So far, in its process of industrialization, India has been relying heavily on its own coal reserves and on imported oil (mostly from the Middle East). Attempts to build a strong nuclear industry based on domestic Thorium reserves have so far been unsuccessful. Despite the shale gas revolution in the US, it seems like fossil fuels will become more and more expensive in India. At the same time, the potential for wind and solar is just beginning to be tapped. India is just at the beginning of its industrialization. In order to drive it, should the country develop a predominantly non-fossil strategy to energy supply? And what would that imply? This is part 3, looking at the cost trajectories of fuel sources for India.
To read part 1, click here.
To read part 2, click here.
- The cost of oil will rise. The cost of coal will be stable globally but could well continue to rise for India.
- The cost for renewables is reducing fast. Wind is already competitive with fossil fuels on the generation side. Solar, on the consumption side.
- India’s current energy choices will impact its long-term energy mix
In India, the cost of fossil fuels has been rising significantly over the last years. This was driven by challenges in Indian supply lines (e.g. for domestic coal) and weak infrastructure (e.g. grid and railway bottlenecks). The main driver, however, was global prices. Will this trend continue? I will look at the two main current energy sources for India: Oil and coal. With respect to oil, most experts predict that, despite new unconventional oil finds, the cost of oil production will rise. Most investment into conventional oil has gone into existing fields, where the input to output ratio is becoming ever more adverse. Unconventional oil reserves are more expensive. The question of “peak oil” is blurred by the fact that as prices for oil rise, more reserves can be profitably unlocked. So the question is: how much are we willing and able to pay for oil. Or, as Dr. Richard Miller, formerly with BP, said recently: “We’re like a cage of lab rats that have eaten all the cornflakes and discovered that you can eat the cardboard packets too.” The International Energy Agency (IEA) shows that we will be moving from a production cost band of USD 20-60 per barrel to USD 60-100 per barrel (see chart below).
For the same reasons and taking into account growing global demand especially in Asia, the US Energy Information Administration (EIA) assumes a rising long-term cost trend for oil with only a five year impact of US unconventional tight oil (see chart below).
On coal, the EIA says that an “upward trend of coal prices primarily reflects an expectation that cost savings from technological improvements in coal mining will be outweighed by increases in production costs associated with moving into reserves that are more costly to mine.” As with oil, the growth in demand and the fact that there are few new reserves that can be accessed cheaply means that the price will go up. Technology improvements are softening this trend but cannot reverse it. The amount of energy needed to extract and deliver usable fossil fuels to the economy is ever rising. The productivity of the energy economy is declining. Over the past years, coal prices have globally remained fairly stable (see chart below, data from the IEA World Energy Outlook 2013). However, in India, they have gone up. The Ultra Mega Power Projects (UMPPs) that were planned in the 1990 and are still mostly not commissioned, originally offered power tariff of INR 1.5 to 2/kWh. They are now nearer to INR 3/kWh, because of rising fuel costs.
Renewables, on the other hand are becoming cheaper. Solar has made the biggest leap in the past years as modules and other components become more efficient and production costs are fall as a result of learning, innovation and scale (see chart below). The same happens with wind power. The potential for generation of renewable power in India is almost unlimited. India could install around 1,000 GW – equivalent to around four times the current peak power demand – of solar PV power plants on around 16,000 square kilometers of land, the equivalent of half of the desert district of Barmer in Western Rajasthan or 0.5% of India’s total land mass. There is no other technology that offers the same theoretical potential to service India’s long term power requirements. For wind, the Shakti Foundation, in a detailed technical assessment, estimated the potential for on-shore wind at 80m hub height and 25% capacity factor to be more than 300 GW. There have, as yet, been no reliable assessment at all for off-shore wind potential, but given India’s long coast line of 7,500 km there will be ample scope although with significant financial, technical and environmental challenges.
In addition to the favorable cost curve of renewables, they have the theoretical potential to meet India’s power requirements without relying on imported fuels. Fossil fuels, on the other hand, are getting more expensive and there is no credible long-term strategy for a reliable and sufficient supply. The current Indian infrastructure and institutional mindset is set for a continuing fossil fuel expansion (especially coal and oil). In the short term, that is seen as the only option. However, it is not a viable medium term strategy for the country. Renewables, on the other hand, come with a number of challenges – foremost their intermittency.
The important thing is that the energy infrastructure (grids, plants, railways, ports, etc) India decides to build today and the consumer behavior (mobility concepts, efficiency in products, building codes, etc.) it now encourages will determine the long-term energy generation and consumption patterns.
Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.