Energy
Renewables
“Green energy” has
become a policy goal
India is the third-largest
investor in wind energy
4 Business India Intelligence May 27th 2009
Green leap forward
For all the bad press India receives over its environmental credentials, the country’s renewables sector is making
some notable progress
Over the past year issues such as climate change,
energy efficiency, and the replacement of fossil fuels
have become much more prominent in India.
Environment-related promises featured centrally in
the election manifestos of the main political parties
contesting the 2009 general election. Yet there is con-
siderable debate as to just how much of this is rhet-
oric and what’s being done to translate policy into
action. Here the situation becomes less certain, with
many of the standard problems that dog India’s busi-
ness environment—bureaucracy, mismatched and
contrary state and federal policy, and poorly devel-
oped technological capacity—undermining the
broader push towards a more diversified energy
mix. That said, there is a strong case for optimism as
the renewables sector gains momentum and “green
energy” goals are increasingly integrated into the
economic-planning process.
Green credentials
India environmental and climate policies have pro-
gressed rapidly in recent years. Several notable
developments unfolded in 2008: in April, the prime
minister, Manmohan Singh, appointed a special
envoy on climate change. In June, the government
unveiled both its Prime Ministerial Council on
Climate Change and its National Action Plan on
Climate Change, the latter an eight-point document
outlining India’s existing and future policies to miti-
gate and adapt to climate change. More recently, in
March 2009 India joined the International
Renewable Energy Agency.
Underlining just how far the question of India’s
energy mix has risen up the political agenda, the
country’s main political parties, for the first time,
made green election pledges of substance. The
Congress party committed to add at least 12,000-
15,000mw of capacity each year through a mix of
energy sources. The main opposition Bharatiya
Janata Party (BJP) pledged to invest heavily in non-
fossil-fuel clean energy sources, with a goal of
adding at least 120,000mw of power in the next five
years, 20% of which would be from renewables.
India can also claim a number of “green” mile-
stones: it was the first country to create a ministry
dedicated to new and renewable energy. Last year,
India emerged as the second-largest investor in
renewable-energy technology in Asia. In 2008 India
increased its wind-energy capacity in this area by
1,800mw—bringing total wind-energy capacity to
9,645mw and making India the world’s third-largest
investor in the sector. All this activity has been
accompanied by a multitude of new targets and pol-
icy ideas. The government aims to increase power
generated from renewables to 24,000mw out of a
total of 200,000mw by the end of 2012 (when the
current five-year plan ends). Depending on which
report is being cited, a total of between 6,000mw
and 10,500mw of this is envisaged to come from
wind power.
Three obstacles
For all this optimism and rhetoric, however, the situ-
ation on the ground is less convincing. There are
three main areas of concern:
Targets, efficiency and utilisation. India has tradi-
tionally done a poor job of meeting targets. Last year
was no exception, with extra generation capacity hit-
ting less than one-third of its target. For all the talk of
commitment to renewables, they currently account
for only 3% of India’s energy mix. The gross installed
capacity of grid-interactive renewable power is
11,273mw, which is around 8% of total installed gen-
eration capacity. But in terms of power generation,
the contribution of renewables is just a fraction of
this, as renewables work on very low plant-load fac-
tors. India has a great deal more progress to make in
improving the energy efficiency of existing applica-
tions and storage techniques, but at this stage it is
looking for external support in this area rather than
concentrating domestic resources towards it. As for
solar energy, as of March 2009 India had just 5mw
off-grid and grid-connected photovoltaic capacity
and a 1mw solar plant operating in the country.
Who is doing what? India’s main energy compa-
nies are arguably as guilty as the politicians when it
comes to empty rhetoric. Certainly, each pledges a
commitment to renewable energy, but in reality the
impact of the schemes that have been implemented
has been minimal. Bharat Petroleum has set up an
“environment cell” in its organisational structure, is a
member of the global Carbon Disclosure Project,
and, according to its website, is working on Clean
Development Mechanism-related projects. In terms
of projects, Bharat has expressed interest in biodiesel
production, and has made low-level forays into solar
and wind energy. Last year it signed an agreement
with the state government of Punjab to create a 1mw
solar plant, and it has a 5mw wind plant in
Karnataka, with more planned.
Oil and Natural Gas Corp, shows a similar pat-
tern of low-level activity in the renewables sector. To
date the company has set up one wind farm in
Gujarat, with plans slated for a second in the same
© The Economist Intelligence Unit Limited 2009

state. Meanwhile, Hindustan Petroleum pursued its
first wind-energy generator in Maharashtra in 2007.
In January the firm commissioned a second, larger
project in Rajasthan. Beyond this, there is some inter-
est in manufacturing: Tata and BP announced in
India: Energy overview
Despite its low energy consumption per
head, India’s enormous population of
more than 1bn people makes it one of the
world’s largest energy consumers and a
net energy importer. Coal is the dominant
fuel source in India, fulfilling more than
half of the country’s demand. However,
consumption of oil and natural gas is ris-
ing rapidly. The government is aggressively
seeking new sources of energy to fuel a
fast growing economy, and is exploring
opportunities in the Middle East, Russia,
South-east Asia and West Africa. Although
much of India’s economic growth comes
from services, the country’s large industri-
al sector has contributed to a high level of
oil intensity (defined as oil consumption
per US dollar of GDP).
India’s energy sector suffers from inef-
ficiency, overregulation and red tape at
both national and state levels. As a result,
India is confronted with energy shortages
in many parts of the country.
Liberalisation of the energy sector began
more than a decade ago, but it still suffers
from underinvestment. The sector is also
held back by political and security rivalry
with Pakistan, which has impeded plans
for regional gas and oil pipelines through
Central Asia. In addition, Bangladesh,
which has proven gas reserves of 5trn cu
ft, according to the US Energy Information
Administration (EIA), has been reluctant
to approve gas exports to India, for
domestic political reasons.
Recent rapid economic growth is now
spurring demand. According to the EIA,
India: Energy consumption
(m tonnes oil equivalent)
2004a 2005a
India 359.2 377.8
US 2,353.8 2,357.5
Japan 530.6 530.8
China 1,417.7 1,567.4
Germany 345.8 342.9
a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.
Source: Economist Intelligence Unit.
© The Economist Intelligence Unit Limited 2009
April that they had manufactured solar cells and
modules capable of generating 105mw of energy.
Policy questions: A number of policy questions
dog India’s renewables sector. First, the government
has an expressed interest in solar energy, prioritising
in 2007 oil demand increased by 150,000
barrels/day. However, India’s level of
energy consumption per head is still
extremely low compared with developed
countries and even compared with many
other emerging markets: among the latter,
only Pakistan, Sri Lanka, Vietnam and
Nigeria use less energy per head than
India.
China, the country most similar to
India in terms of population and potential,
offers a striking comparison. China’s ener-
gy consumption per head in 2007 is esti-
mated at 1,863 kg of oil equivalent, where-
as India’s is estimated at only 422 kg. This
reflects the lag in India’s economic devel-
opment, and its over-regulated and under-
supplied energy sector. Brazil and Russia
also use more energy per head than India:
Brazil’s consumption is estimated at 1,121
kg of oil equivalent per head in 2007, and
Russia’s is estimated at 5,419 kg.
One reason for India’s low energy con-
sumption is its failure to ensure that sup-
ply keeps up with demand. Power short-
ages and grid failures are common, and
inadequate access to energy of all kinds
has been a significant constraint on eco-
nomic growth. India’s rate of real GDP
growth accelerated to over 8% a year in
2003-08, but the government’s goal of rais-
ing the growth rate to 10% will require rad-
ical reform of the power sector.
India will be one of the world’s fastest-
growing consumers of energy in 2009-13,
trailing only China among the larger
emerging-market economies in this regard.
2006a 2007b 2008b 2009c
408.7 433.9 460.1 484.2
2,342.2 2,333.0 2,300.0 2,225.0
531.8 526.2 513.9 476.4
1,718.0 1,853.0 1,972.0 2,000.0
349.5 355.0 359.1 338.0
Energy
The growing competitiveness of the indus-
trial sector will raise economic output and
hence energy consumption, as will the
surge in car sales and rising penetration
rates for computers, televisions and other
electrical and electronic goods. India is
already the third-largest consumer of elec-
tricity in Asia after China and Japan. The
Economist Intelligence Unit expects ener-
gy consumption in India to rise by 4.9% a
year during 2009-13, a slower rate of
expansion than the annual average rate of
GDP growth.
The energy sector has undergone limit-
ed and fitful liberalisation and deregula-
tion in recent years. Nevertheless, many of
the major players remain under govern-
ment control, and energy prices are kept
artificially low, encouraging inefficient use.
However, subsidies on petroleum prod-
ucts are being reduced, and the govern-
ment is also moving towards the phased
deregulation of the gas market. The dereg-
ulation and unbundling of the electricity
sector is also under way, promising
increased competition, less government
interference in power markets and, even-
tually, lower electricity tariffs.
However, huge challenges remain,
including the massive underpricing of
power provided to agricultural users, high
levels of power theft, and cross-subsidies
that hit large- and medium-scale industry.
Most companies in India will continue to
use generators as a back-up source of
power, given the unreliability of the
domestic power grid.
2010c 2011c 2012c 2013c
511.3 543.2 578.5 616.0
2,213.0 2,212.0 2,214.0 2,238.0
476.1 480.5 484.9 489.5
2,095.0 2,209.0 2,332.0 2,459.0
333.0 332.3 334.2 338.0
Business India Intelligence May 27th 2009 5
Energy
Mismatches between
federal and state policies
hamper progress
Energy-security concerns
have boosted interest in
renewables
it in documents like the National Action Plan on
Climate Change. Some observers have questioned
the validity of this on a cost basis, arguing that high-
er subsidies are required to make solar power as
attractive as wind power, making the former less
viable during times of economic slowdown. This is
all the more so in places where rates of return on
solar-energy projects are low or, in the case of some
Indian states, negative.
Secondly, India frequently suffers from mis-
matched federal- and state-level policies. This is not
particular to energy policy. Indian states enjoy con-
siderable autonomy in managing their affairs and
finances, producing policies that often clash or are
inconsistent. In January 2008, for example, the New
and Renewable Energy Ministry announced a solar-
incentive scheme that allowed states to apply for a
share of 50mw of grid-connected solar capacity, but
restricted each scheme to a maximum size of 5mw.
In Gujarat, a separate state scheme has subsequently
emerged offering more generous incentives and
allowing for larger-scale schemes in a bid to secure
500mw of solar energy, and in turn to reduce costs.
In Tamil Nadu, meanwhile, the state authorities have
complained that an existing and useful federal sub-
sidy offered for solar projects has been dropped.
Thirdly, and related to this, is India’s age-old prob-
lem with bureaucracy. Projects routinely take longer
than forecast, or are shelved because of the amount
of red tape that they face. During a recent conference,
Reliance Industries revealed that during negotiations
to pursue a solar project, the company had had to
send its applications through several ministries and
committees, including, bizarrely, the pollution con-
trol board. Clearly application and approval process-
es need streamlining to end the lack of clear mecha-
nisms for implementation.
A recent report by the Commonwealth Business
Council and Indian Institute of Management seized
upon several additional policy problems in the renew-
ables sector. These included the need to address the
wind sector’s major problems with grid interfacing,
which results in the generation of low levels of elec-
tricity; the need to structure the biomass market; and
the need to address major gaps in local data, without
which it is difficult to make informed decisions about
local conditions and markets.
Outlook
India’s potential for generating renewable energy is
considerable. On the positive side, the need to diver-
sify its energy mix is moving increasingly to the cen-
tre of India’s policy debate. Issues of long-term ener-
gy security—particularly following a period of high
oil costs—are driving this. Taking a lead from the US
administration, there is also increased talk of the
need to “green” the economy and make renewable
energy a part of the overall development process.
In terms of the impact of the global economic
slowdown on the sector, the outlook is mixed. In
line with global trends, there is likely to be fewer
funds for research and development. This is particu-
larly problematic because India needs to concen-
trate resources on improving the efficiency of its
renewable projects, improving storage, and general-
ly bringing down the costs associated with these
types of schemes. More positively, many of the
renewables projects are typically a lot smaller than
conventional-energy schemes, which keeps the
costs lower and makes them less likely to be affect-
ed by cost-cutting.
Furthermore, the federal government’s fiscal-incen-
tive schemes, which have been introduced in
response to the slowdown, have focused on infra-
structure as a means to boost economic activity. Power
projects are expected to benefit from the infrastructure
refinancing. The government is supporting this by
allowing the state-controlled India Infrastructure
Finance Company to sell government-backed bonds
to refinance projects, and by allowing the Power
Finance Corporation and Rural Electrification
Corporation to raise US$2.1bn for power projects.
How much of these will be conventional is unclear,
but small renewable projects stand a good chance of
recognition given their lower cost base.
In terms of policy, there is clearly a long way to
go. But significant strides were taken in 2008 with
the publication of major documents in this area.
Another is expected soon, with the Central
Electricity Authority expected to publish a report on
the anticipated role of renewables in the govern-
ment’s 2012-17 five-year plan, providing a steer on
policy direction. There is considerable policy activity
at the state level, notably in Gujarat, Karnataka,
Maharashtra, Rajasthan, Tamil Nadu and West
Bengal. Growing competition among India’s states is
contributing to this.
One scheme being developed is a version of ener-
gy trading. The Renewable Energy Certificate is cur-
rently being finalised, allowing states with large
renewables potential to buy as many certificates as
they want and then trade the excess with other states
in a less fortunate position. Once there is a financial
incentive involved, the sector can be expected to
receive a boost. In addition, if the government pursues
plans to make states purchase at least 5% of their
power from renewable sources, this will be a catalyst
for growth in renewable-energy infrastructure.
Despite all this, the government’s targets continue
to look somewhat optimistic. So do recent outlooks
published by Greenpeace and the Energy Watch
Group. These suggest, respectively, that renewable
could meet 35% and 29% of India’s electricity
demands by 2030. Given India’s current energy mix,
the country has a very long way to go before it gets
close to achieving this.

6 Business India Intelligence May 27th 2009 © The Economist Intelligence Unit Limited 2009