Dr Sanjib Pohit

In recent times, the growth of hydropower has received a set back as negative externalities of hydropower are taken into project accounting and companies need to compensate the stakeholders for the same. However, hydropower companies are not compensated for the positive externalities in terms of better environment after completion of the projects.

At the outset, Integrating Energy policy of Government of India has outlined that coal would be the dominant source of power for India in the next 30 to 40 years. However, it has also advocated the growth of green energy. In this context, the report has put lots of emphasis on developing hydropower, the potential of which is believed to be large. However in recent months, the growth of hydropower has received set back. The environment consideration has compelled the National Hydroelectric Power Corporation Limited
to stop its construction of Loharghat Hydropower station on Ganga in Uttarakhand despite the considerable expense already borne on the project. Ministry of Environment and Forests has put stringent conditions on the construction of new hydropower stations in Uttarakhand and elsewhere.

Simultaneously, we find that quite a few of the companies specialising in the production of hydropower have moved into the production of thermal power. The usual argument put forward by them is that stringent environment conditions, human rehabilitation, etc. have led to escalating costs in this sector. In many cases, these have made hydropower unprofitable from the business point of view. Moreover if we consider the long gestation period of a hydropower station, it makes all the sense for the hydropower companies to switch to coal-based power. Hydropower may reduce GHG emission but in the current context that does not add to their profitability. It is also an irony that while negative externality of hydropower (in terms of environment degradation, rehabilitation, etc.) are taken into project accounting and the company need to compensate the stake-holders for the same, the hydropower companies are not compensated for the positive externality in terms of better environment.

This is in stark contrast to the case of thermal power. In fact, most of the negative externality of thermal power arises at the stage of coal extraction, which is usually not accounted anywhere in the whole supply chain. As a result, coal is a relatively inexpensive source of energy, as priced by current market conditions. Relative prices provide the incentives that drive the choices of users. If relative prices make coal the best choice for users, coal will inevitably be the preferred source of electricity.

The important issue is whether market price reflects all the relevant information and sends right signals to the members of the society. In reality, this is not so due the inadequacy of the market price in capturing external costs or externalities. In other words, market price very often does not capture the social costs imposed on society. A divergence exists between private interests and social interests. The divergence is everywhere but in most cases this is not significant enough to warrant intervention. However, the externalities are often significant enough in the case of environmental resources to warrant further introspection. Coal-fired energy is a prominent example in this respect since it involves health and environmental costs–risks of more death and illness, ecosystem damages and risks to species. For instance, in the U.S. the current tax per ton of coal is about 40 per cent of the market price and estimates of the environmental cost range from 300 to over 650 per cent of the market price.

It is clear from the above discussion that the social costs of coal are not reflected in market prices. As a result, the market price sends wrong incentives for users, which in turn make their choices of the selection of energy source inconsistent with society’s best interest. To balance individual interests and society’s interest, it is necessary to close the gap between the readily available price of coal and the social cost of coal. To do so, one need to estimate the true social cost of coal, which itself is a challenge.

Unlike the market price of coal, the environmental and health cost (i.e., social cost) of coal production and use are not readily available. To estimate the social cost of coal, one needs to isolate the social damages from the net private benefits that we derive from coal use. The first step in doing so is to understand the key elements of the coal cycle, namely, pre-mining, extraction, process and disposal, transportation and utilisation. Table 1 gives a fair exhaustive list of key elements of the coal cycle. Note that this long list includes both private costs captured by market prices and social costs not accounted by the existing prices. This needs to be accounted for, creating level playing field between thermal and alternative sources of energy. If this is done, coal may not be too attractive source of energy in the Indian context.
.

The author is a professor at National Institute of Science, Technology and Development Studies, New Delhi. Email: spohit@nistads.res.in