Pandit Deendayal Petroleum University School of Petroleum Management

15-Months Executive MBA (Oil and Gas)

Energy Economics: Fuel Substitution

Submitted to: Dr. Rasananda Panda, Associate Professor, School of Petroleum Management

Submitted by: Abhik Tushar Das Roll No: 20104001


Coal/ Natural Gas Fuel substitution
Energy is the lifeline for any growth. Post liberalization India has been on the growth trajectory with a robust GDP growth rates. The economic downturn of the 2002 and 2008 could not dent the spirits of the economy; the 2008 Oil shock was successfully absorbed by the country. The dream of becoming the 4th largest economy in the world by 2020 and moving from a low income country to a middle income country would require the role of the energy sector as the key drivers for the economic prosperity. However this rapid rate of energy consumption would also lead to serious environmental concerns with global warming taking the centre stage in global forums. The demand for power would be increasing with the development and it is expected to touch 292000MW by 2020. India is a party to the United Nations Framework Convention on Climate Change (UNFCCC) and the objective of the Convention is to achieve stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. The Kyoto Protocol provides for quantified emission limitations and reduction commitments for the developed countries and mechanisms to facilitate compliance with these targets, reporting and review and it lists six greenhouse gases;       Carbon dioxide (CO2) Methane (CH4) Nitrous Oxide (N2O) Hydro-fluorocarbons (HFC) Per-fluoro-carbons (PFC) Sulphur hexafluoride (SF6)

The environmental impact of Thermal power generation, a proven technology is huge. At the projected rate (Planning Commission: India Vision 2020) the power consumption in the industrial sector is expected to touch 570 Tera-Watt-Hour (1012 Watt-Hour) by 2020. To achieve this growth rate with a declining rate of increase in emission, we can;  Improve energy efficiency  Switch to low/ no carbon fuels  Clean up the flue gas (burnt gas)


Energy demand 2020 (MTOE)
Coal Oil Non Commercial 8% 11% 26% Gas Nuclear Hydro Renewables 5% 3% 2% 47%

Coal: India has the 4th largest coal reserves in the world with 60600 MT (7% of Global reserves). Anthracite and sub-bituminous coal consists of 92.57% as against 7.43% of Lignite’s; hence the quality of domestic coal is of good quality. As a measure to effect longevity of domestic coal, the coal sector has been liberalized and imports are promoted to the Ultra mega power projects (UMPP). The Indian Power sector consumes 75% of the coal with a conversion efficiency of 47%. In effect every MTOE of coal consumed yields 0.47MTOE of electricity at our power plants which are technologically obsolete. The calorific value yield of Indian Coal is 3000-4000 Kcal/kg as compared to imported coal of 7000 Kcal/kg.

Coal reserves
4% 31% 30% 2% North America South America Europe


Coal shares a 29.6% share in Global Energy consumption. It is expected that by 2020, the demand for coal in Indian energy sector would be 688MT with a current consumption of 277.6 MTOE with an annual growth rate of 10.8% over 2009. The magnitude of consumption is very high and hence energy dependency on coal in India is evident.


Gas: Policy initiatives of the Government of India have resulted into discovery of substantial gas reserves 11.5 trillion cubic feet (TCF) in the Krishna Godavari Basin. This has encouraged the Government in promoting the use of Natural gas in Industrial Heaters with predefined priority sectors like Power, Steel & Fertilizer with a supply of 60-80 MMSCMD (Million standard cubic feet per day).

Natural Gas reserves
North America South America Europe Asia Pacific
The thermal efficiency of a gas based power plant is 60% as compared to 40% of a coal fired thermal plant. The emissions from a Natural Gas power plant is half that of a coal fired unit, this environmental aspect is one of the primary reasons of shifting generation from a coal based structure to a gas based economy. However the supply side constraints have limited the capacity expansion of gas based units.

NG reserves India (TCM)
1.5 1.3 1.1 0.9 0.7 0.5 NG reserv es India (TCM)

Natural Gas 40 Production (MTOE)
35 30 25 20 Nat ural G…


1999 2001 2003 2005 2007 2009

Demand: Energy demand;

E = ΔQ * Σ (ΔEI) * ΔS
E: Energy Demand Q: Economic Activity EI: Energy Intensity S: Structure of the sector Hence;

ΔE = ΔQ + ΔI + ΔS
For sustained economic growth with decreasing rate energy consumption; ΔI can only be reduced by changing the energy mix or by incorporating more efficient technologies. Hence a need was felt to substitute traditional energy fuels like coal with a highly efficient gas fuel. The energy intensity of India has been falling since the 70’s when it was very high. Energy demand for any sector can be estimated by;   Demand elasticity: Change in energy with demand with change in economic variable like price or GDP. Energy intensity: energy consumption per unit of driving economic variable. 5 Comments:

A comparison with the global figures for energy intensity;

Energy intensity (Kg of oil equivalent/$GDP)
0.25 0.2 0.15 0.1 0.05 0 0.16 0.23 0.22 0.17 0.13 0.14 0.15 0.15 0.21 India China US Germany & OECD Denmark UK Brazil Japan World average

Note: In Purchasing Power Parity terms Ways to improve energy intensity (DSM):     Using energy efficient equipments Improve efficiency in energy conversion Promote minimum life-cycle cost (high depreciation rate) Increase efficiency in the transport sector

Industrial direct energy consumption: In India, industrial energy use reached 150 million tonnes of oil equivalent (MTOE) in 2007 accounting for 38% of the country’s final energy used. From a global perspective, India is the fourth‐largest industrial energy consumer with a 5% share of total industrial energy use, surpassed only by China, the United States and Russia. The five most energy‐intensive industrial sectors; a. b. c. d. e. Iron and steel Cement Chemicals and petrochemicals Pulp and paper Aluminium

They account for 56% of India’s industrial energy consumption in 2007.


Demand side fuel substitution can be achieved by; a. Replacing industrial use of Naphtha, Fuel Oil (FO) and High Speed Diesel Oil (HSDO) and domestic use of LPG and Kerosene by Natural Gas. Domestic availability of gas, is promising than oil. (Gas should be used for power generation only after it meets the above demand). b. Produce bio-diesel in a decentralised manner and substitute all agricultural use of HSDO/LSHS/fuel oil with bio-diesel. Encourage blending of ethanol with petrol. c. Provide adequate quality power to reduce the need for diesel used for standby generators and diesel pumps. d. Expand electrification of railways to reduce diesel needs. Improve railways’ freight service so that all long distance goods traffic prefer railways thereby substantially reducing HSDO used for transport e. Promote urban mass transport to reduce demand for petrol for personal motorised vehicles. Improve fuel efficiency of motorised vehicles by a factor of two through better vehicle design. Encourage hybrid vehicles which are now available commercially on cost competitive terms


Others 23%

KG Basin Gas Allocation
Power 41%

Sponge Iron 4% Fertilizers 32%

The Energy supply in India is fuelled by coal which is abundantly available. However due to environmental concerns, coal as a fuel is not desirable in the long run in meeting global emission norms. Hence a shift to alternative fuel mixes is necessary, which can be in the form of; Natural Gas Hydro-electricity Coal bed methane Coal liquefaction (SASOL process: 6 tonnes of relatively high quality (5500+ kcal/kg) coal is required to produce one tonne of liquid fuel)  Nuclear energy 7 Comments:    

  

Biomass Solar and wind Gas Hydrates (methane gas trapped in ice)

A comparison of Indian fuel mix with the global scenario is;

Possible fuel-wise substitution should be taken into account in considering supply options. With respect to oil for transport use, it cannot easily be replaced in significant quantities unless there are technological breakthroughs or large-scale shifts to public transport in place of personal vehicles or to freight movement by railroads in place of trucks. Other than for power generation, demand for natural gas is in the production of fertilisers and chemicals (as raw material) where it cannot be economically substituted. With coal and natural gas there is a clear substitution possibility. Such a substitution will depend on the relative availability and price of coal/gas

Per Capita Energy Consumption (million BTU)
15 5 1980 1990 2000 2010 y = 0.3615x - 709.86

Per Capita Energy Consumption (million BTU)


Hence the alternatives are; a. b. c. d. e. f. g. Technological advancement in reducing emissions in coal based power generation Improving efficiencies of power plants Utilizing the hydro-electric potential (150000 MW) Promoting the use of Nuclear power Adding renewable capabilities Promoting coal bed methane Reducing Energy Intensity by Demand Side Management (DSM)

Consumption (MTOE)
450.00 350.00 250.00 1995 2000 2005 2010 Linear (Consumption (MTOE)) y = 18.723x - 37166 Consumption (MTOE)

Coal prices:

50.00 – 1990 1993 1996 1999 2002 2005 2008

Coal Index (Appalachian coal spot price index) Crude Prices (Brent $)


Gas prices:

Henry Hub Spot rate Domestic rate

$4.21 per MMBTU $10 per MMBTU $4.2 per MMBTU

Out of 13000MW of capacity, about 4500MW is unutilised for the short supply of gas. Although the current consumption of gas is 55.7 MTOE and it is expected to grow to 150190 MTOE by 2030; the share of gas in the energy consumption shall remain stagnated at 8%.

81.50 61.50 41.50 21.50 1.50 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

NG price index (US Henry Hub)

Based on country reports it is calculated that in 2002 the average purchasing power parity price in US cents per kWh was 30.8 in India, 7.7 in US, 9.5 in Germany, 15.3 in Japan, 20.6 in China and 27.6 in Brazil. Hence based on purchasing power parity comparisons, the Indian consumer pays one of the highest tariffs in the world, for energy supplies/services. Deterrents for Gas based heaters:
High conversion Efficiency (60%) Low emissions (56.1 tCO2 ) High calorific value Low wastage/ pilferages

High infrastructure cost Supply constrained High running cost Logistics handling


Environmental issues: In per capita terms, India’s carbon emissions in 2031-32 will be 2.6 to 3.6 tonnes of CO2 compared to the 2004 level of over 20 tonnes in US and a global average of 4.5 tonnes. The Kyoto Protocol of 1997(signed at Kyoto, Japan) recognised the role of developed economies in Green House gas (GHG) emissions and the treaty put obligations on signatories for quantifiable reduction in emissions within a time frame of 2008-2012. The protocol is legally binding when at least 55 countries (55% of developed countries with 1990 CO2 emissions) have signed the treaty. The protocol recognized three mechanisms in achieving reduction in emissions; a. International emission trading (ETS): Trading of emission quotas among signatories b. Joint implementation: Receive ERU (Emission Reduction Units) for participating in a green project which earns carbon credits (nuclear projects are not included) c. Clean development Mechanism (CDM): Trading of CER (Certified Emission Reduction) across international energy exchanges Sectors covered under CDM; a. b. c. d. e. Energy sector (energy, manufacturing, construction & transport) Industrial processes ( minerals, chemical & metal) Solvent and its users Agriculture Waste

1CER = 8-10 €
A CER (Carbon Credit) is a generic term for any tradable certificate or permit representing the right to emit one tonne of carbon or carbon dioxide equivalent. A 4,000 MW project will generate about 22.5 million CER credits for initial 10 years of operations with the expected incremental revenue from the sales of CER of over ` 2,00000 million. 11 Comments:

Number of CDM Projects;

Number of CER generated:

Advantages of Gas based power plants over coal based units:

Coal fired UMPP tariff: `2.5425 /kWh Gas fired UMPP tariff: ` 2.72 to `3.29 /kWh


1200 1000 800 600 400 200 0 Revenue Total Fixed Total fuel cost CER Savings Gas Coal

It has been empirically established that natural gas is rejected when the gas price is > US$ 4.5 per MMBTU as long as the coal price remains < US$ 2.27 per MMBTU (i.e. $45 per tonne of imported coal with 6000 kcal/kg)

Current coal price in India: $1.76/ MMBTU Imported coal price: $ 4.2/ MMBTU Current gas price in India: $4.2/ MMBTU Imported spot gas price: $10/ MMBTU


Conclusion: Hence it is seen from the above study that; a. Although Natural gas is a better fuel in terms of conversion efficiency and low emissions, the natural abundance of coal makes it the fuel for the future. Hence coal is un-substitutable for the next30 years in the Indian energy domain. b. In the absence of huge reserves of Natural Gas, it is better to use the gas in the unorganised sectors like transport where emission controls are difficult to enforce. c. In the Industrial sector, projects should be undertaken which have high capital expenditure wherein the super-critical boiler technology can be implemented to increase the energy conversion efficiency. Hence the concept of UMPP (Ultra-megapower-projects) should be encouraged to build infrastructure with best of the technology utilising the economies of scale. d. To ensure energy security of coal, long-term Fuel Supply & Transport Agreements (FSTA) should be signed. e. Alternate fuel sources should be explored to replace coal as a industrial heater, technologies like CBM (Coal Bed Methane) and GTL (Gas to liquid) would help India utilise its vast coal reserves. f. Resource rent charged through coal should be utilised in promoting renewable sources of energy to substitute the traditional fuels.


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