India - Environmental issues in the power sector

Joint United Nations Development Programme / World Bank Energy So r AESMAP Energy Sector Management Assistance Progra India ME ninmretl Issues in the Power Sector Repo. r No 205/98 June 1998  JOINT UNDP / WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) PURPOSE The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) is a special global technical assistance program run as part of the World Bank's Energy, Mining and Telecommunications Department. ESMAP provides advice to governments on sustainable energy development. Established with the support of UNDP and bilateral official donors in 1983, it focuses on the role of energy in the development process with the objective of contributing to poverty alleviation, improving living conditions and preserving the environment in developing countries and transition economies. ESMAP centers its interventions on three priority areas: sector reform and restructuring; access to modern energy for the poorest; and promotion of sustainable energy practices. GOVERNANCE AND OPERATIONS ESMAP is governed by a Consultative Group (ESMAP CG) composed of representatives of the UNDP and World Bank, other donors, and development experts from regions benefiting from ESMAP's assistance. The ESMAP CG is chaired by a World Bank Vice President, and advised by a Technical Advisory Group (TAG) of four independent energy experts that reviews the Programme's strategic agenda, its work plan, and its achievements. ESMAP relies on a cadre of engineers, energy planners, and economists from the World Bank to conduct its activities under the guidance of the Manager of ESMAP, responsible for administering the Programme. FUNDING ESMAP is a cooperative effort supported over the years by the World Bank, the UNDP and other United Nations agencies, the European Union, the Organization of American States (OAS), the Latin American Energy Organization (OLADE), and public and private donors from countries including Australia, Belgium, Canada, Denmark, Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, the United Kingdom, and the United States of America. FURTHER INFORMATION An up-to-date listing of completed ESMAP projects is appended to this report. For further information, a copy of the ESMAP Annual Report, or copies of project reports, contact: ESMAP cdo Energy, Mining and Telecommunications Department The World Bank 1818 H Street, NW Washington, DC 20433 U.S.A.  India: Environmental Issues in the Power Sector June 1998 Energy Sector Unit Energy, Mining and South Asia Region Telecommunications Department The World Bank 1818 H Street, N.W. Washington, DC 20433 U.S.A.  SP. <J5 . ll  Contents PREFACE AND ACKNOWLEDGMENTS ...............................v ABBREVIATIONS AND ACRONYMS .............................. vii EXECUTIVE SUMMARY .............................. ix WHY THIS WORK HAS BEEN DONE ...............................1 1.1 The questions that are asked ...................3 1.2 The Methodology ....................4 1.3 The Decision Making Tool ....................6 1.4 The Environmental attributes ....................8 1.5 The Institutional Framework ................... 12 2 THINKING ABOUT THE FUTURE ........................ 15 2.1 What will happen if present policies on electricity and fuel prices are maintained? ................................................. 18 2.2 Would Reform and Restructuring of the Power Sector Benefit the Environment? ................................................. 42 2.3 What are the Consequences of Choosing Plant according to Economic Cost? ............................................ 61 2.4 Renewable Energies would Improve the Environment, but how much would it Cost? ............................................ 73 2.5 Demand Side Management would Improve the Environment, but How Much would it Cost? .83 2.6 What are the benefits of rehabilitating T&D and generating plant? . 94 2.7 How much would clean coal and coal washing achieve? .98 2.8 Can more ash from power stations be utilised and if so how? .105 2.9 What would it Cost to Implement the New World Bank Environmental Standards? ................. 117 2.10 What are the Environmental Impacts of Power Plant Location and Concentration? ................. 121 iii  2.11 What are the Costs of Reducing Emissions of Carbon Dioxide? ......... 133 2.12 Can Market Based Instruments contribute to Better Environmental Management? ................................................. 138 3 MAKING CHOICES .................................................. 141 3.1 Multiple Attributes ................................................. 141 3.2 The Attributes ................................................. 141 3.3 Multiple Attribute Trade-Off Analysis ................................................. 143 3.4 Damage Costs ................................................. 150 4 WHERE DO WE GO FROM HERE? ....................................... 161 4.1 Introduction ................................................. 161 4.2 Implementation of Findings from the National Synthesis .................... 161 4.3 Implementation of the Decision Making Process and Tool ........... ....... 171 iv  Preface and Acknowledgments Environmental issues in the power sector are of major importance in India. Electric power has played a fundamental role in the economic development process. However, the most important single source of fuel for power generation has been coal, accounting for about 70% or more of electricity production; and the environmental impacts of coal-based electricity production are particularly serious, in terms of human health and well-being. The expansion of coal-based power generation affects air, land and water resources. Air pollution is a high-priority concern, because of the health consequences. The accumulation of ash at power station sites pre-empts land and endangers both ground and surface water. Furthermore, when additional coal is burned, there is an associated increase in coal production, which can degrade more land, deplete water resources and cause water pollution. Recognizing these problems, the Government of India (GoI), the World Bank and the UK Department for International Development (DFID) have collaborated in an activity called India: Environmental Issues in the Power Sector. The counterpart for the activity was the Ministry of Power (MoP). The World Bank managed the work, with Robin Bates (IENPD) and Mudassar Imran (SASEG) as co-task managers; and contributed part of the funding, through the South Asia Region. Further substantial funding was provided by DFID, through ESMAP. Liaison with MoP on day-to-day matters was facilitated by MoP's Energy Management Centre (EMC). The key developmental objective of this activity in the long-run is to reduce the adverse impact on the environment of power generation in India. It tries to do this through a participatory process, involving a wide range of stakeholders, and a methodology that would improve environmental planning, management and decision-making in the power sector. The report which follows describes that process and methodology; and how it was successfully applied in two important states in India (Andhra Pradesh and Bihar). The report demonstrates that a similar approach can be replicated elsewhere in India. Although a key output of the activity was the development of a decision-making tool, which enables government officials and institutions in India to evaluate alternative options for power development, the large body of data collected, the analysis conducted and the findings reported are also regarded as substantial contributions to assist the authorities in India in dealing with the adverse environmental impacts of power generation. v  ESMAP and the South Asia Region are indebted to a large number of individuals and organizations involved in completing this activity. However, a special acknowledgment is necessary to DFID for its support and encouragement from the earliest stages and its commitment to the work throughout the implementation period; and to many government officials at the state and central level, especially the Department of Economic Affairs (DEA), the Planning Commission, MoP/EMC, the Ministry of Coal (MoC), the Ministry of Environment and Forests (MoEF), the Ministry of Non-conventional Energy Sources (MNES), the Central Electricity Authority (CEA), the National Thermal Power Corporation (NTPC), the Central Pollution Control Board (CPCB), the State Secretaries of Energy for Andhra Pradesh and Bihar, the State Secretary of Environment, Forests, Science and Technology for Andhra Pradesh, the State Secretary of Forests and Environment for Bihar, the Bihar State Electricity Board, Tenughat Vidhut Nigam Ltd. in Bihar, the Bihar State Hydroelectric Power Corporation, the Andhra Pradesh State Electricity Board, the Bihar State Pollution Control Board, the Andhra Pradesh State Pollution Control Board, the Environment Protection, Training and Research Institute (EPTRI) in Andhra Pradesh, and numerous individuals from academic and research institutions (notably the Tata Energy Research Institute, Indira Gandhi Institute of Development Research, Jawaharlal Nehru University, and the Indian Institute of Technology) and NGOs (especially the Integrated Sustainable Energy and Ecological Development Association). Acknowledgments are also due to the Administrative Staff College of India (ASCI) and the Sone Command Area Development Agency (SCADA)/Metallurgical & Engineering Consultants (India) Ltd. (MECON), who carried out the Case Studies in Andhra Pradesh and Bihar, respectively; to Environmental Resources Management (ERM), the international consultants who co-ordinated the Case Studies and Special Studies and prepared the Synthesis Report; the Advisory Group for the Synthesis Report (comprising MoP, MoC, MNES, MoEF, Ministry of Petroleum and Natural Gas, CPCB, and CEA); the peer reviewers for the Special Studies, the Case Studies and the Synthesis Report; and the consultants who conducted the Special studies, namely the Tata Energy Research Institute (India), 3EC Consulting (India), Gosh, Bose & Associates Ltd (India), ERM (India), an independent Indian consultant and Water and Earth Science Associates Ltd. (funded by the Canadian International Development Agency). Finally, a vote of thanks is due to the many staff at the World Bank who generously gave their time to commenting on the work as it progressed; and provided sound advice and welcome support at timely moments. All of these parties played a critical role in contributing to the success of the work. vi  Abbreviations and Acronyms ADB Asian Development Bank AP Andhra Pradesh APPCB Andhra Pradesh Pollution Control Board ASCI Administrative Staff College of India AUD Ash Utilisation Division BAT Best Available Technology BAU Business as Usual BHPC Bihar State Hydroelectric Power Corporation BSEB Bihar State Electricity Board BTU British Thermal Units CAC Command and Control CCGT Combined Cycle Gas Turbine CEA Central Electricity Authority CERI Canadian Energy Research Institute CII Confederation of Indian Industry C02 Carbon Dioxide COI Cost of Illness CPCB Central Pollution Control Board DFID Department for International Development DG Directorate General DRF Dose Response Function DSM Demand Side Management DVC Damodar Valley Corporation EBRD European Bank for Reconstruction and Development EGAT Electricity Generating Authority of Thailand EIA Environmental Impact Assessment EIPS Environmental Issues in the Power Sector EM Environmental Manual for Power Development ES Environmental Statement ESCO Energy Service Company ESMAP Energy Sector Management Assistance Programme FGD Flue Gas Desulphurisation FO Fuel Oil GAIL Gas Authority of India Ltd. GDP Gross Domestic Product GNP Gross National Product GTZ German Agency for Technical Cooperation GWh Giga Watt hours HE Hydroelectric HP Hydro Power HT High Tension IFS Inter-Fuel Substitution IGCC Integrated Gasification Combined Cycle Plant. IGIDR Indira Gandhi Institute of Development Research vii  IIED International Institute for Environment and Development IPP Independent Power Producer kcal kilo calorie kt kilo tonne kWh kilowatt-hour LC Least Cost LNG Liquefied Natural Gas LOLP Loss of load Probability LRMC Long Run Marginal Cost LT Low Tension MATA Multi-Attribute Trade-Off Analysis MBI Market Based Instruments MMBTU Million British Thermal Units MNES Ministry of Non-conventional Energy Sources MoEF Ministry of Environment and Forestry MOU Memorandum of Understanding mt Million Tonnes MW Mega Watts NCAER National Council of Applied Economic Research NGO Non Governmental Organisation NHPC National Hydro Power Corporation NOx Nitrogen Oxides NTPC National Thermal Power Corporation PFBC Pressurized Fluidised Bed Combustion PM Particulate Matter pv Present Value R&R Resettlement and Rehabilitation RET Renewable Energy Technology Rs Rupees SCADA Sone Command Area Development Agency SDP State Domestic Product SEB State Electricity Boards SHP Small Hydro Power SME Small and Medium Enterprises SOx Sulphur Oxides SPBC State Pollution Control Board T&D Transmission and Distribution TEDDY Teri Energy Data Directory & Yearbook TERI Tata Energy Research Institute TOD Time of Day TSP Total Suspended Particulates TVNL Tenughat Vidyut Nigam Ltd TWh Terra Watt Hours UNEP United Nations Environment Programme UNIDO United Nations Industrial Development Organisation USAID United States Agency for International Development VSL Value of a Statistical Life WB World Bank WTP Willingness To Pay viii  Executive Summary Introduction The Synthesis describes the results of an activity on India: Environmental Issues in the Power Sector. The activity was undertaken on behalf of the Government of India, through the Ministry of Power, by the World Bank, supported by funding from the UK Department for International Development. The principal outputs of the activity are: a set of analytical tools and a decision-making process that will assist power system planners in making decisions that are environmentally more sustainable; seven Special Studies; two Case Studies; and a Synthesis Report. The decision making tool has been demonstrated in two case-study states, Andhra Pradesh (AP) and Bihar. Although no two States can adequately represent the complexity of the Indian power sector, AP and Bihar offer a good cross-section of the issues and options. Bihar is relatively poor and the Bihar State Electricity Board (BSEB) is in a particularly precarious financial and technical condition. About 40% of electricity demand comes from heavy industry; the high degree of dependence of its power sector on coal permits an in-depth analysis of the environmental impacts of coal mining and coal use in power generation; the area is comparatively remote from alternative sources of energy, although natural gas imports from Bangladesh are possible in the long run; and it has significant biomass potential. AP, on the other hand, has a wider range of supply options, including hydropower, wind and solar energy, as well as coal, and its long coastline and good ports offer better possibilities to import fuels, including LNG and coal. Agriculture accounts for some 40% of electricity demand; and the financial performance of the AP State Electricity Board (APSEB) has been better than BSEB. In both states, there is ample scope for an analysis of the whole range of policy options, including DSM and restructuring. Nevertheless, the intention is to test the tool further in other states (see below, Dissemination). The Case Studies were supported by a set of Special Studies, dealing with: inter-fuel substitution (IFS); the welfare effects of increases in electricity tariffs; the technical and economic potential for renewable energy technologies (RETs) and demand-side management (DSM); the possibilities of adopting market-based instruments (MBIs) in India; the options available to mitigate the environmental impacts of coal-fired power stations and coal mining; and the management, disposal and utilisation of ash from thermal power plants. The Special Studies provided basic generic data to supplement the detailed state-specific information collected under the Case Studies. The Case Studies were carried out by local consultants, namely the Administrative Staff College of India (ASCI) in AP and the Sone Command Area Development Agency (SCADA) and Metallurgical & Engineering Consultants (India) Ltd. (MECON) in Bihar, co-ordinated ix  x India: Environmental Issues in the Power Sector by international consultants (Environmental Resources Management - ERM). The first six of the seven Special Studies listed above were also carried out by local consultants, under the supervision of ERM, viz. the Tata Energy Research Institute, 3EC Consulting, Gosh, Bose & Associates Ltd (India), ERM (India), and an independent consultant. The seventh was executed by Water and Earth Science Associates Ltd. (Canada), funded by the Canadian International Development Agency (CIDA). The Synthesis Report, prepared by ERM, describes briefly the decision-making tool but focuses mainly on the results and findings of the two Case Studies, the Special Studies and relevant work carried out by others in India and elsewhere. The activity was designed to explore the environmental implications and the trade-offs implied by a range of options for power system development; and present them in a useful way to decision-makers, rather than produce specific policy recommendations. Nevertheless, the Synthesis Report does attempt to draw some lessons learned that might be relevant at the state and national level. Methodology for the Case Studies The structure of the decision-making tool used to conduct the Case Studies consisted of a set of linked modules. The power system planning mod,ule calculates an investment programme for power plant and a corresponding operating schedule that will meet forecast demand at least cost. The demand forecasting module is driven by a detailed examination of the historic demand and assumptions about factors that may affect the future demand for electricity at the power plant, such as system losses and tariff and income changes. The results of the power system expansion plan are linked to environmental and financial modules that produce environmental balances and financial accounts. The local environrnental aspects (ambient conditions and plant siting) are examined using an air quality model. The Case Studies have demonstrated the general validity of the decision-making tool. The power system planning and financial modules accept both financial and economic costs. The former are typically administered prices, e.g. for coals of different grades and for the transport cost per ton of coal. In practice, administered prices do not reflect adequately economic costs and provide distorted signals in terms of efficient resource allocation. Economic costs proceed from estimates of the opportunity costs of resources, and are especially relevant to the costs of building power stations, constructing ash handling facilities, mining and transporting coal, and burning coal in power stations, etc. Environmental costs were internalised and included in the estimates of economic costs, through the requirement to meet existing Indian environmental objectives, notably standards, regulations and laws governing the use of the environment; and are, consequently, handled as a fundamental and integral part of the transition in the analysis from financial to economic prices. Therefore, considerable attention has been given to  Executive Summary xi ascertaining the control costs of power generation and the costs of mitigating the environmental impacts of coal mining. In principle, most environmental impacts are intemalised in the calculation of economic costs. However, certain features of the methodology need to be underlined. First, the environmental costs included as part of economic costs are not necessarily equal to the financial costs or compensation actually paid. Second, the methodology provides valuable information to decision-makers about the costs of alternative ways to meet their own environmental objectives, but does not evaluate the merits of those objectives. Information on the relationship between damage costs (including the external costs of pollution and the social impacts of resettlement and rehabilitation) and control costs, essential for such an evaluation, are not available or could not be collected to a satisfactory level of reliability under this activity. Within the activity, only two limited attempts were made to go beyond existing environmental objectives, to analyse the cost impact of alternative (World Bank) standards and the costs of C02 reduction. Also here, no attempt was made to introduce a normative assessment of those cost impacts relative to possible benefits. Third, the methodology does not address the costs or issues related to the effective monitoring and enforcement required to apply existing standards and to financial policies to compensate for environmental damages. In recognition of the above features, a small subset of environmental attributes has been monitored explicitly: total suspended particulates (TSP), oxides of sulphur (S02) and nitrogen (NOx), because of their importance to air quality and human health, and the need to highlight for decision-makers the possibly serious implications of substantial increases in these attributes, which may not be addressed adequately in the long term by existing standards; carbon dioxide (C02), because it is not subject to standards yet has an important global impact; and land use and ash, because the sheer scale of the problem in India in the future is a cause for concern, which again needs to be highlighted for decision-makers. However, the individual environmental impacts of coal mining are not tracked separately: they were costed and (to the extent possible) fully internalised within the estimates of the economic costs of coal supplied to the power stations, as described above. The decision-making tool was used in the AP and Bihar Case Studies to explore a set of scenarios, which were designed to illuminate a number of questions. These questions are: (i) what will happen to the environment if present policy on electricity and fuel prices are maintained?; (ii) would reform and restructuring of the power sector benefit the environment?; (iii) what would be the consequences of choosing plants on the basis of economic costs, including internalisation of environmental costs?; (iv) renewable energies would improve the environment, but by how much and what would it cost?; (v) demand side management would improve the environment, but by how much and what would it cost?; (vi) what are the benefits of rehabilitating transmission and distribution networks for electricity and existing generating plant?; (vii) how much would it cost to use new clean coal technologies and to wash coal and how much would they achieve?;  xii India: Environmental Issues in the Power Sector (viii) can more ash from power stations be utilised and if so how?; (ix) what would it cost to implement the new' World Bank environmental standards?; (x) what are the environmental impacts of power plant location and concentration?; (xi) what are the costs of environmental controls?; (xii) what are the costs of reducing emissions of carbon dioxide?; (xiii) what are the costs of environmental damage?; and (xiv) how can government intervention be used to intemalise costs and in particular can market based instruments contribute to environmental management in India? There were three main scenarios: (i) A "business-as-usual" (BAU) scenario assumed that decisions in the power sector continue to be made on the basis of administered (or financial) prices for fuels and other inputs, no fundamental tariff reform takes place, and there are no significant improvements in technical efficiency; (ii) An "inter-fuel- substitution" (IFS) scenario posited the selection of power plants on the basis of economic rather than administered input prices. Perturbations to this scenario were analysed, to isolate the impact of certain promising options, implemented individually and in bundles; and (iii) A "reform" scenario evaluated the implications of certain tariff increases and improvements in operational efficiency. No attempt was made to link reform with any particular institutional or managerial model, nor to questions of ownership. The Process Used in the Activity A fundamental precept of the activity was that it should be developed through a participatory process, characterised by extensive preliminary consultation and continual consultation with stakeholders thereafter. Initially, a questionnaire was delivered to senior officials in the energy and environment sector and NGOs, to obtain their views on the main issues relating to the environment in the power sector (June 1996). This was used to help focus the subsequent work on the priority issues and problems in India. Then followed a series of Workshops and Seminars in Delhi, designed to encourage the participation and interest of a wide audience and to get an early feedback on the scope, objectives and methodology of the work: a Meeting of Expert Modellers, to debate the modelling tools available to help in the analysis, which led to the selection of ASPLAN as the power system planning model for the Case Studies (July 1996); an NGO Workshop, to discuss issues of interest to NGOs and a mechanism to involve NGOs in subsequent phases of the work (July 1996); an Inception Seminar, attended by key decision makers from the Indian ministries and the power sector, at which a number of basic decisions were taken which influenced the state-level Case Studies and the Special Studies (July 1996); a Technical Workshop, bringing together the same basic audience as the Inception Seminar, to reach final consensus on methodology and modelling (October 1996); and a National Mid-Way Workshop, attended by senior officials from the central ministries, representatives of the state electricity boards, the local consultants carrying out the Case Studies and Special Studies, and representatives of NGOs (May 1997).  Executive Summary xiii Parallel state-level Mid-Way and Decision-Makers' Workshops were held in Hyderabad (March 1997 and August 1997, respectively) and Patna (June 1997 and August 1997, respectively). These workshops brought together officials from the state governments, SEBs and NGOs to discuss the preliminary results from the Case Studies and exchange views on the implications of the outputs from the work. The general participation of the NGO community in the activity was further strengthened through the recruitment of a co- ordinator, in April 1997, whose role was to disseminate the results on a continuing basis and to organise workshops for NGOs; and direct liaison by the Bank with NGOs at the state and central level. The participation of the state governments in the work was further enhanced through state-level Steering Committees. The work culminated in a National Decision Makers' Workshop and a National NGO Workshop in Delhi in May, 1998. The former was attended by representatives from state electricity boards, officials from both state and central level ministries, and individuals from academic and research institutions and from international organisations. It provided feedback on the work, which has been integrated in the Synthesis, particularly in the writing of Section 4 ("Where do we go from here?"); and permitted early dissemination of the methodology and results. The NGO Workshop provided an opportunity to a cross- section of NGOs from across India to review the issues and options considered in the Synthesis and the two Case Studies. Finally, an Advisory Group for the Synthesis was established; and the Special Studies, Case Studies and the Synthesis Report itself have been subjected to extensive peer review. The Advisory Group, consisting of representatives of the central Ministries and agencies, met in October 1997 and April 1998, to advise ERM on the design and scope of the Synthesis Report. The panel of peer reviewers included local academics and researchers, NGOs, officials familiar with the power sector and the environmental impacts of power generation, and consultants; as well as international experts and NGOs. Lessons Learned from the Activity Based on the findings of the work, the following main conclusions emerge: (i) continuation of current policies and practices in the power sector is not sustainable in financial terms and will lead to even greater harmful impacts on the environment than in the past; (ii) the economic pricing of fuels, which internalises these environmental impacts, will improve the situation; (iii) options are available to ameliorate the situation further, but they need to be implemented in combination, to achieve the maximum reductions in environmental impacts; and (iv) the changes in incentives which are likely to follow from power sector reform should greatly benefit the environment.  xiv India: Environmental Issues in the Power Sector Current Policies and Practices Continuation of current policies and practices in the power sector is not sustainable in financial terms and will lead to even greater harmful impacts on the environment than in the past If current tariff policies are maintained, the financial performance of the power sectors in both AP and Bihar will impose an insupportable financial burden on their respective state governments. The rate of return on capital in AP will become increasingly negative over the period, reaching -18% by 2015; and in Bihar it would average -14% from 1996 through 2015. The necessary financial injections that would be necessary from the respective state governments to ensure a minimum flow of funds to maintain and operate the sectors is unlikely to be forthcoming. The analysis draws attention to the important relationship between the poor financial condition of the two SEBs under current policies and their inability to comply fully with environmental standards. All the thermal power plants in AP are fitted with controls to limit TSP levels, but many units, particularly the older ones, are unable to meet the standards, due to managerial and technical problems, including inadequate maintenance. In view of the fact that the older plants are unable to conform fully to environmental standards, APSEB has appealed to the AP State Pollution Control Board (APSPCB) to raise the permitted emissions limits. Similarly, in Bihar, BSEB's need for subsidy to cover its deficits prevents it funding investment out of retained earnings. Under- investment and poor maintenance lead to inadequate capacity to meet requirements, so that it is hard to close plant to maintain pollution control equipment, because of the impacts on an already low quality of service. Moreover, when there are inadequate funds for maintenance, preference will be given to actions that are necessary for operation of the plant. In such circumstances, rigorous attempts to implement existing standards are not feasible. The fundamental requirement of environmental protection is to return the power system to a position where it can provide an adequate quality of service and generate funds to make the necessary resources available for control and maintenance. Though present circumstances make environmental compliance difficult or impossible, it was found in Bihar that the costs of doing so may be small. The Bihar case study estimates that the cost of the required measures is about Rs. 260 nn, roughly equivalent to 10 MW of generating plant. These measures would roughly halve the emissions of TSP from 2003 onwards. In both AP and Bihar, emissions go up significantly under a "business-as-usual" (BAU) scenario. In the case of AP, they increase by about four times, and in Bihar they double. The lower growth in emissions in Bihar is because energy consumption is more severely constrained under BAU by the lack of supply. Extrapolating these conditions to India as a whole suggests that by 2014/15 the power sector in India could be producing roughly  Executive Summary xv three times as much S02, NOx, TSP and ash compared with present conditions: by that time, the ash disposal facilities around power plants would require over 1,000 km2 of land or about one square metre per person; and C02 emissions could be 775 mt per year, compared to 1,000 mt presently produced by power generation in the EU. These data indicate that BAU will lead to even greater harmful impacts on the environment than in the past. Emissions on the scale described above are bound to affect air quality and have major human health impacts. The damages caused by TSP to the respiratory system are especially a cause for concern. Air quality is affected under BAU in two ways. First, the AP case study comments that TSP emissions frequently exceed standards; and air sheds around power plants in AP would currently be described as poor with respect to TSP under World Bank standards (Section 2.10.2). While these emissions could be reduced by renovating equipment in old plant, this would only be possible if APSEB had sufficient cash flow. Increased funds will also allow utilities to invest in new plants with lower unit emissions. Second, evidence from Bihar shows that, where power supply from the main system is inadequate, individuals resort to large numbers of privately-owned diesel generating sets, which suffer from high emissions of S02 and NOx. A study which was carried out in three important commercial centres in Bihar demonstrated the significant contribution to ambient concentrations from these sources (Section 2. 10). Economic Pricing of fuels Economic pricing of fuels which intemalises the environmental impacts of power generation will improve the situation. Shifting from financial prices for coal, as used under BAU, to economic costs, as used in the inter-fuel substitution scenario (IFS), would more than double the price of coal (from 524 Rs/t to 1350 Rs/t for Grade D coal and from 247 Rs/t to 580 Rs/t for Grade G coal in Bihar, see Table 2.31) It is estimated that the costs of environmental mitigation measures included in these costs would account for approximately 7ORs/tonne of coal mined, or 5- 12% of the total economic cost of coal, depending on coal grade (Table 2.42) . Furthermore, environmental control costs add 7% to the capital cost of a conventional coal-fired power plant (Table 2.43). Using these economic costs in place of financial costs would not affect the comparative cost advantage of domestic coal in the short and medium term. For example, in both Case Studies coal from the Talcher and Sigareni coal fields continues to be part of the least-cost solution. In the long term, however, the comparative advantage of natural gas and coal imports improves, leading to their higher use in the later part of the planning period. For Bihar, this goes along with a general improvement in the environmental impact, due largely to significant imports of coal around 2008; and natural gas from Bangladesh, along with imported LNG at coastal sites towards the end of planning period. In the case of AP, the outcome is more ambiguous. Current policies were expected to lead to a number of naphtha-based IPPs. However, if planning based on economic costs is adopted, naphtha consumption is replaced mainly by  xvi India: Environmental Issues in the Power Sector imported coal and by LNG. The effect on environmental impacts is mixed - there are gains in lower ash production, but higher emissions of S02 and NOx. The trends identified in the Case Studies of AP and Bihar have been extended to all- India, as in the case of BAU. The major difference compared with BAU is in the generation of power from natural gas, which at the end of the period is responsible for 26% more electricity generation in the IFS scenario. This increase is at the expense of electricity generation from domestic coal (which decreases by 4% in IFS) and naphtha (which falls by 67%). This fuel switching between the IFS and BAU scenarios, stemming from the choice of fuels according to their economic costs, results in reductions in annual emissions of 3.5% for C02, 0.6% for S02, 2.8% for NOx and 3.6% for TSP by the end of the period. However, if a substantial increase is to take place in natural gas utilisation, existing policies would need to be reconsidered. Indigenous gas is scarce in India and scarcity is managed not by prices but administered through a distortionary system of gas allocations. Gas shortages in India are likely to continue in the future, aggravated by constraints on the gas transportation infrastructure. To meet the additional requirements for natural gas from the power sector calculated above, for example, might require liberalisation of gas imports and replacing the allocation system for indigenous gas by a market-based mechanism. Speciric Measures Options are available to ameliorate the situation further, but they need to be implemented in combination, to achieve maximum reductions in environmental impacts. The main options considered to reduce the environmental impacts of power generation include: demand side management (DSM); clean coal technologies; coal washing; renewable energy technologies (RETs); and T&D rehabilitation. The work shows that no single option by itself would make a significant impact on the dominance of indigenous coal in power generation; and therefore the adverse environmental impacts associated with coal-based power generation. However, applying the full range of options in combination would make a substantial contribution to pollution control. DSM The work concludes that DSM is in general a win-win solution. In the case of AP it was found that DSM programs could reduce total system cost (in present value terms) and power consumption by about 6% by 2015. In consequence, environmental attributes decline by 9-1 1% (S02 and NOx reduce by 9%; TSP and C02 by 10%; and ash by 11%). In Bihar, the demand and cost (in present value terrns) reductions are in the same order of magnitude and environmental attributes fall by about 6%. For all India, the full DSM potential is estimated to reduce environmental attributes by about 10% by 2015.  Executive Summary xvii Clean Coal Technologies Two specific clean coal technologies were considered in the case studies: PFBC in Bihar; and IGCC in AP. Both technologies have advantages in improving combustion efficiency and reducing emissions to the environment. Their disadvantages lie in higher capital and operating costs, which exceed those of co-nventional power plants by 10%-15% on a levelised cost basis. The benefits described in Section 2.7 suggest at best only marginal reductions in ash (none in Bihar and 2% in AP) and C02 (3-4%) but more substantial impacts on TSP (17% in Bihar, 3% in AP), S02 (17% in Bihar and 15% in AP) and NOx (8% in Bihar and 10% in AP), against overall increases in the present value of total system costs (2% in both states). Coal Washing The economics of coal washing is controversial, given the properties of Indian coal. About 15-25% of coal is lost in washing. Coal washing is therefore expensive, amounting to about 20-30% of the cost of mining coal. The Synthesis concludes that for high ash coal (i.e. with an ash content of 38% or more), transported over distances exceeding 1000 km, coal washing can be economically viable. The coal washing scenario carried out in AP highlights the trade-offs involved. Washing coal increases total system cost by less then 1%, while ash production drops by nearly 20%. On the other hand, taking into account the environmental impacts at the coal washeries, the overall requirement for the disposal of solid waste may be higher, although some of this waste may be burnt as washery tailings in a fluidised bed boiler in a power plant burning unwashed coal. RETs The work considered several types of renewable energy supply options. Their relative importance depends on the renewable resources in the state under consideration, as demonstrated by the case studies (with Bihar favouring bagasse and AP developing hydro and wind power). On the basis of existing knowledge, it was concluded that the overall technical potential for RET generation in India is considerable. However, the economic potential is much more limited. Also, there are major uncertainties about the likely rate of technical progress in RETs and hence different views on the possible range of future costs. In AP, system cost is estimated to increase by about 3% but lead to a reduction in all the environmental attributes in the same order of magnitude. Employing optimistic assumptions about the potential for co-generation from bagasse in Bihar it was found that environmental attributes can be reduced, by about 2% with a small decrease in system cost. A least-cost optimisation carried out for India as a whole, comparing renewable energy with other forms of generation, concluded that RETs could account for up to 4% of electricity generation capacity by 2010 (corresponding to about 36 TWh), mainly in the form of small hydro, wind and co-generation.  xviii India: Environmental Issues in the Power Sector T&D Rehabilitation As in the case of DSM, the work concludes that T&D rehabilitation is in general a win- win solution. Investment in the T&D networks has been seriously neglected in both AP and Bihar. Consequently, T&D losses are currently in excess of 30%; whereas it is believed that 10% losses are achievable in most states in the long run, in line with current performances in Singapore and Korea. In AP, it was estimated that investment in the transmission and distribution system that would cut overall technical losses to 10% by 2010 could lead to a 3% reduction of all environmental attributes, compared to the IFS scenario; whilst the present worth of system costs would fall simultaneously by 4%. The Bihar Case Study took less optimistic assumptions, with overall technical losses cut to 18% by 2015. Nevertheless, the present worth of system costs fell even more, by over 6%, reflecting the worse condition of the T&D system in Bihar; and the improvement in environmental attributes was commensurate, in the range 4-7% (S02 reduces by 6%, NOx by 5%, TSP by 7%, C02 by 6% and ash by 4%). Combination of Options It can be seen from the above discussion that each of the options applied individually does not have any major environmental benefits. However, when taken in combination the environmental impacts look more significant. For example, in AP, a combination of options consisting of renewables, DSM, T&D rehabilitation, coal washing and clean coal technologies, reduces coal-based power generation by 18% by 2015, compared with IFS. Total system costs (in present value terms) fall by about 4.5% with significant environmental benefits ( S02 and NOx fall by 27% and 21% respectively, while the decline in TSP, C02 and ash is in the order of 18%). In Bihar, a mix of DSM, renewables and T&D rehabilitation reduces coal-based power generation by 15% over the same period. Total system costs (in present value terms) fall by about 7.5% with reductions in environmental impacts in the range of 4-10% ( S02 7%, NOx 4%, TSP 8%, C02 10% ). It is striking from these results that, in most cases, options which reduce local environmental damages would also help to reduce C02 emissions, as further demonstrated by the multi-attribute trade-off analysis conducted in Section 3. Altering Incentives The changes in incentives which are likely to follow from power sector reform should greatly benefit the environment The quantitative analysis of the work and, in large measure, the discussions at the National Decision Makers' and NGO Workshops, point to economic and energy sector reform as a particularly attractive alternative to BAU, even if such reform is defined very conservatively, in terms of tariff increases and improvements in operational efficiency. Notably, reform would improve the financial position of utilities and create better incentives for cost-effective power system planning: the rate of return on capital in AP  Executive Summary xix quickly becomes positive; and in Bihar averages 12% rather than -14% from 1996 through 2015. The environmental performance of the energy sector is likely to benefit substantially from a more healthy financial situation, as detailed below. There was, therefore, a consensus at the Workshops that, without some measure of reform, the options may not be taken up or, if implemented, may not be sustainable. The reason is that many of the specific measures have common factors influencing their potential effectiveness, including: getting the price of electricity right (for DSM), to send correct signals to consumers to invest in efficient economic activities and appliances; getting the price of fuels right, "to create a more level playing field" (for natural gas and renewables); increasing the financial incentives of utilities (for T&D rehabilitation, coal washing, coal utilisation and ash management); and increasing the funds available to utilities (through raising tariffs). If the adoption of clean coal technologies is to be fostered, additional measures might be necessary. They are not part of the least-cost development plan in AP and Bihar under present environmental standards. There is therefore a trade-off between emissions and costs and implementation would not proceed on the basis of normal market incentives. The AP model clearly indicates the environmental benefits which accrue under a reform package, compared with BAU: the present values of emissions of NOx, S02 and TSP fall by 5-7%; whilst cumulative emissions of C02 and ash production fall by 8% and 11% respectively by 2015. Meanwhile, the demand for electricity by industry increases by 35% in 2015, compared with BAU, indicating strong concurrent economic development. However, it should be noted that where there is now large suppressed demand, reform may increase environmental impacts, if the effect of higher prices on demand is outweighed by growth in incomes and if increased revenues permit utilities to build more power plants to meet demand. Nevertheless, the effects of reform in the Bihar model are salutary: despite meeting sales which are one-third higher by 2015 under reform compared with BAU (Table 2.37) and reducing system LOLP from 40% to 5% by 2001, environmental attributes all fall (NOx, S02 and TSP by 11-15%, cumulative C02 and ash by 11% and 6% respectively), indicating that the beneficial aspects of reform dominate (Table 2.38). Since non-compliant plants cannot be closed at the moment, because of the serious supply constraints, it can reasonably be expected that the higher reserve margin under reform will make the enforcement of compliance more practical. Finally, it is interesting to note again, in AP and Bihar, that there is a marked correlation between the local and global environmental benefits to pollution reduction. In reaching the above conclusions, the work assumed the objective of complying with existing Indian standards. Hence, a "command and control" approach to environmental management was implicit, through the intemalisation of the control costs. The work highlighted a number of issues which would need to be addressed before attempting to introduce market based instruments (MBIs) (Section 2.12), especially the need to ensure that the legislative and regulatory framework for administering MBIs is created. Also,  xx India: Environmental Issues in the Power Sector power plants and companies using MBIs must have strong commercial incentives and face hard budget constraints. Additionally, the work gave limited attention to the cost consequences of applying the new World Bank standards. Although these standards are more stringent for S02 and particulates than existing Indian standards, the analytical results suggested that the incremental costs need not be substantial, if plants are sited appropriately. Mainly, the problem would be encountered on the side of particulates, and particulate control is relatively inexpensive. However, the work deliberately refrained from making any judgement on whether or not implementation of these alternative standards would be economically justified, particularly since the review of damage costs in Section 3.4 is inconclusive. It is important to note that delegates at the National Decision Makers' Workshop agreed that better implementation of existing standards was more important than the adoption of new and stricter standards. In other words, better implementation of monitoring and enforcement procedures might be of more immediate benefit. Another area where the work has gone beyond Indian standards is in the cost consequences of C02 reductions, since India has not signed the Kyoto Protocol or any other global agreements to control C02 emissions and consequently, there are no binding targets on C02 reduction in India. The Bihar case study investigated the supply-side opportunities for reducing C02 through a series of carbon tax scenarios. Results show that at low tax rates (Rs. 175/ton of C02) not much change in emissions occurs; however, as the tax rate increases to Rs. 525/ton of C02, substantial reduction in C02 is realised, partly as the substitution of natural gas takes place. The Andhra Pradesh case study shows that an effective way to reduce C02 emissions is through rehabilitation of the transmission and distribution system and by implementing DSM programs. Applied in combination, these two activities could save about 12% of total expected production of C02 over the planning horizon. Dissemination Two types of dissemination are envisaged for the activity on India: Environmental Issues in the Power Sector. The first is to publicise the results of the activity to a wider audience; and the second is to transfer the capability of using the decision-making tool to appropriate agencies. In the first category, workshops would be conducted in selected states, including AP and Bihar, bringing together a wide audience of decision makers, NGOs and the general public. The goal would be to raise awareness about the availability of the tool and the issues and options involved with the environmental impacts of power generation. In particular, it will be emphasised that conventional Environmental Impact Assessments should be seen as a last resort, to try to manage those impacts, rather than minimise them or avoid them in the first place; and that use of the decision-making process and tool  Executive Summary xxi developed under this activity can help to anticipate those impacts, and incorporate them directly into decisions. In the second category, selected states would be helped to actually apply the decision- making process and tool. As a first step, a Manual for Environmental Decision Making (MEDM) will be prepared, as a self-contained document, describing the objectives, methodology, outputs and interpretation of the outputs of the decision-making tool. It would be available to all organisations involved in the preparation of similar studies and would be used as a standard reference to transfer the capacity to use the tool. Given limited resources, it is recommended that active assistance in transferring and applying the tool should be targeted initially towards states where the power sector is being restructured. The likelihood of seeing effective results will be much higher in such states. A critical step towards replicating the successes of the Andhra Pradesh and Bihar Case Studies will be to build the human resource capacities in these other states to use the model. Where states are restructuring, a suitable counterpart agency could be the regulator or grid company. Of course, the regulator or grid company would either have to develop in-house capacity to use the tool or else to manage consultants to use it on their behalf, and then integrate the results of the tool into their indicative power system planning. As part of the second category of dissemination, there could in the training phase be a rapid application of the tool, to achieve two results: (i) demonstrate the application of the tool, using actual data from the state in question; and (ii) test further the extent to which the results of the AP and Bihar Case Studies have wider applicability in India.  India: Environmental Issues in the Power Sector: Synthesis Report June 1998 This report has been prepared by Environmental Resources Management (ERM) on behalf of the World Bank with funding from the UK's Department for International Development (DFID) Environmental Resources Management  1 WHY THIS WORK HAS BEEN DONE Electricity is essential to modem life and to economic development. All countries aim to ensure a supply of electricity that is affordable, reliable and secure. Developing countries consume far less electricity per person than do developed countries and it is impossible to envisage any path of development that does not require a many-fold increase in the amount of electricity used. The production of electricity has important consequences for the global, regional and local environment. The generation of electricity from fuel by combustion releases carbon dioxide that contributes to global warming and climate change. India is already a major producer of carbon dioxide in aggregate, although its production per capita is small. Developed countries have already taken a disproportionate share of the carrying capacity of the atmosphere, but it is developing countries which will be the main incremental source of greenhouse gases over the next several decades. It is also cheaper to save a marginal unit of carbon dioxide in developing, rather than developed countries. Fossil fuels contain small amounts of sulphur and nitrogen that when burnt produce acid gases; oxides of nitrogen are also formed by the combination of nitrogen and oxygen in air at high temperatures. Small particles are produced during combustion from ash in the fuel, from pyrolysis and from recombination of carbon atoms. Acid gases and particulates from electricity generation are dispersed by high stacks, but eventually they reach the ground and can damage health and property. Except for a few places in India, the contribution of the power sector to ambient concentrations of acid gases is not large. The sector is frequently responsible for excessive concentrations of particulates. Acid gases can be transported long distances across frontiers and are eventually precipitated as acid rain. Oxides of nitrogen are also precursors of tropospheric ozone, so high local concentrations of ozone can originate from remote sources. These trans- boundary problems are well documented in Europe and North America and have lead to stringent controls to reduce emissions. The problems are not yet severe in India, but the large increases in coal fired power generation that are expected, could change this picture. India has large reserves of coal that are a major asset. They mostly have a high ash content, up to 40% or more. Disposing of the ash by-product is troublesome; the requirement for land is huge and leaching can contaminate ground water. Most forecasts of energy use in India show rapidly rising use of local coal, so the problem will get worse if nothing is done. Coal ash can be used in many ways and it may be appropriate to encourage this practice so as to minimise the environmental impacts. 1  2 India: Environmental Issues in the Power Sector Sites for hydro and thermal power stations and for ash disposal require large areas of land. Hydro power stations are inevitably on rivers and thermal power stations also require cooling water, so the necessary land is generally of economic value. The resettlement of populations, though more properly a social, rather than environmental issue, is an important constraint on new development. The two issues are often practically inextricable. Given these significant social and environmental impacts of power development it is reasonable to ask what can be done to mitigate or avoid them and what it would cost. The environmental impacts of power development may be reduced by using less electricity, by controlling the impacts of generation, by preventing waste products reaching the environment or by adopting new, intrinsically, clean technologies. Energy conservation is an alternative to new power supply. Renewable energies are an alternative to fossil-fuel generation. These measures cannot be studied in isolation. If three power stations are envisaged in one State then the same set of energy conservation activities cannot be used to challenge all of them. Whereas the market in the state for ash-bricks to replace clay bricks may be sufficient to absorb the ash from one plant it may not be enough to handle three. A holistic vision is necessary to see how the possibilities in terms of supply, demand and control can be best combined. The objective is to find a suitable balance between the needs for power and the preservation of the environment over the long-term. The means and effectiveness of implementation depend on the structures and capabilities of institutions. The power sector in India is on the verge of fundamental and significant reforms. It is moving slowly from a publicly owned, vertically integrated, monopolistic system with highly distorted prices for fuels and electricity to a more liberal system with market prices, competition and commercial motivations. These changes will affect the environment. They will affect the demand for electricity, the financial viability of the entities involved, the capacity of the state to influence action, the viability of all market based policies and the choice of fuel and technologies. The changes will rebound on the relationships between fuel suppliers and the power sector and between the power sector and its regulators. Market based instruments may supplement or replace command and control mechanisms for regulation. It is necessary to understand how these structural changes will affect the environment and to identify how the opportunities can be maximised and any threats averted. One important aspect of the structural changes that are in motion is the decentralisation of the decision making process to the State level. The practice in the past is that planning has been made at the national level by the CEA using the regions as the planning unit The States contributed to this with load forecasts and indications of likely economic and industrial development. They have not in the past carried out power system expansion  Why This Work Has Been Done 3 planning. Any effective decentralisation will require that the State Electricity Board (SEB) acquire either the capacity to perform that function themselves or sufficient understanding to be an "informed buyer" of such services from an independent institution. This change requires the development of planning tools that are appropriate to the State level. It is important that the environmental impacts of the power sector be properly recognised in any planning exercise and the development of new tools to support State level planning also creates the opportunity to ensure that the environment is fully incorporated into the planning tools and processes. In recognition of this need and its opportunities, the present work has been undertaken on behalf of the Government of India, through the Ministry of Power, by the World Bank, supported by funding from the UK Department for International Development. The principal outputs of this work are a set of analytical tools and a decision-making process, that will support power system planners in making decisions that are environmentally more sustainable; seven Special Studies; two Case Studies; and a Synthesis Report. In particular, the analytical tools and decision-making process can help decision makers in India: (i) improve the planning and management of their power systems, taking into account the major environmental impacts; and (ii) assess more explicitly the economic and environmental trade-offs involved between different options for power generation. The tools are also able to exhibit clearly any residual impacts that may be of interest and that may not have been fully internalised. The decision making tool has been demonstrated in two States, Andhra Pradesh and Bihar. From this demonstration some empirical evidence has been obtained concerning the effectiveness of various environmental policies. That evidence is resumed here along with some other important studies within and outside the country and a tentative extrapolation of the findings -is made to all India. 1.1 THE QUESTIONS THAT ARE ASKED The work that has been done addresses the practical questions of where the power sector is going, what the consequences will be, what can be done to reduce the impacts on the environment and what it will cost. The Synthesis is structured around a set of questions that arise from the discussion in the preceding section. They are: * what will happen to the environment if present policies on electricity and fuel prices are maintained? * would reform and restructuring of the power sector benefit the environment? * what would be the consequences of choosing plants on the basis of economic costs including internalisation of environmental costs? * renewable energies would improve the environment, but by how much and what would it cost?  4 India: Envirornental Issues in the Power Sector * demand side management would improve the environment, but by how much and what would it cost? * what are the benefits of rehabilitating transmission and distribution networks for electricity and existing generating plant? * how much would it cost to use new clean coal technologies and to wash coal and how much would this achieve? * can more ash from power stations be utilised, and if so how? * what would it cost to implement the new World Bank environmental standards? * what are the environmental impacts of power plant location and concentration? * what are the costs of environmental controls? * what are the costs of reducing emissions of carbon dioxide? * what are the costs of environmental damage? * how can government intervention be used to internalise costs, and in particular can market based instruments contribute to environmental management in India? 1.2 THE METHODOLOGY 1.2.1 An Overview of the Work The work that underlies this Synthesis Report comprises two detailed Case Studies at State level in Andhra Pradesh and Bihar, a set of cross-cutting Special Studies and other relevant work done in India and elsewhere on the topic. The Case Studies look in detail at the interaction of technical options for managing demand, controlling impacts and using clean technologies. They also track how reform and restructuring of the electricity sector may affect the environment. The Special Studies expand upon key issues covered in the Case Studies and this Synthesis Report. They deal with the possibilities for Inter-Fuel Substitution, the Welfare Effects of increases in electricity tariffs, the technical and economic potential for Renewable Energies and Demand Side Management, the possibilities of adopting Market Based Instruments in India, the costs of available Mitigation Options for Coal Power Stations and Coal Mines and the Management of Ash from Thermal Power Stations. Andhra Pradesh and Bihar were chosen for the Case Studies. No two States can adequately represent the richness and complexity of the Indian sub-continent, but these two States exhibit some of the important characteristics. Bihar is a relatively poor State and the SEB is in a precarious financial and technical condition. A large part of demand for electricity comes from heavy industry. There are large coal reserves nearby and the area is comparatively remote from alternative imported sources; it has useful reserves of biomass. Andhra Pradesh is a largely agricultural State; it has a reasonably  Why This Work Has Been Done 5 well performing SEB and with its long coastline and good ports has the option to import fuels; it also has appreciable wind and solar resources. The Case Studies explore a set of scenarios based on the questions posed in Section 1.1. The questions, and therefore indirectly the scenarios, form the organising framework for this synthesis. 1.2.2 The Organisation and Process The process employed to do the work was chosen to help achieve the principal objective which was to create an effective and acceptable decision making tool. The process was therefore characterised by extensive preliminary consultation and continual consultation thereafter. The organisation of the study is shown schematically in Box 1.1. Box 1.1 Organisation of the Study MOP/ E.MC World Bank i ~~~~~~(Fu n ding) (Management) International Contract Consultants --------------------__ __ __ _ (ERM UK) Technical Assistance/ Qu ality Assurance Contracts Special Rsdn Contracts Studies Project National Director il Synthesis r- (ERM India) Res*lts l l ~~~~~~~~~~~~State Governments of AP and Bihar Coordination A a - - - - - - - - -_- State Nodal J I Institutions