Shyam Ponappa: Subsidies as game-changers

Incentives for alternatives to fossil fuels can help reshape our energy consumption

Oil and gas are our essential high-cost imports. Used in India primarily for transport, power generation, fertilisers and cooking, uncertainties in oil-producing countries contribute to our high inflation. Are there ways to reduce our dependence on fossil fuels through policy incentives?

Petroleum use
Diesel comprises 44.3 per cent of petroleum products used by weight (see energy consumption chart). It is used primarily for transport, followed by electricity generation. Cooking fuel is next, comprising LPG (9.9 per cent) and kerosene (4.9 per cent), amounting to 15 per cent of use. This is followed by petrol at about 10 per cent, mainly for transport. High subsidies account for diesel’s preponderance in transport and electricity generation, as petrol is not subsidised. CNG also is used as automotive fuel, because of high subsidies and regulations (for buses and three-wheelers). Reduced subsidies could result in private users switching to petrol.

For transport, as well as for electricity generation, the policy could be to reduce subsidies for diesel and gas for private use, while providing good public transport services, with incentives for desirable use. For cooking, most urban dwellers in India use LPG, CNG or kerosene (see cooking fuels chart).

Can the right incentives steer users, including the sizable number who use firewood, to energy sources that align with the objective of reducing consumption of fossil fuels? It will take some doing, but consider two supplements for LPG and

kerosene: solar cookers; or, where these are unusable but electricity is available, induction cookers. If there are incentives for these alternatives to fossil fuels, there may well be significant benefits from reduced subsidies for LPG and kerosene; reduction in demand for imported fossil fuels; a greener carbon footprint, provided the manufacture of cookers is managed well; and a cleaner, healthier environment. Conversion from firewood and cow dung would not reduce subsidies, but would be beneficial in other ways.

LPG and kerosene subsidies for solar and induction cookers
One possibility is to use part of the LPG and kerosene subsidies to provide solar cookers. The kernel of the idea is given below.

The price of a solar cooker is about Rs 4,500. This is equivalent to the cost of five LPG cylinders at Rs 900 each, including subsidies. If you’re wondering how practical this is, cookers are available at this price, and we have one that works. Solar cooker prices will fall as volumes increase.

While the subsidies would finance solar cookers in the first year, from the second year about a third to half of the annual subsidies for every user would be reduced in perpetuity, assuming an average use of 10 cylinders annually.

This approach could be applied to all households that can use solar cookers — that is, those with space for a cooker, access to the sun, and an environment with some protection. About two-thirds of urban residents are LPG users — and, according to one source, half the total population uses 16.5 million tonnes of LPG annually.1 A guesstimate is that a third to half of these households could be persuaded to supplement their use of LPG with solar cookers. Less than 10 per cent of households use kerosene for cooking; some of these could also become users of solar cookers.

The chart for subsidies on LPG and kerosene from 2005 to 2012 shows them ending at a little over Rs 60,000 crore. After financing the cookers the first year, subsidies could be reduced by Rs 20,000-30,000 crore a year.

If there is no access to sunlight but if electricity is available, an alternative for LPG users is induction cookers and ferro-magnetic vessels on similar terms (five cylinders = Rs 4,500) to supplement LPG. This would result in lower LPG use and subsidies, together with lower electricity use, as induction cookers are about 25 per cent more efficient than conventional electric stovetops.

Standby diesel generators
A major area for substituting diesel with solar power is backup generators, which are used widely to supplement our erratic electricity supply. There are several sectors where there is potential for replacing diesel generators with solar-powered inverters, provided substantial changes are made to tax policies to encourage the manufacture of such equipment to bring down prices, as well as to spread their acceptance as a preferred alternative to diesel generators. While parity between solar and conventional electricity prices in India is expected by 2017,2 the upfront capital cost of solar inverters deter their installation because they are exorbitantly priced — notwithstanding existing subsidies that are inadequate and laborious to claim.

Generators are widely used to provide primary or supplementary electricity supply to mobile phone towers. A year ago, generators for 585,000 towers used over five billion litres of diesel annually. If solar power were used, after the cost of initial installation recurring costs would be significantly lower, with no fuel costs over the life of the equipment and no local atmospheric pollution.

Likewise, many shops, commercial establishments and homes use diesel generators for backup electricity supply. These can be encouraged — even mandated — to adopt solar inverters where possible. Individual establishments could convert to off-grid solar inverters without any changes required in the grid. In areas such as markets and shopping clusters, organised efforts to provide local solar power would greatly facilitate the substitution, resulting in significant reductions in diesel use.

A transformation can come about only if there are systematic, end-to-end packages designed to encourage all of the above, applied consistently, that is, for supplementing cooking gas and kerosene with solar and induction cookers, and substituting solar inverters for diesel generators. The critical elements required are incentives, including tax cuts tailored to each market segment, making it attractive for users to switch. All this can be a prelude to changes to the grid, which would integrate large-scale solar plants that feed in power at a reasonable price.

shyamponappa@gmail.com
1. http://indane.co.in/aadhaar.php
2. www.kpmg.de/docs/PowerSector_2010.pdf