Bridge India

What are India’s strategic energy options? Part 3: Cost trajectories of fossil and renewable energy

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).

India's energy options- graph 1

 

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).

India's energy options(III)- graph 2

 

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.

India's energy options(III) graph 3

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.

India's energy options(III) graph 4

 

Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.

4 comments

  • Well written article to give complete insights about prospects of investing in India Solar projects. India is at the stage of a Solar revolution within the next two years with hoping a new Government will be formed in the centre who are clearly focused on Solar energy over Coal energy. The Coal industry is going to suffer, but in any case its right not to use our fossil fuel which is depleted and now we are depending on imports of fossil fuel

  • Hello Tobias: Good synopsis. While I have not read your parts 1 and 2 yet, the above focus appears to be on large centrally located power systems with established transmission infrastructure already in place. As having spent significant time in rural India would a smaller micro-grid format be more beneficial where the intermittency can be solved by using a fuel cell to support the solar and wind power generation? Additionally, if all components are sized correctly, the renewables can be used for on-site generation and storage of hydrogen or methanol eliminating the need for fuel transportation and costs. First Element Energy has resources in India and have developed. manufactured, and installed systems in Asia. If interested please contact me. Best Regards,
    Steve Quai

  • Energy Consumption comparison with Global average is giving a target of 1000 GW more capacity addition. However, in the present 228 GW capacity added by INDIA many of them are not producing, hence, we need to target more on the kwh really needed with Global average.

    Many Global average accounts cold countries which need Heating demand, which INDIA is not plagued as yet… however, our peak demand and supply gap was only 5%, but, many GW capacity being Idle, we should be more concerned about the MINDLESS capacity addition, rather, we need to make a detailed Energy Demand Study in Every Taluka (villages) with the anticipated local Industry promotion as INDIA has many Germanys…

    Off shore wind potential study and Shale gas study and Nuclear capacity addition can be kept in back burner, instead, we need to make a sincere and honest energy potential study and energy demand study in each Taluka including 24 x7 Power in all villages, this will give us a correct picture on the actual kwh being produced, really needed and also to find a good energy mix through Renewables, Hydro, Coal, Gas and if we run short, then ONLY think of Nuclear… Convert this kwh need in each taluka to MW capacity through various sources of energy mix by mapping with Energy Potential study in that Taluka to reduce the cost on transmission or its losses.

    Many Industries have been closed (which are the main consumers in INDIA) and many more to come esp the high energy consuming semiconductor sector…..

    India requires a decentralised energy generation model through local Entrepreneurs with a transparent energy potential study and with easy access to funds to establish transparent business and financial plans, so that low cost solutions and its maintenance for next few decades through these new generation Entrepreneurs with Mentoring will be the key Sustainable solution rather than Crony Capitalism related Industrialisation and its bust like in Europe and USA.

    Agriculture GDP increase along with Energy generation shall be the key to the India’s success and we do not need to copy the models of West in a more Blind way…..