October 2015: Closing the Coal Gap

Lydia Powell, Observer Research Foundation

The news that dominated October was the increase in domestic coal production and the consequent decrease in imported coal. In July we were told that coal production by Coal India Limited (CIL) had increased by 32 million tonnes (MT) in 2014-15, a record in the history of CIL. The increase in production in a single year was more than the cumulative increase achieved in the last four years. The reasons given by the coal secretary include the record acquisition of 2000 hectares of land along with the record securing of 41 environmental clearances.

While we can celebrate the spurt in productivity of CIL, a much maligned public sector company, one cannot but wonder if the quick acquisition of land and environmental clearances was the result of the heavy hand of the government intervening in matters that it should stay out of. The record acquisition of 41 environmental clearances in a year may be very good for the coal sector but a disaster for the local environment. The 2000 hectares may have involved moving down of people with earth moving equipment. One will never know.

One other nagging thought is whether the sudden appearance of 32 MT of coal could be traced to the grey coal market rather than to new coal mines. Reports by those who have been brave enough to study and write about the coal mandi in Chandasi near Varanasi talk about legal and various degrees of ‘illegal’ coal (from diverted to stolen) amounting to over 60 MT of coal being traded annually. Whatever the truth, the coal ministry’s confident declaration in October that CIL will produce 50 MT of additional coal in the current financial year does not appear to be far-fetched now.

The increase in domestic coal production has broken the hearts of potential coal exporters who were led to believe that increase in domestic coal production by CIL is impossible and that India would fill the gap left by China in coal imports. What they were greeted with instead is a flood of news items that reported on the dramatic fall in coal imports by India such as the news on a 27 % decline in coal imports in September.

The other news related to coal was on problems in the auctioning of coal blocks. Industry chambers were calling on the government to resolve issues in coal block auctions. For its part the central government was pushing the state governments to expedite clearances for auctioned coal blocks so that it can declare victory. For our part we will wait before we declare that auctions were no better than allocations.

It is generally the case that the power sector looks down on the coal sector for its inability to keep up with its dynamism. Tables have now turned and it is the coal sector that is looking down on the power sector’s inability to absorb all that extra coal it is producing. The power sector appears to have nothing to look forward to. Demand for power is faltering and the Prime Minister is threatening an increase in the already high power tariffs supposedly to improve the balance sheets of distribution companies. The PM probably does not realise that no one would want to make anything India if power tariff increases further. As if all this was not enough, power sector employees are threatening a nationwide strike in December.

On the oil front, not much was reported as prices held steady in the domestic market. However the chill in the global gas market was beginning to affect the domestic market. A formula for domestic gas prices based on international gas price bench marks was probably conceived on the assumption that the only way these bench marks would move was upwards. The shock of seeing it move downwards taking with it the domestic price of gas has sent domestic producers back to the doors of the government. They are now knocking for a formula for permanent profits. What happened to the private sector’s call for the exit of the State to make way for the entry of the market? Is their relationship with the market only a fair weather friendship?

India’s Intended Nationally Determined Contribution (INDC) to address climate change was released before its deadline on 1st October and its key elements were (1) reduction in emissions intensity of its GDP by 33 to 35% by 2030 from 2005 level (2) creation of additional carbon sink of 2.5 to 3 billion tonnes of CO2 equivalent through additional forest and tree cover by 2030 and (3) a mission to become an anchor of a global solar alliance. India hailed it as comprehensive and balanced but the many international NGOs that have sprung up like meerkats to assess and rank INDCs rated it as moderately ambitious and probably ineffective. India’s INDC may be part of organised hypocrisy like it is designed to be but it has the power to send a message that we can play the game just as well as anyone else can!

Views are those of the author                    

Author can be contacted at lydia@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 20

 

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Notes: Development / Discussions in the run up to Paris COP 21

Lydia Powell, Observer Research Foundation

  • The US performed an impressive back-flip and endorsed both Loss and Damage as a stand-alone section and committed an annual 0.7% of GDP to financing it.
  • Negotiators from Saudi Arabia came to a newfound appreciation of human rights and are now supporting their comprehensive integration throughout the document.
  • Australia has convinced the Umbrella Group to accept major compromises on both mitigation and the long-term goal.
  • The latest EU numbers show that greenhouse gas emission fell 4% between 2013 and 2014. This brings the EU’s domestic emissions down to 23% below 1990 levels, and will most likely lead to below 30% by 2020. EU’s current 2020 reduction commitment is 20% below 1990.
  • The Oil and Gas Climate Initiative released a report calling for a price on carbon and investment in carbon capture and sequestration.
  • Shell and BHP announced a commission to advise governments on climate policy.
  • Among all of the financial mechanisms under the Convention, the Adaptation Fund (AF) has made unique progress. The AF plays an important role in the climate finance landscape by providing funding for small-scale adaptation projects. It now has a portfolio of 50 such projects, enabled especially through its direct access modality. Furthermore, the AF has successfully accredited 20 national implementing entities (NIEs) and helped build local capacity
  • The new version contains a good proposal featuring the AF as a key instrument of the Financial Mechanism. The AF can help recipient countries to implement their NAPs and their INDCs. Despite the scarcity of the resources, the Fund’s board received an unprecedented 15 proposals (including the first regional programmes) at its last meeting.
  • This burgeoning interest may be understood as a call for more pledges to help the Fund reach the fundraising target of US$100 million by COP21.
  • As the AF is a fund where all developing countries are eligible for financing in principle, it is a powerful tool for advancing the adaptation debate across the globe. Within a few years, the AF has pioneered a robust direct access and operationalised a streamlined and rapid project cycle that enables developing countries to maintain full ownership throughout project implementation and ensure monitoring and transparency at each stage.
  • A new report, Fair Shares: A Civil Society Equity Review of INDCs shows that there is still a big gap between what it will take to avoid catastrophic climate change, and what countries have put forward so far.
  • The report says all high emitting countries will have to do more to close this emissions gap, and this can be done in a fair way. Richer emitters must reduce their emissions substantially and they must contribute to more emissions and adaptation action by poorer countries by providing additional finance and technology access.
  • The report recommends that the Paris Agreement provides a framework where governments set targets in line with fairness and what the science says is needed.
    • To avoid a 3 degree world, governments must agree targets to reduce emissions in 2025, 2030, 2040 and 2050, with a view of near-zero emissions by the middle of the century;
    • The Paris agreement should include a mechanism to ratchet up current targets before they come into effect in 2020, and every five years thereafter
    • It should include a step-change in international climate finance;
    • It should create a clear and fair plan to address the emissions gap through new cooperative action fuelled by scaled-up support from the developed countries that are most responsible.

Views are those of the author              

Author can be contacted at lydia@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 19

 

INDC gives new hope to coal washing

Ashish Gupta, Observer Research Foundation

As India’s coal based power plants age, improving their efficiency is increasingly recognized as an important aspect of energy policy. Higher efficiency in power generation is an important element of energy security and also in reducing environmental impacts, and in lowering the cost of electricity. As agreed in earlier climate negotiations, India has submitted its Intended Nationally Determined Contribution (INDC) document. The document is well drafted and measures on mitigation and adaptation that India is undertaking currently and plans to undertake in the future are described in detail.

In the INDC document, coal receives the attention that it deserves. . Some of the crucial measures with regard to mitigating carbon emissions from the coal use are given below:

  • Coal beneficiation (washing) has been made mandatory (Stage I – Pre-Combustion Process).
  • All new, large coal based generating plants has been mandated to use the highly efficient super-critical technology (stage II – Combustion Process).
  • Renovation & Modernisation of existing old power stations in a phased manner (Stage II – Combustion Process).
  • 144 old thermal based power stations have been assigned mandatory targets for improving energy efficiency (Stage I & II).

It is good that the INDC document has emphasised on efficiency. But before going into the details of efficiency we need to clarify that high ash coal does not automatically lead to higher carbon emissions. Ash is particulate matter unlike CO2 and coal washing reduce ash content. Pollution from the coal use needs to be understood in the context of how it is processed. Different kinds of pollutants arise during different stages of processing and there are technologies available to address them.

image (1)

 

As far as Stage II is concerned, Indian power plants are switching to super-critical technology thereby saving  on coal consumption and consequently reducing  carbon emissions (For example: Critical technology uses 1kg of coal to produce 1 unit of electricity; Super-critical uses 700gm of coal for producing the same; Ultra-critical technology will reduce coal consumption even  further). Given the technology and costs involved, switching to ultra-critical technology will take some time. Stage III where carbon emissions are controlled by capturing it and storing it underground is not commercially viable currently.

Ash removal (Stage I), though a proven and simple technology is neglected in India. The notification regarding coal washing is in place from 2001 but unfortunately notification has no legal teeth and so it is ignored by the coal sector Most of the power plants are reluctant to use washed coal. There could be reasons behind this but it is well known that there are economic and environmental benefits in washing coal.

The use of washed coal will reduce the quantity of coal required to generate the same amount electricity by increasing the calorific value of the given amount of coal. The increment in calorific value for a given mass when coal is washed in shown in the table below

Reduction in Ash % Increment in Gross calorific value (calculated kcal/ kg) Reduction in Per Annum Requirement  of Coal (MT)
Raw coal at 41 3,970 3.77
Washed coal    
36 4,440 3.33
34 4,628 3.19
32 4,816 3.07
30 5,004 2.95

Source: India: Implementation of Clean Technology through Coal Beneficiation, 1998

Reducing the ash level from 41 percent to 30 percent, reduces  coal consumption at the power plant  by 22 percent (ie from 3.77 MT to 2.95 MT) as the heat content in a given mass increases  and the quantity of disposable ash falls.

Reduction in disposable ash

Ash % Reduction in Per Annum Requirement  of Coal (MT) Disposable Ash (MT)
41 3.77 1.55
36 3.33 1.20
34 3.19 1.09
32 3.07 0.98
30 2.95 0.89

Source: ibid

The table above clearly shows that the quantity of disposable ash will be reduced to 0.89 MT from 1.55 MT in case of washed coal with 30 percent ash. This will automatically bring reduction in land requirement for disposing ash.

Land requirement for disposing ash at different ash levels

Ash % Disposable Ash (MT) Land Requirement (Ha)
41 1.55 400
36 1.20 310
34 1.09 281
32 0.98 254
30 0.89 229

Source: ibid

The use of washed coal with ash content of 30 percent will reduce the land requirement to 229 hectare (Ha) from 400 Ha. Consequently, the water requirement to transport ash to the disposable pond will also go down from 17 million m3/annum to 9.79 million m3/annum.

Water requirement at different ash level

Ash % Disposable Ash (MT) Water Requirement (Million m3/annum)
41 1.55 17.05
36 1.20 13.20
34 1.09 11.99
32 0.98 10.78
30 0.89 9.79

Source: ibid

But the benefits do not end here. The carbon emissions too will go down by 2 to 3 percent when washed coal is used.. This can be further improved by improving efficiency at power plants (1 percent efficiency improvement will bring down further 2 to 3 percent in carbon emissions).

Annual Carbon emissions of power plant at different ash levels

Ash % CO2 emissions in 1000 tonnes/ year Reduction in CO2 emissions %
41 1.55  
36 1.20 2.03
34 1.09 2.28
32 0.98 2.51
30 0.89 2.72

Source: ibid

Though combustion efficiency must be increased (Stage II) through the adoption of technology coal washing must be pursued as it is inexpensive compared to super and ultra critical technologies. The inclusion of coal washing in the INDC document shows that India has given the attention that it deserves. There is an urgent need for the adoption of policies that address the institutional barriers preventing the widespread adoption of coal beneficiation in India. Coal washing needs to be given priority as it is a genuine first step towards efficiency in the coal sector.

Views are those of the author                    

Author can be contacted at ashishgupta@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 18

 

Will Solar Energy defy Marx and yield to Musk using Moore?

Lydia Powell and Akhilesh Sati, Observer Research Foundation

Not many will associate Karl Marx with energy but a close reading of his ‘Capital: A Critique of Political Economy’ that was first published in 1867 shows that Marx understood energy better than many do today.  He observed that the energy sources powering industrialisation had to be ‘dependable, urban and completely under the control of man’. Dismissing the ‘horse’ as the worst form of energy he observed that the horse had a head of its own, was costly to maintain and was limited in factory applications’. He also dismissed wind because it was ‘inconsistent and uncontrollable’. He had more charitable views on the kinetic energy of flowing water but he noted that ‘it could not be controlled at will, failed at certain seasons and was essentially local’. Marx’s vote was for coal (with water in the steam turbine of Watt) which he said was ‘entirely under the control of man, mobile and a means of locomotion, and also urban unlike wind and water that were scattered up and down the countryside’. Marx did not dwell on the nature of energy because his mission different (to show how capital would use energy to marginalise labour) but his observations on characteristics of energy such as ‘certainty’ ‘mobility’ and ‘controllability’ that would make certain sources of energy indispensible for industrialisation were accurate.

The western world that has completed the process of industrialisation using dependable and mobile fossil fuels has moved up the hierarchy of characteristics that it wants in its energy sources. Energy sources now have to be ‘clean and green’ apart from being ‘urban, mobile and completely under the control of man’. The pursuit of ‘clean and green’ values in energy sources takes us back to energy sources such as wind and sun that were dismissed by Marx as ‘uncontrollable and undependable’.

This brings us to Elon Musk, the CEO of Tesla Motors who is hailed as the messiah of modern energy sources.  Tesla’s Powerwall battery system launched recently is expected to overcome the ‘undependable and uncontrollable’ characterises of wind and solar power and ‘fundamentally change the way the world uses energy’ as Musk put it at the launch of Powerwall in January 2015. Though the euphoria that surrounded the launch of Powerwall has subdued as many have understood that the fundamental change that Musk was talking about would come only at a cost, it has sparked the hope that the day the world will be running on solar energy is much closer than we think.

Solar energy is already urban (as opposed to being scattered up and down the countryside) because photovoltaic panels can convert sunlight into electricity from urban roof tops. The hope is that Musk’s lithium-ion battery will take care of not just the ‘uncertain and uncontrollable’ nature of solar energy but also make it mobile. Uncertain solar energy will be stored in Musk’s efficient batteries and allow people to draw energy whenever they want for whatever they want to do (use electrical appliances or move around in a vehicle) even when the sun is not shining.  The question now is ‘at what cost?’

The figures available for the cost of power from Musk’s Powerwall varies but it is nowhere close to the tariff of grid based electricity. The hope is that the cost of power from solar panels and batteries will decline rapidly and out-compete grid based electricity. This brings us to Gorden Moore, co-founder of Intel who famously said in 1965 that the circuit density of semiconductors (made of high grade silicon) will double every eighteen months.  Moore’s law as it has come to be known has proved to be true in the micro-chip industry. The number of transistors on a circuit has doubled almost every two years and the cost has fallen dramatically. Many of those who are betting on solar energy believe that Moore’s law is applicable to PV panels (made from solar grade silicon) and storage batteries and that dependable and controllable electricity from these systems will be cheaper than grid based electricity (derived from fossil fuels) in a matter of few years.

PV System Prices for 2013 (US$/W)- Selected Countries

image (2)

Source: IRENA, Renewable Power Gen. Costs in 2014

Solar photovoltaic (PV) modules and the inverters required to convert the DC power output from PV systems to AC power are commodity products that are traded internationally. The price of PV modules has fallen from about $76/watt in 1977 to about $0.30/watt in 2015 according to Bloomberg new energy finance which amounts to a 13% compounded annual average fall over the 38 year period. This is nowhere near a Moore scale decline but impressive. As pointed out by a recent report on solar energy by MIT, most of the cost declines are on account of lower input material cost (solar grade silicon) and on account of increased scale of production (economies of scale), lower labour costs through manufacturing automation and lower waste from efficient processing. In other words the cost declines of PV modules are the result of production experience and not the result of better grasp of fundamental physics that is required if we want Moore’s law to work.

Indian Imports of Solar Panels

image (3)

Trends in Global Average Solar PV Module (c-Si) Selling Price US$/W

image (4)

Source: IEA 2014, Technology Roadmap-Solar Photovoltaic Energy.

In the last fifty years, the power of a given sized microchip has increased by a factor of over a billion but the power output of a solar panel has merely doubled. This is not because of insufficient investment in research and development of solar technology. The United States poured money into solar technology in the late 1940s when domestic reserves of oil began to decline. It increased support for research on alternative energy technologies after the oil crises of the 1970s. Though the enthusiasm for alternative energy sources generally waned when oil prices fell, ideas such as peak oil, the oil weapon (in the hands of Arab nations) etc have kept up the support for alternative energy sources. Despite this solar has not managed to make a break-through on the scale of micro-chips because of fundamental technical limitations of crystalline silicon.

There are inherent technical limitations in using crystalline silicon to convert electromagnetic radiation from the sun (light) into electricity. This needs to be explored further. The physics behind solar cells is complex but a brief outline of the technology is necessary to grasp the potential of solar energy and to answer the question posed in the title of the article.

Silicon is converted into solar cells in well established industrial processes that draw on sixty years of semiconductor processing for integrated circuits. There are single crystalline and multi crystalline solar cells.  Higher the crystalline quality higher is the efficiency of charge extraction and power conversion but also higher cost. Single crystalline silicon cells have recorded lab level efficiencies of about 25.6 % while multi crystalline cells have recorded efficiencies of about 20.4 %. Single crystalline cells account for 35 % of the market while multi crystalline cells account for 55 %. Crystalline silicon accounts for 90 % of global photovoltaic (PV) production and it is expected to continue its dominance for the foreseeable future.

In order to gain some understanding of how PV cells work, it is necessary to understand the concept of band gaps within atoms of materials. In pure materials, electrons can only reside in certain discrete energy bands.  The electronic properties of materials are dependent on the profile of these energy bands and gaps between these energy bands. In semiconductors such as crystalline silicon, the band gap is somewhere between the high band gap of insulators (materials that do not conduct electricity) and overlapping bands of conductors (materials that conduct electricity). To be precise, the band gap of semiconductors such as silicon is too large for it to conduct electricity (allow movement of electrons from one band to another) in their normal state (in the absence of additional energy in the form of light/heat) but small enough for it to conduct electricity when additional energy from sunlight is available for absorption. A solar cell can only absorb photons (light) with energy gap greater than the band gap. The band gap energy is the maximum energy that can be extracted as electrical energy from each photon that is absorbed by the solar cell. One fundamental limitation of crystalline silicon is its indirect band gap (which involves a change in energy and a change in momentum) which leads to weak light absorption and consequently makes thick wafers a necessity. This translates into higher capital costs, low power to weight ratios and constraints on module flexibility and design. Alternatives to silicon wafers such as gallium arsenide, a compound with a direct band gap (only involves a change in energy) are being investigated but those in the field do not see commercially viable alternative to silicon emerging within the next decade.

Thin film PV technologies that are made by additive fabrication process reduce material usage and capital expenditure account for 10% of global PV production capacity. Commercial thin films use hydrogenated amorphous silicon (non crystalline silicon), cadmium telluride and copper indium gallium diselenide. These materials absorb light 10-100 times more efficiently than silicon. This property reduces thickness of material required for light absorption to just a layer of film coated on a support material such as glass. Cadmium telluride is the leading thin PV technology on account of its ability to harvest solar energy with a direct band gap of 1.45 electron volt (eV) compared to the indirect band gap of 1.12 eV for crystalline silicon. Thin film PV technologies use 10 to 1000 times less material than crystalline silicon reducing cell weight per unit area and increasing power output per unit weight. A key disadvantage of commercial thin film technologies is their low average efficiency typically 12-15 % compared to 15-20% for crystalline silicon. Another key problem with thin film technologies is that they often require scarce elements that cannot be replaced easily. This puts a limit on scaling up solar capacity that is dependent on thin films.

Irrespective of which material is used, improvements in efficiency of industrial processes are likely to bring down costs significantly in the future but this alone will not guarantee the success of solar energy. If solar seeks to displace other fuels that dominate electricity generation today, it needs to perform on other measures as well.

Indicators of Competitiveness with Grid Electricity

Many in India (and elsewhere) have been led to believe by the media that the levelised cost of electricity (LCOE) captured in the tariff of solar electricity is the only indicator that one needs to watch to establish the competitiveness of solar electricity. For example, the bid price of Rs 5.05/kWh of solar generated electricity in Madhya Pradesh was captured in headlines that said that solar power will be cheaper than thermal power in 2-3 years. This is not necessarily true. Even if solar tariff bids come down to Rs 3/kWh it will not mean that solar electricity is cheaper than thermal power.

LCOE is defined as the rate per kWh of electricity that implies the same discounted present value as the stream of costs. The discount rate used generally varies with project type. Put another way, the LCOE is the minimum price a generator would have to receive for every kWh of electricity output in order to cover the costs of producing this power, including the minimum profit required on the generator’s investment. Many solar projects are financed using a power purchase agreement (PPA) sold to a utility. The PPA shifts risk from the power generator to the power purchaser. One of the many limitations of the LCOE is that it implicitly values all kilowatt hours of electricity generated to be the same regardless of when they are generated.  Another limitation is that the LCOE does not reflect the project’s ability to provide capacity to meet uncertain demand (or ramping up capability). Even if solar capacity increases dramatically in India the need for dispatchable capacity will not be reduced significantly. Capacity credit defined as the solar energy capacity that can be confidently relied upon at times of high demand is low for solar energy. In EU the capacity credit for wind is estimated at 5-10% for wind and 0-5% for solar power.

Some of the problems in using levelised cost of electricity (LCOE) to establish competitiveness of electricity generated by solar panels were discussed. The concluding part of the article will continue with the discussion.

One of the problems with LCOE is that it does not capture certain system costs. Grid connected solar PV units offer price bids at their marginal cost of production which is zero and receive marginal system price each hour.  With zero marginal cost of production grid connected PV systems operating at the retail end (household and building rooftops) displace conventional generation with higher marginal cost at the wholesale end. The wholesale and retail markets for electricity follow different dynamics. In general the wholesale market is not subject to too many policy interventions. Even in India which has a regulated structure the government does not intervene in the wholesale market as much as it does on the retail market. The only exception is when the government mandates purchase of electricity from certain sources (such as renewables) which distort merit order dispatch. But governments actively intervene at the retail end of the market even in industrialised countries. In India the intervention is near total at the retail end.

image (5)

Source: MIT report on The Future of Solar Energy

The central and state governments intervene to promote polices for energy access and electoral popularity. In industrialised nations wholesale price of electricity is lower than the retail price of electricity as it should be in a reasonably well functioning market. In India retail price for electricity is lower than the wholesale price on account of numerous policy interventions. This explains the financial distress of distribution companies which have to buy power at a higher price and sell at a lower price. Distributed solar generation such as solar PV competes at the retail level which is the most attractive for solar PV because it is the end that is most visible and subject to policy interventions but it conceals the problems that arise out of its variability and imperfect predictability that affect the wholesale end.

Variability and imperfect predictability (qualities that allowed energy sources similar to solar energy such as wind and water to be displaced by coal based steam generation during the industrial revolution according to Marx) of solar PV systems requires counterbalancing from thermal plants that have to be cycled (switched on and off) frequently as PV output varies. This increases the wear and tear of conventional thermal generation and reduces their efficiency. The cost of using back up capacity that has to suffer loss in efficiency and wear and tear on account of frequent cycling is not reflected in the LCOE. At high levels of PV penetration, the average cost of conventional plants (subject to frequent cycling) increases significantly. This in turn increases system costs that have to be borne by the rate payer or the tax payer. Many roof top PV users (in industrialised nations) gleefully declare that solar power has not only slashed their power bills but has also contributed to a net income in certain periods because they are unaware of these hidden subsidies.

The argument that distributed systems save on transmission costs is made to favour decentralised solar power.  This is not entirely true. Studies have found that the savings from transmission losses are far lower than the system investment required for solar. In India as transmission and distribution losses are high decentralised energy systems may be favoured. However at a broader system level this is not necessarily an efficient outcome.

Table: Estimated Levelised Cost of Electricity for New Generation Resources in 2019

2012$ per MWh

image (6)

Source: MIT report on The Future of Solar Energy

The MIT report that provides the basis for many of the arguments in this paper concludes that in all cases analysed by it (within USA) the per kWh costs of residential generation were just over 170 percent of the estimated cost of utility scale generation. In this light, if residential PV systems are growing faster than utility scale systems, it means that they receive a much higher per kWh subsidy than utility scale systems. A rupee subsidy for residential solar PV generation is likely to produce less solar electricity than the same subsidy given to larger utility scale investments. The government of Delhi which has come up with a roof top PV policy must take note of this. Subsidies will reduce the private costs of solar but larger social and economic benefits are likely to be insignificant at best and non-existent at worst.

Yet another concern is the hidden cross subsidies in hybrid systems that combine solar PV with conventional generation. Distribution companies that supply conventional grid based power recover distribution network costs through per kWh charges on electricity consumed. Owners of distributed grid connected PV generators use these distribution networks but shift network costs including added costs of accommodating significant PV generation to other network users. These ‘cost-shift’ subsidises users of distributed PV but it is rarely acknowledged. This subsidy raises the issue of fairness.

Current economics of PV will allow only affluent households (and PSUs that receive an explicit subsidy under current Indian policy framework) to invest in grid connected solar PV generation even if it is only to signal commitment to green values. On the other hand poor households and small businesses are likely to cling to cheap grid based power because (a) grid based electricity is cheaper and more reliable (b) they involve no transaction costs such as effort to install, repair and maintain equipment from the part of the owner (c) they do not have roof tops and (d) they cannot afford the upfront costs of PV systems. But when the less affluent are part of a hybrid grid system that privileges the use of grid connected PV they will essentially end up subsidising rich PV users on distribution network costs. This raises a serious question of fairness in public policy especially in India where the poor outnumber the rich by a huge margin.

If the affluent users of PV systems choose to exit the grid entirely it would eliminate the subsidy but it will also reduce the number of high value customers for the grid. The rich who exit the grid will have to invest in storage and backup systems such as Musk’s Powerwall but economics does not favour this option. In the USA which has a whole sale and retail market for electricity, a grid connected PV user will be better off selling PV electricity to the grid during the day and buying it back at one third the price in the night rather than using Powerwall’s stored supply at night (or any other time when the sun is not shining) at four times off-peak rates or twice peak rates for grid electricity. Regulations that mandate the dispatch of solar (a move being considered in India to promote solar PV generation) can lead to increased system operating costs (as it would intervene in merit order dispatch) and also give rise to problems in maintaining system reliability.

Another curious phenomenon that will affect the economics of grid connected PV is scale. In competitive wholesale markets for electricity the market value of the output falls as PV penetration increases. Simple economics tells us that increasing zero marginal cost solar PV generation during periods of high solar insolation will drive prices down thus reducing profitability of solar generators. This price reduction at peak hours has already been demonstrated in Germany. The more PV capacity is online the less value an increment of PV generation will produce. This means that PV costs for new PV installations have to keep falling to keep it competitive.

This phenomenon need not worry Indian policy makers now as India does not have a competitive market for electricity. Nor does India have time of the day pricing that will value electricity more during peak hours than off-peak hours. This suits solar PV prices conveyed in terms of LCOE because LCOE attributes the same value to electricity generated at different times. Ironically the absence of a competitive market for electricity in India has increased the perceived value of PV electricity and hence the profitability of PV generators.  What the popular media is hailing as the success of solar in defeating coal is in fact the success (profitability) of solar energy companies. Indian policy is yet to distinguish between the two – the success of solar energy and the success of solar energy companies.

The MIT report quoted earlier observes that incremental solar capacity without storage may have little or no impact on total required non-solar capacity, especially in systems where peak load occurs at a time for low or no solar insolation. At an all India level system peak demand occurs during late afternoon or early evening when there is no solar insolation. Exceptions to this pattern are Delhi with peak air conditioner load in the middle of the day (in summer) and late afternoon and Maharashtra where industrial demand peaks during the day.  Even if these loads are met with solar electricity they would have to invest in back up as a mere cloud passing for a few minutes could reduce solar generation by an order of magnitude.  If the expensive 100 GW solar energy capacity that India has planned is unlikely to displace thermal power generation capacity required for the future, then on has to ask if this is a wise decision.

Overall policy makers must keep in mind that solar energy remains a value choice and not an economic choice as it is made out to be. According to the MIT report, at current gas prices in the USA using solar energy to generate electricity is more expensive than using combined cycle gas generation even at a carbon price of $38/tonne of carbon. In India coal is far cheaper as acknowledged by the government. The report also says that it may be more cost effective not to use all available zero variable cost production rather than force a coal plant to stop operating only to start it after a few hours.

Moreover policies that are designed to subsidise solar power generation may lead to inefficient and costly operational decisions in the short term and more inefficient generation mix in the longer term. Policies such as Renewable Portfolio Standards (RPS) that are state specific will locate solar PV generators at sub-optimal locations. This means that India should focus on a national policy framework. Policies that restrict international trade in PV modules and related system components in order to aid domestic industry in the name of ‘making in India’ may also raise the cost of using solar to reduce carbon emissions. Furthermore there is no evidence to show that manufacturing renewable leads to higher job creation than other industries.

Returning to the question posed in the title, solar energy is a long way from defying Marx and yielding to Musk even with some assistance from Moore. Even the Indian solar policies that have been put on steroids are unlikely to help in defying Marx!

Views are those of the authors                    

Authors can be contacted at lydia@orfonline.org, akhileshs@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 13

Courtesy: Energy News Monitor | Volume XII; Issue 14

Courtesy: Energy News Monitor | Volume XII; Issue 18

 

The Problem of Plenty – International

Lydia Powell and Akhilesh Sati, Observer Research Foundation

Last week we observed that the problem of plenty is playing out differently in the domestic and international contexts. In the domestic context the problem of plenty was partly a consequence of insufficient demand but in the international context it is clearly a problem of excess supply, especially of oil and gas. But low oil prices which are often quoted as the cure for low oil prices is having an impact on supply.

Though the physical oil market continued to show signs of weakness (too much oil) the financial or the paper market appeared volatile with large shifts in short and long positions. It appears that no one is sure how long the least efficient shale drillers in the US will last in an environment of low oil prices. According to the Financial Times, US shale drillers ran a deficit of $32 billion in the first half of 2015 equal to the entire deficit of the sector for 2014. This was followed by news from energy information & analysis (EIA) of the US that there was a meaningful reduction in US oil output. In September US production was about 9.13 million barrels per day (b/d), a 500,000 b/d reduction in output from peak production levels. The reduction in supply from the US was equal to the total output from a small country like Libya. This reduction was in spite of an increase production of conventional crude from the Gulf of Mexico. A reduction in supply is expected from other non-OPEC producers as well.  According to the international energy agency (IEA) non-OPEC oil production is expected to fall by 500,000 b/d by 2016, the sharpest drop in the last 25 years.

Crude Oil and LNG Prices

image (1)

Source: Bloomberg

The unexpected stability of low oil prices led Goldman Sachs to predict (around mid September) that oil prices would drop to $20/bbl. But how reliable are Goldman predictions? Goldman predicted that oil prices would touch $250/bbl in 2009. The average price for crude in 2009 was about $56/bbl.

Oversupply is changing the industry in many ways. According to data from Baker Hughes the number of drilling rigs in the US has fallen by over 1100 since October 2014. Over supply and low prices has also led to a decline in investment in the sector. Moody’s said in a recent report that oil companies can expect a decline of $ 80 billion in cash flow. A Wood McKenzie report said that $ 1.5 trillion worth oil and gas projects faced the risk of a cash crunch. The report also said that only 10-11 upstream projects will be completed as opposed 50-60 which was the norm.

Gas Production and Consumption- USA

image (2)

Source: Bloomberg

While the ‘market’ is pushing towards the logical response of reducing supply, non market forces seem to be working in the opposite direction. Among the many non market forces are China ‘energy security’ driven filling up its 600,000 million barrel Strategic Petroleum Reserves (SPR) and Russia’s geo-politics driven pumping of 10.74 million b/d which is a post Soviet record. Analysts are speculating a downward pressure on prices when China eventually winds up its SPR filling. They are also speculating on the impact of talks between Saudi Arabia and Russia on prices. Some think that Russia is colluding with weak OPEC members against the strong ones such as Saudi Arabia to cut production to increase prices.  Overall no one is sure how this complicated game that mixes geo-politics with economics will play out.

The issue of US crude oil exports continued to be debated but the commercial incentive to export crude is no longer strong. Crude oil exports from the US would have made sense (for the US companies) when WTI traded at a discount to Brent but now the discount is so small that crude exports look uninteresting commercially.  But geopolitical and strategic analysts always have a view that runs counter to market views. According to them export of crude and gas from the USA will put down Putin and also reduce the clout of other energy tyrants in the Middle East.

Moving on to the European continent, North Sea oil producers were said to be facing an existential crisis.  Though there have been spending cuts across the world in the oil & gas sector, the off shore oil sector has been particularly vulnerable as this sector has some of the highest costs in the world. Many of the fields are in decline and require constant injection of capital. Some are said to be facing the risk of shutting down. As many companies share infrastructure if one shuts down others may also have to shut down. The downturn in oil prices also contributed to Shell shelving its arctic drilling plans. The project had also suffered a set-back from disappointing geological results.

Crude Oil Future Trading ($/bbl)

image (3)

Source: Bloomberg

There was also news on China moving towards establishing an oil price bench mark in October that could become the most important after WTI and Brent. Given that China is the biggest oil importer (and India the third largest) it makes sense to have an Asian index but as the Chinese index is to be priced in Yuan and not dollars it may take time to gain acceptance.

There was news of the problem of plenty in the LNG sector as well. According to a new report by Wood Mackenzie most US LNG projects totalling about 60 million tonnes (mt) of capacity are moving ahead. G2 LNG a new US company is said to be planning a new LNG export terminal specifically targeting countries with which US does not have a free trade agreement. The new LNG capacity in the US will add to the 140 mt capacity that is being constructed globally. Projects under construction alone can double existing LNG capacity in the next one or two years.

The glut in the gas market has led to economic and political changes. Encouraged by falling prices and growing supplies Japanese buyers are said to be refusing to sign contracts with destination clauses (contracts that prevent reselling). India’s Petronet is lifting only 70 percent of contracted capacity from Qatar and is paying about $8/mmBtu which is 36 per cent less than the contracted price. On the political side, abundant supplies have encouraged the EU to impose market manipulation charges on Russia’s Gazprom. Russia has also been pushed to settle gas prices with Ukraine.

Gas Futures Trading

image (4)

Source: Bloomberg

The problem of plenty was also behind depressing commercial news on falling value of energy companies and the prospect of distressed companies putting themselves up for sale and growing prospect of consolidation in the offshore services business. Among key mergers, takeovers and impending takeovers were Shell’s takeover of British Gas (which has been approved by the EU), GE’s purchase of the power equipment business of Alstom, Oil Search’s rejection of Woodside’s bid, GE emerging as contender for Halliburton’s assets, Total’s sale of its oil sands assets to Suncor and so on. A shakeout is generally good for the sector in the long term but not necessarily in the short term, especially for those who are likely to lose their jobs.

September brought some good news (or perhaps bad news in an environment of plenty) on a major gas discovery in Egypt. According to ENI which discovered the field, it is a supergiant with over 30 trillion cubic feet of gas. This piece of good news for Egypt and ENI may be really bad news for Israel and Nobel energy as they had expected Egypt to the biggest customer for the gas from their giant gas field Leviathan.

On the non hydrocarbon sector the media was engrossed with news on renewable energy which is understandable given that countries are vying for the largest renewable energy share title in Paris later this year. China was said to be planning for a nationwide carbon cap and trade by 2017 which is something that India should watch. One last bit of non hydrocarbon news in September was that Chinese companies may be building nuclear plants in the UK. For China bashers this is not necessarily good news!

Views are those of the authors                    

Authors can be contacted at lydia@orfonline.org, akhileshs@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 17

 

 

September 2015: The Problem of Plenty – India

Lydia Powell and Akhilesh Sati, Observer Research Foundation

The problem of plenty is the theme that comes to mind in both the domestic and the international context when we look at the key developments in the energy sector in September. But they are playing out differently in each of the contexts.

In the domestic context the problem of plenty is not that there is too much energy but too few who want more energy. How much energy can a person with a single light bulb use? How many litres of motive fuels can a person without a motor vehicle use? At a more basic level how much modern energy can a person without a proper (‘pucca’ as described in the census) home use? To what will the electrical wires or solar panels be fastened or where will the LPG stove be stored safely?  The only thing that the government has done about it is to label the un-served need for energy as latent demand hoping to eventually measure it. This is similar to what the government did with local pollution.  It just decided to measure it.  Though measurement is the first step in solving the problem, it is not a substitute to solving the problem.

In the context of the problem of plenty, news emerged that India’s ultra mega power projects were grinding to a halt. Among many reasons is that the anticipated demand has not materialised. Ten years ago the business press hailed these ultra mega plants as temples of private-public partnership. The low tariff quoted by some of the pit head projects were said to reflect the absence of downside risk given the ‘infinite’ demand for electricity from the millions of Indians living in darkness. But what we have today is states that live in darkness declaring themselves as energy surplus states! These depressing tales of scarcity of aggregate demand for energy has no takers because most are infatuated with the fairy tales on renewable energy!

Chart 1

image (1)

Source: Various reports of Central Electricity Authority & MNRE.

The media too has decided to believe in magic since the new government took over and so it tends to fill all available space with tiring tales of investment (or rather the promise of investment) flowing into the solar and renewable sector (please refer to Data Insights at page no. 8). If you add up all the figures quoted for renewable energy investment you can easily come to the conclusion that there is too much investment in the sector not too little. If the history of promises and commitments on investment in India is any guide, few will reach closure on paper. Out of those, few will actually materialise. Out of those that do materialise few will reach operational status.

There was a sensational announcement that the share of renewables in India’s energy basket will increase to 40 percent by 2030. This is probably a figure that will make it to the India’s commitments in Paris.  The target is for capacity and it is achievable but the question that needs to be answered is how much energy this capacity would actually generate. The call from senior leaders that coal should subsidise solar was repeated by the most senior leader. But has it not occurred to him that this may be counter-productive? If you have to emit more carbon (burn more coal) to emit less carbon (increase renewable share), then will not be simple to just let things be as they are? Why should coal take on the responsibility of orchestrating its own demise?

Chart 2

image (2)

*for April to Dec 2015 (around 46.8 BU)
Source: Chart 1- Executive Summary, March 2015, CEA
Chart 2- Executive Summary, March 2015, CEA & Rajya Sabha Q. No. 709 (by MNRE)

The theatre of the government opening the floodgates of incentives (capital subsidies, duty exemptions, the certainty of long term purchase contracts and the like) for a sector and the private sector rushing in with ‘over the top’ announcements on how it is going to invest in the sector and help the government achieve its policy goals is something we have seen many times in the past. The problem is that this show has had too many re-runs even though it has been a flop show in most segments. The private sector tailors a cup that has the right size to capture the benefits but not the risks and walks away when reality catches up only to join the queue for the next show.

The sustainability of this model makes one wonder if this is a show that the government and the private sector put up in collusion to deceive the common man/woman into believing that the government and the private sector are working together in his/her interest. Under the cover of the warm and friendly phrase ‘public-private partnership’, is the government only finding new business segments that will allow it to transfer public funds into private pockets to balance the flow that went the other way during elections? We will never know but perhaps we can hope that this time it will be different.

The other news that grabbed international attention is on India’s rush to save the global commons (atmosphere and the levels of green house gas in it). There is something tragic about India rushing to put the seat belt on the rest of the world when its own citizens travel without seats leave alone seat belts.  But unconcerned leaders were busy telling the industrialised west about India’s plans to create renewable energy capacity in the next seven years that will match the renewable energy capacity created by the whole world in the last fifty years.

In other news, we saw that the time had finally come for oil refiners such as Essar and MRPL to pay the $ 700 million owned to Iran now that the sanctions on Iran have been lifted. There was also news that Iran was offering gas at $ 2.95/mmBtu for urea production within Iran and that India was ready to invest billions of dollars there. India’s insatiable appetite for bargains seems to have kicked in as it has apparently asked for half the price Iran offered. India did the same thing when Iran offered pipeline gas for $1/mmBtu about two decades ago.  We all know how that ended.

While Andhra Pradesh was signing agreements to set up two LNG plants others such as BPCL, ONGC and Mitsui LNG terminal were shelving their LNG projects. The signal from each of these developments point in opposite directions but for long time observers of the Indian energy sector this will not be shocking.  One is used to noise rather than clear signals in the gas sector!

In other LNG news, we had an item that said that GAIL was re-floating its tender to hire LNG ships. The problem appears to be the ‘make in India’ clause. Turkmenistan’s announcement that it will start work on TAPI in December also appeared in the news this month. When it comes to cross border pipelines, paper work alone can take years and so it is too early to get excited!

Another news item that grabbed attention was GE’s statement that it will not invest in nuclear plants in India.  India should not worry about comments from its many spurned lovers from the nuclear sector. The statement probably reflects their insecurity over the future of nuclear energy industry and the shrinking market for its nuclear business. India should not rush to save the global nuclear business by altering its policies. There is less at stake for India than there is for GE.

There was also news that India and US will cooperate on coal. This is probably one of the most positive news items that came out in September, especially in the light of what coal had to put up from the self appointed coal slayers of the world. The United States is an example of a country that built its wealth on the back of coal and it is time that it endorses other countries’ right to do so.

Views are those of the authors                    

Authors can be contacted at lydia@orfonline.org, akhileshs@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 16

 

Should coal production increase when demand for electricity is falling?

Ashish Gupta, Observer Research Foundation

In 2014-15, Coal India Limited (CIL) increased coal production by 32 million tonnes (mt) which means a production growth of 9 per cent. This is the reason behind power plants having a coal inventory of 25 days compared to 5-7 in the same period last year. The increase is attributed to CIL acquiring 2,000 hectares of land, which is again a record and in addition secured 41 environment clearances for its new projects. This enabled it to expand production from existing mines and open new ones. As per secretary coal, CIL is opening a new mine each month. Many senior officials in the coal ministry hope this trend will continue and further improve after the monsoon. CIL is likely to hit the target of 550 mt set for this financial year. This is an achievement for the coal sector in general and CIL in particular. If the growth rate is maintained, the sector may be on track to achieve the production target of 1 billion tonne / year by 2020. Unfortunately the demand for coal from the power sector, its prime consumer appears to be falling.

The demand side is stagnant and there has been no off-take of surplus production. The reason is that there is no growth in demand for coal from power utilities. The problem is also reflected in the financial statement of discoms. Discoms are unwilling to buy additional power. Some in the sector think that it is a temporary phase. The central government is discussing ways to improve the financial health of the distribution companies. Unfortunately problem has persisted for decades. Can the problem be solved through discussions and commitment? Will demand for electricity and the demand for coal pick up? Unfortunately this does not look very likely.

The solutions to the problems of discoms are hard to implement because of social and political pressure but it is the only way forward. But solutions which are economically viable but politically not viable will never be implemented. The combined debt of all distribution companies was around Rs 2 lakh crore as on March last year and despite most discoms raising tariff, they have not managed to cut losses significantly. They are in fact depending on loans for even taking care of operational expenses. Therefore what is the solution? A temporary quick fix such as another financial restructuring exercise may give discoms a breather which may increase coal off take. Here we need to learn from our past mistakes. In the past, the central government had introduced ‘restructuring packages’ for discoms, the most recent in 2013, but it has not been able to address the problem. No state had signed new power purchase agreements since 2013 and many continue to opt for load shedding rather than to buy power forcing the industry and commercial outfits to depend on expensive power.

Discoms on an average lose money on every kilowatt-hour of power they provide to users, even after the government subsidies they receive are included. On the technical front, transmission and distribution (T&D) losses are high, reflecting issues such as low metering efficiency and power theft. Even when the discoms accurately bill the end user for the power consumed, their ability to collect money is poor in many cases. This risk and uncertainty of long term power offtake is indirectly passed onto the power generation companies, who in turn have to pay a higher cost of capital for their projects. Despite a 15 year effort, the overall improvement of the discoms financial health has been dismal. One of the key reasons for this has been an attempt to financially engineer the discom books, without specific hard linkages to operational metrics improvement.

Discoms are often advised improve efficiency eliminate corruption in the system and reduce transmission and distribution losses. These are relevant solutions but they are not adequate. While the blame is often on the politician it is the broader socio-economic system that is to blame.  Short term measures are followed not out of ignorance but because of political and social considerations. The only ‘solution’ is to keep moving towards cost recovery from every segment. While the poor farmer or the poor household is often blamed for most of the power sectors problems it is often informal and small industries resort to theft of power to bring down their overall costs. Some states have their own fiscal issue which forces them to keep delaying subsidy infusion, thus forcing discoms to pile up more debts on the top of existing unserviceable borrowings.

Good economics and good politics must go together. Coal producers may be hoping for a revival of demand but producing 1 billion tonnes when there is no demand will not be considered an achievement.

Views are those of the author                    

Author can be contacted at ashishgupta@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 16