Life cycle costs and energy market equilibrium: a policy assessment for India

Abstract

Energy production and consumption cause unintended impacts. Their exclusion by the market leads to sub-optimal resource allocations. Conventionally, market correction is proposed through Pigouviantaxes or Coasianbar gaining interventions that shift the equilibrium. The long-life of energy assets and their external impacts need interventions along the future time-path to correct the dynamic equilibrium. The energy modeling literature in eludes interventions that inter nalize externalities at the point of energy use, but miss other externalities of energy value chain such as land degradation in coal mining and nuclear waste disposal. The life cycle analysis is deployed for full accounting of externalities of energy use. However, the conventional life cycle analysis is static and is carried out at micro level for each fuel and hence is inadequate to correct the dynamic macroeconomic equilibrium. The proposed research aims to address the following questions: i) How do market prices com pare with the life cycle costs for major primary energy resources (coal, natural gas, nuclear and biomass) in India? ii) What would be the long-term energy equilibrium trajectories f- or India under business-as-usual (BAU) policy regime? iii) How could external costs from life cycle assessment for different primary energy resources be internalized in energy market. iv) How would policies based on life cycle cost alter long-term energy market equilibrium vis-a vis BAU trajectory in India? v) Once external costs are internalized through alternate pack ages of policies, measures, and instruments, how do they impact indicators like energy security, energy access and sustainability? The framework of analysis developed for this research comprises life cycle analysis (ExternE,2005) that includes impact pathway approach, an integrated energy- economy-environmental model, and future energy scenario analysis. Extensive data collection was done along the entire value chain of major fuels such as coal, nu clear and natural gas. Within literature, no dose response functions (DRF) specific to India are available. Usage of DRFs from Ostro (1994) has support from previous Indian studies (Brandon and Homman, 1994 and Shah and Nagpal, 1997) and hence has been used while evaluating health impacts from power generation. The environmental impacts arising from coal and uranium mining activities have been assessed and monetized using control cost methodology. A bottom-up energy modeling framework ANSWER-MARKAL is then used to internalize the external costs from the static life cycle analysis to generate dynamic energy system equilibrium and to make comparative policy assessment for the Indian energy system. Several key results arise from this research. First, the tack of internalization of lifecycle externalities in India is resulting in significant distortions in energy prices. This is contributing to inefficient use of energy resources, higher demand and suboptimal investments on supply side. Second, the internalization of life cycle environmental costs have highest implications for coal based power generation system, leading to early introduction of advanced coal burning and clean coal technologies. Third, the shift from the current inefficient equilibrium to an efficient frontier is made at very low cost by introduction of technologies which mitigate emissions of local air pollutants like S02, NOx and SPM. Besides, the efficient equilibrium also includes substitution of coal by natural gas and to a lesser extent also by the renewable energy and nuclear technologies. Evidently, India's environmental policy therefore should include mandatory use of FGD, ESP and SCR technologies in the coal-based electricity generating units. Fourth, the long-run marginal co st of electricity is significantly altered if lifecycle external costs are internalized. The resulting enlarged energy portfolio calls for lesser reliance on coal and would pose higher energy security risks. Fifth, the energy security risks are further exacerbated if India undertakes carbon emissions constraints. Due to high coal content in India's business-as-usual scenario and highest carbon content per energy unit for coal, the carbon constraint has most severe impact on coal use compared to any other fuel. Sixth, in case of carbon constraints, CCS (carbon capture and storage) technology is an alternative to advanced coal generation. However, this research shows that due to low potential of depleted oil and gas fields in India, the initial benefits from sale of oil and gas through enhanced oil / gas recovery (EOR/EGR) soon gets overwhelmed by the cost of capture. Hence, deployment of CCS in India would require very high international carbon price or explicit incentives for deployment of CCS. Seventh, the nuclear power is an important option within India's energy portfolio. With the possible availability of low cost uranium fuel because of import, nu clear electricity will be competitive and also reduce climate change risks. Eighth, given the diversity of future energy resources and technology options, there is no silver bullet, i.e. a single dominant technology, to internalize the external costs. The energy environment efficient frontier would evolve through a mix of choices from among the portfolio of energy resources and technology options. The diversity of these options including their cost structures; multiple objectives of energy environmental policies and the varied interlink ages of energy and environmental policy dynamics call for a hybrid package of direct regulation and market-based economic instruments to sustain energy environment economy frontier on the efficient path. The key contributions of the research are: i) detailed life cycle cost estimations for major energy sources, ii) delineation of policies and instruments for internalizing the external costs, iii) modeling of Indian energy system under different future scenarios to assess the implications of life cycle costs to describe efficient energy environment frontier.