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E N The Policy Framework for Energy SectorNeed for Demand Side Management

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E N The Policy Framework for Energy SectorNeed for Demand Side Management
  E NERGY   E CONOMICS 98 THE IIPM THINK TANK G Bhalachandran Department of Economics, Sri Sathya Sai University, Prasanthinilayam Ram P. Aneja Former Managing Director, NDDB,  Anand, Gujrat, Visiting Professor, Department of Economics, Sri Sathya Sai University,Prasanthinilayam S. Subramanian Research Scholar, Department of Economics,Sri Sathya Sai University, Prasanthinilayam  D  YNAMIC  D EMAND 99 THE INDIA ECONOMY REVIEW Policy Framework For Energy Sector: The Need for Demand Side Management 1. Introduction:  Energy economics  studies about the production, distribution exchange and consumption of energy resources and energy commodities and their subsequent economic effects in an economy. In the parlance of physical science,  energy  refers to the capacity for doing work, where as in economics, energy includes all energy commodities, energy resources and com-modities or resources that embody significant amounts of physical energy providing the ability to perform work 1 . Energy is classified as an  essential good  because in economics, an essential good is one for which the demand remains positive, no matter how high its price soars 2 . In modern times, economic growth the  world over, is driven by energy, obtained either from finite resources such as coal, oil and gas or in renewable forms such as hydroelectric, wind, solar and biomass, or their converted form, electricity. This energy generation and consumption supports agricultural sector, power a nation’s industries, vehicles, homes and offices. This process has significant impact on the quality of the air, water, land and forest resources around. That being the case, for future growth of an economy, to be both rapid and sustainable, it needs to be as resource-efficient and environmentally benign as possible. In this paper, an attempt is made to think aloud how by tuning the Demand Side Management (DSM) of Indian energy sector, the desired goals can be realised. 2. Indian Energy Sector: An Overview: With a humble beginning in 1880s, the Indian Energy Sector has come a long way. India is the fifth largest consumer of energy in the world, accounting for 3.7 per cent of the world’s energy consumption. Its total primary energy demand is expected to get doubled by 2030. It hardly requires any empha-sis to say that poverty reduction and economic growth are the prime objectives of the national policy of a less developed country (LDC). With a GDP growth rate of 7.9 per cent during the second quarter of fiscal year 2009-10 3 , India has risen as one of the leading economies of the world even during the current phase of recession the world over. At this juncture, the future levels and patterns of energy use in India, is bound to have important implications, which must be viewed at the  national  level, more in terms of environmental impacts of energy use, issues of access and equity and at the  global  level in terms of geopolitics of energy supply and Green House Gases (GHG) emissions related to the combustion of fossil fuels.However, India’s dream rate of economic growth, 10 per cent per annum, would certainly require a major provision of infrastructure and enhanced supply of inputs, including energy in the economy on the whole. In other words, the high rate of economic growth would create much larger demand for energy and this would pressurise the country to have a variety of choices in terms of supply possibilities.World oil production peaked in July 2008 at 74.82 million barrels/day (MBD) 4 . India’s share in it was about one per cent  whereas in consumption, its share was 3.3 per cent of the total  world oil consumption of 3,953 million tonnes (MT). In the case of production and consumption of natural gas, India’s share was to the tune of one per cent and 1.4 per cent respec-tively 5 . India’s projected production of crude oil during the Eleventh Five-Year Plan (2007-2012) is expected to be 206.76 MMT, while that of natural gas is estimated at 255.27 BCM. India’s domestic demand for oil and gas is continuously on the rise. As per the estimates of Ministry of Petroleum, the demand India’s projected production of crude oil during the 11th Five-Year Plan (2007-2012) is expected to be 206.76 MMT  E NERGY   E CONOMICS 100 THE IIPM THINK TANK for oil and gas is likely to increase from 186.54 million tonnes of oil equivalent (MMTOE) in 2009-10 to 233.58 MMTOE in 2011-12 6 . India’s primary commercial energy consumption in 2008 stood at 433.3 MTOE and it comprised coal, oil, gas, and electricity generated from nuclear, hydroelectric, and renew-able sources 7 . At least three-quarter of rural households in India (668 million people) use traditional biomass fuels, fuel  wood, animal dung or agricultural residues, for cooking and heating 8 . This use is expected to grow to the level of 215 MTOE by 2030, though its share in the total primary energy consump-tion is expected to drop from the current share of 34 per cent to 21 per cent 9 . In recent years, India’s energy consumption has been growing at a faster rate like the trend found in the other growing economies of the world, due to its population growth and the stimulus packages provided by the government. Over the years, the Indian energy sector has been regulated and it is largely owned by government agencies and to a limited extent by the corporates. Of late, Government of India has recognized the need for  energy  security  for the nation and top priority is assigned in the plan targets to achieve  energy independence  in future. 3. The Area of Concern: The energy policies that have been adopted in India ever since Independence to serve the socio-economic priority of her development have encouraged and sustained much inefficiency in the use and production of energy. India has been paying the highest prices for energy in  purchasing power parity  terms 10 . This has resulted in the erosion of the competitiveness of many sectors of the economy. The challenge before the country is to ensure adequate supply of energy at the least possible cost.  Another important challenge that India has is to provide clean and convenient lifeline energy to the poor, which is critical to their well-being, even though they cannot fully pay for it. This calls for an  effective  and  comprehensive energy policy .The power supply position prevailing at present in the country is characterized by persistent shortages, unwarranted power cuts and high-cost energy for the industrial consumers, especially. Moreover, India depends on imported oil to the extent of 70 per cent 11 and this naturally causes anxiety about  energy security . These concerns were exacerbated when there  was volatility in the international oil prices during the mid-2008 12 . Though most electricity is domestically produced, its  supply  depends upon several external factors like availability of coal, exploitation of hydro power sources, the scope for expanding nuclear power, etc. and there are many constraints affecting each one of these sources.  Achieving an  efficient  configuration of the various forms of energy requires  consistency  in the policies that govern each segment of the energy sector and supported by a productive  pricing system  with regard to different types of energy sources. The policy initiative must ensure  energy security , the line on  which research and development is expected to be carried out, environmental safety, energy conservation processes, etc. It will be more effective if these issues are addressed in an integrated  manner. This, of course, is a broad overarching framework for guiding the policies governing the production and the use of different forms of energy from  various sources optimally. 4. Current Shortages of Power in India: Currently, India produces 147,000MW 13  of power and it needs to add an addi-tional capacity to produce 78,000 MW 14  to meet the demand of the population projected for 2012. This will certainly incur an additional investment to the tune of US$ 100b over a period of time. The average energy and peak shortage in the country are of the order of 9.3 per cent and 12.6 per cent respectively 15 .The frequent power cuts across the country have led to an additional investment on the standby generators by the industries and power-inverters by the households. This is nothing but the duplication of investments at the societal level, amounting to an increase in the capital cost and operational cost of power production in the economy on the whole. Moreover this process adds to air pollution too, and results in an inefficient production of electricity in general. This can be streamlined if the peak hour pressure is reduced. One has to remember here that an uninterrupted, low cost power supply  would not only improve the competitiveness of the industrial sector but also ensure a steady employment growth of the The T&D losses in power sector is to the tune of 40%, while the admissible loss could be no more than 20%  D  YNAMIC  D EMAND 101 THE INDIA ECONOMY REVIEW economy.Some of these problems of shortages can be rectified by the  supply side management  usually. The ultimate solution to this problem is, of course, to increase the capacity of the power sector and accentuate the supply of electricity. But, this is a time consuming process and will not give a helping hand to mitigate the problem in short-period. It has been estimated that the transmission and distribution (T&D) losses in power sector is to the tune of 40 per cent 16  while the admissible loss could be no more than 20 per cent 17 . This problem can be tackled through the privatization process of T&D of electricity. But no progress could be seen in this line on account of the influence of the vested interest.Generally, the shortage of power experienced during day time is compensated by free and subsidized power during the off-peak hours like late night. The Indian experience is different since there is an overall shortage of power supply in the country. When the free or subsidized power is provided to agricultural sector, the framers draw water more than their required quantity and this leads to over exploitation of the national resource. Most of the advanced countries manage the peak hour demand for power by generating more power from different sources during that time. Their techno-logical advancement and management skills do support them to manage the fluctuation in demand at ease, of course, with enormous effort and cost. Moreover, they have excess capacity in their power plants. But, India has to go a long way to think of managing its shortage of power on the line in which advanced countries have planned and executed their activities.But, the short-term remedy one can suggest here is the DSM,  which is simple to administer and effective in response. 5. Demand Side Management, Defined:  The streamlining process of electricity markets in developing and the developed countries has to face several challenges, largely due to the uncertainties in the load growth,  lumpy  investments required in capacity addition, declining non-re-newable fuel sources, coupled with their high environmental costs. Tariff changes, due to the changing regulatory stands, also affect the ability of utilities to service their customer base.  At this juncture, DSM is recommended with a view to address-ing the impinching problems of  global warming  , the need for sustainable development and to improve the level of  energy  efficiency 18 . DSM entails actions that influence the quantity or patterns of use of energy consumed by end users, such as actions targeting reduction of  peak demand  during periods  when energy-supply systems are constrained 19 .  Peak demand  connotes a period of strong consumer demand 20 .  Peak demand  management  does not necessarily decrease the total energy consumption, but could be expected to minimize the need for additional investments 21  in the generation of electricity.  Load management  is defined as the sets of objectives de-signed to control and modify the patterns of demand of various consumers of a power utility. This control and modification enables the supply system to meet the demand at all times in the most economical manner. Load management can be applied to all the loads experienced by a power utility  which varies  by day, month  and  seasons . This means that load on the system is always changing with the time and is never constant. Thus, power utilities always keep an eye on the  average  load and  maximum  load of their system 22 . 5.1 Techniques of Peak Load Management:  The following three techniques are suggested under the  Peak  Load Management  Strategy.•  Peak Clipping (reduction in the peak demand):  It means reduction of load during peak periods to get the load profile as desired by the utility. When the usage of electric appli-ances by the consumers is at its maximum, this direct control can be used to reduce the capacity requirements, operating costs, and dependence on the critical fuel. Peak clipping becomes essential, especially for those utilities that do not possess enough generating capabilities during the peak hours.• Valley Filling (increased demand at off-peak):  It is the second classic form of load profile-shape change technique. Valley-filling is the improvement of the system load factor by building load in off-peak periods 23 . • The third technique of load-shape change is  load shifting  When the free or subsidized power is provided to agricultural sector, the framers draw  water more thanrequired quantity   E NERGY   E CONOMICS 102 THE IIPM THINK TANK (demand shifting to non-peak period) , which moves peak loads to off-peak time periods without necessarily changing the overall consumption.  Load shifting   combines the benefits of  peak clipping and  valley filling  , by moving the existing loads from the on-peak hours to off-peak hours. Load shifting typically does not substantially alter the total electricity sales 24 . These three techniques of load management are diagram-matically presented in Fig 1. Conservation  and  demand management  can go hand in hand to make the best use of the existing electricity resources and it  would certainly contain the pressure on demand. Moreover, there are tremendous opportunities to reduce the  supply-de- mand gap  through the wise use of electricity too. Conservation is the reduction of utility loads, more or less equally, during all or most hours of the day 25 . This process is expected to produce the following internal  and  external  economies of scale.• Better usage of existing generation and distribution infra-structure.• Less efficient/ environmentally unfriendly generation process can be de-commissioned. • Minimizing the generation, transmission and distribution losses. • Reducing the intrusive load shedding. • It facilitates better maintenance. • Spill-over effect  of the local economic development.• It ensures less black-out. • The overall efficiency in energy system improves.The impact/effect of DSM can be better understood through the following case studies.  5.2 Smart Meter:   A  smart meter   is an intelligent  energy meter   that identifies the consumption of electricity in a more detailed manner. It provides details about the regular consumption of electricity, along with the processing and feed back of consumption data to the customer 26 . A  smart meter   is also referred to as interval  or time-of-use  meters. It uses a sophisticated technology-mix, such as real-time or near real-time sensors, power outage notifica-tion, invariably cutting the power connection if misused or bypassed, and power quality monitoring 27 . The utilities compa-nies elsewhere charge a fee of around US$ 53 28  per customer to install this meter.There are many factors that influence the pricing of electric-ity. One of these is the  season  in which electricity is used. In  western countries, electricity charges are generally higher in  winter   and  summer   than they are in the  spring and  fall . Another factor is the time of the day . Electricity charges tend to be higher in late afternoons and early evenings when the demand    P  e  a   k   C   l   i  p  p   i  n  g   V  a   l   l  e  y   F   i   l   l   i  n  g   L  o  a   d   S   h   i   f   t   i  n  g Fig. 1: Load Management Techniques. Source: Zahir J. Paracha and Parviz Doulai (1998), pp. 215-216.    P  r   i  c  e SAMPLE ENERGY COSTS (In cents per kilowatt-hour) Cost SavingsWithout Interval MeterWith Interval Meter Fig 2. Difference in Energy Cost Due to Smart Meter 24 hours Source: Ontario’s Independent Electricity System Operator (IESO) The bottom line of energymanagement, p 5.
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