WP 66, IIM, Electricity

Natural Gas in India:
An Assessment of Demand
from the Electricity Sector
P.R. Shukla, Subash Dhar, David G. Victor, & Mike Jackson
Working Paper #66

October 2007
The Program on Energy and Sustainable Development at Stanford
University is an interdisciplinary research program focused on the
economic and environmental consequences of global energy consumption.
Its studies examine the development of global natural gas markets, reform
of electric power markets, international climate policy, and how the
availability of modern energy services, such as electricity, can affect the
process of economic growth in the world’s poorest regions.
The Program, established in September 2001, includes a global
network of scholars—based at centers of excellence on five continents—in
law, political science, economics and engineering. It is based at the
Freeman Spogli Institute for International Studies.
Program on Energy and Sustainable Development

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Encina Hall East, Room 415
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http://pesd.stanford.edu
About the Authors
Subash Dhar is a doctoral candidate in the Public Systems Group at the Indian Institute of Management in
Ahmedabad.
Mike Jackson is the India Country Director for the Program on Energy and Sustainable Development at Stanford
University.
P.R. Shukla is a professor in the Public Systems Group at the Indian Institute of Management in Ahmedabad.
David G. Victor is the director of the Program on Energy and Sustainable Development at Stanford University and
a law professor in the Stanford Law School.
About the PESD Study: Natural Gas in the Energy Futures of China and
India
PESD has been studying the emerging global market for natural gas through a series of closely
integrated research projects. The topics of these studies range from focusing on the geopolitical
implications of a shift to a global gas market, the factors that affect gas pricing and flows as
LNG links the U.S. and European markets across the Atlantic basin, and how gas projects fare in
privately-owned independent power projects (IPPs) in emerging markets.
One of the open questions in all these studies concerned China and India--both countries use
relatively small amounts of gas now but could be very large in the future. The role of natural gas
in Chinese and Indian economies is of critical import both domestically and for global energy
and environmental issues. The competition between coal and natural gas in these two markets
has tremendous implications for local air pollution and for climate change. Rising demand for
imported gas in China and India will also shape the LNG market in the Pacific Basin and could
lead to the construction of major international pipeline projects to monetize gas supplies in
Russia and the Middle East. The present paper is one in a series that looks at the Indian market
in detail.
Disclaimer
This paper was written by a researcher (or researchers) who participated in the PESD study
Natural Gas in the Energy Futures of China and India. Where feasible, this paper has been
reviewed prior to release. However, the research and the views expressed within are those of the
individual researcher(s), and do not necessarily represent the views of Stanford University.
Abstract
The electricity sector is among the key users of natural gas in India. The sustained electricity
deficit and environment policies have added to an already rising demand for gas. Post 1994, the
market reforms have led to increased gas supply from domestic production and imports. This
paper models the future demand for gas in India from the electricity sector under alternative
scenarios for the period 2005-25. The scenarios are differentiated by alternate economic growth
projections and policies related to coal reforms, infrastructure choices, and local environment.
The results across scenarios show that gas competes with coal as a base load option if price
difference is below US $ 4 per MBtu. At higher price difference gas penetrates only the peak
power market. Gas demand is lower in the high economic growth scenario since electricity sector
is more flexible in substitution of primary energy. Gas demand reduces also in cases when coal
supply curve shifts rightwards such as under coal reforms and coal-by-wire scenarios. Local
environmental (SO2 Emissions) control promotes end of pipe solutions (FGD) initially, though
in the longer term mitigation happens by fuel substitution (coal by gas) and introduction of clean
coal technologies (IGCC).

Natural Gas in the Indian Electricity Sector: An assessment of demand from Electricity Sector
Natural Gas in India:

An Assessment of Demand from the Electricity Sector
P.R. Shukla, Subash Dhar, David G. Victor, & Mike Jackson
1. Introduction
Natural Gas 1 has been used in India since 1960s but the share of gas amongst the
sources of primary energy remained less than 1% till 1980s due to limited resource
availability. The scenario changed post 1980 as major gas finds in the Western
offshore (Bombay High and South Bassein) started commercial production. A 1700-
kilometer long, cross-country pipeline was constructed, to carry gas from west coat to
north India (Appendix, Figure 26). The supply push created by these developments
resulted in gas share in primary energy jump from under 1% in 1980 to around 6% in
1990 with power and fertilizer accounting for nearly eighty percent of natural gas
consumption on account of government policies which gave priority to these two
sectors in gas allocation. A second spurt in gas demand is in the offing as there have
been major gas finds on the east coast 2 and there are proposals for creating a
nationwide gas transmission grid to link these supplies to the existing market in the
northwest(Appendix, Figure 26). There is however a different environment in which
this growth of gas market is going to take place – the new supplies will be mostly
coming at much more expensive market determined prices and a number of new
consumer segments like transport, residential, and industrial consumers are looking to
source gas but have different price sensitivities. At the same time, reforms expected in
coal and electricity markets could significantly affect fuel choices made by power
producers. In fact, the power sector has shown growth in gas consumption during the
post-1991 reforms period and the same has been attributed to failure of electricity and
coal markets (Shukla, Heller, Victor, Biswas, Nag & Yajnik 2004). In this paper, we
would therefore like to understand what share of gas can be there for power
generation under alternative growth and reform scenarios in coal and power sector
and what will be the implications for climate and electricity prices.
1 In rest of the text Natural Gas is referred to as Gas

2 Gas reserves which had come down from a peak of 735 bcm in 1991 to 648 bcm in 1998 have due to
recent gas finds increased to 1075 bcm (CMIE)
-1-
The future fuel choices for power sector in India has been modeled using energy
system models in the past with focus on climate change issues (Shukla, 2006; Garg, ,
et. al., 2003; Shukla, 1997). In the immediate past, there are two government reports,
which have looked at future energy scenarios, (GoI, 2006; TERI, 2006) and both
provide projections for gas in electricity sector for different GDP growth rates. The
issue of reforms in power sector and the impacts on fuel choices has been studied
(Shukla et. al., 2004) but the same has not been projected for future. Therefore a study
which has looked at reforms in coal and electricity sector in India and its impact on
fuel choices in power sector with consequent implications for power prices and
externalities has not been studied and this paper is trying to address this gap.
Reforms in energy markets have been fairly difficult in the past due to the political
sensitivity and control of pricing. The oil and gas markets have been more liberalized
than the coal sector, but aggressive reforms in coal sector could change relative prices
and availability of coal, profoundly impacting fuel choice decisions. In the electricity
sector, there are a whole host of reforms that are pending – electricity tariff reform,
increased role for private onsite generation, reduction in theft and transmission losses
– but in this paper we focus largely on reforms on the generation side. Finally, we
explore the impact on fuel choice under local environmental constraints (SOx) as
India has begun, and is expected to continue to take more aggressive measures to
reduce urban air pollution. 3 The expectations about future growth of the Indian
economy show a wide range – the Planning Commission of the Government of India
currently talks of 8% and 9% GDP growth rates through 2032 (GoI, 2006) whereas
the International Energy Agency (IEA) has talked of a 5.1% GDP growth for period
till 2030 (IEA, 2006b). Therefore three GDP growth rate scenarios were used in this
study to explore the impact of this uncertainty on fuel requirements and demand.
The paper is organized as follows. The first section talks about evolution of electricity
generation markets in India to give a background to a reader uninitiated to Indian
energy sector. This is followed by a section on future growth scenarios where we
3 For example, the Supreme Court of India has mandated a switch of all of Delhi’s taxis, buses, and
rickshaws from diesel to compressed natural gas (CNG) in an attempt to help alleviate the city’s
horrendous air pollution.
-2-
analyse gas demand for power under alternative expectations of growth rates and
another section on policy reforms in coal and electricity sector. In the end we
conclude with a discussion of the results.
-3-
2. Evolution of Gas in Indian Electricity Market

Electricity generation in India till 1991 was done mainly by government owned
entities – State Electricity Boards (SEBs) owned by respective state governments and
Central government owned entities like National Thermal Power Corporation
(NTPC), National Hydel Power Corporation (NHPC), Nuclear Power Corporation,
North Eastern Power Corporation and Damodar Valley Corporation (DVC) (Shukla
et.al., 2004). SEBs were vertically integrated utilities involved with generation,
transmission, and distribution, whereas central entities simply concentrated on
generation. In addition to the SEBs, there were a few private entities operating in
large cities like Ahmedabad and Kolkatta. In 1991, as a part of a broad economic
liberalization of the Indian economy, generation was more broadly opened to
competition and private participation (Shukla et.al., 2004). In line with the definition
of a utility provided in the Electricity Act, 2003 all these entities can be together
referred to as utilities.
SEB’s are responsible for selling to end consumers and collecting payments.
However, because these are ultimately politically controlled, they have had difficulty
charging tariffs above even the cost of supply. The Indian electricity sector follows
inverted tariffs - industrial customers cross subsidize the low or uncollected tariffs
from residential and agricultural users. In addition rampant theft is largely
overlooked. As a result of high theft and low tariffs, the SEBs have been transformed
into loss making entities, rendering them incapable of making investments on their
own for generation, and increasing investment risks for private generators. The
investment climate has therefore resulted in inadequate generation investments, which
has led to persistent electricity shortages (Figure 1).
-4-
Figure 1. Shortage of Electricity in India – 1996-2006
20%
18% Peak Shortage Electricity Shortage

16%
% Shortfall
14%
12%
10%
8%
6%
4%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Ministry of Power, Annual Reports
2.1. Utilities
Coal has been the mainstay fuel choice of the SEBs and NTPC and accounts for more
than 50% of total installed capacity (Figure 2). Coal is the most economical fuel for
power generation (Chittakur et. al., 2007) though gas can become economical in
certain cases 4 (Shukla et. al., 2004). At locations far from coal fields, the relative
price difference will be lower (e.g., in northern parts of India, in proximity to the
existing gas transmission infrastructure, it can be cheaper to transport gas than coal
(which comes from the east of the country). Large hydro is the cheapest source of
power in India (Shukla et. al., 2004), and is mainly used for meeting the peaking
demand, and has maintained a share of around 25% of total capacity for the last
fifteen years.
4 Shukla et. al instead of having a single cost for calculating the levelized costs used distributions for capital
costs, fuel costs, efficiencies and other parameters and found that there can be instances when gas based
power plants may turn cheaper than coal.
-5-
Figure 2. Electricity Generation Capacity – Utilities
140
120
1.7%
100 10.8%
19.4% 5.0%
80
GW
3.7%
60 2.2%
40
2.7% 2.1%
20 4.5%
0
1991 1996 2001 2006
Coal Hydel Gas Nuclear Oil Biomass Wind
% Figures indicate CAGR in the intervening period

Source: Data from CMIE and CEA, 2006
The share of coal in generation has been more than 70% since 1996 despite a decline
in capacity shares (Figure 2 & 3) - the aggregate plant load factor (PLF) for coal
based power plants increased from 47% in 1991 to 71% in 2005. The other trend is
the lower contribution of hydro where the availability has come down from 43% in
1991 to just 31% in 2005. Gas increased its share in capacity and generation from
1991 to 2001, but since then, the share has remained at around 10%.
Figure 3. Electricity Generation Utilities
700
600 5.5%
500 15.0%
6.3%
400
Twh
25.2% 0.5%
300 0.3%
200
4.5%
8.9% 5.4%
100
0
1991 1996 2001 2006
Coal Hydel Gas Nuclear Oil / Gas Biomass Wind

Source : Data from CMIE and CEA, 2006, Year 2006 Author Estimates
-6-
A closer look at gas based generation in the utilities shows that SEBs, centrally-
owned generators and the private sector have currently an almost equal stake in total
countrywide gas based generation capacity (Figure 4). The manner of capacity
additions has been different with ownership type. SEB have added plants with small
unit sizes (average unit size 42 MW (CEA, 2006)), at many places without steam
cycle, making them suitable for peaking purposes. The plants added in the last five
years however have larger unit sizes (average unit size 60 MW) and a majority of
them have a combined steam cycle. Central utility plants had larger unit sizes
(average unit size 95 MW) and mostly with steam cycle. The central plants were
given priority allocation of cheap government allocated gas supplies through the
Administered Pricing Mechanism (APM), and this helped them to run as baseload
plants. In the recent past, with the decline in supply of APM gas, these plants have
compensated the shortfall by using regasified LNG, which, being more expensive, has
increased their costs of generation (Figure 4). Private plants, like central plants, had
large unit sizes (average unit size 101 MW) and mostly with steam cycle. These
plants came up as a part of government efforts to attract foreign investment into the
power sector in the post-reforms period. Many of these power plants had a dual firing
capability of running on naphtha and natural gas. This was seen necessary as many
large plants 5 did not receive priority allocations of APM gas, making supplies
unreliable. However, oil price liberalization drove naphtha prices well above even
private gas in the late 1990s and early 2000s, making it unviable to run them. This
contributed to very low PLF for these plants in 2000. However, the PLFs for private
plants have improved overall in last five years, (Figure 4) mainly due to
improvements in states like Gujarat 6 where 40% of private plants are located, due to
improved availability of private gas and imported gas which allowed them to transit
from naphtha to gas 7 .
5 Enron Power Project which had a installed capacity of 740 MW or 655 MW Paguthan Power
6 The PLF for Private Power Plants in Gujarat went up from 31% in 2001 to 83% in 2005
7 The two major gas plants which did this transition are Essar Plant at Hazira and Gujarat Paguthan.at
Bharuh
-7-
Figure 4. Ownership wise growth in Gas Based Power Generation Capacity
14000
125% 300
Tariff Paise / Kwhr

100% Tariff Center
12000 200
75% Center
PLF 50% Private
10000 State 100
25% Private
Capacity (MW)
0% 0
8000
00
01
02
03
04
05
20
20
20
20
20
20
6000 Center
4000 IPP Policy

HVJ Pipeline
2000
State
0
Mar-76
Mar-78
Mar-80
Mar-82
Mar-84
Mar-86
Mar-88
Mar-90
Mar-92
Mar-94
Mar-96
Mar-98
Mar-00
Mar-02
Mar-04
Mar-06
Source : CEA, 2007
2.2. Captive Generation

The growth of captive generation has been attributed to the changes at the macro level
and micro level (Shukla et. al., 2004). Macro level policy changes arose from
economic liberalization enabling private investment in power plants, but the major
driver for setting up captive power plants has been the sectoral inefficiencies within
the power sector and the failure of coal markets (Shukla et. al., 2004). These
inefficiencies resulted in poor quality and reliability of power; and high industrial
tariffs. Captive power plants could help in overcoming these barriers and in addition
provide multiple benefits like heat, utilization of waste, etc. As a result of these
factors captive power plant capacity more than doubled within the period 1991-2001
(Figure 5) and within this gas based capacity rapidly increased its share.
-8-
Figure 5. Electricity Generation Capacity- Captive

20
15 3.0%
6.8%
10.4%
GW
10 7.6%
13.8%
15.0%
2.9%
5 4.9%
4.8%
0
1991 1996 2001 2006
Coal Gas Other Hydel

The gas based capacity not only accounts for a large share of capacity but a larger
share of generation (Figure 6) and gas based generation has grown faster than coal
and other fuels. This is happening because coal as a fuel is not widely and easily
available, gas based power (particularly plants running on subsidized, government
gas) is often cheaper as compared to grid-supplied power (Shukla et. al., 2004), and
captive gas units provide industries with higher quality and more reliable power.
Figure 6. Electricity Generation– Captive
80
1.2%
60
11.6%
14.4%
Twh
40 15.4% 9.1%
22.3%
20 6.7% 4.0%
7.8%
0
1991 1996 2001 2006
Coal Gas Hydel Other

-9-
2.3. Regulation
The Indian electricity sector is characterised by peak shortages (Figure 1) and
sometimes over production in off peak periods (Chikkatur, et. al., 2007) despite
overall electricity shortages (Figure 1). The government started giving incentives for
high PLF since 1992 (Chikkatur, et. al., 2007) to improve availability of plants and
thereby improve the utilization of current capacities. The PLF for thermal plants did
show a lot improvement and in 2005 average PLF for India was 73.71% (CEA, 2006),
up from 46% in 1991. This incentive however did create a problem during off peak
periods as the power plants continued generation even when the demand was low
resulting in high frequency (Bhushan, 2005). To correct the problem of peak
shortages and over supply in off peak periods the government introduced a
mechanism called Availability Based Tariff (ABT) in 2002, which gives incentives or
imposes penalties on producers and the SEBs to maintain the system frequency.
Generation companies get paid a higher tariff if they supply beyond the scheduled
generation when the system frequency 8 is low and are penalised if they supply beyond
their scheduled generation when system frequency is high. The generation companies
are paid an additional payment beyond their normal tariff called the Unscheduled
Interchange (UI). UI varies linearly with the system frequency with a ceiling. In 2005
the ceiling price was Rs. 5.80 per kWh (around 14 U.S. cents per kWh). The UI
changes tariffs dynamically and induces SEB to buy less when the system frequency
is low (Bhushan, 2005).This mechanism has succeeded in reducing the grid frequency
disturbances (GoI, 2006). The success of the mechanism depends on strict
enforcement of penalties and on this count CERC has played an active role
(Chikkatur, 2007). SEBs due to ABT have to commit their demand for grid power for
the next day and arrange for the corresponding supplies. The demand for grid power
is satisfied by central utilities, private producers, surplus SEBs or imports. Power
deficit states normally have long term contracts with central utilities but the quantity
left out is met by having short term contracts. The market for short term contracts has
developed with the clear articulation of power trading in the Electricity Act, 2003. In
the market for short-term contracts, on account of prevalent shortages in electricity,
8 Frequency will be low when the demand is more than supply and vice versa (Bhushan, 2005)
- 10 -
high rates are being paid 9 . These rates make it economically viable to run plants on
costlier gas available from private gas producers and imported gas. In the state of
Gujarat, the private producers who did not have any firm allocations of APM gas had
been running at aggregate PLF of 31% in 2001 (CEA, 2007). In 2006 the aggregate
PLF for the same capacities has increased to 83% (CEA, 2007), which means they are
running as base load plants. The long term viability of the gas for base load against
coal will however depend on relative prices of coal and gas and this question is
discussed under future scenarios.
9 In February 2006 different states were paying prices ranging from 585 paise per Kwh to 201 paise per
Kwh (Infraline, 2007)
- 11 -
3. Future Scenarios
Energy scenarios are useful tools to understand the impact of a range of market
drivers on the future energy system. Each scenario is one alternative image of how the
future can unfold based on a range of assumed input; they are neither predictions nor
forecasts. They represent the playing out of certain economic, social, technological,
and environmental and policy paradigms (IPCC, 2000). Diverse future socio-
economic scenarios capture the possible variability in future national energy and
emission paths based on different combinations of key change driving forces and
hence are valuable tools to long-term energy and environment policy analysis in
country preparedness for future energy transitions. Scenarios have been used as a tool
to assess future greenhouse gas and other gas emissions, energy and environment
futures (Hafele, 1981; Nakicenovic, et. al., 1988; Gallopin, et. al., 1988; Fujii &
Yamajii, 1998 and IEA, 2006a). The most prominent exercises on scenarios-based
analysis have been done by the IPCC, which to serve as inputs to Global Climate
Models (GCMs) (Houghton, et. al., 1990; Alcamo, 2001 & IPCC, 2000). The scenario
methodology has also been widely used in developing country context (Jiang & Hu,
2001; Cadena & Haurie, 2001) and also speciafically for India (TERI, 2006, Shukla,
2006; Shukla, et. al., 2004; Garg, et. al., 2001; Rana & Morita 2000; Shukla, et. al.,.
1999).
3.1. Scenario Storylines

Storylines provide consistent narration of complex interplay among various driving
forces for alternative scenarios (Shukla, 2006). Storylines are a way of moving from
the qualitative narratives about key drivers to quantitative assessments for the model
parameters. The key drivers for the current scenarios are similar to IPCC scenarios,
namely economic growth, demographic profile, technological change, energy
resources, institutions and policies (IPCC, 2000). The quantification of key drivers is
a judgmental process done using a two stage process (Shukla, 2006) – first the range
of numerical values for key drivers from known data sources is collected and then
using the qualitative storyline we decide a specific driver trajectory. We will first
discuss about drivers that are common across scenarios and then discuss the storylines
- 12 -
of the three reform scenarios which we have developed around this reference
scenario.
3.1.1. Macro Economy

The expectations about GDP growth rate of India vary considerably (Table 1) – while
the Indian government projects high growth rates given the consistent high growth
rates in the last few years, the international agencies like IEA have a lower
expectation of growth rates.
Table 1. GDP Growth Rate Future – Key Agencies
Agency 2007-12 2012-17 2017-25 Overall Reference
CAGR
DOE 5.9% 5.4% 5% 5.6% International Energy
Outlook, 2007
(DOE/EIA, 2007)
IEA 6.4% 5.1% 4.2% 5.2% World Energy Outlook
2006 (IEA, 2006)
Planning 8% 8% 8% 8.0% Integrated Energy
Policy (GoI, 2006)
Commission
9% 9% 9% 9.0%
GDP is one of the key drivers; therefore we developed scenarios to explore the
expected impact of GDP growth on energy use. At the higher end, we matched the
growth rate with the planning commission 8% growth rate, and at the lower end we
took a flat 5% growth rate which is lower than IEA and DOE scenarios. In between
we took a scenario which was developed using a long term trajectory but truncated at
2025 (Table 2).
Table 2. GDP Growth Rate – Future Scenarios
Scenario 2007-12 2012-17 2017-25 Overall
CAGR
High Growth 8% 8% 8% 8.0%
Medium Growth (Reference) 7% 6% 5% 6.0%
Low Growth 5% 5% 5% 5.0%
The structure of the Indian economy (See Appendix, Table 6) was estimated using
logistic regression with asymptotic values fixed based on discussions with experts.
The general expectation is that there will be an increase in share of industry, and
commercial sectors at the expense of agriculture and this trend is accentuated with
increasing growth rates.
- 13 -
The population projections as well as the urbanization are as per medium scenario of
United Nations Population Projections to 2030 available from United Nations World
Population Statistics (See Appendix, Table 7).
3.1.2. Energy Supply and Prices

India is a large country with geographically separated energy resources and demand
centres. Different fuels become competitive at different locations and at different
times depending upon the availability of the resource, extraction costs, and
transportation costs. This results in competition among energy sources at multiple
points that result in their partial penetration. This is represented in the model through
multiple grade specifications for each energy form. Coal and gas are the two most
important sources of thermal energy in India and the competition between the two
will depend to a large extent on the relative prices of these two fuels.
i. Coal
The Indian coal sector, which came under complete state control post nationalization
of 1973, has been gradually reformed since the early 1990s, but still remains heavily
under the influence of the central government. The government allowed coal mining
by steel (in 1976), power (in 1993), and cement (in 1996) producers for captive
consumption. Coal mining for selling into the broader market is still restricted to
centrally-owned Coal India Limited (CIL) and Singareni Coal Company Ltd. (SCCL).
The coal companies supply coal to users, decided by a coal linkages committee,
composed by government representatives from the state-owned coal companies,
railways, and major consuming industries. In March of 1996, the government granted
CIL & SCCL the freedom to set prices for Grade A, B & C coal. The move allows
producers to charge differentially based on coal quality and transportation costs. The
prices were progressively decontrolled and as per the Colliery Control Order, 2000
CIL & SCCL are now free to price all grades of coal. The prices increased post-
decontrol (See Figure 7) and the gap between domestic coal prices and international
coal prices was rationalized to some extent but the recent spike in international coal
prices has again left domestic coal prices out of sync with international coal prices.
- 14 -
The mine mouth coal price vary with grade (with higher grades commanding a higher
price) and also the between different coalfields 10 .
Figure 7. Coal Price Trend: Northern Coal Fields
Prices in 2005 USD

3.00
Prices of Gr A/B/C
2.50 Deregulated
Prices fully
2.00 Deregulated
US $/GJ
1.50
1.00
0.50
0.00
Dec-95 Mar-96 Mar-97 Aug-98 May-99 Jan-01 Jan-05
A B C D E F International
Source: Indiastat (1995 -2001) & CMIE (2005)

The domestic reserves of coal and hence production is not evenly spread and located
mainly in eastern and central parts of India whereas power plants are scattered rather
evenly across country (See Appendix, Figure 27). The average distance over which
coal was transported to power plants was 641 kilometres in 2005 (Ministry of Rail,
2006). The average transportation cost of coal by rail in 2005 for one tonne of coal
was Rs 853 (US $ 19.4) per 1,000 km (Ministry of Rail, 2006) which is around the
price of Grade C and D coal used for power generation. Therefore the coal cost for
domestic coal show a wide variation firstly due to widely varying mine mouth costs
and secondly due to different transportation costs. This wide variation in prices is
modelled by having around seventeen grades of coal with total annual mining
capacity projected to increase from about 400 million tonnes in 2005 to about 820
million tonnes per annum in 2025.
10 Coal prices in 2005 varied between Rs.20/GJ to Rs.70/GJ for the different coal fields in India (Based
on prices for different mines available at http://www.coalindia.nic.in/)
- 15 -
Coal imports have increased from 5.93 million tonnes to 34.88 million tonnes in 2005
(CMIE) and a large percentage is for power generation. Plants both near coast and
inland are consuming this coal. Imported coal is modelled as three grades to account
for variation in leads of inland transportation costs. The FOB coal price assumptions
are based on price assumptions given by IEA and US EIA but relatively lower as we
believe that coal prices will move down given the abundance of this fuel, and
improvements in technology and generally a subdued demand due to a tighter climate
regime in developed countries (See Appendix, Table 8).
ii. Natural Gas

India has historically had limited reserves of domestic natural gas. However, new
large gas finds off the east coast of the country, as well as imports as LNG and
potentially via an international pipeline could bring significant new supplies to the
Indian market. There are currently multiple prices prevailing in the Indian gas
market, which are dependent on the suppliers. Broadly the Indian gas prices can be
classified into three grades – administered government prices, market-priced domestic
gas, and market-priced imported gas. The current gas prices for these three categories
shows a very wide variation in prices (Table 3).
Table 3. Current Prices for Gas in India
US $ per Mbtu Lower Upper Remarks
APM 1.67
Market Priced Gas 3.06 4.75 Lower : Gas from Lakshmi & Gauri Fields
(Pre-NELP & NELP) Upper : Gas from PMT
LNG Imports 2.53 10 Lower : Petronet
Upper : Shell Spot Cargoes
Source: Prices based on Infraline Database and Newspaper reports
The main problem for modelling the future supply curve for gas is imports. Gas
imports can come through LNG and pipelines. The two modes for imports not only
have different investment costs but also different risks. International pipelines are
generally considered riskier than LNG due to the high sunk costs, involvement of
transit countries, and supplier inflexibility, but pipelines are generally cheaper over
shorter distances than LNG. India is close to several gas rich countries in Central Asia
- 16 -
and Middle East therefore pipeline can be a cheaper option. LNG is likely to be
imported if India is willing to pay a market clearing price and therefore, LNG supplies
are amenable to the modelling framework in this study. Conversely, the availability of
international pipelines to supply gas are best modelled as separate scenarios which
talk of geopolitical uncertainties. To resolve this issue we interviewed experts on
geopolitics, looked at literature on cross-country pipelines and came to the conclusion
that pipelines from Middle East and Central Asia is a very low probability event and
therefore not considered. However to understand the implication of these pipelines we
introduced imported pipeline gas in the high growth scenario. In order to understand
future domestic availability we took a two-pronged approach. We met key persons in
the firms who are into development of gas basins to understand from them their
expectations of future, and substantiated these expectations of future by going through
expansion plans for major players, which are in the public domain. The international
prices of LNG gas are linked to the international oil prices on a heat content basis
which in turn are based on price forecasts of IEA and US EIA. The price assumptions
are provided at Appendix , Table 9.
In addition to the wellhead prices there are pipeline transmission costs and city gas
network costs, which have to be taken into the supply prices. The wellhead prices and
transmission prices were combined and modelled by having sixteen grades of gas to
develop a supply curve (Figure 8 is a linearization of the step wise articulation). CGD
network costs were separately provided by modelling CGD as a consumer of bulk gas
and seller to retail customers.
- 17 -
Figure 8. Supply Curve for Natural Gas
14
12
2010
10 2025
US $ Per MBtu
8 2015
-
0 25 50 75 100 125 150 175 200 225
bcm
3.1.3. Electricity Generation technology

The electricity generation technologies differ from each other on the basis of type of
fuel used, capital cost, operating and maintenance costs, conversion efficiencies, scale
economies, suitability to meet peaking loads, and environmental characteristics. In
addition the same generation technology will have different costs at different places
on account of land prices, labour costs, and scale of production and utilisation levels.
The non-linear distribution in the costs of technologies across the country and the
diversity in technological characteristics are represented in the model by different
grades of technologies. The generic generation technologies provided in the model are
given in (See Appendix, Table 10). The different technologies have been assumed to
improve over time on account of autonomous efficiency improvements in the stock of
existing plants, penetration of advanced technologies due to certain policy
interventions, retrofitting of existing technologies into improved ones, retirement of
old and inefficient technologies, and better environmental performance of
technologies.
- 18 -
i. Peak and base load technology representation:

There are two peaks observed in the all India daily load curve, occurring for about
three hours each in the morning and evening (Bhushan, 2005; Banerjee, 1998). This
changing hourly demand is represented in a stylized way by a two-step demand
function having an off-peak and peak period. To satisfy the demand generation
capacities are designated as peak and off-peak. Hydro and gas technologies are more
suitable for meeting peak load requirements than coal technologies due to inherent
technology characteristics. Coal and nuclear technologies are suitable for meeting
base load requirements.
The actual peak demand can be higher than the peak demand representation through
the two-step demand curve as there can be unscheduled shutdowns, demand peaks
and uncertainty in the availability of solar, wind or hydro power (Loulou, Goldstein &
Noble, 2004). To overcome this shortcoming and improve system reliability a peak
reserve capacity factor is introduced which leads to creation of a reserve capacity.
Higher levels of peak reserve capacity need to be built in the system in order to
improve reliability of electricity supply.
ii. Technology penetration:

The penetration of certain technologies, like hydro and nuclear, is restricted by social
and political factors like siting, rehabilitation, and nuclear waste disposal. In the case
of nuclear, India’s position as a non-signatory of the Nuclear Non-Proliferation Treaty
has restricted its ability to import nuclear technology and fuel. These siting and
approval constraints are modelled by specification of upper bounds on technology
penetration. Starting points for assigning the upper bounds are the official government
projections (which have historically been overly bullish on new capacity projections)
which are available in the Integrated Energy Policy (GoI, 2006). The second step is to
moderate these projections for the growth rates that we are assuming and also take
into account the past trends in actual capacity additions with planned figures.
iii. Transmission and distribution efficiency

The Indian electricity grid has historically faced very high transmission and
distribution losses (Table 4). The transmission losses figures include commercial
- 19 -
losses in addition to the technical losses, which are euphemistically referred to as

“Electricity Unaccounted” (CEA, 2006). The technical losses should vary from 7% to
15.5% according to a study by Electric Power Research Institute (EPRI) of USA. In
most developed countries these are even less than 7% (Bhalla, 2001). The increase in
T&D losses in the post reform period is more a result of changed regulatory
environment which has resulted in better accounting. The auxiliary power
consumption figures show variations which is due to variations in fuel mix.
Table 4. Performance parameters for Indian Power Sector
1970 1980 1990 2000 2005
Auxiliary Consumption 5.1% 6.5% 7.4% 7.0% 6.9%
T & D Losses 17.2% 20.4% 22.6% 32.6% 30.8%
Source : Data taken from CMIE
T&D losses have shown a declining trend of late and the government is apprised of
the need to reduce the same further and by employing technology options as well as
community participation (Ministry of Power, 2006). Therefore, our future projections
adopted the two pronged approach of the central government to improve T&D
efficiency. The technical losses are put at 15.5% for 2005 which is the maximum
possible as per the EPRI study and then improved progressively over years.
Commercial losses are also reduced rapidly to reflect the partial success of reforms in
controlling thefts from industrial units and residential consumers in urban areas but
reduction of losses from agricultural sector would be politically difficult (Table 5).
Table 5. Future projection of Transmission Losses
2005 2010 2015 2020 2025
Transmission Loss (Technical) 15.5% 14% 11% 10.5% 10%
Commercial Losses 15.3% 11% 6% 5.5% 5%
T &D Losses 30.8% 25% 17% 16% 15%
Commercial losses is nothing but a zero price demand for electricity but the model is
passing on the marginal cost of generation to all consumers and therefore to represent
zero price demand for electricity is not a straight cut. We therefore let commercial
losses be a part of the technical losses and this raises the delivered price of electricity
to all consumers. This way we are closer to reality because in any case the utilities are
using T&D losses to get higher tariffs on the grounds of remaining viable.
- 20 -
3.2. Analysis & Results Growth Scenario

The future gas market analysis has been done using Answer Markal Model (Berger,
et. al., 1987; Loulou, Shukla & Kanudia, 1997; Shukla, 1997). ANSWER MARKAL
model that follows the bottom-up modeling paradigm enabling specification of
technology details was initially setup for India years by Shukla and Loulou (Loulou
et. al., 1997) and later, significant model development in an integrated framework
have been done (Kanudia, 1998; Kanudia &.Loulou, 1999; Garg, et. al., 2003; Shukla,
et. al., 2003). The current exercise also relied on MARKAL model for India setup at
IIMA. The model databases were upgraded to bring it in line with changed
expectations about the future of Indian economy and to create a more detailed
representation for natural gas.
3.2.1. Demand for Gas in Power Generation

The general trend across the three growth scenarios High Growth (HG), Medium
Growth (RS), and Low Growth(LG) is an increase in gas demand for power till 2020
and downturn post 2020. The second interesting result is the lower gas demand in the
HG scenario (Figure 9). The situation changes for the high growth scenario when we
change the supply side by introducing the imported pipeline gas. The decline in
demand post 2020, which happens due to rising gas prices, is arrested. Pipeline gas
helps in keeping gas price lower with respect to imported LNG by delivering gas
directly into Northern parts of India which are far away from coast (LNG terminals).
Secondly this market is also far away from coal deposits (Figure 26 & 27) and
therefore the delivered coal prices also turn out higher.
- 21 -
Figure 9. Demand for Gas for Power Generation: Three Growth Scenarios
52
42
32
BCM
22
RS
12 LG
HG
HG IP
2
2005 2010 2015 2020 2025
The trend of gas in power sector can be explained by four main factors: demand for
electricity, gas availability, relative prices of coal and natural gas, and gas demand
from other sectors.
i. Demand for Electricity

The demand for electricity is increasing over time for all the growth scenarios, though
the demand is moderated for higher growth scenarios as there is declining electricity
intensity with increasing growth (Figure 10). The decline in intensities is on account
of the changing structure of the economy towards a more services orientation, and
more advanced and efficient technology choices. Overall we find an increased
demand for power is creating opportunities for new capacities besides the replacement
demand.
- 22 -
Figure 10. Generation & Electricity Intensity: Three Growth Scenario
2,000 60
RS Generation
LG 50
1,500 HG
S i 1
Kwh/'000 INR
Billion Kwhr
40
1,000 30
Electricity Intensity
20
500
10
- -
2005 2010 2015 2020 2025
ii. Gas Supply

There is a rightward shift of the gas supply curve (See Figure 8) on account of
increasing availability of gas from domestic sources and imports post 2010. This
enhanced availability of gas helps in removing constraints of gas supply. In 2025
however we see a shift towards left on account of decline in cheaper domestic gas
reserves and an increase in global gas prices. This shift means that gas prices will be
higher for the same quantity and increase the price for power sector. However if
international pipelines from Iran and Turkmenistan happen they will have a delivered
price lower than LNG and therefore additional supplies are created at lower prices.
iii. Relative Prices of Fuels

Coal and natural gas are the two fossil fuels that compete with each other for a share
of power generation. Their future share in the power sector will depend largely on the
relative prices of these two fuels. Gas based plants have lower capital costs and higher
generation efficiencies (Table 10) which gives them a competitive advantage of
around US $ 4 per MBtu over coal based plants. The coal prices in nearly all the
scenarios are close to US $ 3 per MBtu and this means that a market clearing price of
gas till US $ 7 Mbtu will result in growth of gas based generation. The tightening gas
situation post 2015 results in an increase in the gas prices (Figure 11) and this results
in a fall in gas demand from base load gas plants in 2025.
- 23 -
Figure 11. LRMC of Coal & Natural Gas :Three Growth Scenarios
6 Gas
US $ per MBtu
LG
5 HG
RS
4
3
Coal
2
1
-
2005 2010 2015 2020 2025
In the high growth scenario the coal prices decline due to improved coal availability
and therefore widen the relative price difference and this makes it difficult for the
growth of gas in the power sector.
iv. Demand from other sectors

The second factor is the growth in demand from sectors like industrial, residential,
commercial and transport where gas is a substitute for liquid fuels like motor spirit,
diesel, naphtha and furnace oil where price elasticity is higher. If we look at Figure 7
and Figure 11 we find for the high growth scenario the demand from other sectors at a
price of US $ 7.3 per Mbtu is around 100 bcm (132 bcm minus 32 bcm) whereas for
reference scenario at the same price it is around 90 bcm (132 bcm minus 42 bcm) and
for the low growth scenario it is around 83 bcm (125 bcm minus 42 bcm).
v. Fuel Choices
Coal continues to be the mainstay of power generation in the first ten years across
scenarios, whereas gas based capacity comes as base load at places far away from
coal resources and for meeting peaking demand. From 2015-2025, gas-based capacity
assumes its largest market share in the low growth scenario. In the high growth
scenario, although gas capacity is highest, total generation is actually low, due to the
- 24 -
fact that a lot of gas-based capacities come up for meeting the peaking load
requirements and improving system reliability.
Figure 12. Capacity Additions: Three Growth Scenarios
180
2005-2015 2015-2025
160
140
120
100
GW
80
60
40
20
-
LG RS HG LG RS HG
Coal Gas/ Naptha Hydro Nuclear Renewables
3.2.2. Electricity costs

Gas technology is the preferred option in the least-cost power plan in all scenarios for
building lower utilization capacities such as for peaking generation and system
reliability. Hydro also provides peaking generation, but growth is constrained by
difficulty in installing new capacity. Other renewables, like wind and solar, are too
intermittent and small to provide significant peaking power and reliability. Therefore
the price signals for peaking power arise from the long run marginal cost (LRMC) of
gas-based generation. The LRMC of electricity for peaking demand shows variability
over time and for different scenarios (Figure 13).
- 25 -
Figure 13. LRMC of Electricity Peak & Off Peak : Three Growth Scenarios
14
Peak
12
RS
US Cents/Kwhr
10 LG
8 HG
6 Off Peak
2
2005 2010 2015 2020 2025
The major components of generation costs for a gas based plant are the gas prices,
annualized capital costs, plant efficiency, and plant utilization. In addition, as these
are the delivered costs of electricity to end consumers, we have to add transmission
and distribution costs, which include losses. In the reference and low growth scenario,
peak electricity prices show a declining trend despite mildly fluctuating gas prices due
to an improvement in transmission losses (Table 5) and improvement in generation
efficiencies (Table 10). In the high growth scenario, there is an initial resistance due
to lower utilization of gas plants. Post 2015, increasing gas prices and minor
improvements in transmission losses results in increasing peaking prices for
electricity. The increase is higher for the high growth scenario as the plant utilization
levels are also lower.
The peak prices average between $0.08 per kWh to $0.12 per kWh and the off peak
tariffs remain between $0.06 per kWh and $0,04 per kWh. Assuming the peak period
lasts for 6 hours a day, the weighted average tariff is around 6.25 cents per kWh. This
tariff is lower than average tariffs charged for domestic consumers consuming more
than 100 kwhr in a month in most states, lower than tariffs charged for industrial and
commercial customers in nearly all states but higher than agricultural tariffs (CEA,
2007b). Therefore, at an aggregate level, if agricultural subsidies are borne by the
- 26 -
state government’s then solvency of SEBs can be ensured without changing the
tariffs.
The peak tariffs are nearly double the off peak tariffs meaning that there is a merit in
time of use pricing so that correct signals are passed on for bringing in capacities for
meeting peaking demand. ABT as discussed in Section 2 has addressed the problem
of peaking demand at the bulk market level and will translate into clear signals for
peaking plants when the state regulators make it mandatory for SEBs to supply
electricity to consumers at all times and in turn allow SEBs to pay as per the time of
use.
3.2.3. Emissions
SO2 emissions show a Kuznet phenomenon in the LG and RS. All the growth
scenarios have considered some sulphur mitigation using flue-gas desulfurization
(FGD), given that India is requiring some new plants coming under the ultra mega
power plant policy to provide space for FGD units. There is also local pressure on
existing units to build FGD 11 . In addition, scenarios with a higher growth in gas are
associated with stabilization or reduction in SO2 emissions because higher use of gas
reduces SO2 emissions. Post 2020 a left ward shift in gas supply curve (Figure 8),
results in lower gas demand from the power sector, and therefore a rise in SO2
emissions (Figure 14).
11 Reliance Energy Limited, has been forced to set up a FGD at their Coal Plant located at Dahanu Taluka
in Maharashtra (REL, 2006)
- 27 -
Figure 14. SO2 Emissions Power Generation: Three Growth Scenarios
4.5 SO2 - HG
SO2 Emission (MT)
4 SO2 - RS
3.5 SO2 - LG
2.5
2
2005 2010 2015 2020 2025
- 28 -
4. Policy Scenarios
4.1. Coal Reforms

Coal is the predominant source of energy currently used in the power generation in
India. However, coal availability has been a major concern of power producers
(Shukla et. al., 2004). The Indian coal sector remains heavily managed by the central
government, with the state-owned companies Coal India Ltd. (CIL) and Singareni
Coal Company Ltd (SCCL) monopolizing the domestic market. Government owned
mining companies maintain exclusive rights to sell coal within the Indian market. In
the 1990s, coal reforms provided for captive mining and consumption by the steel,
cement, and power sectors and pricing became less uniform, to reflect different
quality coals from different mines. Furthermore, reduction of import tariffs since 2000
have resulted in increasing coal imports, the share of which is expected to grow
substantially in the future.
Coal reforms in the future are defined as opening up of the coal mining to other
players besides captive producers and the incumbent state-owned monopolies. The
opening up of coal sector will lead to an improvement in management practices
within the existing companies on account of competitive pressures. This will lead to
improvements in operational efficiencies which mean a lowering of LRMC. In a
purely competitive market, this would lead to lowering of prices, but on account of
old contracts the coal mines have, this may mean higher producer surpluses. The
second impact of reform is in attracting new investments. New investments will come
in a new regime where the expectations about coal prices are higher because of long
term expectations of international coal (Table 8). This in turn means that the contracts
now signed will have government taking a higher royalty and profit share resulting in
improved coal availability albeit at higher prices. The third function of a reformed
market is availability at all locations freely and this means there will be adequate
capacity for transporting coal on both rail and port. Additional transport sector
investments will again mean higher transportation costs. Investments in transport
would make it possible to reduce arbitrage between domestic and international coal
market. Overall the supply curve becomes flatter due to reforms (Figure 15).
- 29 -
Figure 15. Future Supply Curve for Coal
3.5
2015 CR
2015 2025 2025 CR
3.0
2.5
US $ Per MBtu
2.0
1.5
1.0
0.5
-
0 200 400 600 800 1000
Million Tonnes
4.2. Electricity Reforms

India has faced a shortage of power consistently not only during the daily load peaks
but also base load capacity for more than ten years (Figure 8). The central government
is eager to correct this situation, but the problem has persisted despite electricity
reforms launched in many states. One new solution currently being promoted by the
central government would establish several 4,000 MW coal-fired power plants. These
“ultra-mega power plants” will be built on an expedited approval process through
which the government identifies project location, contracts with long-term buyers for
power, takes necessary clearances, and then sells the special purpose vehicle to the
private player who bids to generate power at the cheapest cost. The goal is to
encourage jittery investors who have been reluctant to invest in the Indian power
sector due to the bankrupt SEBs. The plants are located at either pithead or along the
coast, and will source their coal either from the local mine or via imports –
eliminating exposure to the Indian railways. Ultimately, these plants will deliver
electricity over a longer distance, rather than transporting coal close to demand
centers – a strategy sometimes referred to as “Coal by Wire”. The current policy
paradigm to correct for market failures in generation will create a generation and
- 30 -
transmission structure quite different from that followed in the past where generation
was located close to demand centre (Figure 16 & Appendix, Figure 28).
Figure 16. Consumption and Generation Across Regions (2005)
Maharashtra
Madhya Pradesh
Gujarat
Western Region
Tamil Nadu
Pondicherry
Kerala Generation
Karnataka Consumption
Goa
Andhra Pradesh
Southern Region
Uttaranchal
Uttar Pradesh
Rajasthan
Punjab
Jammu & Kashmir
Himachal Pradesh
Haryana
Delhi
Chandigarh
Northern Region
West Bengal
Tripura
Orissa
Jharkhand
Chhattisgarh
Bihar
Assam
Arunachal Pradesh
Eastern Region
- 20,000 40,000 60,000 80,000 100,000 120,000 140,000
Power (Million Kwh)
This will happen because four states – Jharkhand, West Bengal, Orissa and
Chattisgarh account for 77% of coal reserves (Figure 17 and Appendix, Figure 27).
- 31 -
Figure 17. Coal Reserves by State
Total Proven Reserves 90 Billion Tonnes

Others
Madhya Pradesh Maharashtra 1%
8% 5%
Andhra Pradesh Jharkhand

9% 39%
Chhatisgarh
10%
West Bengal
Orissa
12%
16%
The ultra mega power plant policy in the long term will therefore lead to a lot of coal
based power generation capacities in the eastern region at the pit head, which is
already power surplus. The implications of this policy on having a rather unbalanced
generation profile is one of the concerns but here we wanted to understand what
would be the implications of this policy on gas based generation. In order to model
this we introduce inter regional transmission costs between power surplus regions and
power deficit regions, and changed the supply curve for coal by having a higher
availability of coal grades which have lower transportation costs.
4.3. Sulphur Controls

The burning of fossil fuels causes damage to the atmosphere in terms of SO2, NOx and
particulate emissions. In India coal is the major fossil fuel used for power generation
and is associated with all the three emissions. As the emissions are conjoint we take
SO2 as the key pollutant around which we have modeled the environmental reform
scenarios.
SO2 emissions have nearly doubled from 3.54 Million tonnes in 1990 (Garg &
Shukla, 2002) to 6.46 million tonnes in 2005. The major contributor for these
emissions are the power, cement, steel and fertilizer sectors, which collectively
accounted for roughly 50% of emissions in 2005 (Figure 18).
- 32 -
Figure 18. SO2 Emissions for 2005
Total SO2 Emissions 2005 - 6.46 Million Tonnes

Fertiliser Plants
Cement Plants
2%
3%
Steel plants
6%
Other
49%
Power plants
40%
The spatial distribution of SO2 emissions shows that though the overall share of
power is only 40%, but the role of power in hot spot districts (top 25 districts) is
higher (See Appendix, Table 11). It can be seen that high ambient SO2 levels are
observed in high population-density areas which means that the impacts of these
pollutants will be felt by a large number of people and lead to substantial social costs.
The power sector is the main contributor in the majority of these districts and being a
point source, sulphur can be easily monitored and controlled. In order to understand
the spatial spread of emissions in 2025 we disaggregated emissions 12 obtained from
reference scenario at district level (See Figure 29). There is a rise in hot spot districts
in the eastern part and coastal regions. The relevant Indian Environmental Laws is
“The Air (Prevention & Control of Pollution) Act, 1981” which specifies SO2
emission concentration for coal based power plants and stipulates stack height. The
emission concentration has to be measured at the smoke stack but there is no limit on
the absolute emission for a plant. In the major cities though the ambient air quality is
being monitored and this creates a pressure for reducing SO2 emissions. In Delhi
which has very high SO2 emission load (See Appendix, Table 11) we found that the
expansion plans of the two utilities envisage setting up generation capacities based on
gas despite uncertainties in gas price. In addition a coal based capacity in the heart of
city is being closed down due to air pollution concerns.
12 National Level Emissions were disaggregated on the basis of information about upcoming power, steel,
cement and fertilizer plants, and population patterns in future.
- 33 -
SO2 emission problems can be solved by either technology performance standards or

by using economic approaches (Baumol & Oates, 1998). Economic approaches have
been found to be superior to technology performance standards (Kerr, Suzi & Newell,
2003; Schmalensee, et. al., 1998; and Stavins, 1998) and are also amenable to
modelling approaches. We analyze by specifying a emission cap on SO2 emissions.
We took a case when SO2 emissions are reduced 40% from Reference scenario in
2025.
4.4. Analysis & Results Policy Scenarios

The policy analysis was done around the reference scenario which is our medium
growth scenario. This scenario is closer to the international scenarios of IEA and DOE
for two main reasons. The first is that the Indian gas paper is part of an international
study of the two major developing country gas markets in India and China, and
therefore there was a need to make the scenarios comparable and acceptable to the
international audience. The second is that the Planning Commission scenario of 8%
and 9% economic growth are likely possible only if a fair amount of reforms are
carried out (Chapter 5, GoI, 2006) and therefore a reforms scenario over and above
these reforms would become useless. The results for all three policy cases have been
consolidated so that a comparison between different cases can be done. The graphs,
for the sake of clarity, have been abbreviated to CR for Coal Reforms Scenario, CBW
for Coal by Wire, SC for the Sulphur Controls scenario.
4.4.1. Demand for Gas in Power Generation

CR and CBW scenarios both show lower gas demand, whereas the SC scenario shows
demand for gas rising steeply post-2015 (Figure 19). The three scenarios were run by
changing the parameters which would be affected by the respective policy change and
keeping other parameters the same as the reference scenario. Electricity demand, gas
supply curves, and demand from other sectors remain unchanged. The trend in gas
demand that emerge for three policy cases can be explained by – relative prices of
fuel, environmental constraints, and infrastructure availability.
- 34 -
Figure 19. Demand for Gas : Policy Scenarios
80
70 RS CR CBW SC
60
50
Bcm
40
30
20
10
2005 2010 2015 2020 2025
i. Relative Prices of Fuels

The difference between the CR and CBW scenario and the reference scenario is
simply on the basis of relative price differences of coal and gas. The coal prices are
lower in both these scenarios. In the CR scenario coal prices go down due to a
rightward shift of coal supply curve (Figure 15) whereas in CBW it is the flexibility
of infrastructure (discussed next). The difference in gas demand from the reference
scenario reduces as the difference in relative prices is reduced.
- 35 -
Figure 20. LRMC of Coal and Natural Gas : Alternative Policy Cases
8
Gas
7
6
US $ per MBtu
5 RS
CBW
4 CR
SC Coal
3
-
2005 2010 2015 2020 2025
ii. Sulphur Constraint

The sulphur constraint results in a shadow price of SO2 and this shadow price changes
the relative price of coal and gas. Coal has the highest sulphur concentration in the
fossil fuels, whereas gas is free from sulphur. In the initial years, when constraints are
mild, it is cheaper to install FGD units which partially mitigate SO2 emissions from
coal plants at a low cost, for both the existing and future plants. In the longer term, the
constraint becomes stringent, and the low hanging fruits (low cost FGD with partial
Sulphur mitigation) become scarce. The choice for power producers is between gas,
costlier FGD (with 99% Sulphur removal), or technologies like IGCC which start
becoming available at this time. The FGD continues as the first choice for mitigation
but the second most economical solution is substitution to gas. This once again shows
the close competition that exists between coal and gas for power generation. Clean
coal technologies like IGCC get a minor push because of sulphur controls, but their
uptake remains limited in our study.
- 36 -
Figure 21. Technology Shares in the Sulphur Mitigation
2.0 100%
Million Tonnes SO2
1.6 80%
1.2 60%
0.8 40%
0.4 20%
0.0 0%
2005 2010 2015 2020 2025
FGD Gas Clean Coal FGD Share
iii. Infrastructure
Electricity uses different infrastructure to transport the raw materials (coal and natural
gas via pipelines and rail) and the final product (electricity over the grid). All these
infrastructures have natural monopoly character but rail infrastructure provides a
secondary public good for transport of other goods and people. In the CBW scenario,
we modelled this flexibility for coal plants and it turns out that power producers find
it cheaper to set up plants at the mine mouth. This flexibility helps coal based power
plants to overcome shortages in rail capacities and therefore install additional coal-
fired capacity.
iv. Fuel Choices

Coal continues to be the mainstay of power generation across scenarios, except for SC
scenario where between 2015 and 2025, gas becomes the dominant fuel choice. Gas
based capacities are installed across scenarios and a large amount of gas-based
capacity is added in the period between 2015 and 2025 for replacing old gas based
plants which are being used for meeting peaking demand and for improving the
system reliability.
- 37 -
Figure 22. New Capacity Additions: Policy Scenarios
140
2005-2015 2015-2025
120
100
80
GW
60
40
20
-
RS CR CBW SC RS CR CBW SC
Coal Gas/ Naptha Hydro Nuclear Renewables
The gas based plants have relatively lower PLF in CR and CBW scenario indicating
that a major portion of capacity is used only for peaking purposes and for improving
the system reliability. Gas based plants also display a higher sensitivity compared to
coal as fuel prices comprise a higher share of their levelised costs.
Figure 23. PLF Coal Vs Gas Policy Scenarios
1.0
RS
CR Coal
CBW
0.8 SC
S i 1
PLF
0.6
0.4 Gas
0.2
2005 2010 2015 2020 2025
4.4.2. Electricity costs

The peak prices of electricity as discussed under growth scenarios are determined by
marginal cost of gas based generation. The variations in price from gas based plants in
- 38 -
turn is mainly on account of variations in fuel costs and PLF. Low PLF for gas based
plants increasing their generation costs and high PLF act in the other direction. The
peaking prices for electricity therefore in SC turn out lower. The price trends for base
load are similar to those obtained under growth scenarios.
Figure 24. LRMC of Electricity Peak and Off Peak: Policy Cases
14
RS
CR Peak
12 CBW
SC
S i 2
US Cents/Kwhr
10
6
Off Peak
4
2
2005 2010 2015 2020 2025
4.4.3. Emissions
SO2 emissions are assumed to stabilize even in the reference scenario, as we assume
that there would be some efforts at sulphur mitigation. In the sulphur constraint
scenario, when a 40% reduction from RS was implemented, a smooth reduction is
obtained which pushes the emissions even below that in 2005 and nearly equal to
power sector emissions from the year 2000 (Garg et. al., 2006).
- 39 -
Figure 25. SO2 Emissions Power Sector : Alternative Policy Cases
4.50
4.00
SO2 Emissions (MT)
3.50
3.00
2.50
2.00
RS CR CBW SC
1.50
1.00
2005 2010 2015 2020 2025
- 40 -
5. Conclusions
The current capacity of gas based plants is mainly for base-load because there are
shortages for electricity and also shortages of domestic coal. Gas has played an
increasing role in power generation within utilities and even more in the case of
captive power plants. Power shortages have resulted in high prices for electricity and
these have helped the gas-based power plants which have improved PLF even when
gas prices have increased in the Indian market.
In the future, gas competes with coal for base-load capacity in scenarios where
domestic coal supply remains constrained. Base-load gas power plants are
competitive vis-à-vis coal plants when relative difference between gas and coal prices
is below US $ 4 per MBtu. At higher than $ 4 per MBtu price difference, gas is
competitive only for peak power supply. The future price expectation for coal, in all
scenarios, is around US $ 3 per MBtu. Thus, the market clearing gas price is around
US $ 7 per MBtu. The rightward shift in coal supply curve in the High Growth, Coal
Reforms and Coal by Wire scenarios therefore makes coal more competitive vis-à-vis
gas in base load generation. In the Coal by Wire scenario, the incremental
transmission cost of mine-mouth coal power plants makes gas power plants
competitive at demand centres located far from coal mines and nearer to gas supply
points. International gas pipelines help in making gas competitive with respect to coal
in northern gas markets which are far from coal deposits.
In the electricity sector coal and gas have emerged as two very competitive choices
which have given flexibility to power producers. The flexibilities are a result of
reform policies like coal sector reforms and generation reforms. This flexibility results
in a high elasticity of substitution between the two fuels. In the high growth scenario
as a result though the overall demand for gas is higher the demand for gas from power
sector is lower owing to higher demand from other sectors. In the coal reforms
scenario the flexibility allows power producers to shift faster to coal when there is a
right-ward shift of coal supply curve The flexibility of transporting coal or
- 41 -
transporting power to demand centres is used by power producers to overcome the rail
infrastructure bottlenecks and substitute gas from base load power generation.
The flexibilities available in the electricity sector effectively lead to higher coal power
capacities that substitute gas. These polices though add to environmental problems,
like higher SO2 emissions from coal burning. Our results show imposing a cap on SO2
emissions, results in end of pipe solutions like FGD as most cost-effective solution.
However, in a longer term, gas technologies are also contributing to sulphur
mitigation. Clean coal technologies like IGCC get a minor push in the longer term.
Gas technology is the preferred option in the least-cost power plan in all scenarios for
building lower utilization capacities such as for peaking and system reliability. The
increase in gas price thus has higher implications for the peak electricity price. In the
early years though, improvements in generation and T&D efficiency, including
reduction in commercial losses from pilferage and metering deficiencies, can
compensate for higher gas price. However, as the electricity system becomes
competitive and converges to an efficient equilibrium in the long-run, the peak
electricity price gets increasingly aligned to the gas price.
- 42 -
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- 46 -
Appendix
- 47 -
Table 6. Structure of Economy: Alternative Growth Scenarios

2005 2010 2015 2020 2025
Industry RS 31.1 32.0 32.7 33.4 34.0
HG 32.1 33.0 33.8 34.5
LG 32.0 32.7 33.4 34.0
Commercial RS 42.5 44.0 45.0 45.8 46.3
HG 44.7 46.2 47.4 48.3
LG 43.0 43.5 43.8 43.9
Agriculture RS 20.6 17.6 15.0 12.9 11.1
HG 17.3 14.5 12.1 10.1
LG 17.7 15.1 13.1 11.4
Table 7. Population and Urbanization Projections

2005 2010 2015 2020 2025
Total Population 1103 1183 1260 1332 1395
Urban Population (LG) 317 358 406 462 527
Urban Population (RS) 368 420 479 547
Urban Population (HG) 373 430 497 577
Source: UN population Projections for Total and Low Growth
Table 8. Future Prices for Imported Coal in 2005 INR (Rs/GJ)
Description 2005 2010 2015 2020 2025 Reference
This Study 98.61 80.40 80.40 81.92 81.92
IEA IEA,
94.82 83.44 84.96 86.47 87.99
2006b
DOE EIA/DOE,
103.16 110.75 97.09 98.61 101.64 2006
International Coal Prices converted from USD to INR @ 1 USD = 44.11 INR
Table 9. Future Prices for Gas (US $/Mbtu)

2005 2010 2015 2020 2025
APM Gas 1.98 1.98 1.98 1.98 1.98
Imported LNG 6.50 6.93 6.64 6.93 7.36
Other Domestic Gas 4.55 4.85 4.65 4.85 5.15
- 48 -
Table 10. Assumptions for Power Generation Technologies

TECHNOLOGY 2005 2010 2015 2020 2025
1 Coal-based Technologies
1.1 Sub-critical PC Combustion
Capital cost (Rs. crore/MW) 4.2 4.15 4 3.98 3.87
Capacity factor (%) 73.7 80 82 85 85
Efficiency (%) 31% 33 34 35 36
1.2 Super-critical PC Combustion
Capital cost (Rs. crore/MW) 4.6 4.2 4.1 4 3.9
Capacity factor (%) 70 70 72 73 75
Efficiency (%) 33.3 37 37.5 38 39
1.3 AFBC
Capital cost (Rs. crore/MW) 4.5 4.45 4.34 4.3 4.23
Efficiency (%) 29 29 30 31 32
1.4 PFBC
Efficiency (%) 37 37 38 39 40
1.5 IGCC
Efficiency (%) 40 40 41 42 43
2 Gas-Based Technologies
2.1 Open Cycle Gas Turbine
Peak Capacity factor (%) 100 100 100 100 100
Efficiency (%) 32 33 35 35 35
2.2 CCGT
Efficiency (%) 45 46 47 47 50
3 Hydro
3.1 Large Hydro
Capital cost (Rs. crore/MW) 5 5 4.9 4.9 4.9
Capacity factor (%) 31.2 35 37 40 40
3.2 Pumped Storage
Capital cost (Rs. crore/MW) 7.1 7 6.8 6.6 6.5
4 Wind
5 Biomass Electricity
Efficiency (%) 30 30 31 31 32
6 Solar PV
Note: The values provided are the average. In the model a range of values around this average
number for different technology grades are used
- 49 -
Table 11. Hot Spot Districts (Top 25) for SO2 Emissions in 2005
Rank District Emission per Area % Population
unit area (Sq Contribution density
(ton/ sq. km) .Km) of Power
1 Central Delhi 457.91 25 85% 29098
2 Kolkata 261.98 185 77% 24430
3 Chennai 233.47 174 66% 26420
4 Mumbai 188.58 157 72% 22315
5 South Delhi 181.14 250 87% 10204
6 New Delhi 162.92 35 92% 5545
7 North East Delhi 77.76 60 33204
8 East Delhi 59.88 64 25570
9 Panipat 52.42 1268 91% 784
10 Mumbai (Suburban) 47.48 446 20277
11 Sonbhadra 47.30 6788 99% 243
12 Bokaro 47.18 2861 35% 745
13 West Delhi 43.46 129 18561
14 Hyderabad 41.72 217 17814
15 Gautam Buddha 37.81 1269 93% 1089
Nagar
16 Rupnagar 36.09 2056 87% 594
17 North Delhi 34.38 60 14681
18 Cuddalore 32.70 3645 95% 620
19 Korba 29.73 6599 99% 161
20 Anugul 28.26 6375 98% 187
21 Bhagalpur 26.00 2569 91% 1002
22 Chandigarh 21.57 114 9211
23 Murshidabad 21.27 5324 87% 1185
24 Gandhinagar 20.50 2163 75% 720
25 Purbi Singhbhum 19.75 3533 596
Source : Emission Inventory Estimates, IIMA 2007
- 50 -
Figure 26. Gas Grid for India – Existing and Proposed

Ta j i k i s t a n
t a n
TAPI
C h i n a
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.
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! Important Places
Chittoor Existing Gas Pipelines
Palmaner!
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Mangalore! . .
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Future Gas Pipelines
Coimbatore!. .
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F
Tiruchchirappalli
Kochi!
. Future LNG terminals
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.
Tuticorin!
. Existing Gas Basin
M a l d i v e s
S r i L a n k a
¨ Future Gas Basin
Future Gas Pipelines (trans-country)
- 51 -
Figure 27. Location of Coal Based Power Plants and Coal Deposits
Legend
1. Eastern Coal Fields Ltd.
2. Bharat Cooking Coal Ltd.
!
( Coal based power plants
3. Central Coal Fields Ltd.
!
P Major Places
4. Northern Coal Fields Ltd.
5. Western Coal Field Ltd. Incomplete Golden Corridor
6. South Eastern Coal Field Ltd. Completed Golden Corridor

7. Mahanadi Coal Field Ltd. Broad Gauge Railway Line
8. North Eastern Coal Field Ltd.
9. Singareni Collieries Co. Ltd. Lignite Mines
10. Neyvelli LigniteCorporation

Coal reserves
- 52 -
Figure 28. District wise Generation and Consumption of Electricity (2005)
(
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- 53 -
Figure 29. District wise SO2 Emissions from Coal Based Power Generation
2025
2005
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- 54 -

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Natural Gas in India:

P.R. Shukla, Subash Dhar, David G. Victor, & Mike Jackson

Working Paper #66

Program on Energy and Sustainable Development

coal technologies (IGCC).

Natural Gas in India:

1 In rest of the text Natural Gas is referred to as Gas

2. Evolution of Gas in Indian Electricity Market

Figure 1. Shortage of Electricity in India – 1996-2006

18% Peak Shortage Electricity Shortage

Source: Ministry of Power, Annual Reports

Figure 2. Electricity Generation Capacity – Utilities

Coal Hydel Gas Nuclear Oil Biomass Wind

% Figures indicate CAGR in the intervening period

Figure 3. Electricity Generation Utilities

Coal Hydel Gas Nuclear Oil / Gas Biomass Wind

% Figures indicate CAGR in the intervening period

Figure 4. Ownership wise growth in Gas Based Power Generation Capacity

Tariff Paise / Kwhr

4000 IPP Policy

2.2. Captive Generation

Figure 5. Electricity Generation Capacity- Captive

Coal Gas Other Hydel

% Figures indicate CAGR in the intervening period

Coal Gas Hydel Other

% Figures indicate CAGR in the intervening period

3.1. Scenario Storylines

3.1.1. Macro Economy

3.1.2. Energy Supply and Prices

Figure 7. Coal Price Trend: Northern Coal Fields

Prices in 2005 USD

Source: Indiastat (1995 -2001) & CMIE (2005)

ii. Natural Gas

Figure 8. Supply Curve for Natural Gas

3.1.3. Electricity Generation technology

i. Peak and base load technology representation:

ii. Technology penetration:

iii. Transmission and distribution efficiency

losses in addition to the technical losses, which are euphemistically referred to as

3.2. Analysis & Results Growth Scenario

3.2.1. Demand for Gas in Power Generation

i. Demand for Electricity

Figure 10. Generation & Electricity Intensity: Three Growth Scenario

ii. Gas Supply

iii. Relative Prices of Fuels

iv. Demand from other sectors

Coal Gas/ Naptha Hydro Nuclear Renewables

3.2.2. Electricity costs

Figure 14. SO2 Emissions Power Generation: Three Growth Scenarios

4.1. Coal Reforms

Figure 15. Future Supply Curve for Coal

4.2. Electricity Reforms

- 20,000 40,000 60,000 80,000 100,000 120,000 140,000

Power (Million Kwh)

Figure 17. Coal Reserves by State

Total Proven Reserves 90 Billion Tonnes

Andhra Pradesh Jharkhand

4.3. Sulphur Controls

Figure 18. SO2 Emissions for 2005

Total SO2 Emissions 2005 - 6.46 Million Tonnes

SO2 emission problems can be solved by either technology performance standards or

4.4. Analysis & Results Policy Scenarios

4.4.1. Demand for Gas in Power Generation

Figure 19. Demand for Gas : Policy Scenarios