or otherwise, it will encounter

a better placed and strong Indian Navy and this is likely to drive both countries into a

rivalry and competition for control/domination of the SLOCs. Dependence on fossil

fuel has placed India under extreme pressure to reduce its GHG. The Government is

aware of the energy security challenges and has put into practice a number of

initiatives to secure its future energy needs. The IEP lays down the plan to be

followed to ensure India meets its future energy needs; however, it is the

implementation of the policies, which have often been slow and unnecessarily

influenced by political and social factors.

India needs to elevate energy security to form an integral part of the national security

architecture and adopt a whole-of-government approach to address the energy security

challenges. The first step in a direction towards securing India’s energy future is to

create an overarching organisation, ‘Energy Ministry’ or ‘Energy Council’, designed

to help integrate and coordinate the efforts of various Ministries working towards

energy security. The next step is to reduce India’s over-dependence on imports by

moving towards a balanced energy-mix comprising all energy resources. The use of

gas, nuclear and renewable sources of energy, as an alternative to oil/coal, and cleaner

51

coal technology, will also help India address its environmental concerns. The gas

pipelines from Iran, Turkmenistan, Bangladesh and Myanmar need to be

operationalised at the earliest opportunity. A nuclear energy policy needs to be

initiated and India will have to engage Australia to secure uranium. The high potential

of hydro-power within India and in Nepal, Bhutan and Bangladesh will have to be

realised. Initiatives should be taken to increase domestic energy extractions; efforts

need to be made to make the energy sector an attractive investment area to encourage

private participation. The upward pressure on energy demand needs to be checked by

enforcing energy efficiency and energy conservation initiatives, backed up by an

effective legal framework and a sustained public awareness campaign.

To reduce India’s dependence on West Asia, long-term energy contracts need to be

secured in Africa/CAR using ‘Oil Diplomacy’ and by coordinating with other

countries which are seeking energy in these areas. Developing a capable navy and

enhancing regional cooperation will also help India secure the energy-critical SLOCs

from conventional and non-conventional threats.

Although energy security poses significant challenges, the Indian Government, in

concert with the private sector, is capable of addressing the situation. A whole-of-

government approach, incorporating the recommendations made in this paper will

assist the Government in providing all its citizens an assured access to energy, both

for personal and commercial use, at an affordable price. The energy security

challenges will continue to increase in future too. The Indian policy makers will be

required to periodically re-assess their energy policies and plans to ensure unhindered

supply of energy resources.

52

Abbreviations

ADB Asian Development Bank

bcm billion cubic meters

bpd barrels per day

BTL biomass-to-liquids

CAR Central Asian Republics

CBM coal-bed methane

CCS carbon capture and storage

CFL compact fluorescent lamp

CIL Coal India Limited

CNG compressed natural gas

CO carbon monoxide

CO2 carbon dioxide

CTL coal-to-liquids

ECBC Energy Conservation Building Code

FBR fast-breeder reactors

GDP gross domestic product

GHG greenhouse gases

GTL gas-to- liquids

GW Giga watt

IEA International Energy Agency

IEP Integrated Energy Policy

IOR Indian Ocean Region

IPI Iran-Pakistan-India

IRENA International Renewable Energy Agency

LNG liquefied natural gas

LPG liquefied petroleum gas

mb/d million barrels per day

MEA Ministry of External Affairs

mt million tonnes

mtce million tonnes of coal equivalent

mtoe million tons of oil equivalent

MW megawatts

53

NEF National Energy Fund

NELP New Exploration Licensing Policy

NPT Nuclear Non-Proliferation Treaty

PLAN People’s Liberation Army Navy

R&D research and development

Rs rupees

SAARC South Asian Association for Regional Cooperation

SLOCs Sea Lines of Communications

SPP Security Policy Paper

SPR strategic petroleum reserve

TAPI Turkmenistan-Afghanistan-Pakistan-India

TERI The Energy and Resources Institute (formerly Tata Energy and

Research Institute)

T&D transmission and distribution

TPED total primary energy demand

TPES total primary energy supply

US United States

WEO World Energy Outlook

54

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