Dynamics of energy and electricity markets: policy analysis for India

Abstract

Energy and electricity markets have very long term implications as energy supply projects typically have long gestation periods and lifetimes; environmental impacts manifest over centuries; and availability of primary energy resources change significantly over time. In addition, other long-term phenomena like alternate development patterns (e.g. sustainable development), infrastructure revamping and significant (new) technology penetration come into picture and can be explored over such a time period. The research objective was to evaluate the implications of alternative policies on energy and electricity market development, not just on market parameters such as cost/price of technologies/fuels, but also on factors such as energy and environmental security issues. In pursuit of this broad objective, the following policy issues have been addressed in this research: 1. Analysis of energy and electricity market dynamics 2. Impact of energy market reforms and regional market integration 3. Energy and its linkage with sustainable development 4. Impact of international oil price change on the energy-economy 5. Impact of Carbon tax on Energy trajectory in the long run. Methodology involves extensive use of scenario analysis as applied to an integrated energy sector bottom-up optimization model with a planning horizon of 40 years. Some of the significant findings/insights of this research are: 1. Energy market reform and regional energy market integration scenarios lead to low cost of environmental transitions in terms of lower investment requirement and lower costs of electricity to the consumer. However, regional co-operation policy is a better medium to long term policy due to additional benefits. 2. Enhanced Gas and hydro supply through regional co-operation affects coal markets adversely in the medium to long term. However, coal continues to be the dominant fuel source for power plants in all the scenarios (except stabilization tax scenario) although coal capacity share declines over time. 3. Sustained high international oil price increase energy system investment due to penetration of advanced technologies, especially in transport. Low international oil price commits economy into a higher energy import mode, leading to higher foreign exchange outgo in long run. Therefore sustained high international oil price scenario is an opportunity to leapfrog current development path into a more sustainable mode through technology-push policies. 4. Energy intensity and price elasticity of oil are more sensitive to a rise in oil price than decline. 5. High economic growth causes early transition to low trajectory of local emissions, thereby validating environmental Kuznets’ curve. 6. Local and global environment policies are disjointed and global environmental control needs separate policies and instruments. 7. Stabilization carbon tax policy reduces cumulative carbon emissions significantly (by 26%), with most of the reductions coming from electricity generation and some from industry and transport. Response from power sector is delayed as technology life span is longer and investments are higher. However, stabilization tax leads to more than 50% rise in electricity price.