EVALUATION OF A RENEWABLE ENERGY SCENARIO IN INDIA FOR ECONOMIC AND CO 2 MITIGATION EFFECTS

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1 RURDS Vol. 15, No. 1, March 2003 EVALUATION OF A RENEWABLE ENERGY SCENARIO IN INDIA FOR ECONOMIC AND CO 2 MITIGATION EFFECTS Ashish Rana National Institute for Environmental Studies, Tsukuba, Japan Renewable energy technologies (RETs) are attractive for sustainable energy supply and CO 2 mitigation. In this paper, a CGE model is used to analyze the effects of rapid reduction of costs of solar power generation, an important RET, in India. Alternate scenarios of cost reduction of solar power, hybrid scenarios with a carbon tax and a scenario of only carbon tax are compared with a reference scenario. Simulation results show that under such a scenario, high penetration of solar technology, economic gains, and modest emission reduction are achieved. The analysis shows that compared to accelerated solar technology scenario, a carbon tax achieves superior mitigation. Broad policy implications for developing countries are drawn in the context of global climate change debate. 1. Introduction Renewable energy technologies (RETs) based on sunlight, water, wind and biomass have long been considered to provide sustainable energy alternatives (Grubb, 1990). Their decentralized nature also makes them suitable for developing countries, many of them lacking in full energy infrastructure. India has been implementing an active renewable energy program for the last two decades. At present, non-conventional energy sources, such as solar, wind, biomass, small hydro (of capacity up to 25 MW), etc. have more than 3000 MW of capacity (MNES, 2002), which is around 3% of the total installed power generating capacity of 103 thousand MW (MOP, 2002). The clean nature of renewable energy also makes it very attractive from the environment perspective. Considering this feature RETs are supposed to be very important in promoting sustainable economic development. Article 2 of the Kyoto Protocol of the UNFCCC states that each Annex-I party, in achieving its emission reduction target, in order to promote sustainable development, shall Research on, and promotion, development and increased use of, new and renewable forms of energy (Article 2.1(iv), UNFCCC, 1997). Cost is one of the prime reasons for slower penetration of renewable technologies in commercial use. For instance, the cost of generating electricity from solar photovoltaic (SPV) on a life cycle basis is over 10 times higher compared to coal-fired thermal power. If the costs of these technologies are brought down drastically, increased penetration and thereby a gain on environment could be achieved ceteris paribus. The main objective of this paper is to analyze this gain vis-à-vis macroeconomic effect for the case of solar electricity in India.. Published by Blackwell Publishing.

2 46 Rana, Evaluation of a Renewable Energy Scenario in India for Economic and CO 2 A computable general equilibrium (CGE) model is a very effective tool for such an analysis. CGE models have been used for a variety of policy analysis including environmental policies (Xie and Saltzman, 2000). The Second Generation Model (SGM) is the CGE model used in this paper. This model has been widely applied for analysis of GHG mitigation policies at the global level (Edmonds et al, 1995; Edmonds et al, 1997; MacCracken, Edmonds, Kim, and Sands, 1999) as well as at national level, for example, in Japan (Hibiki and Sands, 1996) and India (Fisher-Vanden et al, 1997; Rana and Shukla, 2001; Shukla and Rana, 2002). 2. Model description and assumptions The economy is represented by eight producing sectors Agriculture, Oil, Gas, Coal, Electricity, Oil refining, Gas distribution, and Everything Else (ETE), four final demand sectors consumption, government, investment, and net imports, and three factors of production land, labor and capital. The flow of goods and services is shown in Figure 1. There are six sub-sectors in the electricity sector Oil-fired, Gas-fired, Coal-fired, Nuclear, Hydro and Solar. Each sub-sector within a sector produces a homogenous good. Production relations are represented by constant elasticity of substitution (CES) functions. Technological change is assumed to be "Hicks Neutral" and is exogenously introduced as change in total factor productivity. Technological progress also results from the selection of new technologies. Figure 1. Flow of go ods and ser vic es in SG M AGRICULTURE grains and oil seeds animal products forestry food processing other agricultural services HOUSEHOLDS demographics labor supply ENERGY land supply oil production household savings PRIMARY FACTORS gas production final product demands OF PRODUCTION petroleum refining land surface gas distribution subsurface resources coke and coal products labor biomass production capital uranium production hydro and solar electric power GOVERNMENT electricity production general government national defense education EVERYTHING ELSE paper and pulp manufacture chemical manufacture cement manufacture primary iron and steel primary non - ferrous metals other manufacturing passenger transport freight stransport other services So ur ce: Ed mo nds et al (1995)

3 Rana, Evaluation of a Renewable Energy Scenario in India for Economic and CO 2 47 Economic growth occurs through enhanced factor supply and improved productivity, i.e. technological progress. Investment in a sector (or sub-sector) in each period depends on the savings in the economy and expected profit in the sector. Investment allocation within a sector is determined by a logit function. Capital is assumed to be "putty-clay" type, that is, once the investment occurs the technology cannot be changed. Capital is modeled using a vintage approach and investments operate for life or until they cover operating expenses. Data required are input-output tables, past capital investment pattern, energy flows in the economy at sub-sector and technology levels, reserves of resources, land supply, and current emissions. Labor supply is estimated using population data and given exogenously to the model. Both renewable and natural resources are explicitly treated. Only commercial energy sources are considered. Traditional biomass fuels are ignored since national accounts and official input-output data do not include their value. A complete description of original SGM is given in Edmonds et al (1995). The original model structure allows for sub-sectors in oil, gas, and coal (by use of grades), and for oilrefining and gas transformation. Sectors depicting biomass production and uranium production are also provisioned. Seven sub-sectors for electricity including one for biomass-based electricity production are also present. For setting up SGM for India many of these features are not utilized due to data limitation. The present version of SGM for India is calibrated for the year Details of this calibration are given in Rana (1999). The analysis spans forty years, from 1990 to The SGM endogenously generates macroeconomic information such as energy prices and loss of sectoral GDP and consumption. This information, besides its direct utility, is also necessary to modify the inputs for equivalent scenarios in bottom-up models (Shukla, Nair and Rana, 2002). One of the main drivers of economic growth and energy consumption is population growth. This is exogenous input to the model using projections of the government (Government of India, 1996) to 2016 and extrapolating linearly for later years. Total population grows at 1.17% per annum from 1990 to 2030, decreasing over the model horizon. For total factor productivity, a growth rate of 2% per annum is used for the large ETE sector, which comprises mainly the secondary and tertiary sectors of the economy, based on Dholakia (1995). In this model, solar electricity is introduced in the reference scenario from the second period. The assumptions of energy resources available for use are 1.6 billion tons of crude oil, 730 billion cubic meters of natural gas and billion tons of coal. An important assumption about energy resources is that they are assumed not to grow over time, regardless of policy. 3. Accelerated solar technology scenario The prospects of penetration of renewable energy technologies are bright because the fossil fuel resource base is limited and the cost of these technologies is declining; moreover, they are less polluting. We concentrate on only one technology, namely solar photovoltaic, for two reasons. First, there is need to demonstrate how a technology push scenario would compare with a carbon tax scenario. Second, solar does not have concerns of other cleaner technologies, for instance safety and waste disposal issues in nuclear power, and high environmental and social costs of large dams for hydro-electricity, which increase the total cost. Solar electricity technology is incorporated in the reference scenario but here its development is accelerated. Photovoltaic electricity costs around 20 to 40 cents per kwh.

4 48 Rana, Evaluation of a Renewable Energy Scenario in India for Economic and CO 2 Photovoltaic prices have fallen sharply since the mid-1970s and are expected to fall further. In the 21st century, photovoltaic systems should be able to provide electricity at a cost of 4 to 6 cents per kwh as cost reductions can be achieved in several ways (Johansson et al, 1993; Goldemberg, 2000). Here the solar cost is assumed to be Rs. 32/kWh 1. As photovoltaic prices fall, markets will expand rapidly. To reflect the declining cost of this technology we reduce the relative factor intensity of capital in the production of solar electricity, effectively reducing the capital-output ratio, in the model. The other parameters for this technology remain same as in the baseline case. Such a construction reflects an active technology push policy of mitigation wherein the policy is directing substantial R&D culminating in technological breakthroughs translating in reduced cost. The investments in this R&D, which are massive for the Indian economy, may be undertaken through technology funds outside India, to which India can contribute and acquire technology through technology-transfers. We consider two other alternatives (Table 1) to this kind of policy, which capture imposition of carbon tax alone or along with some amount of solar penetration. Scenarios using only carbon tax scenarios for this version of SGM for India are described in Rana and Shukla (2001). Carbon tax is modeled as an additive tax per ton of carbon content of fossil fuels. Revenue from carbon tax is recycled to households by adding to income. In SGM, the influence of carbon tax pervades to alter the macro-economy. 4. Results Basic simulation results for the reference scenario and three alternate scenarios are shown in Tables 2, 3, 4 and 5. Here the discussion is focused on results pertaining to Primary Energy Demand, Electricity Demand, CO2 emissions and GDP under different scenarios. In the reference scenario, primary energy demand increases at 4.4% per annum from 6.83 EJ to 38.7 EJ (Table 2). Coal remains highest consumed fuel over the model horizon but its share falls from 58% in 1990 to 48% in A shift is observed towards consumption of natural gas and oil. Share of nuclear increases while that of hydro falls. Solar electricity grows very rapidly, but its contribution in total consumption does not increase significantly. These trends reflect the current common understanding of the future energy system that as growth occurs, there would be a shift away from coal employing more oil and gas while the non-fossil fuels use increases less significantly. Table 1. Accelerated Solar Technology and Alternative Scenarios for SGM Scenario Name Implementation in model Solar energy costs reduce by 50% by 2005 $25/ton-Carbon tax on fossil fuels Medium Solar+ $25 tax Solar costs reduce by 33% by $25/ton-Carbon tax 1 Assuming investment cost of Rs. 20 Crore/MW, 20 years lifetime, 10% interest rate, operation and maintenance cost to be 2% of annual system cost and annual electricity yield of 750 kwh/kw.

5 Rana, Evaluation of a Renewable Energy Scenario in India for Economic and CO 2 49 Table 2. Primary Energy Demand (Units: EJ) All Scenarios Oil Gas Coal Nuclear Hydro Solar Total Note: EJ means Exajoules (1 EJ = Joules) Table 3. Electricity Demand (Units: EJ) All Scenarios Oil-based Gas-based Coalbased Nuclear Hydro Solar Total Note: EJ means Exajoules (1 EJ = Joules = Billion KWh)

6 50 Rana, Evaluation of a Renewable Energy Scenario in India for Economic and CO 2 Table 4. CO 2 Emissions (Units: TgC) Scenario Notes: TgC means Teragrams Carbon (1 TgC = g of Carbon = 10 6 tons of Carbon) CO 2 Emission Coefficients employed: Coal TgC/EJ, Oil TgC/EJ, Gas TgC/EJ Under the alternate scenarios we observe changes in fuel mix in primary energy demand. In scenario, the total energy demand remains almost same as in the reference scenario, but a significant share of total demand is now taken by solar. The share of solar in total demand is 5.5% in The interesting thing to note here is that solar replaces coal and oil to a large extent, but gas and hydroelectricity are also reduced to some extent. In scenario, the total energy demand reduces from 38.7 to 32 EJ in Imposition of carbon tax increases the relative price of coal, thereby reducing its use. Penetration of other fuels is still limited due to hurdles such as expensive technologies, lack of required infrastructure, and so on. The ultimate result is reduction of total energy demand by increasing the energy efficiency. A shift away from coal in favor of gas, nuclear, hydro and to some extent solar is observed. The share of solar in total energy demand increases from 0.7% to 1.1% in The situation of Medium Solar + scenario is between these two scenarios, that is while the reduction of total demand more than in the scenario, the share of solar increases more than in scenario. In case of electricity demand (Table 3), the pattern in reference scenario is similar to that of primary energy demand. Coal-based electricity is predominant initially, but gas-based power makes an important share in the later periods. Gas-based electricity increases at a rate of 8.6% per annum in the 40-year period. Solar electricity enters in 2000 with EJ and increases to 0.09 EJ getting 2% share. The hydro electricity share in total demand in 2030 is around 7%, falling from 25% in The nuclear electricity share in 2030 is 4% of the total electricity demand, increasing from 2% in Under the alternate scenarios, the fuel mix of electricity also changes. In scenario, share of solar electricity increases since the relative price of this technology is brought down in this scenario. The share of solar in total electricity consumption is 15.5% in 2030 compared to 2% in reference scenario (Table 3). Solar electricity largely replaces coal-based and gas-based electricity. A little displacement of nuclear and hydro electricity is also observed. In contrast, in scenario the share of solar increases only marginally. In $25 Tax scenario, gas-based electricity forms the major share of total electricity and shares of nuclear and hydro also increase a little. The total electricity consumption increases in. This indicates more use of electricity in final energy demand as in this scenario the carbon tax acts to check the consumption of polluting fossil-fuels and also as electricity produced under this scenario uses lesser of polluting fuels. Carbon dioxide emissions in scenario are around 4% lower than emissions in the reference scenario by 2030, while they are around 23% and 25% lower in and

7 Rana, Evaluation of a Renewable Energy Scenario in India for Economic and CO 2 51 Medium Solar + $25 tax scenarios (Table 4). The mitigation contribution of solar energy is lower than its added share in total energy since a fraction of the substituted energy is from carbon-free resources such as hydro and nuclear. The mitigation analysis shows that under the $25 tax there is 25% cumulative mitigation. The mitigation under a case is only 5%. A mixed policy, such as Medium Solar +, causes substantially higher mitigation than technology push scenarios. This analysis indicates that carbon tax achieves superior mitigation than the technology push strategy. Evidently, the technology push is more effective for penetration of solar technology compared to the market pull by carbon tax. Simulation results (not shown here) reveal that even under a high carbon tax, for instance a $100/ton-Carbon, the penetration of solar technology remains below that obtained by a Medium Solar + scenario. The influence of technology push is greater on the economy. 6 Fig.2. Cumulative CO2 mitigation ( ) 5 4 TgC Med Solar + Table 5. GNP (Units: Rs. Thousand Crore at constant 1990 prices) Scenario

8 52 Rana, Evaluation of a Renewable Energy Scenario in India for Economic and CO 2 In there is a 1% loss of GNP initially. The loss stabilizes at 0.4% below the level of base case in later periods. In contrast, under a case, the real GNP increases over the base case and the gain in real GNP reaches 0.6% in The GNP gap between the two cases is about Rs 45 thousand Crore (or around 1%) in 2030 (Table 5). The improved mixed solar technology and tax scenarios cause little GNP loss, but have equivalent or better mitigation on tax scenario. The GNP gain under the case results from a high penetration of improved solar technology, which raises the efficiency of the energy sector as well as that of the entire economy. The analysis shows that R&D investments can be extremely cost effective if innovations lower the technology costs rapidly. The breakthrough in solar or other renewable technologies can generate tremendous economic benefits. 5. Conclusion In this paper the Second Generation Model, a CGE model, is applied to evaluate how rapid development and deployment of solar electricity generation technologies effects macroeconomic growth, primary energy consumption mix and carbon dioxide emissions in India. CGE models, as other type of models, also have certain limitations and weaknesses, such as sensitivity to parameter assumptions and theoretical weakness of assumption about representative agents. More importantly, the inherent structure of these models is based on assumption of current market optimality, which might seem difficult in context of developing countries. Since the analyses here pertain to long time horizons, however, it is admissible to expect the markets to correct in the long-run. Solar power generation is one of the renewable energy technology options. Such options supplement the conventional fossil-fuel based energy sources because their current cost structure keeps them in an uncompetitive position and does not allow them to replace the existing technologies. Solar power has certain advantages over other renewable technologies such as it does not require a specific location unlike wind or hydro power. Rapid deployment of solar power technologies has not occurred because their costs are exorbitant. Prices have fallen since last few decades and are expected to fall further. In this paper alternate scenarios of cost reduction of solar power, hybrid scenarios with a carbon tax and a scenario of only carbon tax are compared with a reference scenario. The main result is that when solar power cost is reduced, rapid penetration of solar in the energy system occurs compared to penetration in carbon tax case. CO 2 emissions are mitigated to greater extent under a carbon tax case than under the accelerated solar case. The possible reason is that solar energy does not replace only fossil-fuel based sources. Some displacement of other clean but relatively expensive technologies like nuclear also occurs. Finally the effect of the accelerated solar case on macroeconomic growth is positive as compared to the carbon tax case, where the impact is negative. Under hybrid scenarios of medium cost reduction of solar coupled with a carbon tax, the economic growth is least damaged. Some broad policy implications can be drawn from the simulation results. From the global climate change perspective, recent statements from US pronounce that without meaningful participation of developing countries like India in the negotiation process, global emission targets cannot be met. In such a case developing countries are likely to get committed to GHG emissions reduction. Since the main source of emissions comes from energy use, developing countries would then need a strategy to achieve the required emission targets without a

9 Rana, Evaluation of a Renewable Energy Scenario in India for Economic and CO 2 53 negative impact on their economic development. Therefore, if the dual considerations of economic development and emission reduction becomes dominant then a hybrid policy which strives to accelerate deployment of renewables along with some form of carbon tax could be pursued. However, if emission reduction targets remain a far thing for developing countries, a simple policy to promote research and development to bring down cost of renewable energy technologies might bring gains to the economy and modest emission reductions as well. The author greatly benefited from discussions with Prof P.R. Shukla, Dr R.D. Sands, Dr. A. Hibiki and Dr. R. Pandey. The author wishes to thank Dr. J. Edmonds and Dr. Sands for access to the SGM model and facilitating calibration of the model. The author is grateful to anonymous referees for their comments and suggestions. Final version received January Send inquiries to Ashish Rana: ashish.rana@nies.go.jp s Dholakia, B.H Sources of India s Economic Growth. Indian Institute of Management, Ahmedabad. Mimeo. Edmonds, J., H.M. Pitcher, D. Barns, R. Baron and M.A. Wise Modelling Future Greenhouse Gases Emissions: The Second Generation Model Description. In Lawrence Klien and Fu-chen Lo (eds.) Modelling Global Change, United Nations University Press, Tokyo. Edmonds, J.A., S.H. Kim, C.N. MacCracken, R.D. Sands and M.A. Wise Return to 1990:The Cost of Mitigating United States Carbon Emissions in the Post-2000 Period. PNNL Report PNL Pacific Northwest National Laboratory, Washington D.C. October. Fisher-Vanden, K.A., P.R. Shukla, J.A. Edmonds, S.H. Kim, and H.M. Pitcher Carbon Taxes and India,. Energy Economics, 19: Goldemberg, J World Energy Assessment: Energy and the Challenge of Sustainability. United Nations Development Programme (UNDP), United Nations Department of Economic and Social Affairs (UN-DESA) and World Energy Council (WEC), New York, NY. Government of India Population Projections for India and States Report of the Technical Group on Population Projections constituted by Planning Commission, August Grubb, M.J The Cinderella Options: A Study of Modernized Renewable Energy Technologies, Part 1: A Technical Assessment. Energy Policy, 18(6): Hibiki, A. and R.D. San ds E stimatin g the Im pact of a Carbon T ax Using th e S econd Generation Mo del o f G reenh ouse Gas Em issio ns fo r Japan. In A. A man o (ed.) Glob al Warming, Ca rb on Lim itation, an d Eco nom ic Develop men t. Center for Global Env iro nm ental Research, Nation al In stitu te for E nvironmental Stu dies, Tsuk uba, Jap an. Johansson, T.B., H. Kelly, A.K.N. Reddy and R. H. Williams Renewables Energy - Sources of Fuels and Electricity. Washington, D.C.: Island Press. MacCracken, C.N., J.A. Edmonds, S.H. Kim and R.D. Sands The Economics of the Kyoto Protocol. In The Costs of the Kyoto Protocol: A Multi-Model Evaluation, John Weyant (ed.). Special issue of The Energy Journal. Ministry of Non-conventional Energy Sources (MNES) Cumulative Achievements of Renewable Energy Programmes in India (Internet document). Ministry of Non-conventional Energy Sources, Government of India, New Delhi. (accessed on ).

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