Daily Editorial Analysis

Decentralisation of energy supply in India, Energy in sachets (GS Paper 3, Economy)

Context:

• The energy problem in India is often framed as one of supply scarcity. India does not have adequate primary energy resources and insufficient energy production capacity which results in supply shortages; this in turn limits energy consumption.
• In reality, India’s key energy problem is one of inadequate effective demand for energy, especially from poor rural households in India and an underdeveloped market for energy.

Energy consumption in India:

• Globally, India is the third largest market for energy but the “largeness” is derived from quantity and not quality. Millions of households consume small quantities of energy mostly for cooking and lighting that adds up to a large sum.
• India’s per person commercial energy consumption (not including unprocessed biomass consumption) estimated at 25.7 gigajoules (GJ) per year in 2022 is only about a third of the world average; it is the lowest among G20 countries and lower than the minimum required for decent living in tropical countries.
• India has the largest share of the population with an energy access deficit estimated at over 505 million. It is not difficult to see why.

Sachet revolution:

• Disposable incomes are low in rural households which means there is not enough money to spend on energy for cooking, lighting, heating, transport or communication. Poor family wage earners are paid weekly which limits energy and other essential purchases to small quantities.
• A South Indian entrepreneur took note of this trend and started marketing grooming products like soap and shampoo in small sachets in rural India in the 1980s. The availability of these products in tiny (3-4 grams) convenient packets opened a new market for hygiene and grooming products in rural areas.
• Large multinational consumer goods companies were forced to adopt the sachet model as the sale of small shampoo sachets boomed in India. Labelled the Indian “sachet revolution”, this development is widely studied in business circles. Estimates of the share of shampoo sachets (single use) in total shampoo sales vary, but by most accounts, it is far more than 50 percent.
• The “sachet revolution” can be replicated in the context of energy with modular energy forms such as LPG (liquid petroleum gas canisters) that can be packed and sold in canisters of many sizes and transported by road, sea or rail.

Energy in Sachets:

• The UN (United Nations) General Assembly has placed energy decentralisation central to the pursuit of SDG7. The role of decentralised energy solutions that were once considered the most suitable for rural India is now overlooked in the context of policy priorities to increase centralised energy solutions, especially for the supply of grid-based electricity.
• The infrastructure for countrywide electricity supply is already in place but the economics of electricity supply to the rural poor remains a challenge.
• The effective demand for electricity from rural households remains small as in the case of soaps and shampoos. This means that electricity distribution companies often lose money on every unit of energy supplied to rural households. Long distances increase technical losses that add to financial losses.

Small canisters of LPG:

• LPG, a modular energy form whose distribution is independent of the transmission grid and gas pipelines needs to be considered as a decentralised bridge fuel until RE with storage options becomes dependable and affordable. 
• Small canisters of LPG (propane and butane) can provide decentralised fuel for cooking, lighting and small-scale industrialisation and also facilitate a gradual move away from subsidised LPG among the rural poor.
• LPG is not a greenhouse gas (GHG) as per the classification of the IPCC (Intergovernmental Panel on climate change) and it is among the clean cooking fuels listed by the WHO (World Health Organisation).
• When LPG replaces other fuel technologies such as heating oil, solid fuel and even grid-based electricity in India, there are significant carbon savings.

Security of supply:

• LPG is among the most secure among conventional forms of energy. LPG is an inevitable byproduct of the oil refining and natural gas extraction processes. It will exist as long as society demands that these two processes happen.
• LPG is freely traded around the world and scores twice as highly as both petrol and diesel on the OECD’s (Organisation of Economic Cooperation and Development) trade openness index.
• It is also a fuel that is less susceptible to political instability due to its dual-source origins and variety of transportation options;ships, trains, boats, and trucks. Unlike natural gas and crude oil which are exposed to high price volatility, the price of LPG is relatively stable and predictable.

RE solutions in rural India:

• The argument that rural India should leapfrog into RE (renewable energy) solutions rather than use fossil fuels like LPG is premature from an economic perspective and inequitable from a social justice perspective.
• Decentralised (off-grid) RE solutions with storage are unaffordable even for affluent urban households. Most urban households use LPG or PNG (piped natural gas), petrol & diesel and grid-based electricity as key sources of household energy which together carry a large carbon footprint.
• Mandating that the rural poor should use RE-based solutions will not only take away their right to choose but also impose undue costs on them. Effectively RE solutions imposed on the rural poor would be a climate subsidy extracted from the poor by the rich.

Challenges:

• Even at a subsidised price of INR 603 for a 14.2 kg canister in 2023, LPG remains unaffordable for many poor households in India. 
• As per information conveyed in the upper house of the Indian Parliament in December 2023, the consumption of subsidised LPG cylinders is on average just 2.8 cylinders per household per year. In urban households, the average number of 14.2 kg LPG canisters used is over 9 per year.

• Smaller canisters may improve adoption and use of LPG in rural areas but the experience of 5 kg LPG canisters introduced by public sector oil marketing companies in the early 2010s is not very encouraging.
• Among the reasons are the fact that the number of dealers and retail outlets for 5 kg “free trade” LPG canisters is limited and the price of the 5 kg LPG canister is too high for a typical single-income poor household.
• The small LPG canisters target populations with no proof of address in urban areas and not the poor in rural areas. If the 5 kg LPG canisters are sold primarily in rural markets at reasonable (not subsidised) prices, it is likely to be adopted in rural kitchens.

Way Forward:

• Applications of LPG in lighting and power generation can also be introduced in rural areas which may initiate investment in small-scale industries and create demand for LPG. 
• LPG can also serve as a robust and affordable backup source for off-grid RE solutions. As LPG supply does not require specialised infrastructure, LPG can be replaced with renewable LPG (rLPG) when it becomes affordable and available.
• This will necessarily mean a focused policy for the promotion of small LPG canisters to improve access to cooking fuels, reduce carbon emissions and prepare for the energy transition.