We missed electricity reforms while thinking about climate change.
Let's see how we can address the climate change with electricity policies
Climate Change.
We are facing the cruel realities of our planet, losing thousands of lives and trillions of rupees, still not pulling up our socks to fight climate change in an urgent and reformative way. We are stuck in solving the small visible problems like transportation and not putting our energy, efforts and resources on the issues which have to be addressed immediately and which can give us the maximum bang for the bucks.
The challenge I am going to discuss in this post is Electricity, we have just normalised the miracle of electricity. This post is basically an effort to spread a very important discussion about policy direction we need to follow to tackle climate change in India. It is based on a recent episode of puliyabaazi I linked above by Pranay Kotasthane, Saurabh Chandra and Khyati Pathak with Mr Akshay Jaitley which was in fact inspired by a paper by Ajay Shah and Akshay Jaitley himself.
Understanding Electricity Supply Chain in India
Let us start with a simple market journey of any product, it is manufactured then stored and then sold in the market, right?
Here, in the market of electricity, it cannot be stored, so basically it needs to be sold as soon as it is produced (Batteries store a minuscule of energy which gets produced, hence not counting). In the Indian constitution, electricity is a subject of concurrent list, where both state and centre together makes policies. And in India, electricity is still largely in the hands of government players.
It has usually three stages in its journey: Generation, Transmission and Distribution. Before 2003, both had to be done by a single entity.
The Electricity Act, 2003 did the following major corrections:
Advised all the states to disintegrate these three processes.
Advised each state to set up a regulatory body, and centre set up a central regulatory body, APTEL, Appellate Tribunal for Electricity which would resolve disputes between states among other roles.
Generation of electricity is gradually getting privatised, and transmission is being done through the process of bidding by private companies. But distribution is still largely in the hands of government. Delhi, Mumbai and Kolkata are some of the major cities which have privatised it completely and have observed huge reduction in losses due to leakages.
National Grid
The GRID INDIA is managed by Power System Operation Corporation (POSOCO) whose main job is to monitor and ensure round the clock integrated operation of Indian Power System. POSOCO does the accounting exercise to buy and sell electricity based on calculations based on predictions of consumer usage patterns.
For example, in cities, usually the peak consumption hours are 6pm-11pm when people come from offices, turn on their air conditioners, lights, etc. Although seems simple, but balancing this grid is the most difficult task in this entire process with high stakes because misbalancing can even lead to collapse of entire grid causing massive black-outs, have a look.
We though have many regional grids, which directly supply power to distribution companies (DISCOM). To give a clearer idea, electricity generation basically means putting electrons in wires, and we consumers take out those electrons by turning on the switch.
Change in Power sector because of climate change?
Considering India’s long history of missing in action, the discussion begins with a question that does India’s power sector even has the capacity to reform itself towards green transition. Fortunately, this time the question is not of whether it will or won’t, it already has started, the question which daunts this time is how fast and how efficiently.
A fact on which we can be proud for a moment, today, India already has more than 40% of installed capacity for generation of renewable energy. But again, the reality is that The Plant Load Factor, which is commonly considered as a measure of a power plant's capacity of utilisation is around 25-30% in case of renewable power plants and around 80% in case of coal based plants.
Major Emission sources in India
Electricity generation- 31%
Agriculture- 22%
Transportation- 8.5%
My dear readers, our government is spending loads of money for subsidising e-vehicles, implementing odd-even schemes and what not for a component which is 8.5% contributor in the emission crime and if left on market, which would anyway happen eventually. But in this thrust of doing what is visible, we are paying high opportunity cost of our energy, time and resources to not being able to do which is more important and bigger problem at hand.
Think again, if majority of our electricity generation is coal based, than what great are we doing by diverting the source of emission by increasing the electricity requirement by that same amount. On top of it, we are bound to have higher electricity demand as we move on our developmental journey of high growth being a developing economy.
Challenge in comparison to USA, China, Japan, Europe, etc.
In these developed economies, any new unit of electricity generated using renewables is used to replace the energy supply generated by fossil fuels. But in India, because we are a developing economy, our demand for electricity is growing at a much higher pace than our pace of increasing production through renewable sources. Because of this reason, our new energy is just complementing fossil generated energy in fulfilling the demand by consumers.
Economics 101: Demand-Supply lessons and mistakes to correct
In India, price signals are always distorted. A simple economics principle says that Costs matter. Another principle says that There are No Such thing as a Free Lunch. Combining both, when we analyse Indian situation, we realise that we are not letting price do its magic and economics solve our problems.
These distorted price signals lead to inefficient generation and usage of electricity.
Our electricity generation contracts are mostly fixed for a fixed term at a pre-decided fixed price for 20-25 years, therefore the generator has no control over price adjusting levers as per the demand requirements.
On the other hand, we consumers pay a flat price per unit throughout the day, having no incentive to manage our behavioural patterns as per the peak and off-peak hours.
Free electricity is becoming a norm in many Indian states, which leads to differential pricing for different consumer segments, which in turn, leads to cross subsidising, which means one consumer segment pays the high price to compensate for the free electricity given to the other segment.
It changes people’s behavioural patterns in not so good direction. If a farmer is getting 100% free power in his farm, he would have an incentive to connect a line from his farm to his house also, to get free electricity, or to set up a flour mill at his farm to get an additional income.
What it does on consumers, investments and economy.
Power and subsidised electricity does not come out of thin air, somebody has to pay for it, and in this case, who pays? The Taxpayer.
States are not very good at paying their bills on time. Data tells that bills of the distribution companies often get delayed by more than 18-24 months, and in states like Delhi or Tamil Nadu where most of the electricity is government subsidised, imagine the financial pressures the DISCOMs must be bearing. Because of ill financial health of these companies, power generation companies don’t sell power to these DISCOMS, and the consumer suffer without electricity. Just to give an example, Tamil Nadu’s power sector is under a debt of 2 trillion (2,000,000,000,000) INR.
Investment companies have ranked regions in India in 3 categories, i.e., A,B and C, as per the health of their DISCOMs. Just 3 entities, Solar Energy Corporation of India, NTPC Vidyut Vyapar Nigam Ltd, and Gujarat state comes in the A categorisation, rest all comes in B and the worst states in this matter comes in C ranking. So if you take some business idea for funding, and in case your project location comes in B or C ranking, the value of your portfolio falls.
Political Challenge confronting and innovative solutions
We can neither discontinue the free electricity to farmers, nor we can keep distributing free electricity at the cost of the state’s economic development. Precisely because of this reason, we need to think of different economic solutions.
Solutions
Direct Benefit Transfer (DBT)- We can start pricing first, and then whoever needs help in the bill payment, we can help those particular families.
Stop cross-subsidising- Charging some segment of consumer higher rates to compensate for the loss of revenue from some another segment of society is called cross subsidising in the simplest words.
One time capital cost- In agriculture, we can give the farmers solar pumps from public funds. It would be a one time huge capital cost but it would save millions we are pouring for free electricity.
Use that freed up electricity to sell that to commercial and industrial users for a charge.
Carbon Tax as an idea of Hope to mitigate the climate change
GST Neutral Carbon Tax
Explained in very simple terms, it is basically taxing the commercial users on per ton carbon emission.
A good public policy, instead of giving shocks to the stakeholders, gives them enough time to prepare themselves and transform their businesses. Here, we can notify in public that after 5 years, we will start levying a carbon tax per ton of carbon emissions. Initially we will start from 2% rate and then gradually within 20 years we will increase the tax rate to reflect the actual cost of these emissions.
Geo-political Pressure from Europe
In European Union, Carbon Border Adjustment Mechanism (CBAM) is a new policy instrument which is planned to be implemented from 2026. United Kingdom has also designed a similar mechanism to be implemented alongside.
How does it work?
Some European countries have already introduced the carbon tax while some are in process of introducing it. Keeping this in mind, and to give equal treatment to the imported and domestically produced cement, iron, steel and aluminium, it is designed.
In countries like India where there is no carbon tax, manufacturers can save tax cost in comparison to European manufacturers, which gives the Indian exporters a comparative advantage and scope to keep prices relatively lower. This is causing negative pressures on European producers.
The solution to this is that if the exporting country does not levy the carbon tax, the European Customs would levy the carbon tax on their imported goods. You must be thinking won’t it create double carbon tax burden after India would also introduce this? Or what if the Indian rate of carbon tax is 10% while European rate is 20%, what would happen in that case?
The answer is no, there would be no such confusion.
The mechanism will ensure that no manufacturer would pay the tax twice. If a manufacturer has already paid the carbon tax in India, they can reach the European markets without any tax. While in case Indian tax rate is lower than the European tax rate, then manufacturers would pay the difference amount (20%-10% = 10%) at the Europe Customs.
Being an Indian, first thought came to my mind was, why should Indian producers give tax to European customs, even of the difference amount. Rather they should pay the entire 20% to the Indian government, at least, they would have the satisfaction that their money has been used in their own country.
The sun shines during the day, and the winds blow at night.
While we think about the green transition, we also need to give a thought to the intermittent cycles of the nature. Like the title says, solar energy can be harnessed during the day while wind energy can be harnessed during the night time, how can we make this generation, transmission and distribution seamless?
There are multiple technologies currently, but if we succeed in making this aspiration of net-zero a reality, then definitely more hard work awaits us. Some solutions can be suggested, like:
The grid modernisation, smart grids can save the problem of efficiency to a large extent.
If we can manage to produce electricity locally, then this problem can be solved to a large extent.
DISCOMs many times buy electricity at market rates which are very high during the peak hours of 6pm to 11pm. If consumers would get changed as per the usage time cycle, behavioural patterns can improve. Maybe, we will use kitchen Mixi or water pump or borewell during the day time to use the solar energy at negligible rates.
Immense potential of Nuclear Energy and its challenges
The first and most important barrier to such a technology in a democratic country is the safety concerns among the people.
In case of nuclear energy, the safety concerns are exaggerated.
Setting up a nuclear power plant takes around 8-10 years, which increases its cost of finances. So if we do some accounting exercises assuming that we are setting up a nuclear power plant, the per unit cost of that energy would be around 10-12 Rupees, which is much higher than coal-based.
Be it private sector investment or private sector operations, everything is prohibited, which also creates a barrier in case of putting in money. Understanding the security concerns of such an important sector, it is believed that even if a plant is privately owned, the security must be governmental and the government would have to have an eye on its fuel cycle.
A new hope: Small Modular Reactors (SMR)
Small modular reactors (SMRs) are advanced nuclear reactors that have a power capacity of up to 300 MW(e) per unit, which is about one-third of the generating capacity of traditional nuclear power reactors. SMRs, which can produce a large amount of low-carbon electricity, are:
Small – physically a fraction of the size of a conventional nuclear power reactor.
Modular – making it possible for systems and components to be factory-assembled and transported as a unit to a location for installation.
Reactors – harnessing nuclear fission to generate heat to produce energy.
Advantages of SMRs
Many of the benefits of SMRs are inherently linked to the nature of their design – small and modular. Given their smaller footprint, SMRs can be sited on locations not suitable for larger nuclear power plants. Prefabricated units of SMRs can be manufactured and then shipped and installed on site, making them more affordable to build than large power reactors, which are often custom designed for a particular location, sometimes leading to construction delays. SMRs offer savings in cost and construction time, and they can be deployed incrementally to match increasing energy demand.
One of the challenges to accelerating access to energy is infrastructure – limited grid coverage in rural areas – and the costs of grid connection for rural electrification. A single power plant should represent no more than 10 per cent of the total installed grid capacity. In areas lacking sufficient lines of transmission and grid capacity, SMRs can be installed into an existing grid or remotely off-grid, as a function of its smaller electrical output, providing low-carbon power for industry and the population. This is particularly relevant for microreactors, which are a subset of SMRs designed to generate electrical power typically up to 10 MW(e). Microreactors have smaller footprints than other SMRs and will be better suited for regions inaccessible to clean, reliable and affordable energy. Furthermore, microreactors could serve as a backup power supply in emergency situations or replace power generators that are often fuelled by diesel, for example, in rural communities or remote businesses.
In comparison to existing reactors, proposed SMR designs are generally simpler, and the safety concept for SMRs often relies more on passive systems and inherent safety characteristics of the reactor, such as low power and operating pressure. This means that in such cases no human intervention or external power or force is required to shut down systems, because passive systems rely on physical phenomena, such as natural circulation, convection, gravity and self-pressurization. These increased safety margins, in some cases, eliminate or significantly lower the potential for unsafe releases of radioactivity to the environment and the public in case of an accident.
SMRs have reduced fuel requirements. Power plants based on SMRs may require less frequent refuelling, every 3 to 7 years, in comparison to between 1 and 2 years for conventional plants. Some SMRs are designed to operate for up to 30 years without refuelling.
Conclusion
In conclusion, tackling climate change in India requires a strategic focus on transforming our electricity sector. By prioritizing the generation and distribution of renewable energy, improving grid efficiency, and implementing innovative policy solutions like Direct Benefit Transfer and carbon taxes, we can make significant strides. The challenges are substantial, but with concerted effort and investment in technologies such as Small Modular Reactors, India has the potential to lead in sustainable energy practices. It’s imperative that we reallocate resources wisely to ensure a greener and more resilient future for all.