On India’s Electricity Consumption

Abstract

This paper studies growth in electricity consumption, the key factors affecting it, and its link with economic activity. To do so, the paper discusses the major characteristics of India’s power sector, and the historical trends of power consumption and economic growth, by tracing the changes over the years. The study also briefly discusses the key factors that have impacted consumption measures, including captive power, deficits, enhanced efficiency, etc. It also discusses the historical role of the manufacturing sector, the growing importance of the agriculture and household sectors, and the introduction of new and more energy-efficient technologies (such as the LED bulb), in determining power-sector outcomes. In the process, the study provides an overview of the existing relationship between energy and gross domestic product (GDP) in India, using past data and extant literature. Finally, the study conducts a time-series analysis to estimate the elasticity of energy consumption with respect to overall economic activity (using gross value added (GVA) as a measure). It finds that despite ups and downs in consumption and elasticity estimates over time, the long-term elasticity has been close to unity. Therefore, given that long-term annual economic growth is expected to be in the 5–7 percent range, India should plan for capacity increases at 6–7 percent for the next five- to ten-year horizon as it is better to err on the side of excess than shortage.

At fairly conservative growth rates we find that India will need to plan for electricity consumption levels that are approximately double of those at present, and higher than other estimates like central electricity authority (CEA). This calls for significant investments in electricity-generation capacity.

However, elasticities can change over time. India is an emerging economy, moving away from its dependence on fossil fuels. This is as a consequence of the global decarbonisation process and adding more renewable capacity. This study notes that as elasticities may change in the future, the power planning horizon should be limited to ten years, appropriate investments made in electricity-generation capacity, a constant watch kept on electricity-consumption growth, and consumption
closely monitored.