Repor No. *0-I Energy Intensive Sector of the Indian Economy Path to Low Carbon Development Energy, Environment, Water Resoure-es and Climate Change Units Sustainable Development Department, South Asia Region The World Bank -, Copyright @ 2011 The International Bank for Reconstruction and Development/THE WORLD BANK GROUP 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing November 2011 The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, or its affili- ated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. 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Adapted by: Maryland Composition, Inc. Printing: Automated Graphics Systems, Inc. Production Editor: Marjorie K. Araya Report No. 54607-IN Energy Intensive Sectors of the Indian Economy PATH TO LOW CARBON DEVELOPMENT KWAWU MENSAN GABA CHARLES JOSEPH CORMIER JOHN ALLEN ROGERS Energy, Environment, Water Resources C ZA A 1) and Climate Change Units ILdayl , U U Sustainable Development Department, Energy Sector Management Assistance Program South Asia Region The World Bank ............. ............ ............ ............ . ....... .. .. ....... .... ........... .... .... ....................... ........... Contents Abbreviations ........................................................................................... vi Acknowledgments ......................................................................................vii Executive Summary ..................................................................................ix Conclusions and Implications............................................................. xii I. Introduction: India's Current Carbon Footprint and Challenges for Future Development...................................................................... 1 C o n text ....................................................................................................1 Challenges Ahead.............................................................................. 4 Objectives of the Study..................................................................... 5 Scope and M ethodology ..................................................................... 5 II. Sectoral Overview and Study Approach........................................ 9 Power Generation, Transmission, and Distribution ......................... 9 Household Electricity Consumption............................................. 14 Nonresidential Buildings.................................................................. 16 IndustrialS ector............................................................................... 17 Road Transport Sector..................................................................... 18 General Energy Efficiency Improvement......................................... 22 III. Scenario 1 Five Year Plans .......................................................... 23 Key Assumptions............................................................................... 23 KeyFi ndings..................................................................................... 25 IV. Scenario 2 | Delayed Implementation of Supply Measures......29 Key Assumptions.............................................................................. 29 KeyFi ndings..................................................................................... 29 V. Scenario 3 "All-Out Stretch" Scenario........................................ 33 Key Assumptions.............................................................................. 33 KeyFi ndings..................................................................................... 34 VI. Comparison of Scenarios ............................................................... 43 Implementation Costs of the Different Scenarios.......................... 45 VII. Challenges in Achieving the Low Carbon Path........................47 Annex 1 Scope and Methodology .................................................................................................... 51 ScenarioB uilding ............................................................................................................................... 51 C o sts ................................................................................................................................................... 5 1 Treatment of Terminal Year and Residual Value ......................................................................... 51 Implementation Costs.......................................................................................................................52 Annex 2 Sources of Data and Assumptions.................................................................................... 53 Annex 3 Description of Industrial Sector ...................................................................................... 61 Iro n an d Steel ..................................................................................................................................... 6 1 A lu m in u m .......................................................................................................................................... 6 2 C em en t ...............................................................................................................................................6 3 Fertilizer ............................................................................................................................................. 63 R efin in g ..............................................................................................................................................64 P ulp an d Pap er...................................................................................................................................65 References................................................................................................................................................ 67 Figures Figure 1.11 Top Twenty Countries Ranked by CO2 Emissions from Fossil Fuel Combustion in C alen d ar 2007 ..................................................................................................................................2 Figure 1.2 India's Per Capita CO2 Emissions Compared to Other G-20 Economies (2007) ............. 3 Figure 1.3 CO2 Intensity of India Compared with Select G-20 Economies........................................ 3 Figure 1.4 Low Carbon Development Model Structure .......................................................................6 Figure 2.11 Renewable Energy Installed Capacity (2008) Compared to Potential in India....................11 Figure 2.2 Indian Power Sector: Institutional Framework ................................................................ 12 Figure 2.3 Household Size Distribution, Urban (left) and Rural (right), against Mean Household Expenditure..................................................................................................................... 15 Figure 2.4 Historical Trends in New Construction............................................................................ 16 Figure 2.5 Energy Intensity of the Six Energy-Intensive Industries from 1973 to 2001.................... 18 Figure 2.6 Emission Intensity of Industries........................................................................................ 18 Figure 3.1 Total CO2 Emissions in Scenario 1 (billion tonnes) ......................................................... 25 Figure 3.2 Share of Coal-Based Generation Capacity in 2031 in Scenario 1................................... 26 Figure 3.3 | Evolution of Grid Electricity Supply and Associated C021 ntensity............................... 26 Figure 3.4 Car Ownership per Thousand People (in relation to GDP per capita) 1990-2008.............28 Figure 3.5 | Emission Profile for Lower GDP Growth Sensitivity Analysis........................................ 28 Figure 4.1 Total CO2 Emissions in Scenario 2 (billion tonnes) ..............................................................30 Figure 4.2 Impact of Delayed Implementation in Scenario 2 on CO2 Intensity and Captive Power Generation................................................................................................... 30 Figure 5.1 Total CO2 Emissions in Scenario 3 (billion tonnes) ......................................................... 34 Figure 5.2 Share of Coal-Based Generation Capacity in 2031 (Scenario 3) ..................................... 35 iv I Energy Intensive Sectors of the Indian Economy Figure 5.3 Evolution of the Grid Electricity Supply and Associated CO2 Intensity ..........................35 Figure 5.4 CO2 Emissions from Household Electricity Consumption ............................................. 36 Figure 5.5 Total Household Electricity Consumption in 2031...........................................................37 Figure 5.6 CO2e Emissions from Six Industries Five Year Plans...................................................... 38 Figure 5.7 CO2e Emissions from Six Industries All-Out Stretch.................................................... 38 Figure 5.8 CO2e Emissions from Road Transport.............................................................................. 39 Figure 5.9 CO2 Emissions/Passenger-Kilometer ................................................................................ 39 Figure 5.10 CO2 Emissions/Freight Tonne-Kilometer....................................................................... 40 Figure 5.11 CO2e Emissions from Road Transport............................................................................ 40 Figure 5.12 CO2 Emissions from Nonresidential Buildings ............................................................. 41 Figure 5.13 Sensitivity Analyses for Scenario 3 - Emissions Stabilization in Power Sector............. 41 Figure 6.1 Share of Coal in Grid Power Generation ......................................................................... 44 Figure 6.2 CO2 Emissions from Grid Electricity Generation ........................................................... 44 Figure 6.3 Comparison of Cumulative Emissions in 2007-2031 Relative to Scenario 1 ................. 45 Figure A3.1 Per Capita Aluminum Production versus GDP ............................................................. 62 Tables Table 1.1 Sum m ary of Scenarios........................................................................................................... 8 Table 2.1 Performance of Power Sector Targets in Five Year Plans.................................................... 10 Table 2.2 Costs and Emission Characteristics of New Power Plants..................................................14 Table 4.11 Investment Costs for Life Extension, Efficiency Improvement, and New Capacity in G rid-Supplied Electricity ........................................................................................................ 31 Table 5.1| Impact of Pace of Transmission and Distribution Loss Reduction Program....................35 Table 5.2 Emission Reduction Potential in 2031, Million Tonnes of CO2e...................................... 36 Table 5.3 | 2031 CO2e Emissions from the Selected Six Industries in Scenarios 1 and 3................... 37 Table 6.11 Investment Costs for Life Extension, Efficiency Improvement, and New Capacity in G rid-Supplied Electricity........................................................................................................ 46 Table A 2.1 Sources of D ata.......................................................................................................................53 Table A2.2 General Assumptions........................................................................................................ 54 Table A 2.3 Pow er Sector ...........................................................................................................................54 Table A2.4 Household Electricity.........................................................................................................55 Table A2.5 Nonresidential Electricity.................................................................................................. 56 Table A 2.6 R oad Transport.......................................................................................................................58 Table A 2.7 Industry...................................................................................................................................59 Contents I V Abbreviations BEE Bureau of Energy Efficiency CD compact disc CEA Central Electricity Authority CO2 carbon dioxide CO2e carbon dioxide equivalent g grams DVD digital video disc GDP gross domestic product GHG greenhouse gas GOI Government of India GW gigawatts IEA International Energy Agency kWh kilowatt-hours MW megawatts NAPCC National Action Plan on Climate Change NPV net present value PLF plant load factor SME small- and medium-size enterprise T&D transmission and distribution TWh terawatt-hours VCR video cassette recorder All currencies are U.S. dollars unless otherwise noted. All years are financial years in India (April to March), unless indicated other- wise, with the year indicating the first year of the financial year. For example, 2007 represents financial year 2007/2008, or April 2007 to March 2008. vi I En rgy Intensive Sectors of the Indian Economy Acknowledgments his report is the product of a collaborative effort between the World Bank and the Government of India under the overall leadership of the Planning Commission. The report has also received significant support from several ministries and agencies of the government of India, in- cluding the Ministry of Environment and Forests, the Ministry of Power, the Central Electricity Authority, and the Bureau of Energy Efficiency. Special gratitude is extended to the following government officials: Surya Sethi, for- mer Principal Advisor (Energy), Planning Commission; Gireesh Pradhan, Additional Secretary, Ministry of Power; J.M. Mauskar, Additional Secre- tary, Climate Change, Ministry of Environment and Forests (current Special Secretary); Rakesh Nath, Managing Director, Central Electricity Authority; V.S. Varma, former Member (Planning), Central Electricity Authority; Ajay Mathur, Director-General, Bureau of Energy Efficiency; and Saurabh Ku- mar, Secretary, Bureau of Energy Efficiency. The study also received significant contributions from various represen- tatives from nongovernmental organizations, central sectoral agencies, think tanks, and academics during meetings and workshops held at various stages of the study and their technical support to the study consultants, through the provision of data and information, is gratefully acknowledged. This report has received funding from the U.K. Department for International Development and donors through the Energy Sector Management Assistance Program (ES- MAP). However, the views expressed within do not necessarily reflect official policy. The Energy Sector Management Assistance Program (ESMAP) is a global knowledge and technical assistance program administered by the World Bank that assists low- and middle-income countries to increase know-how and in- stitutional capacity to achieve environmentally sustainable energy solutions for poverty reduction and economic growth. The contributions and written comments received from a number of ex- perts deserve special mention and are gratefully acknowledged, especially John Allen Rogers (ESMAP) for leading the effort on modeling. Gratitude is also extended for comments and inputs to Marianne Fay (SDNCE); Kirk Hamilton (DECEE); R.K. Jain, Alok N. Bansal (SASDT); Maureen Cropper; S. Vaideeswaran (SASDI); Suphachol Suphachasalai, and E. Stratos Tavoulareas, and Dr. Anil Markandya of the BC3 Basque Centre for Climate Change. The World Bank team was initially led by Kseniya Lvovsky and in the subsequent phase by Kwawu Mensan Gaba with Charles Cormier as co-leader of the task team. The team included John Allen Rogers, Muthukumara Mani, Richard Damania, Masami Kojima, Mustafa Zahir, Rohit Mittal, Gaurav Joshi, Kirtan Sahoo, Bela Varma, and Kumudni Choudhary. Technical background reports were produced by a team of consultants from the Lawrence Berkeley National Laboratory led by Jayant Sathaye, and from Segment Y Automotive Intelligence Pvt. Ltd. led by Paul Blokland. Peer reviewers of the final report were: Masami Kojima (who was an active reviewer through the preparation process), and Michael Toman of the World Bank. Helpful comments and contri- butions were received from several experts who reviewed the modeling methodology or sector methodologies including Sameer Akbar, Doug Barnes, Mudassar Imram, Ashish Khanna, Sunil Kosla, Ranjit Lamech, Jeremy Levin, Rohit Mathur, Sudhir Chela Rajan, Pedro Sanchez, Lee Schip- per and Daljit Singh. Special thanks are due to Giovanna Prennushi, Richard Damania, Dan Biller, Rosanna Chan, Karin Kemper, Salman Zaheer, and Gajanand Pathmanathan for detailed and in- sightful comments on the draft report and for their support. Finally, we would like to express our sincere appreciation to Isabel Guerrero, former Country Director for India and current Vice-Pres- ident, South Asia Region; N. Roberto Zagha, Country Director for India; Herbert Acquay, Sector Manager, Environment; Jyoti Shukla, Sector Manager Energy; and John Henry Stein, Sector Direc- tor, South Asia Sustainable Development, for their overall guidance and support to this activity. Thanks are due to John Dawson for his meticulous contributions in editing the report and ap- pendices. Special thanks to the ESMAP publishing team, Marjorie K. Araya and Heather Austin. The opinions presented here and any errors are the sole responsibility of the authors and should not be attributed to the individuals or institutions acknowledged above. I Energy Intensive Sectors of the Indian Economy Executive Summary nitiated in 2005, this study was requested by the government of India to: (a) develop the analytical capacity required to help identify low- carbon growth opportunities, up to the end of the 15th Five Year Plan (March 2032), in major sectors of the economy; and (b) facilitate informed decision-making by improving the knowledge base and raising national and international awareness of India's efforts to address global climate change. India is at a unique juncture in its development. Prior to the recent global economic and financial crisis, its gross domestic product (GDP) grew at more than 9 percent annually between 2003 and 2007, with high rates of investment and savings and strong export growth. This rapid economic growth gener- ated substantial potential for public and private investments in infrastructure development. As outlined in India's 11th Five Year Plan (April 2007- March 2012), the government of India is aiming to double per capita GDP over 10 years. Achieving such rapid income growth for a country as populous as India will require transformative changes in all sectors, including in the energy sec- tor. Accordingly, carbon dioxide (C02) emissions are set to grow rapidly if the government's growth and development objectives are to be met. How- ever, during the run-up to Copenhagen, where the international community was striving to come up with a comprehensive agreement to combat climate change, India made a significant announcement that it intends to reduce 20 to 25 percent of its carbon intensity by 2020 against a 2005 baseline. With its relatively low carbon footprint and a steadily declining carbon intensity over the last decade, India will further its contribution to reduce climate change by this voluntary target. India has the tremendous challenge of meeting the energy needs of its growing economy while also connecting and providing lifeline electricity to about 400 million people who currently do not have access and to address chronic energy shortages within the context of tight fiscal constraints and lim- ited availability of low-cost, lower-carbon energy resources. The scale of the growth of energy demand in India raises obvious questions about the time path of the country's CO2 emissions, which has strong global implications: according to the International Energy Agency (IEA 2009), In- dia's CO2 emissions from fuel use in 2007 were less than 5 percent of the world total; however, as mentioned above, its global share of emissions is projected to increase with economic development. India relies heavily on coal for its commercial energy demand (53 percent of installed generation capacity) but lacks other domestic energy resources, and is increasingly dependent on imports of fossil fuels to meet demand. The reduction in the growth in total CO2 emissions will depend on the extent to which total growth in energy use is offset by a combination of: (a) further reduction in energy intensity of GDP, allow- ing growth and development goals to be met with less growth in energy use and associated CO2 emissions than currently projected; and (b) a further reduction in the CO2 intensity of energy use through greater increases, where possible, in the share of energy demand met by lower-carbon or even carbon-neutral energy resources. This collaborative study by the World Bank and the government of India uses an innovative bottom-up model and examines CO2 emissions from energy use in India beginning in 2007 through the 15th Five Year Plan, ending in March 2032. The report focuses in particular on power generation; energy consumption in six energy-intensive industries (iron and steel, aluminum, ce- ment, fertilizer, refining, and pulp and paper); energy consumption in nonresidential buildings; electricity consumption by households; and fuel use in road transport, all of which are estimated to contribute significantly to India's future CO2 emissions. The findings reported represent India's potential "carbon futures"-how total emissions might evolve to 2031 under different assumptions about the drivers of energy supply and demand, in particular the potential evolution of total emissions from several sectors of the economy in the scenarios considered. The study does not in any way recommend a future carbon trajectory; that decision is for India itself to make based on national development considerations and the pro- cess of international negotiations on greenhouse gas (GHG) mitigation. Nor does it provide a cost-benefit analysis of alternative measures to limit the growth of CO2 emissions, because of the limited knowledge of associated transaction costs. The report is divided into seven chapters. Chapter 1 discusses India's current carbon footprint, the drivers that will contribute to growth in GHG emissions, the objectives of the study, and the scope and methodology of the analytical approach. Chapter 2 provides an overview of each of the sectors covered by the study, along with their respective specific challenges and past performance, and the modeling approach adopted in the study. Chapters 3, 4, and 5 provide the specific assump- tions and findings of the three scenarios: (1) Scenario 1, alternatively called Five Year Plans scenario, assumes full implementation of the Five Year Plans and other projections and plans by the government of India (2) Scenario 2, alternatively called delayed implementation, more closely follows historical performance in implementation of the Five Year Plans (3) Scenario 3, or all-out stretch scenario, adds to scenario 1 additional steps to increase energy efficiency and low-carbon energy sources Sensitivity analysis is conducted on each scenario. Chapter 6 provides a brief comparison of the results of the three scenarios, and chapter 7 concludes with a brief description of the challenges of low-carbon development in India. All scenarios and their sensitivity analyses show emissions of CO2 equivalent (CO2e) from the sectors studied increasing from 1.1 billion in 2007 to between 3.2 and 5.1 billion tonnes of CO2e in 2031. The overall carbon intensity of the sectors studied is set to fall against a 2007 baseline in scenario 1 by 19 percent by 2020 and 32 percent by 2031, whereas an all-out effort on the technical, financial and institutional fronts in scenario 3 would result in a reduction in carbon intensity of 29 percent by 2020 and 43 percent by 2031. This is consistent with the government's voluntary target of reducing carbon intensity by 20 to 25 percent by 2020 against a 2005 baseline, which was announced immediately prior to the Copenhagen negotiations in December 2009. With respect to electricity generation and supply, three major findings emerge from the mod- eling exercise. First, the model estimates that coal-fired generation plants are likely to continue x I Energy Intensive Sectors of the Indian Economy to dominate energy supply to the grid despite considerable efforts to increase the share of less carbon-intensive sources of power. The share of total power generated derived from coal increases from 73 percent in 2007 to 78 percent in scenario 1 (Five Year Plans). The increase in coal's share of generated power is a consequence of the lack of significant alternative natural resources in India, lack of availability of lower-carbon technologies such as solar at affordable prices, and the abun- dance of (global and domestic) coal and its relatively low prices. Should the Five Year Plan scenario experience significant delays in implementation, as observed in the last three Five Year Plans (April 1991 to March 2006), the share of total power generated from coal increases to 84 percent (sce- nario 2) and total emissions increase at a higher pace. Only in scenario 3 (all-out stretch) does the share of coal decline slightly to 71 percent. The amount of CO2 emitted per kilowatt-hour (kWh) varies markedly from scenario to sce- nario. Compared to 2007, CO2 emissions per kWh of grid electricity in 2031 are about 19 percent lower under the all-out stretch scenario, almost 13 percent lower under scenario 1 (the Five Year Plan scenario), and just about 3 percent lower under scenario 2 (delayed implementation scen- ario). Compared to the all-out stretch scenario, CO2 emissions per kWh of grid electricity in 2031 are almost 20 percent higher under scenario 2 and 8 percent higher under scenario 1. By far the most carbon-intensive is scenario 2, because of the delay in the reduction of technical transmission and distribution losses, and halving of the rates of construction of new supercritical power plants and renewable power generation compared to scenario 1. Another finding of the model is that reducing technical transmission and distribution losses remains one of the most cost-effective means of improving power sector performance while si- multaneously reducing CO2 emissions. Reducing technical losses is in fact equivalent to adding new capacity with no increase in CO2 emissions. For example, by accelerating the implementa- tion of the transmission and distribution loss reduction programs by 10 years, and assuming that the same amount of grid electricity as in scenario 1 is supplied to end-users, there is a reduction in CO2 emissions of 568 million tonnes (equivalent to the total emissions of the power sector in 2005) and of 94 billion 2007 rupees (equivalent to US$2.1 billion) in investment in new plants and renovation of existing plants between 2007 and 2031. Finally, results show that scenario 2 lowers capital expenditures for grid electricity by about 14 percent on the basis of net present value (NPV) compared to scenario 1. In scenario 2, cap- tive generation covers the unmet electricity demand created by delayed implementation, giving a temporary relief to the public sector but imposing higher costs to society as a whole: over the medium term, a portion of investment in the power sector is shifted from the grid system to pri- vately owned, smaller-scale power generators throughout the economy running mainly on diesel. In sensitivity analysis B where delayed implementation affects only 20 percent-rather than 50 percent-of generation plants using lower-carbon technology, the capital expenditures for grid electricity are lowered by about 8-instead of 14-percent on a NPV basis. With regard to household use of electricity, the model confirms that adopting energy effi- ciency standards for household appliances significantly trims down the electricity demand. Results for scenario 1 show that the amount of electricity used for space-cooling and water-heating makes up slightly more than one third of total electricity consumed, but rises to nearly half by 2031 as household incomes increase. In scenario 3 where there are tighter mandatory energy efficiency standards, the share of electricity consumed for space-cooling and water-heating exceeds 60 per- cent by 2031, but the total amount of electricity consumed is lowered by almost a third. The largest reduction in electricity consumption occurs with lighting: in 2031, the total amount consumed is 70 percent lower in scenario 3 than in scenario 1. For nonresidential buildings, the model indicates similar trends as in the residential sector. To assess those trends, consumption of electricity, diesel used for additional power generation, and use of liquefied petroleum gas (mainly for heating water and also for cooking in restaurants) were calculated for six categories of buildings, two of which were separated further into public and pri- Executive Summary I xi vate. The model confirms that meeting tighter energy efficiency standards for electric appliances lowers consumption by about 10 percent. In both scenarios 1 and 3, retail stores have the highest share of electricity consumption among the nonresidential buildings. Retail and private offices realize the largest reductions in electricity use in scenario 3. All measures for tightening energy efficiency standards to achieve these reductions are estimated to have real rates of return of 10 percent or higher. With respect to the transport sector, the model calculates that CO2e emissions will increase by a factor of 6.6 in scenario 1 and 5.4 in scenario 3 between 2007 and 2031. Emissions from road transport were dominated by those from heavy-duty commercial vehicles (buses and trucks) in 2007, constituting as much as 60 percent of the total. Their relative share declines over time and the share of passenger cars increases rapidly in scenario 1. The model forecasts private ownership in India of 86 cars per 1,000 people in 2031, a level that is significantly lower than the 300 to 765 per 1,000 observed in most high-income countries today. In scenario 3, where tighter CO2 emis- sion standards for passengers and light-duty commercial vehicles are imposed and modal shifts from private to public transport are promoted, the growth of emissions from passenger cars is substantially curtailed. Emissions from heavy-duty commercial vehicles in scenario 3 exceed those in scenario 1 because of much greater use of buses for public transport. Shifting passengers from private to public transport reduces congestion and, where the shift is from cars to buses, CO2e emissions. Shifting passengers from motorcycles to buses, however, does little to reduce overall CO2e emissions. This is because emissions per kilometer traveled of motorcycles are an order of magnitude lower than those of buses. When converted to CO2e emis- sions per passenger-kilometer, there is essentially no difference between the two. Incremental cost calculations show that the technology options to lower CO2e emissions by 35 percent give a real rate of return of 10 percent or higher for most light-duty vehicles, although tighter CO2e emissions standards for some vehicles result in lower rates of return. Higher global oil prices in the future could increase the rate of return in each case. For the total CO2 emissions of the sectors covered in this study, the model shows that: (i) the largest share of CO2e emissions continues to come from the power sector (captive generation and grid supply), which in 2031 is estimated to make up 50 percent of the total in scenario 1, 53 percent in scenario 2, and 52 percent in scenario 3. The potential for reducing aggregate emissions in 2031 by implementing all the demand-side and supply-side measures in scenario 3 is estimated to be 815 million tonnes of CO2 relative to scenario 1. While the largest volume of emissions reduction is from the power sector, the highest percentage of reduction is from industry. The study also asked what additional capacity of carbon-neutral generation would need to be added to stabilize CO2 emissions in the power sector by 2025 with no further growth. Replacing 130 gigawatts (GW) of coal-based and 2 GW of gas-based power generation with carbon-neutral generation capacity beyond scenario 3-for example, adding more nuclear-was found to achieve this stabilization target. By 2031, these measures nearly halve CO2 emissions relative to scenario 1 in the power sector and reduce the overall CO2e emissions to 2.8 billion tonnes, which is 2.5 times the 2007 level. It is important to point out that these calculations say nothing about the feasibility or cost of such massive additional introduction of carbon-neutral generation. CONCLUSIONS AND IMPLICATIONS Expansion needs for power generation during the study period are vast, with estimated increases from fourfold to as much as sixfold. During the same period, demand for fuel used in road trans- port may increase more than fivefold. These increases are a natural consequence of income growth and greater availability and delivery of basic services. They occur even with investments that im- prove supply-side energy efficiency-such as greater thermal efficiency in new power plants and xii I Energy Intensive Sectors of the Indian Economy reduced technical losses in transmission and distribution-and demand-side efficiency improve- ment through adoption of efficient household appliances, continued industrial modernization, higher-fuel-economy vehicles, and other means. According to this study, electricity consumption of Indian households will remain relatively frugal, with even the richest third of urban households in 2031 consuming only about one third of the average current electricity consumption in the European Union. For the six energy-intensive industries, per capita consumption in India even in 2031 is forecast to be no higher than per capita world production in 2006, despite a significant increase in outputs to support India's growth. All major sectors of the energy system can contribute to a lower-carbon development and this would require comprehensive and large-scale changes in sector investment, performance, and gov- ernance; particularly in the power sector. A crucial first step would be for India to substantially im- prove upon its past performance in achieving its targets. Unless India allocates financial, technical, institutional, and skills-based resources more efficiently, new power generation capacity addition may continue at half the planned rate as in the past three Five Year Plans. Meeting the targets for the power sector, contained in the 11th and subsequent Five Year Plans, will require coordination and an enhanced performance of institutions across all levels of government-federal, state, and municipal. If grid electricity continues to fall short of demand, then captive generation relying on diesel could expand, resulting in higher costs to the economy and higher overall CO2 emissions. In addition to a streamlined regulatory framework, the development of solar power, nuclear power, and other lower-carbon energy sources beyond existing ambitious plans would require significant structural changes, including access to new energy sources and technologies, better delivery mechanisms, and widened access to a skilled workforce. The likelihood of success also depends on putting in place a monitoring and evaluation system to detect any systemic slippages during program implementation and to ensure that early corrective measures are taken. By 2031, India's urban population is expected to double, placing substantial stress on existing- often insufficient-transport infrastructure, both for long-distance freight and the movement of people within cities. Developing extensive and better mass transit in cities, investing in the shift of freight transport from road to rail, and improving facilities for nonmotorized travel to meet some of this inevitable growth in demand for transport would pose both institutional and technological challenges. It would also be critical that new vehicles entering service have high fuel economy- regardless of what might happen sometime in the future in development of low-cost, low-carbon, and environmentally sound biofuels. At the same time, tighter tailpipe emissions standards for lo- cal pollutants are required such that the growth in the in-use vehicle fleet does not further impair air quality. Ultimately the scope of this study does not allow making conclusive statements about the costs of achieving different future carbon trajectories. While there are capital cost increases because of the switch to costlier technologies, these outlays, however, are only part of the total cost of achiev- ing such ambitious GHG reductions. The speed of the hypothesized carbon-neutral capacity in- vestments in sensitivity analysis D for scenario 3 (in which additional fossil-fuel power generation is replaced by carbon-neutral generation capacity) is estimated to increase costs considerably- more than 25 percent-and infrastructure and other investments for substantially reducing trans- port sector emissions would be very large. There are possibilities in many sectors for significant improvements in energy efficiency, with low or potentially negligible costs. However, those opportunities depend on accomplishing vari- ous policy and institutional changes noted above, which constitutes a challenge. Other barriers include competition for limited funds from projects with higher risk-adjusted rates of return and constraints on financing availability for covering up-front costs. A well-known example of the former in industry is the tendency for a growing firm to choose production capacity expansion over energy efficiency improvement to increase its market share, even if both energy efficiency improvement and capacity expansion give positive rates of return. Executive Summary I xiii Aside from the possibilities discussed to this point, what are the options for truly dramatic reductions in GHG growth, even as energy use expands? One option is to promote international cooperation and regional trade in lower-carbon energy sources and allow India, under appropri- ate conditions, to have access to natural gas in neighboring countries. Another option is adoption of emerging new carbon-neutral energy sources-beyond wind and hydro, which are already as- sumed to be maximally exploited in our scenario analysis-providing that they are acceptably safe and relatively affordable. Much international attention has been given to the future role of carbon capture and storage for use with fossil fuels. Aside from the fact that this technology is still pre- commercial, India's geology does not seem particularly hospitable. Current estimates indicate that India's oil and gas fields plus coal fields have less than 5 billion tonnes of CO2 storage capacity. This could store national emissions from large point sources for only five years (IEA 2008). Given the limited outcome of the Copenhagen negotiations, the financing of additional costs for the higher-cost carbon-neutral resources through sales of CO2 reduction credits or other car- bon finance mechanisms has become uncertain. But given the large amounts of carbon-neutral investment needed in scenario 3 and even more so for emission stabilization, unless the carbon- neutral technologies were fairly cost-competitive the carbon finance costs would be staggering. Ultimately, India needs to decide what steps it will take to meet the continuing energy and eco- nomic development needs of its people, taking into account the costs and risks of various options. India also shares with the rest of the world an interest in limiting disruptive and costly climate change. The findings in this study underscore the challenge of meeting energy access, energy cost, and global environmental objectives within the menu of technological options currently available. Where there are synergies between cost-effective efficiency improvement and demand manage- ment on the one hand and reduction of carbon intensity on the other, they should be pursued as a top priority. In addition, if efforts in the non-energy sectors like agriculture and forestry (which the Bank study did not examine) are also sustained, trends indicate that India could achieve its voluntary target while meeting its priority development objectives. Several improvements in technologies and practices in these sectors are known to help reduce carbon intensity, such as the reduction of methane emissions from irrigated rice production and livestock, the reduction of nitrous oxide from the use of fertilizers, afforestation, as well as reforestation. xiv I Energy Intensive Sectors of the Indian Economy I. Introduction: India's Current Carbon Footprint and Challenges for Future Development CONTEXT n 2005, the government of India requested a study examining strategies for low-carbon growth to: (a) identify low-carbon growth opportunities, up to March 2032, in major sectors of the economy in ways that enhance national growth objectives, relative to baseline conditions; and (b) facilitate informed decision-making by strengthening the knowledge base as well as raise national and international awareness on India's efforts to address global climate change. India is at a unique juncture in its development. Between calendar 2003 and 2007, before the onset of the global financial crisis, India experienced high rates of investment and savings and strong export growth and its gross domestic product (GDP) grew annually at more than 9 percent. This rapid growth generated substantial public and private resources for investment and development programs. The objectives of the government, as outlined in India's 11th Five Year Plan, are to achieve an annual GDP growth rate of 9 percent and double per capita GDP within 10 years. For India, the overarching priority is to maintain its economic growth and lift millions out of poverty while providing them with access to modern energy. Although India is the world's fourth largest economy it faces signifi- cant challenges in meeting the Millennium Development Goals, as it is home to a third of the world's poor and a quarter of the world's poor with- out access to electricity (about 400 millions in 2008). In addition, electricity supply is both inadequate and unreliable and more than two-thirds of all Indian households relied on traditional use of biomass as the main source of cooking fuel and one-thirds of households on kerosene for lighting in 2004- 05 (NSSO 2007). Recent World Bank analysis (World Bank 2008a) shows that the number of people who live below a dollar a day in 2005 dollars valued at purchasing power parity-a threshold that is close to the official poverty line-came down from 296 million in calendar 1981 to 267 million in calendar 2005. However, the number of people living under US$1.25 a day increased from 421 million in 1981 to 456 million in 2005. This indicates that in India there are many millions of people living just above a dollar a day and their num- bers are not falling. As with China in the past decade, the scope and speed of India's transforma- tion are key questions for the next decade. Should India maintain high eco- nomic growth in the coming decade and beyond, it may succeed in lifting millions out of poverty within a generation. But according to a recent IDA Review (World Bank 2009a), India has made less progress than other countries in reducing poverty and resentment about the unequal distribution of the benefits of growth contributes to social discontent. For these reasons, the challenges of inclusive, sustainable growth and service delivery are at the center of the government's priorities. At the same time, such economic growth would call for increased demand for energy and ensuring access to reliable energy for all to address human development issues. According to India's Planning Commission, "the energy challenge is of fundamental importance to India's economic growth imperatives" (IEP, 2006). If India were to grow annually at 9 percent to 2031, it is likely that India's primary energy supply would need to triple or quadruple and electricity supply would need to increase fivefold or more. Along with quantity, the quality of energy sup- ply also has to improve, with implications for future carbon emissions. Historically, the Indian economy has a relatively low carbon footprint on a per capita basis. Though India is ranked among the top ten emitters (Figure 1.1) due to the size of its economy and population, the level of its per capita CO2 emissions from fuel combustion, at 1.2 metric tonnes in calendar 2007, was a fraction of the global average of 4.4 (Figure 1.2). In the same year, India's CO2 emissions intensity per unit of GDP, valued at purchasing power parity, was at the world average (IEA 2009; World Bank 2009b) (Figure 1.3). A recent World Bank cross-country comparison (Kojima and Bacon 2009) examined the change in CO2 emissions from fossil fuel combustion between calendar 1994 and 2006 in 123 countries by separating them into changes in five factors: the carbon intensity of fossil fuels consumed, the share of fossil fuels in total energy used (fossil fuel intensity of energy), the en- ergy required to produce a unit of GDP (energy intensity), GDP per capita, and population. The study defined an offsetting coefficient: the ratio of the negative value of the sum of the changes in emissions of the three factors sensitive to energy policies-fossil fuel mix, fossil fuel share in total energy, and energy intensity-to the change in emissions related to GDP growth (product of the last two factors). During the study period, India offset one third of CO2 emissions due to GDP growth. India's performance for the full period was comparable to the world average, but Figure 1.1 | Top Twenty Countries Ranked by CO2 Emissions from Fossil Fuel Combustion in Calendar 2007 6,000 5,000- 6 S4,000 - 0 1,000 - 0- Sr IEA 2009. 2n t endi E Source: IEA 2009. 2 1 Energy Intensive Sectors of the Indian Economy Figure 1.2 | India's Per Capita CO2 Emissions Compared to Other G-20 Economies (2007) Tonnes of CO2e per Capita-Year 2007 18 19 17 14 11 9 9 1 7 7 3 4 4 4 6 1 1 1 .(a > 10 0 (0 a) lu >1C > 0 C: (0 u) S ) r Bn 09 a au calculatio 5) x -C 0 0o C 0)- I C -C U)~< - 0 LL C U Source: lEA 2009; World Bank 2009b; and authors' calculations. its offsetting coefficient of 43 percent the second half of the study period was markedly higher than the world average of 18 percent. The study also identified India as one of the twenty countries in which CO2 emissions inten- sity declined successively from the first half to the second half of the study period, with larger declines in the second half. Similar to the world average, the decline in CO2 emission intensity in India occurred from a relatively low initial level. India's relatively low carbon footprint can be attributed to several factors. The large numbers of people who still lack access to electricity and modern commercial fuels, and low energy con- Figure 1.3 I CO2 Intensity of India Compared with Select G-20 Economies Tonnes of CO2e per US$1,000 of GDP 2.0 1.8 1.6 ina 1.4 Russian Federation 1.2 0 South Africa 0.8 0.6ndia 0.4 Italy 0.2 Brazil 0.0 I 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Calendar Year Sources: lEA 2009, World Bank 2009b, and authors' calculations. Note: GDP is valued at purchasing power parity in 2005 US$. I. India's Current Carbon Footprint and Challenges for Future Development I 3 sumption of the poor, contribute to low per-capita emissions. Another factor is the change in the composition of GDP with economic modernization since 1990. More importantly, service and industry sectors reduced their respective energy intensities significantly, with services as a whole registering a greater reduction. Both industry and service sectors have increased their share of GDP at the expense of agriculture, and service more than industry. Because the service sector has lower energy intensity than industry, although higher than that of agriculture, there is a small overall reduction in total use of energy for a given amount of GDP. Increased competition arising from the liberalization of the economy, the in- crease in energy prices, and the promotion of energy efficiency schemes with the introduction of the Energy Conservation Act in 2001 have contributed to reductions in the energy intensities of the service and industry sectors. CHALLENGES AHEAD In the years ahead, however, India faces formidable challenges in meeting its energy needs and pro- viding adequate energy of desired quality in various forms to users in a sustainable manner and at reasonable costs. Any meaningful exploration of India's future economic development and CO2 footprint must include, as a point of departure, the expansion of modern energy availability to the poor, the reduction in chronic energy shortages, and the government's poverty reduction targets. Keeping these challenges in mind the government announced an Integrated Energy Policy in 2006. The broad vision behind the policy is to reliably meet the demand for energy services of all sectors including the lifeline energy needs of vulnerable households, in all parts of the country, with safe and convenient energy at the least cost in a technically efficient, economically viable, and environmentally sustainable manner. As India moves along its current growth trajectory, the pattern of industrialization will also de- termine its energy demand and hence carbon emissions. In addition to the power sector, energy- intensive industries are other major contributors of CO2 emissions in India. Interestingly, on the industry side, India's heavy industry sector has recorded more energy efficiency improvement than any other sector since the late 1980s, resulting in reduction of carbon intensity. In addition, total industrial primary energy consumption has increased at a slower rate that the sector's value added since the mid-1980s, demonstrating some decoupling of energy consumption and sectoral GDP. However, a large number of energy efficiency projects with strong financial rates of return remain unrealized in India, in particular in small and medium enterprises. The essential factor hampering the development of these potential energy savings continues to be the underdeveloped state of project delivery mechanisms. Only a fraction of the potential has been tapped using the traditional investment delivery mechanisms operated by local financial institutions. Another sector of importance to India's growth is the transportation section. Emissions from the latter, which constitute 8 percent of the total GHG emissions of India in 2007, are the fastest growing of any sector. About 90 percent of these were from road transport, compared to a global average of 72 percent. This is one of the consequences of the growth of the vehicle population in the country. Annual growth rates of 5-15 percent, depending on the class of vehicle, have been recorded, and the transport sector faces a number of challenges to cope with the rapidly expanding vehicle fleet population. There have been major initiatives at the domestic level to deal with energy security, which in- variably address carbon emissions. On June 30,2008, India's first National Action Plan on Climate Change was released, outlining existing and future policies and programs addressing climate miti- gation and adaptation (Government of India 2008). The plan identifies eight national missions running through 2017 and directs nodal agencies to submit detailed implementation plans to the Prime Minister's Council on Climate Change. The Prime Minister's Council has already approved the Energy Efficiency Mission, which target 5 percent reduction in annual energy consumption by 4 I Energy Intensive Sectors of the Indian Economy 2015 compared to a business-as-usual trajectory, and the National Solar Mission, which has set a target of installing 20 GW of solar power by 2020. Prior to the Copenhagen Climate Change Con- ference, the government also announced that India will cut its carbon intensity by 20-25 percent from 2005 levels by calendar 2020. A group led by the Planning Commission has been set up to develop a strategy for India as a low-carbon economy to feed into the 12th Five Year Plan process. In the words of Prime Minister Manmohan Singh, India's ability to secure a reliable supply of energy resources at affordable prices will be one of the most important factors in shaping its future energy consumption. In addition to pursuing domestic oil and gas exploration and production projects, India is also stepping up its natural gas imports, particularly through imports of liquefied natural gas. This will require the government of India to maintain and increase the momentum for improving efficiency in the supply chain and developing and tapping into renewable energy at both the national and regional levels to the fullest extent possible. OBJECTIVES OF THE STUDY Against this backdrop, the objective of this report is to describe the possible trajectory of GHG emissions out to 2031, under different sets of assumptions organized into particular scenarios described below. To that end the report presents the results of the bottom-up model that was constructed as part of the low-carbon growth study. These results cover the GHG emissions of the 11th, 12th, and subsequent Plans in the power generation, transportation, residential, nonresi- dential buildings, and industrial sectors until 2031. These five sectors covered 75 percent of GHG emissions from energy use in India in 2007 (IEA 2009), which is the base year for the study. This report, which is informed by extensive sector dialogue, also offers an opportunity for pol- icy-makers to reassess the validity of sector plans and other proposed actions under the National Action Plan on Climate Change, given the triple constraints India faces-(1) availability of reliable and affordable energy sources; (2) availability of financing; and (3) institutional capacity, includ- ing availability of adequate human resources-to carry out these ambitious programs. As the re- port concerns actions to be taken until 2031, the modeling did not take into account technologies that are not yet commercially viable but that are likely to form part of a low-carbon growth strat- egy in the longer term, such as carbon capture and storage. The Government has been an active partner in the analysis, with specific interest in energy ef- ficiency options. Data was collected across several sectors-power supply, household appliances, transportation, industry, and buildings-resulting in a flexible model that has generated interest among various stakeholders in India. Even now, the Indian Government is seeking ways to use this modeling framework as an energy-sector planning tool. SCOPE AND METHODOLOGY To compare different carbon futures for India, the study team developed an engineering-based bottom-up model to project future energy demand in sectors of important consumption and ex- pected growth. The model enables comparison of different options for the electricity supply mix to meet those demands, and calculation of associated CO2 emissions under different scenarios. Although a small fraction of the total emissions computed, the model also includes process-related non-CO2 GHG emissions in industry and from vehicle tailpipes. The model was developed with the clear intention of transferring ownership and use to institutions selected by the government of India for its future maintenance, updating, and use. It is expected that the government of India will continue to refine the model and populate the necessary data to better reflect the country's reality. The model outlined in Figure 1.4 includes the following sectors of the economy: 1. India's Current Carbon Footprint and Challenges for Future Development I 5 Figure 1.4 | Low Carbon Development Model Structure General Inputs Transport Industry Agriculture Households Nonresidential Power Summary Source: Authors. Notes: Agriculture is not yet included in the model. Industry covers six energy-intensive industries, excluding small- and medium-size enterprises except for iron and steel manufacture. Supply * Electricity generation, both grid and captive, and transmission and distribution Demand (covering energy consumed by end-users) * Several energy-intensive industries with significant potential for future expansion: (1) iron and steel, further separated into large integrated steel plants and small-scale plants; (2) alu- minum; (3) cement; (4) fertilizer; (5) refining; and (6) pulp and paper * Nonresidential buildings * Residential electricity use * Road transport, comprising vehicles ranging in size from two-wheelers to heavy-duty trucks and buses The underlying approaches and assumptions are given in Annexes 1 and 2. The model calculates: * future demand within the model based on exogenous variables, * GHG emissions throughout the supply chain and from consumption, * the change in investments and operating costs needed to reduce GHG emissions, and * the net present value (NPV) of future expenditures on reducing GHG emissions. The power supply portion of the model covers the entire economy; for consumer categories not covered in the study, demand is based on assumed income elasticities and GDP growth. The five sectors studied accounted for about three quarters of CO2 emissions from energy use in India in 2007 (IEA 2009), which is the base year for the study. Agriculture, an important part of total GHG emissions today, is not included due to non-availability of data, but its relative share is expected to decline as the Indian economy continues to modernize and grow. Detailed recommendations on data collection are included in the background report on agriculture (IFPRI 2009), and once reli- able data are available, adequate modeling for the agriculture sector could be conducted. On the supply side, capacity addition in the power sector-both technology type and unit size-is based on exogenous scenarios derived from Five Year Plans and others discussed with the government of India. New plants are built as needed to cover the required system expansion and 6 I Energy Intensive Sectors of the Indian Economy the technological choices associated with these new plants are varied under different supply-side scenarios. At any given time, electricity is dispatched from grid-connected power plants to meet projected demand on a merit order basis, minimizing costs. Although the model focuses primarily on electricity production and use, it also includes on the demand side direct use of petroleum products, natural gas, and coal for industry, and of petroleum products in transport and nonresidential buildings. Household fuel use is excluded because of dif- ficulties in modeling, and diesel use for irrigation and powering agricultural equipment is also not studied for lack of data. Electricity generated from smaller units by households, shops, and others is also not included. Captive power covers electricity generation from a minimal unit size of 1 MW and uses mainly diesel, except in industry, where other fuels may be used. This leaves out the amount of electricity generated from small generators fueled by gasoline or diesel. Projections for future ownership of vehicles and electric appliances by households are based on assumed GDP and population growth rates, household size, distribution of household income (using expenditures as a proxy), and urbanization. Vehicle fuel use and electricity are projected based on the vehicle size or appliance, technology, kilometers traveled (for vehicles) and hours of use (for electricity). Other demand projections, including industrial commodity sales and build- ing floor space, are based primarily on GDP and population growth, and associated energy con- sumption on the technology for each application. This study takes three scenarios and conducts sensitivity analysis on each. The three scenarios take full implementation of future Five Year Plans as a starting point and investigates likely out- comes if there are delays as well as accelerated progress beyond what is planned: Scenario 1 I Five Year Plan. Full implementation of Five Year Plans. Scenario 2 1 Delayed Implementation. Delayed implementation of Five Year Plans, halving the pace of installation of power generation capacity and a delay of five years for reducing technical losses in power transmission and distribution. Scenario 3 1 All-Out Stretch. Full implementation of Five Year Plans, coupled with accelerated pace of implementation and expanded use of low-carbon and carbon-neutral technologies. The scenarios and basic assumptions are provided in Table 1.1. GDP growth rates vary across the study years and average 7.6 percent per year in the three scenarios. Sensitivity analysis A exam- ines the impact of lowering annual GDP growth to an average of 6.6 percent. Scenario 2 considers delays in both the addition of new generation capacity (with captive power generation making up the shortfall) and in the technical loss reduction program. New capacity addition for certain types of generation reaches only half of the targets set in Five Year Plans-this achievement rate is similar to the historical performance in the past three Five Year Plans. Sensitivity analysis B con- siders increasing the achievement rate from 50 percent to 80 percent. The technical loss reduction program takes five years longer than planned in both scenario 2 and sensitivity analysis B. Scenario 3 is the most ambitious of the three, carrying out more energy efficiency measures in all sectors than in scenario I (including rehabilitating existing plants to higher efficiency), advancing the date of achieving 15 percent technical losses by 10 years to 2015, and adding more solar and imported hydro power to the energy mix. Sensitivity analysis C considers accelerating the loss reduction program by 5 years instead of 10, and sensitivity analysis D considers replacing a certain amount of fossil-fuel-based power generation with carbon-neutral generation. There exists an extensive literature on electricity demand projection, and different approaches are found. One approach makes use of aggregate macro data at the country or sub-national/state level (Bose and Shukla 1999; CEA 2007a). Essentially, this approach aims to estimate the income elasticity of electricity consumption by econometric analysis of the relationship between electric- ity consumption and its key determinants, such as GDP per capita and electricity price, over a relatively long period of time. Another approach, which may be referred to as a microeconomic I. India's Current Carbon Footprint and Challenges for Future Development I 7 Table 1.1 I Summary of Scenarios SCENARIO 1 SCENARIO 2 SCENARIO 3 Five Year Plans Delayed Implementation All-Out Stretch Average annual GDP growth 7.6% 7.6% 7.6% in 2009-2031 Grid generation life extension As defined in Five Same as scenario 1 Enhanced program and efficiency enhancement Year Plans New grid generation capacity As defined in Five 50 percent slippage in new Additional 20 GW of solar expansion Year Plans capacity addition for and 20 GW of imported higher-efficiency coal, hydro hydro, wind, and biomass Technical loss reduction in From 29% in 2005 to Delayed by 5 years to 2030 Accelerated by 10 years to transmission and distribution 15% in 2025 2015 Industry, household, Projected based on Same as scenario 1 Additional energy efficien- nonresidential, transport historical trends and cy measures in each government energy sector efficiency targets Sensitivity A. As scenario 1 but B. As scenario 2 but with C. As scenario 3 but with analyses with a GDP growth 20 percent slippage in new only 5 year acceleration rate of 6.6% capacity addition for (to 2020) of technical loss higher-efficiency coal, reduction in transmission hydro, wind, and biomass and distribution. D. Additional fossil-fuel power generation replaced with carbon- neutral generation capacity relative to scenario 3. Source: Authors. approach, uses micro-level data that reflect individual and household behavior. This approach en- ables analysis across different heterogeneous household sub-groups and takes a number of house- hold characteristics into account. This study uses variant of the microeconomic approach and is sometimes referred to as an end- use or bottom-up approach. As with the microeconomic approach, the end-use approach makes use of micro-level data. While the former aims to analyze income-electricity demand relationships through reduced-form equations, the latter examines the ownership and the use of household electricity-consuming devices and considers efficiency scenarios from an engineering point of view, as opposed to micro-economic/econometric. A key advantage of end-use over other approaches is that it allows the assessment of efficiency scenarios for electrical appliances, their usage, and electricity conservation, as well as the impact of other economic (GDP growth, prices), demographic (population growth, urbanization), and geographical (e.g., rural/urban and regional/state dummies) factors. 8 | Energy Intensive Sectors of the Indian Economy II. Sectoral Overview and Study Approach his chapter provides an overview of the sectors studied and more detailed information on assumptions and the methodology used in each sector. The issues and challenges in these respective sectors have been discussed in greater detail in separate papers published earlier (Rogers 2008; Rogers and Suphachalasai 2008; Sathaye et al., 2010). POWER GENERATION, TRANSMISSION, AND DISTRIBUTION The power sector in India is one of the largest emitters of CO2 in the country accounting for about one half of the total emissions (MoEF, 2010). The share of the power sector CO2 emissions in the total CO2 emissions in India is higher than the global average of one-third, the corresponding share of 18 percent in Russia (McKinsey and Co., 2009), of 34 percent in the USA (US EPA 2008), of 42 percent in China (University of Alberta 2008), and of 46 percent in Australia (McKinsey and Co. 2008). The main reason for such a high share is the power sector's heavy reliance upon coal.At the end of calendar 2008, the grid-connect- ed generation capacity was about 147 GW, consisting of 63.3 percent thermal (mainly coal), 24.9 percent hydro, and 11.8 percent other energy sources (CEA 2008a).About 73 percent of the total power generation supplied by the utilities was from coal. Coal-based generation appears likely to remain the linchpin of the Indian power sector at least for the next few decades, given the large domes- tic coal resources and the absence of any other significant affordable domestic energy sources in the country (Chikkatur and Sagar 2009). The challenges in the power sector are daunting, given the magnitude of the investment require- ments to increase the reliability of supply and expand access, the coordination requirements both within the power sector and with institutions outside the sector, and the complexity of the political economy issues. The state of the power sector in India is currently characterized by an inad- equate level of generation capacity, a high level of transmission and distribu- tion losses, poor reliability of supply, and limited electrification rates. Power supply infrastructure and service quality have been identified as among the most binding constraints to economic growth. Power outages are frequent and affect growth. In 2007, the country faced a peak power shortage of 16.6 percent and an energy deficit of 9.9 percent. As a result, more than 60% in- dustries rely on captive power plants (Rud 2009) and the captive generating capacity connected to the Grid was 19.5 GW at the end of March 2007 (CEA 2008a), which rep- resents about 13.3 percent of the overall installed capacity in India. A recent study by the Manu- facturers Association for Information Technology (MAIT) and Emerson Network Power India (ENPI) reveals that corporate India may have lost Rs 43,205 crore (about US$9.9 billion) in 2008 as a result of the high occurrence of power outages, both scheduled and nonscheduled. Such losses amount to 1 percent of GDP, and have almost doubled since 2003. Although unevenly distributed and high, the average level of aggregate technical and commer- cial losses has been decreasing, from 34.3 percent in 2004 to 32.1 in 2006 (CEA 2009). Reducing those losses further to 15 percent, as currently envisaged under the government-sponsored Ac- celerated Power Development and Reform Program, will generate additional revenues of about US$4.4 billion and help ease some of the supply constraints. Addressing the issues above has been rather difficult. India's performance in meeting its plans has consistently been poor, as it has achieved only about 50 percent of its generation capacity expansion targets in the past three Five Year Plans (Table 2.1). According to the Centre for Moni- toring Indian Economy, the trend continues as power generation capacity addition is 68 percent below target in 2009. The "White Paper on Strategy for 11th Plan,' prepared by the Central Elec- tricity Authority and the Confederation of Indian Industry (CEA and CII 2007), recognized that the power sector is poised for long-term capacity additions and pointed to a number of reasons for slippages in the 10th Plan (in order of decreasing importance): (a) shortages of raw materials and supplies; (b) difficulties in reaching financial closure; (c) delay in deploying supercritical technol- ogy; (d) non-availability of natural gas; (e) delay in implementation of hydropower projects due to technical, environmental, and social issues; (f) delay in procurement, in particular for state proj- ects; (g) delay in investment decisions in hydropower projects; and (h) legal issues. The surprising findings were that slippages were more common in private sector projects (only 27.1 percent of the 10th Plan target was achieved), and slightly higher for thermal-based projects (47.6 percent achievement rate) compared to hydropower projects (54.8 percent achievement rate). This trend points to the need for an improved investment climate for private sector players. In addition, the White Paper suggests that a substantial augmentation of the existing domestic manufacturing ca- pability in thermal and hydropower generation and transmission could help reduce project delays. India has limited options to increase the overall contribution of renewable energy in the grid at current prices and levels of technology development. The government of India has one of the largest programs in renewable energy in the world, covering a wide spectrum of resources such as wind, solar, biomass, and small hydro. Of these, wind has been the most successful program, as India has the fifth largest installed capacity in the world at 9,755 MW in 2008 (MNRE 2009). However, the intermittent or variable nature of wind power, coupled with the moderate wind regime (with low load factors of 20 to 25 percent) in India, limits the capacity of wind power to provide baseload energy, especially in the absence of large energy storage capacities. Hydropower is a promising technology and India already plans to develop full technical capacity by 2031. Even with the development of the entire renewable energy potential (Figure 2.1), the electricity needs of the Indian population would not be met. While expanding the generating capacity, the government has also been focusing on supply-side energy efficiency, with mixed results. Nearly all coal power plants in the country rely on one tech- Table 2.1 1 Performance of Power Sector Targets in Five Year Plans PLAN# PLANT PERIOD TARGET (MW) ACHIEVEMENT (MW) % ACHIEVEMENT 8th Plan 1992-1997 30,538 16,422 53.8% 9th Plan 1997-2002 40,245 19,015 47.2% 10th Plan 2002-2007 41,110 21,180 51.5% Source: CEA and CII, 2007. 10 I Energy Intensive Sectors of the Indian Economy Figure 2.1 1 Renewable Energy Installed Capacity (2008) Compared to Potential in India 160,000 150,000 140,000 120,000 100,000 80,000 C. " 60,000 45,0000 40,000 20,000 21 5 2,344 0- 0 0 U Potential 0 Currently Installed Source: 11th Plan proposal MNRE, Government of India (As on January 31, 2009). nology (steam-based subcritical pulverized coal) (World Bank 2008b). According to CEA (2009), the national average efficiency on gross calorific value of the entire fleet of coal-fired power plants in the country has remained around 32 percent over the period 2004-2007, while the average plant load factor (PLF) has increased from 73.6 to 78.6 percent over the same period. These relatively poor performance and low efficiency of the coal-fired power plants are linked to the poor quality and under-pricing of coal. In general, inferior grades of non-coking coal are used for power genera- tion in India. According to the government's Integrated Energy Policy (Government of India 2006), the properties of coal used for power generation are generally not conducive to high combustion efficiency. The gross calorific value of coal burnt in India's power plants is only about 3500 kilocalo- ries per kilogram and generally lower than those of imported coal, the mineral matter (ash) content is in the range of 27-42 percent, the moisture content ranges from 7-20 percent, the volatile matter content ranges from 15-25 percent, and the sulphur content is generally very low. The low calorific values and high ash content lead to higher specific coal consumption (in comparison with imported coal), high un-burnt carbon losses, higher auxiliary power consumption, and low overall efficiency. In addition to these technical characteristics, pricing and coal supply chain issues make it dif- ficult to ensure higher efficiency in coal-fired plants. According to the government expert com- mittee report, "Road Map for Modernization of the Coal Sector" (Ministry of Coal, GOI, 2005), and the Integrated Energy Policy, there is a strong need for regulating coal prices in light of market realities, where hard sub-bituminous steam and metallurgical coals are produced largely through two public sector companies, Coal India Limited and Singareni Collieries Company Ltd. The pow- er industry uses coal because its prices are low and are anticipated to remain lower than natural gas prices. As noted in the government expert committee report, establishing a market mechanism for pricing coal in India is not simply a matter of having multiple producers and consumers with minimal entry barriers. Competition and the price determining the demand-supply balance for coal and its alternatives is intricately tied to this regulatory environment. Domestic gas is seeking import parity pricing (as most products in the petroleum sector) even whilst power prices to end- II. Sectoral Overview and Study Approach I 11 users are regulated. Transport costs for both fuels (rail and port infrastructure for coal, and ship- ping, port, and pipeline infrastructure for gas) are an important part of the equation. The "Road Map for Modernization of the Coal Sector" (Ministry of Coal, GOI, 2005) and the Integrated Energy Policy recommend that prices of coal for power generation be distinguished from those for other sectors-which use higher-quality coal-and regulated. The regulation of coal price has to differentiate the pricing for power generation, since it consumes 80 percent of the domestic production and the quality of coal it consumes is too low for the steel and cement sec- tors. Further, the power sector has to be serviced with long-term contracts and special investments in coal rail transport. Other problems in the coal supply chain need to be addressed to further enhance the quality and quantity of coal supply to the power stations, thus enabling efficiency enhancements. These include lack of availability of coal reserves, large demand-supply gap, low productivity and ageing manpower, and failure to augment exploration capacity and increase un- derground operations. These problems have led to growing import dependence. Nuclear power plants currently provide approximately 2 percent of India's electricity, and plans are in place to double that capacity by the end of the 11th Plan (to 7.28 GW). Although development in this area has been hampered by India not being a signatory to the Nuclear Non-Proliferation Treaty, India recently signed the U.S.-India Nuclear Cooperation Approval and Nonproliferation En- hancement Act in October 2008, which allows India to purchase nuclear fuel and technology from the United States. Other nuclear agreements have been signed with several countries since, but chal- lenges remain in the nuclear equipment supply chain because of the limited availability of suppliers. In the network segments, although on a declining trend, the technical transmission and distribu- tion (T&D) losses remain relatively high. Across the country, they have decreased from an average 31.3 percent in 2004 to an average of 26.9 percent in 2007 (CEA 2009). According to the Ministry Figure 2.2 | Indian Power Sector: Institutional Framework Mega Power State Licensee Generation CGS ProPICPP Projects Owned owned Transmission PowerGrid (CTU) R : Distribution Distribution I EBs Licensees Source: Authors. CGS = central generation station, IPP = independent power producers, CERC = Central Electricity Regulatory Commis- sion, CPP = captive power plants, CTU = central transmission utility, REB = Regional Electricity Board, RLDC = Regional Load Dispatch Centre, SEB = State Electricity Board, STU = state transmission utility, SERC = State Electricity Regula- tory Commission. 12 I Energy Intensive Sectors of the Indian Economy of Power (MoP 2010) the high T&D losses are the result of ageing and overloaded networks due to inadequate investments in transmission and distribution, improper load management, inadequate reactive power compensation, and uncontrolled expansion of sub-transmission and distribution networks with large-scale rural electrification through long 11-kilovolt and low-tension lines. Several states have launched with relative success different programs to curb the technical losses such as the use of aerial bunch cables, high voltage distribution systems, and segregation of feeders to have dedicated supply to agriculture consumers. Reducing technical transmission and distribu- tion losses is one of the most cost-effective means of improving power sector performance while simultaneously reducing CO2 emissions. Reducing technical losses is in fact equivalent to adding new capacity with no increase in CO2 emissions. This study examines the impact of varying the pace of reducing technical losses in across the scenarios. The difficulties in addressing energy shortages and improving the efficiency of the power sec- tor are further compounded by the multiplicity of actors in the sector. As shown in Figure 2.2, the electricity sector is handled both at the central and the state levels, since power is a concurrent subject (shared jurisdiction) under the Constitution. While many progressive policies have been recently enacted at the central level, the state actors remain the main implementation agents, with significant interfaces with the end-users. The states have the responsibility for managing the distribution sector, where the political economy issues have the highest bearing on sector performance. As a result, more than six years after the enact- ment of the Electricity Act (2003) and associated policies, inadequate electricity service delivery mechanisms remain a critical constraint on India's growth, its economic competitiveness, private investment in energy-dependent industry, and poverty alleviation efforts. In the power module, the model starts building new power plants in 2012 and continues to build as required to meet demand (with plant mix defined on a scenario basis), according to gov- ernment of India plans, adjusted as necessary under each scenario. Demand is estimated separately for households, nonresidential buildings, and energy-intensive industries, excluding small and medium-size enterprises (SMEs) except for iron and steel manufacture. Outside of these sectors, demand is based on an elasticity with respect to GDP that declines from 1 in 2006 to 0.67 in 2023 and remains constant thereafter (CEA 2007d). In thermal generation, new plants are added and, for the existing coal-fired plants, the low- est-performing plants (in terms of thermal efficiency and utilization) are rehabilitated or retired. New additions as well as the renovation and modernization of coal-fired power plants follow the strategy set by the government of India. The model considers captive demand based on historical performance and stabilizes its use once grid supply increases sufficiently to meet new electricity demand (situation of no shortage or surplus). The model subtracts captive generation from total demand to arrive at the demand met by the grid. Technical transmission and distribution losses are added to the grid-based demand and shortages/spinning reserves are considered to calculate the gross electricity supply needed for the grid. Transmission and distribution losses are built in the model in accordance with plans to reduce them over time based on the scenario considered. In the case of hydropower, a similar process to thermal generation is followed, taking into account government of India plans. Besides large-scale hydropower, the model adds renewable energy, in- cluding wind power, biomass, and small hydro, according to government of India plans, adjusted as necessary under each scenario. Table 2.2 shows construction costs of new representative power plant units used in the study and their associated CO2 emissions per kWh of electricity generated. The emission levels in the table are for new plants and increase over time with plant usage. For each existing plant, the CO2 emissions per kWh were derived from the Central Electricity Authority's (CEA's) database for 2007-08 (CEA 2008). The total CO2 emissions for grid electricity are computed based on plant type, size, technol- ogy, and age; fuel type; operating conditions; and the dispatch order minimizing variable costs. II. Sectoral Overview and Study Approach I 13 Table 2.2 Costs and Emission Characteristics of New Power Plants INVESTMENT IN CAPACITY IVSMNINCO EMISSIONS TYPE SUB-TYPE CPIT PLANT & EQUIPMENT FUEL 2 (MW) (US$/kW)a (g/kWh) Hydro Large storage b 1,325 - 0 Hydro Run of river b 1,104 - 0 Nuclear Heavy water reactor 220 1,435 - 0 Coal Subcritical 500 883 Domestic 980 Coal Subcritical 250 930 Domestic 1,000 Coal Low supercriticalc 660 945 Domestic 949 Coal High supercriticalc 800 969 Domestic 919 Coal Ultra supercritical 1000 1,041 Domestic 874 Coal Subcritical 500 844 Imported 957 Coal Subcritical 250 890 Imported 977 Coal Low supercritical 660 910 Imported 928 Coal High supercritical 800 942 Imported 898 Coal Ultra supercritical 1,000 984 Imported 854 Natural gas Open cycle 250 662 - 492 Wind - 100 993 - 0 Solar CSP with storage 15 6,071 - 0 Sources: Central Electricity Authority 2007; Mott and McDonald 2007; and Authors. a. Costs provided in rupees in 2007 and converted to U.S. dollars at a rate of 45.3 rupees to the dollar. b. Costs independent of size. c. Low and high supercritical refer to low and high steam temperatures and pressures. - Not applicable. HOUSEHOLD ELECTRICITY CONSUMPTION Household electricity consumption in 2007 represented approximately 21 percent of the total electricity demand in India. As with all sectors, household electricity consumption is slated for significant growth. According to the Census of India, India's total population will reach 1.4 billion by 2026, and this, coupled with increasing urbanization (urbanization rate is projected to rise from 29 percent in 2006 to 33 percent in 2026), decreasing household size, and increasing household income and expenditure, is expected to drive greater ownership and use of electrical appliances. Against this background, the objective of the Standards and Labeling Program of the BEE is to enable the consumer to assess the cost-saving potential of the marketed appliances and equipment and make an informed choice about energy savings. The program is expected to affect energy sav- ings in the medium and long run while positioning domestic industry to compete in markets with mandatory energy efficiency standards. The program was launched in May 2006 and currently covers frost free refrigerators, direct cool refrigerators, tubular fluorescent lamps, air-conditioners, pump sets, ceiling fans, electric geysers and color television sets. According to a limited survey conducted in this study, lighting accounts for approximately 30 percent of total residential electricity use in 2007, followed by fans, refrigerators, electric water heat- ers, and televisions. Approximately 4 percent of total residential electricity used was for standby 14 I Energy Intensive Sectors of the Indian Economy power-the apparently small amount of power R"7 that many modern appliances consume when they are turned on. Appliance penetration, par- ticularly of refrigerators and air conditioning units, is expected to be the main driver of growth of residential energy demand by 2020 (McKin- sey Global Institute, 2007). In order to build an aggregate of household electricity demand, the appliances that were considered included fans, air-conditioners, air coolers, refrigerators, radios, television sets, washing machines, compact disc (CD) players/video cassette recorders (VCRs), computers, lighting, electric water heaters, ovens, toaster, microwave ovens, and booster pumps. The study projects household size and ex- penditure (as a proxy for household income) to 2031 by location (urban, rural) (Figure 2.3). For each location, households are further separated into centiles containing an equal number of people. The study forecasts the number of new electrified households and their expenditure levels for each year based on historical data, and appliance ownership and usage patterns of electrified households as a function of location and household expenditure. Modeling of appliance owner- ship was based on data from National Statistical Survey Rounds 58 and 61, the survey conducted by the National Council of Applied Economic Research in 2004, and the survey of 600 households conducted in 2007 as part of this study. New appliance sales are derived from the overall annual growth in ownership and the replacement of appliances in service that have been scrapped during that year. The appliance ownership calculation by location and centile-combining the number of households owning each appliance with the number of appliances per household-and assump- tions about appliance usage yield the aggregated household electricity demand. Figure 2.3 1 Household Size Distribution, Urban (left) and Rural (right), against Mean Household Expenditure Urban Household Size Against Mean Household Rural Household Size Against Mean Household Monthly Expenditure Monthly Expenditure Persons per Household Persons per Household 7-7 6 5- 5 4- RaHsoSzAite Huh 3- 3 .. 2- 2- 0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70 Expenditures in Thousand Rupees per Month (2007 Rupees) Expenditures in Thousand Rupees per Month (2007 Rupees) -2007 - 2015 2020 - 2025 -2031 Sources: National Statistical Surveys and Authors' calculations. Note: Study projects household size and expenditure as a proxy for household income. 11. Sectoral Overview and Study Approach 1 15 NONRESIDENTIAL BUILDINGS India has historically seen a near-consistent 5 percent rise in annual energy consumption in the residential and commercial sectors. Building energy consumption increased its share from 15 per- cent in the 1970s to nearly 33 percent in 2004. This growth has been particularly marked in the commercial sector with a growth rate of 8 percent, and the 17th Electric Power Survey forecasts an annual growth of 10.5 percent in the commercial sector over the next five years. The Construction Industry Development Council estimates that the total new construction floor space added in the commercial and residential sectors was about 43 million square meters in 2004, of which about 23 million square meters was in the commercial sector. The new construc- tion trend shows a consistent annual growth rate of about 10 percent. Gross fixed capital forma- tion shows a similar trend, with more than 18 percent annual growth in the nonresidential build- ings sector between 2000 and 2005, with the bulk of the growth taking place in the private sector (MOSPI 2008). Figure 2.4 shows this historical trend in new construction. Energy use in buildings is affected by the physical characteristics of the buildings, including building design, structure, and layout, location, equipment efficiency, and the occupants' energy- related behavior. Specifically, the two most important parameters that determine the energy use in this sector are the building floor space and the end use technologies in place. These two measures provide different aspects of commercial building use, which allow energy analysis to focus on the characteristics of building use as they relate to either the building stock or the amount of floor space. Energy use is also driven largely by the number and type of energy-using equipment in use and the hours of operation of the building. An additional factor is the difference between the energy consumption patterns in existing buildings and those in new stock. Of the total commercial floor space in India, about 30 percent is public sector. The distribution further indicates that warehouses, offices, and schools account for the largest share of total floor area, followed by health care and other services. Schools are primarily in the public sector while of- fices and health have an equal proportion in the public and private sectors. Across all these groups, annual electricity use for lighting and cooling in new construction currently is 173 kilowatt-hours (kWh) per square meter, 27 percent higher than the current average of 137 kWh per square meter for the existing stock. While aggressive efficiency measures in lighting and cooling can reduce power consumption growth in new construction, they are likely to be fully offset in the existing Figure 2.4 Historical Trends in New Construction 45 - 40 35 - - 30 - S25- S 20 0 1998 1999 2000 2001 2002 2003 2004 - Total -Residential uu Commercial Source: Sathaye, et al., 2010. 16 1 Energy Intensive Sectors of the Indian Economy stock by the increased level of appliance use due to modernization of the buildings, both in terms of building renovation and of purchase and use of more electric equipment. The model considers retail stores, government and private offices, schools, government-owned and private hospitals, hotels, and others. Electricity use for lighting, cooling, fans, and other activi- ties are considered. Three technologies are considered for lighting and six technologies for cooling. INDUSTRIAL SECTOR With 35 percent of final energy consumption, the industrial sector in India is particularly energy- and carbon-intensive. Industrial value added grew at an annual average rate of 5.6 percent in the 1990s and 7.3 percent during 2000 to 2005. Industry contributed 26 percent of GDP in 2005 (MO- SPI 2007). The industrial sector can be broadly defined as consisting of energy-intensive industries (such as iron and steel, fertilizer, petroleum refining, cement, aluminum, and pulp and paper) and light industries (for example, food processing, textiles, wood products, printing and publishing, and metal processing). The energy-intensive industries accounted for 66 percent of the energy con- sumed in the sector in 2005 and this report focuses on these industries: (1) iron and steel, includ- ing large integrated steel plants and small-scale industries; (2) aluminum; (3) cement; (4) fertilizer; (5) refining; and (6) pulp and paper. India has nearly 3 million SMEs, which constitute more than 80 percent of the total num- ber of industrial enterprises in the country. The Indian Institute of Foreign Trade estimates that approximately 60 percent of the country's GDP comes directly or indirectly from such enterprises. Numerous sector-specific studies have confirmed that energy intensity in industry can be reduced with the widespread adoption of commercially available technologies, but SMEs have fallen behind larger Indian industry benchmarks in productivity, technology modernization, and energy efficien- cy. The SMEs are facing high and rising energy costs and increasing global competition. In the past, wide-ranging governmental fiscal incentives and other interventions have been offered to SMEs to upgrade technologies and improve efficiency, but they have not resulted in large-scale replication. Industry has recorded greater energy efficiency improvement since the late 1980s than any other sector in India (Roy 2007). In addition, total primary energy consumption in industry has increased at a slower rate than the sector's value added since the mid- 1980s. Many factors account for this trend, including greater competition following the liberalization of the economy in the early 1990s, rising energy prices starting in the late 1990s, and the promotion of energy efficiency schemes through the BEE since the introduction of the Energy Conservation Act in 2001. How- ever, if barriers to energy efficiency improvements in India can be overcome, there appears to be significant, potentially exploitable energy- and emission-saving opportunities in Indian industries. The cement industry has recorded by far the most impressive energy intensity reduction, as shown in Figure 2.5. In 1973, iron and steel was the largest consumer of coal (38.5 percent) of the six industries covered in this study, followed by cement (27.8 percent) and textiles (16.8 percent). In 1983, the cement industry exceeded the iron and steel industry in coal consumption. In 2000, the cement and iron and steel industries each consumed 30 percent of industrial coal use. All the principal industries have shown a declining emissions intensity in recent decades (Figure 2.6). Between 1970 and 2001, the aluminum, cement, and fertilizer industries achieved the largest reduction in emissions intensity (right graph). Textiles, paper, and iron and steel reduced emis- sions intensity less (left graph). Since 1989, however, the emissions intensity declined only margin- ally for all industries, except for cement where the significant decline continued, and textiles, where the intensity increased. The six energy-intensive sub-sectors modeled in this study are described in detail in Annex 3. In all three scenarios, the model assumes that new plants that are added adopt best energy-efficiency II. Sectoral Overview and Study Approach I 17 Figure 2.5 I Energy Intensity of the Six Energy-Intensive Industries from 1973 to 2001 700.0 600.0 6 500.0 4 400.0 0 S300.0- 0 0 0 O & 200.0 - 100.0 - 0.0 1973-74 1978-79 1983-84 1989-90 1995-96 2000-01 Textiles U Paper F&P 0 Cement U Iron & Steel 0 Aluminium Source: Sathaye, et al., 2010. Notes: F&P = Fertilizer and petrochemical industries. Energy intensity valued at 1995 prices. Figure 2.6 | Emission Intensity of Industries - 20.00 70.00 o ~60.00- 16.00 600 12.00 50.00 0 8.0 0 4, 0.00 - 8.00 V4.00 ______ 400 0 10.00 00 (U (UI 15 0.00 0.00- 0 0) T 0) LO) 0) '( 0 fl 00 0) 0 0r~ 00 t 0 - 01 0 0 0 0 Textiles - Paper - Iron & steel - Cement - Aluminium Fertilizers & Petrochemicals Sources: Dasgupta and Roy 2000, 2001; Dasgupta 2005. practice appropriate for India at that point in time. More specifically, the model assumes that energy efficiency increases every year by 0.5 percent beginning in 2011 in all newly purchased and installed equipment and plants. ROAD TRANSPORT SECTOR Road transport is a significant consumer of energy in the urban environment as well as the major mode of transport for intercity movement, with 65 percent share in freight and 90 percent in pas- 18 | Energy Intensive Sectors of the Indian Economy senger. It consumes almost exclusively petroleum products and can be expected to exhibit large growth in energy requirements and GHG emissions over the coming years as rising household income and urbanization promote private vehicle ownership and use. Although India is relatively less urbanized than many countries, its urban population has in- creased by over 100 million since 2001. Cities are increasingly becoming the engine of the national economy, accounting for about 60 percent of India's GDP. Emissions from the transportation sector are the fastest growing of any sector. India's GHG emissions from transport rose from approximately 80 million tonnes per year in 1994 to approxi- mately 119 million tonnes per year in 2000. In 2004, the transportation sector in India contributed about 8 percent of the country's energy-based GHG emissions. About 90 percent of these were from road transport, compared to a global average of 72 percent. It is important to note that roads carry approximately 65 percent of the total freight and 90 percent of passenger traffic across the country. As India grows and becomes further interconnected, GHG emissions are likely to acceler- II. Sectoral Overview and Study Approach I 19 ate if the current trend of emission growth continues. Vehicle population in the country is also growing, with rates of 5-15 percent per year, depending on the class of vehicle. The transport sector faces a number of challenges. It has mixed ownership and management, with the public and private sectors participating in both development and operation of transport services. Until a few years ago, the provision of transport infrastructure for all modes was the exclusive responsibility of the public sector. In cases where the public sector is responsible for provision and maintenance of infrastructure and the private sector for operations, the two sectors at times work at cross-purposes. To maximize their earning and profits, freight operators tend to overload vehicles beyond the upper axle-load limit, thereby damaging the road pavement. On the other hand, the government does not provide appropriate infrastructure to carry high axle-load traffic, enabling minimization of costs. Inadequate funds are allocated for road maintenance, resulting in poor road surfaces and a consequent increase in the operating costs of road vehicles. Data collected on road conditions in several states for a World Bank-funded project show that 30-40 percent of state roads are in poor to bad condition, increasing fuel con- sumption by 8 to 12 percent compared to well-maintained roads. In addition, better roads allow higher highway cruising speeds and larger trucks. Based on authors' calculations, the combined 20 I Energy Intensive Sectors of the Indian Economy impact of these improvements can reduce GHG emissions per tonne of road-freight exceeding 25 percent. Given the amount of vehicle and freight traffic, large fuel savings could be achieved countrywide if roads were properly maintained, and freight vehicles properly loaded. Further, India is also facing infrastructure capacity constraints in all subsectors of the freight transport system. The high-density traffic corridors connecting the metro cities are facing congestion in both the rail and road subsectors. All measures that could alleviate the congestion in the short to medium term in the rail and road subsectors have long gestation periods, high transaction costs, seri- ous operational weaknesses, and capacity constraints related to the introduction of new technologies in rolling stock and signaling systems, use of information technology to optimize utilization of exist- ing capacities, and better infrastructure capable of serving higher unit loads. In the longer term, it is clear that India will have to invest in capacity additions to alleviate congestion and improve service delivery in a diverse economy. Such investments could include high-speed roads capable of taking higher axle loads; larger, more fuel-efficient, and less polluting vehicles; heavier rail and longer freight trains; and faster freight wagons to reduce the speed difference between passenger and freight trains. Due to the accelerated rate of urbanization, the provision of urban infrastructure services has lagged far behind the growing demand. Urban infrastructure bottlenecks are increasingly becom- ing a critical constraint on further urban economic growth. Other factors exacerbating the situa- tion include: (a) insufficient funding for transport infrastructure investments and maintenance, linked to insufficient attention to cost recovery and user charges; (b) imposition of social service obligations on the public sector transport operators (particularly Indian Railways and publicly op- erated bus companies) without compensation, but also without accountability for performance; and (c) rapid motorization (increasing personal transport). There are significant technological developments in the manufacturing of passenger vehicles in India that will influence GHG emission growth. Despite the delay in the start of the full pro- duction of its Nano, Tata Motors is set up to manufacture 250,000 units annually, against annual new passenger car sales of about 1.3 million in 2008. All other manufacturers are also preparing to launch low-cost cars, although none are planning to match the price of Nano. Making cars more affordable will clearly accelerate the growth of car ownership. The National Urban Transport Policy offers some guidelines and financial and fiscal incentives to the states and cities for designing their urban transport strategies. It promotes transit-oriented development of new towns and the creation of comprehensive mobility plans in existing cities with the objective of reducing overall transport demand and integrating land use and transport planning. It encourages state governments to set up a dedicated urban transport fund with pro- ceeds from earmarked state and local taxes, and traffic demand management measures such as parking charges, to cover the urban transport investment requirements. The policy stresses the need to establish modern urban bus services in all cities (most cities currently do not have these) and has produced standardized urban bus specifications to promote quality services. The central government is also providing substantial financial assistance for metro rail projects and bus rapid transit systems, and envisages setting up unified metropolitan transport authorities in all cities with a population of 1 million or more to facilitate coordinated planning and implementation of urban transport programs and projects. However, there are many institutional barriers to be overcome to catalyze environmentally sus- tainable urban development and transport development programs at the metropolitan area, city, or municipal levels. According to recent work by the European Commission (European Com- mission 2007), a combination of technical and nontechnical measures will be required to explic- itly limit GHG emissions from road transport. In India, achieving this will be considerably more complicated and any delay in initiating a major structural change in urban design and transport management locks in more GHG emissions for decades. The modeling of road transport in this study examines consumption of gasoline, diesel, com- pressed natural gas, and bioethanol used by motor vehicles of all sizes. Private vehicle ownership is II. Sectoral Overview and Study Approach I 21 modeled in exactly the same way as household appliances, using urban and rural centiles. Because data to model the number of two-wheelers, but not passengers, per household were available, each car-owning household is assumed to have only one, thereby giving a lower bound on car owner- ship. The model takes into account penetration of low-cost passenger cars in the market. To offset the inability to model the number of cars owned by households, which lowers car ownership across the economy, the model does not assume that the sales of low-cost cars reduce the sales in other car segments. GENERAL ENERGY EFFICIENCY IMPROVEMENT Despite the financial attractiveness of energy efficiency investments and several efforts to build the Indian technical capacity to deliver energy efficiency solutions, there has been limited adoption of efficient technologies and replication of best practices. As in many countries, the risk-adjusted profitability is higher for capacity expansion than for energy efficiency measures, and in a rapidly growing economy, there is a tendency for greater investments in capacity expansion. In addition there are numerous barriers and market failures for energy efficiency investments in India, similar to those typically seen in projects globally, as well as India-specific constraints such as access to finance, which is particularly acute but not limited to small- and medium-size enterprises (SMEs). SMEs constitute more than 80 percent of the total number of industrial enterprises in the country, accounting for 45 percent to industrial production, 17 percent of GDP, and 40 percent of India's exports. Indian companies typically face constraints in accessing adequate and timely financing for energy efficiency on competitive terms, particularly longer-tenure loans, but also, in the context of the 2008-2009 financial crisis, working capital loans. In some cases, pricing policies contribute to significant distortions and inefficiencies-such as free power to consumers in the agricultural sector, leading to unsustainable use of natural resources. Other well-documented barriers to the adoption of energy efficiency and demand-side man- agement schemes in India include: (a) high up-front transaction costs; (b) lack of incentives to utilities who perceive demand-side management as a loss of market base; (c) lack of corporate leadership on energy efficiency and focus on increased outputs, commercial competitiveness, quality, and profitability; (d) lack of intermediation capacity and incentives; (e) the absence of a reliable measurement and verification regime; and (f) lack of trained personnel to integrate the technology, financial, and commercial aspects. Although there is lack of data to track past performance, several studies point out that actual implementation of targeted government programs aimed at energy efficiency and demand-side management has been sluggish. The 8th Five Year Plan ear-marked Rs 1,000 crore (US$200 mil- lion) for targeted programs in energy efficiency with potential savings of 5 GW of installed power generation capacity and 6 million tonnes of petroleum products. As a result of objectives set out in the 9th Five Year Plan, the Energy Conservation Act was enacted and the Bureau of Energy Efficiency (BEE) was established. The 10th Five Year Plan targeted energy savings of 85 million kWh-about 13 percent of the estimated demand of 719,000 million kWh-by the end of the 10th Plan. There were no specific funds allocated to meet the energy-saving targets. Under the various initiatives undertaken by the BEE-the Bachat Lamp Yojana (BLY), the Standards and Labeling Scheme for household appliances, the agricultural and municipal demand-side management, and the Energy Efficiency in SMEs-savings equivalent to 2,600 MW of generation capacity has been targeted (BEE, 2009). 22 I Energy Intensive Sectors of the Indian Economy III. Scenario 1: Five Year Plans cenario 1, alternatively called Five Year Plans scenario, is based on projections of expansion of electricity generation capacity in the 11th (April 2007-March 2012) and 12th (April 2012-March 2017) Five Year Plans, the Integrated Energy Policy which outlines projections until the 15th Five Year Plan (April 2027-March 2032), papers by the 11th Plan Working Group and the CEA, programs led by the Ministry of New and Renewable Energy such as Jawaharlal Nehru National Solar Mission, and model pro- jections on growth in industry, nonresidential buildings and transport. The scenario includes planned investments to expand capacity, increase reliability, and strengthen energy efficiency. KEY ASSUMPTIONS As with all other scenarios, GDP is assumed to grow at an average rate of 7.6 percent between 2009 and 2031. Beyond the 12th Five Year Plan, the model assumes an elasticity of demand for electricity with respect to income falling from 0.78 in 2017 to 0.67 in 2023 and constant thereafter. More specific assumptions include the following: * In thermal generation, the share of supercritical coal-fired plants will increase to 20 percent in the 11th Plan, 50 percent in the 12th Plan, 70 percent in the 13th Plan, and 90 percent thereafter. For the existing coal- fired plants, the strategy is to rehabilitate or retire 5 GW of the lowest- performing plants within the 11th Plan, and 10 GW in the 12th Plan. In addition, the Government of India plans to renovate and modernize about 27 GW of coal-fired power plants by 2017, which will improve energy efficiency (World Bank, 2009c). * Technical transmission and distribution losses are reduced from 29 per- cent in 2005 to 15 percent in 2025 in accordance with existing plans. * Captive demand grows from 78,000 GWh in 2006 to 131,000 GWh in 2011 and then remains constant thereafter (MoP, 2007). This is subtract- ed from the total demand to arrive at the demand met by the grid. Trans- mission and distribution losses are added to the grid-based demand and shortages/spinning reserves considered to calculate the gross electricity supply needed for the grid. . . * In the case of hydropower, the Government of India has an ambitious plan to realize the full potential (150 GW) by 2031, which is a fivefold increase in installed hydropower capac- ity within the next two decades. The Government also has interim targets of a 50 percent increase in hydropower capacity in the 11th Plan (from 35 GW to 51 GW) and another 59 percent increase in the 12th Plan (from 51 GW to 81 GW). * Besides large-scale hydropower, the Five Year Plans envisage increasing renewable energy, in- cluding wind power, biomass, and small hydro, to 10 percent of installed capacity by April 2012 (from the current share of 8 percent). According to current plans, India would have harnessed 88 percent of its available potential for wind and 43 percent of small hydro potential by 2021. KEY FINDINGS Overall, the model predicts that, in the five sectors, CO2-equivalent (CO2e) emissions will increase from 1.1 to 4.9 billion tonnes in 2031, despite significant investments to develop domestic renew- able energy sources such as hydropower, wind and biomass as well as improvements in efficiency as envisaged in the Integrated Energy Policy and the 1 Ith Five Year Plan. Among the various sectors, grid electricity supply accounts for 51 percent of the emissions increase, followed by 20 percent for industry, 16 percent for road transport, and 4 percent for captive power generation (Figure 3.1). Nonresidential buildings account only a small share of the overall increase according to the model. As per the model, India's installed power generation capacity will need to increase fivefold from 145 GW to about 720 GW by 2031. The emission increase from the power sector dominates since model projections show that coal-fired generation plants (59 percent of installed capacity by 2031 as shown in Figure 3.2) are likely to continue to be the mainstay of energy supply to the grid, de- spite considerable efforts to increase the share of renewable and other lower-carbon energy in the power generation mix. By 2031, the share of coal-fired plants will likely increase from 55 percent Figure 3.11 Total CO2 Emissions in Scenario 1 (billion tonnes) 5.0 4.5 4.0 0 3.5 o 3.0 2.5 Fo2.0 0 1.5 1.0 0.5 0.0 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2028 2031 Grid supply electricity = Captive generation Industry = Nonresidential Road transport Source: Authors' calculations. Notes: Electricity supply-grid and captive-covers electricity used across the entire economy, including those areas not covered by this study. Industry covers process-related emissions and direct use of fossil fuels in the six subsectors. Non- residential covers direct use of fossil fuels. Road transport covers gasoline, diesel, compressed natural gas, and bioethanol used by motor vehicles of all sizes. Nonresidential buildings contribute so little from using diesel and liquefied petroleum gas (LPG) that their total contribution is not visible in the figures. Ill. Scenario 1: Five Year Plans I 25 Figure 3.2 | Share of Coal-Based Generation Capacity in 2031 in Scenario 1 Installed Grid Capacity 2007/8 E Hydro 2031/32 3% o/ 1% U Coal 2% 3% 0% MGas 0% 2% gOther Thermal m Nuclear a Wind Biomass 141 GW . Solar 609 GW Source: Authors' calculations. 2007/8 plot is based on the CEA C02 Baseline Database for the Indian Power Sector updated with data from CEA website (November 5, 2009) on commissioned plants and those under construction. to 65 percent in the generation capacity (MW), but the carbon intensity of the sector will likely decrease (Figure 3.3). This is simply a consequence of the lack of natural resources in India, lack of availability of lower-carbon technologies such as solar at affordable prices, implementation issues, and the abundance of (global and domestic) coal and its relative cost advantage. Among the various efficiency improvement options, the reduction of technical transmission and distribution losses clearly appears as a measure that can both reduce GHG emissions and provide significant co-benefits in terms of energy security and the reduction of local air pollution. If one considers a transmission and distribution loss reduction from the current estimated level Figure 3.3 I Evolution of Grid Electricity Supply and Associated CO2 Intensity 3,500,000 1,050 3,000,000 950 2,500,000 850 E 2,000,000 750 12 00 0)0 LUU 500,000 450 0 350 5 0 0 0 0 0 0 0 0 0 0 0 0 Ln r, 0) -1 rn Ln r, 0) -1 rn Ln r, a) - C 0 0 .-1 -1 .-1 ,-1 .- rj r4 rq C r'J i n o 0 C C C 0 0 C C 0 0 0 0 0 Source: Authors' calculations. 26 I Energy Intensive Sectors of the Indian Economy of 29.3 percent to 15.05 percent in 2025 as planned, then the energy supplied through the grid decreases by a total of 16 percent of supplied power over the 25-year period. In Scenario 1, the tonnes of CO2 per tonne of product in industry fall as newer, more efficient production capacity is added to meet the growing demand. Between 2007 and 2031, the integrated steel producers reduce their emissions intensity by more than 19 percent, small iron and steel plants and fertilizer manufacturers about 17 percent, aluminium and cement manufacturers about 12 percent, pulp and paper 8 percent, and refining less than 1 percent. In nonresidential buildings, the changes in scenario 1 from 2007 to 2031 are complex since new buildings have higher specific energy consumption per square meter than pre-existing buildings. Ener- gy consumption in pre-existing buildings also increases as more appliances and equipment are added. These are offset by improvements in appliance efficiency. Overall, the average CO2 intensity (tonnes of CO2 per square meter of floor space) of nonresidential buildings decreases from 2007 to 2031 by 7 percent, ranging from an increase of 11 percent for hospitals to a reduction of 25 percent for schools. The tonnes CO2 emitted per household from electricity consumption rises 50 percent from 1.1 to 1.7 from 2007 to 2031 despite appliances becoming more efficient, because more households gain access to electricity and rising income spurs greater appliance ownership and use. The rise in electricity consumption is concentrated particularly in low-income households. Between 2007 and 2031, the share of electricity use by the bottom third of the population increase from 13 per- cent to 19 percent in urban areas and from 11 percent to 23 percent in rural areas. During the same period, the top third of the population will record a decreasing relative share, from 61 percent to 49 percent for urban and from 64 percent to 43 percent for rural. However, electricity consumption in India will still remain far below that in the European Union or North America. For example, electricity consumption of the top third of the Indian population in 2031 is expected to be only one third of the EU-15 average electricity consumption of 2004. The share of lighting in the total residential electricity use will decline from 30 percent to 21 percent by 2031 due to the increased use of other appliances. By that year, heating and cooling appliances are estimated to consume 270 terawatt-hours (TWh) a year, or 48 percent of total resi- dential electricity. Of this, the largest consumption is for operating fans (36 percent), followed by electric water heaters (26 percent), air coolers (20 percent), and air conditioning (18 percent). Kitchen appliances are estimated to consume 102 TWh in 2031, or 18 percent of the total. Of the 102 TWh, 82 percent will be for refrigerators, followed by 6 percent for washing machines, 5 percent each for electric ovens and toasters, and 3 percent for microwave ovens. Entertainment ap- pliances as expected to consume another 77 TWh, or 13 percent of the total. Out of 77 TWh, televi- sion sets account for 78 percent, compact disc (CD) and MP3 players 13 percent, radios 6 percent, digital video disc (DVD) and video cassette recorders (VCRs) 2 percent, and computers 1 percent. In road transport, car ownership grows from 5.7 million in 2006 to 41.4 million in 2020 and to 113 million in 2031. Motorcycle ownership grows 40 million in 2006 to 164 million in 2020 and to 287 million in 2031. Nano and other low-cost cars are included; their inclusion increased the num- ber of cars at the expense of two-wheelers. Since the average CO2 emissions per passenger-kilometer by car are approximately three times those by motorcycle, vehicle fuel consumption and CO2 emis- sions increase over time. Rapid growth of vehicle purchase notwithstanding, car ownership in 2031 will continue to be lower than the average of about 350 for every 1000 persons in the countries belonging to the Organisation of Economic Co-operation and Development (Figure 3.4). The sensitivity analysis A on scenario 1, taking lower GDP growth, reduces both demand and CO2e emissions. In 2031, GDP in the sensitivity case is 19 percent lower than in scenario 1, and CO2e emissions are 14 percent lower, reflecting a GDP elasticity of CO2e emissions smaller than unity. Among the various sectors, grid electricity supply accounts for 47 percent of the total emis- sions, followed by 34 percent for industry, 15 percent for road transport, and 4 percent for captive power generation (Figure 3.5). Nonresidential buildings account only a small share of the overall increase according to the model. Ill. Scenario 1: Five Year Plans I 27 Figure 3.4 | Car Ownership per Thousand People (in relation to GDP per capita) 1990-2008 800 -Australia -Austria -Belgium 700- -Brazil -Bulgaria -Canada S600- -China -Colombia 0 -Egypt So00 -France -Germany 0 -India -Indonesia 400 -Ireland -Israel -Japan Korea, Rep. -Malaysia 200 'Mexico -Morocco South Africa -Sweden 100- / -Tunisia A Turkey United Kingdon United States 0 5000 10000 15000 20000 25000 30000 35000 40000 50000 GDP per capita, PPP (current international US$) Source: Author's calculations (for India) and data from OECD/IEA (2007). Note: A India is estimated to have 86 cars per 1000 people and a GDP/capita of US$3700 in 2031/2. US passenger cars include other 2 axle and 4 tire vehicles. Sources: EarthTrends (http://earthtrends.wri.org), World Bank Database, US National Transportation Statistics. Figure 3.5 I Emission Profile for Lower GDP Growth Sensitivity Analysis 4.5 4.0 ' 3.5 0 2 3.0 0 $ 2.5 o 2.0 S1.5 ca 1.0 0.5 0.0 FY2031 m Grid Supply Electricity N Captive Generation Industry (Percent) " Nonresidential H Road Transport Source: Authors. Notes: See notes for Figure 3.1. 28 | Energy Intensive Sectors of the Indian Economy IV. Scenario 2: Delayed Implementation of Supply Measures eeting all targets of Five Year Plans, as assumed in scenario 1, might require a paradigm shift in how power sector operations are conducted and monitored, projects are implemented (existing assets maintained and modernized, and new assets added), and sector devel- opment is planned. Scenario 2 is based on the achievement rates of the past three Five Year Plans and builds into its assumptions delayed implementa- tion of electricity supply measures. KEY ASSUMPTIONS Scenario 2 assumes that, relative to scenario 1, there will be delays with respect to the following measures: *A delay of five years in the transmission and distribution reduction loss program * Hydropower capacity added at half the rate, reaching by 2031 half of what is technically achievable * Supercritical coal-fired power plants built at half the planned rate * Wind, solar, and biomass-based plants built at half the planned rate. Unmet demand would be satisfied by additional captive power generation. Sensitivity analysis B on scenario 2 explores the implications of new capacity addition for the technologies mentioned above at 80 percent of the rates as- sumed in scenario 1. KEY FINDINGS In scenario 2, CO2e emissions increase from 1.1 to 5.1 billion tonnes in 2031, as shown in Figure 4.1. Among the various sectors, grid electricity supply now accounts for 43 percent of the increase, followed by industry which accounts for 33 percent. Road transport results in a 16 percent increase and captive power contributes about 8 percent to compensate for the decline in grid-supply. Non- residential buildings account for only a small share of the overall increase. Figure 4.11 Total CO, Emissions in Scenario 2 (billion tonnes) 6.0 5.0 0 8 4.0 O S3.0 0 2.0 1.0 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2028 2031 Grid supply electricity = Captive generation Industry = Nonresidential Road transport Source: Author's calculations. Scenario 2 shows the impact of slowing the addition of new capacity for higher-efficiency coal, hydro power larger than 10 MW, small hydro, wind, and biomass, together with a five-year delay in meeting the transmission and distribution loss reduction targets. Sensitivity analysis B limits the slippage in new capacity addition to 20 percent. As can be seen in Figure 4.2, the carbon intensity of the grid electricity supply rises as a result. By 2031, captive power generation is expected to sup- ply 14.4 percent of electricity (compared to 5.5 percent in scenario 1) and the carbon intensity of the grid increases to 820 g CO2/kWh (9 percent higher than the 750 g CO2/kWh in scenario 1). In sensitivity case B, by 2031, captive generation supplies 9 percent of electricity and the carbon intensity of the grid increases to 780 g CO2/kWh. Table 4.1 shows that delayed implementation lowers capital expenditures for grid electricity by about 15 percent. Captive generation covers the unmet electricity demand created by delayed implementation, giving a temporary relief to the public sector but incurring higher costs to the society as a whole. Over the medium term, a portion of investment in the power sector is shifted Figure 4.2 | Impact of Delayed Implementation in Scenario 2 on CO2 Intensity and Captive Power Generation Impact of Delayed Implementation on CO2 intensity Impact of Delayed Implementation on Captive Generation g/kWh Captive generation as percent of Grid generation 950 30% 900 25%5 50 20% 800 15% 750 10% 700 5% 650 0% - Five year plans (Scl) - Delayed Implementation (Sc2) - Five year plans (Sc) - Delayed Implementation (Sc2) - Scenario 2 sensitivity B Scenario 2 sensitivity B Source: World Bank staff calculations. 30 I Energy Intensive Sectors of the Indian Economy Table 4.11 Investment Costs for Life Extension, Efficiency Improvement, and New Capacity in Grid-Supplied Electricity BILLIONS OF 2007 RUPEES DIFFERENCE FROM SCENARIO 1 SCENARIO DESCRIPTION NPV (2007) TOTAL NPV (2007) TOTAL Scenario 1 Life extension and efficiency improvement 570 1,400 0 0 New capacity 8,000 24,000 0 0 Total 8,600 25,000 0 0 Scenario 2 Life extension and efficiency improvement 480 1,600 -90 200 New capacity 6,900 19,000 -1,100 -4,400 Total 7,400 21,000 -1,200 -4,200 % difference - - -14 -17 Sensitivity analysis B Life extension and efficiency improvement 490 1,700 -80 240 New capacity 7,800 22,000 -200 -1,800 Total 8,300 24,000 -300 -1,600 % difference - - -4 -6 Source: Authors' calculations. Notes: NPV computed using a discount rate of 10 percent. Rupees are in 2007 rupees. Total is the sum of annual investments without discounting. All numbers in the table are rounded off. Differences do not exactly match the differences between the numbers in the table as a result. from the grid system to privately-owned, smaller-scale power generators throughout the economy running mainly on diesel. In sensitivity analysis B, less slippage raises capital expenditures for grid electricity, and the overall capital expenditure level is only about 5 percent lower than in scenario 1. The direct expenditure on rehabilitation and modernization and new plant and equipment for grid-supply over the 23-year period in the model shows a decrease of 17 percent in scenario 2 when compared to scenario 1 and a decrease of 6 percent in sensitivity analysis B when compared to scenario 1. However, greater expense and investments are borne by the private sector through higher captive generation, and will entail higher overall costs to the economy. IV. Scenario 2: Delayed Implementation of Supply Measures I 31 The original had problem with text extraction. pdftotext Unable to extract text.