Renewable Energy in India - Still a long way to go

When I read the news that under Gujarat solar power policy 2009, Gujarat government is planning to set up a solar park capable of 500 Mw within two years, I really felt excited that at least one state government is thinking with a vision (click to open the link). I have always wondered why can't states like Rajasthan and Gujarat (and to some extent also Haryana & Punjab) invest heavily in wind and solar energy.

Though initially costly, they definitely can contribute greatly to reduce the high power deficit the country faces. More so for state like Rajasthan, which lack any other significant natural resources except for wind, solar energy and ofcourse 30k barrels/day of sour crude, this is a huge business opportunity. Alas, only if the state government finds time to think beyond Jat, Gujjar and Rajput reservations and agitations!

A quick look at the proposed solar park project in Gujarat shows that it is going to cost around Rs 15 cr of capex to produce a Mw of electricity. A gross estimate tells us each Mw of installed nuclear power capacity costs Rs 20 cr and traditional coal fired power capacity costs Rs 4-5 cr. This means that solar power is roughly 4 times as expensive as traditional coal fired power but 25% less costly than the nuclear power, strongly advocated by current government. As I mentioned in my previous post, I have no qualms about setting up nuclear power plants but we need to utilize all the available options optimally, which include wind, solar and also thorium based hybrid nuclear reactors, to meet our ever increasing energy demand.

Though central government has displayed some lofty ambitions in renewables through policy statements such as Jawaharlal Nehru National Solar Mission, five year plans etc, the actual exploitation of potential remains a mirage. The plans to generate 1,000 MW of power by 2013 and up to 20,000 MW grid-based solar power, 2,000 MW of off-grid solar power and cover 20 million sq metres with collectors by the end of the final phase of the JNS mission in 2020 remains poorly executed. The performance in wind sector is not as abysmal and India has the fifth largest installed wind power capacity in the world but no where close to the actual potential the states like Rajasthan, Gujarat, TN and Karnataka offer.

I again stress here that if we have to match our continuously increasing energy needs, it's high time we abolish our fragmented approach to energy sector. I feel we need to abolish separate petroleum ministry, renewable ministry, coal ministry, power ministry, atomic ministry and what not and set up a responsible Energy ministry capable of taking a holistic view. If all the above mentioned ministries are essential to satisfy the "coalition dharma", how about setting up an umbrella ministry over and above these ministries that can work on all available sources under one roof. We need to develop a master-plan that provides a guideline on how we want to configure our energy basket over the next few decades with a proper mix of all easily available options.

Energy Scenarios: Juggling with the Good, Bad & Ugly

The recent events including the "Arab Spring", that continues even in the harsh middle-east summers, particularly in Libya leading to a major disruption in the supply side of the crude, recent disagreements over future course of action among OPEC nations and IEA releasing 60 million BOE into the markets to "cool off" the prices show only one thing; the future climate for energy market is going to be much more challenging and haphazard than most predicted.

Good
Everyone's long loved and admired sources of "good" energy such as wind, solar and bio-fuels are yet to take off from the ground despite all the efforts of IPCC and Greenpeace (link). While the technical feasibility of varying degrees has been demonstrated for all of them, the cost effectiveness and willingness of policy makers to make some serious efforts to promote a shift towards them remains a major question. Whatever the IPCC's report may say, I am quite not convinced that policymakers will do anything drastic to support renewables over easily and cheaply (yes you read correctly!) available crude elsewhere. However, the growth rate of renewables will continue to be impressive mainly because of a lower denominator and they will continue to be a small component of the world's energy basket.

Bad
To add to the concerns of the major governments, already grappling hard with the issues related to energy security, the recent Japan nuclear crisis has taken sheen off a major option that was available to them. The first government to respond was Germany, which decided to get away with nuclear power all together! This also leaves the plans of countries like India and China in teeters as they were banking heavily on substituting part of their growing energy demand with nuclear. I feel while some advocates will continue to support nuclear, selling it to the public will be more difficult for the governments and the growth rate of this industry will continue to limp till people forget about Japan's crisis.

Ugly
I feel the ugly/polluting fossil fuels will continue to rule the roost. Till you can dig a bore in the ground (no matter where and how deep) and tap easily palatable energy, getting away with fossils is unforeseeable. While lot of advancements such as efficiency, optimization, non-conventionals (GTL/Coal Gasification/CBM/Shale) and production enhancement technologies will improve this sector further, the carbon based economy of all the major countries will dictate the continued dominance of fossil (Oil, Gas & Coal) sector.

I feel while everyone would want to shift to the renewables completely, it is not going to happen for next several decades. The large percentage of energy demand would still be met by fossils. In such a scenario, the governments and policy makers need to focus on improving the efficiencies in this sector and support the innovation to best utilize the existing resources. As for nuclear, its a necessary devil that we have to live with but whom we can't love. Anyways, it can never be about choosing between Good, Bad or Ugly, it just about juggling with them and juggling better!

Why we don't need an "Aadhar"?

Dear Mr. PM,

I am writing this to bring to your notice a matter of serious concern which has been conspicuously not taken up enough by mainstream media. While I have great respect for your vision, acumen and capabilities, I feel the confines of Z+ security at Race Course road has somewhat taken you away from the common man of India. Few months back, you quietly handed the first Aadhar ID to a bunch of poor Indians thinking you have found the panacea of all the problems facing the country today. You, on suggestion of few individuals equally disengaged from ground realities (read Nandan Nilekani), assumed that a 12 digit number would solve all the problems like corruption, poverty and hunger that face this country. While you were busy visualizing ways this 12 digit number could help in elimination of corruption, people like A Raja, Kalmadi and ISRO officials were busy creating scams running into 12 digits right under your nose. I am pretty sure, your 12 digit "Aadhar" has no aadhar to tackle this kind of rampant corruption. I find Aadhar to be grossly misleading, dangerous and a big blow to exchequer for the following reasons:

Panacea for all evils:

The biggest justification given to Aadhar is that it can stop the pilferage in Public Distribution System (PDS). There is no denying that poor don't receive allotted food grains, benefits under Govt. schemes etc as expected but that is not only because of lack of identity. In-fact if you travel to villages, you will find that large majority of poor people do have identities like Ration Cards, BPL cards, Voter ID card etc but the PDS distributors/NREGA coordinators don't give them their full entitlements. Basically, they get their signatures/thumb impressions on much inflated quantities/amounts, where the excess is sold in black market/their pockets. Even if you provide these people with Aadhar, they will end up being the victim just like they have been so far. The way to address this issues is not creating a new ID but making the grievance addressing mechanism stronger, where even a poor guy can complain and get action done against the corrupt officials if he/she is not given his/her due.

Wastage of Public Money:

Election commission of India started issuing voter ID cards over a decade back and still is not rolled out completely. Even where it is rolled out, there are major errors in the data. My card spells my name wrongly, whereas each of my family members has some or other mistakes in their cards including date of birth, address etc. Despite being educated and informed, I couldn't get my voter ID card rectified. What makes you believe that Aadhar will be different? Will it not be one of those mammoth projects that never achieved what they were set out for?

Countries like UK, Australia etc. have tried similar projects in past but concluded them to be infeasible. What makes you think that we would be any different given the much bigger size of our country and much lesser per capita resource available to Govt.?

If we have to utilize all the advertised benefits of Aadhar, we will have to put in place huge infrastructure in place such as millions of biometric scanners, thousands of micro ATMs and internet connectivity at every point where Aadhar will be verified. Is India currently in a position to undertake these kind of investments when we don't have adequate roads, metros, fly-overs and electricity in all homes?

A rough calculation shows that if each PDS shop were to utilize Aadhar identification for disbursing grains, they will have to shelve out roughly 2.5 Lakh rupees. Do you really think those people can afford that kind of money without extracting even more profit through black-marketing? Basically you are giving them more motive to be dishonest.

No project feasibility study was ever taken, no cost benefit analysis done (atleast to public's knowledge) and national debate held in parliament. Never in my professional life have I seen a project even above 1 Million dollars go to the execution stage without a feasibility study, brainstorming and discussions. Here we are undertaking a project worth billions without any such study.

Identity/Privacy Issues:

In a country as diverse as ours, there is a very high probability of Aadhar being misused by the ruling Governments against certain sections of society. While I agree that post independence so far we have been lucky enough to have a fully functional democratic setup, thus precluding such incidents from happening but that is no surety for future. If we ever have a totalitarian regime in the future, Aadhar can be used for catastrophic end results. Who would have thought of Jews persecution in Germany by Hitler in early 20th century, say 1901 AD.

A few key strokes will yield complete lists of males, females, Muslim, Christian and Hindus in that district. Imagine this information getting into the wrong hands. The argument will be but Aadhaar database does not include religion. Is it not possible to get around this by searching the database using names for example names like Raman, Rehman or Raymonds? This can be extremely dangerous to say the least.

How can the system protect ‘Identity theft’ in such a vast population? One of the major issues in the western world is identity theft. Even in countries with a fraction of the population numbers of India, there are fraudulent people drawing government pensions and social security benefits for years using dead people's IDs. Identity theft is an international issue and a thesis can be written on the topic.

Does being a ‘poor’ person in India leave him or her unprotected from all issues related to invasion of their privacy? (This topic is best left to legal experts on privacy and human rights issues.)?

I know 7 Race course is too far for my voice to be heard so I have put it in my blog.

Regards,
Gajendra

Of Recession, GDP growth, Inflation and Black Swans

Of late, I have been reading and hearing too much about the recession, the negative growth rate and increasing unemployment. All these developments in the global economy has left all the economists rattled and confused. Some are predicting a double dip recession while others are talking about the recovery by Q1, 2010. All this economic mayhem and the debate following it has left me with many mind boggling questions, which I am sure are going to sound so trivial and unintelligible that nobody would even attempt to answer them. I would be really grateful if someone could help me find answer to these.

Q1) Is the negative growth really bad?

From the past 2 years, journalists across the globe are turning their throat hoarse while bringing out the stories about the negative economic growth rate, fall in GDP and so on. I do see their point but one thing which keeps bothering me is that is it really practicable to have a positive GDP growth rate forever. GDP of a country is is nothing but the total market value of services and goods produced within that country. Consider the scenario that if the GDP of whole world were to always have a positive growth rate. To achieve this, the net consumption of raw materials like iron, cement, minerals and petroleum products would also grow at a similar rate. So I always wonder is really feasible of our tiny planet earth to forever supply the required raw materials at an ever increasing rate.

Q2) Is only the moderate positive inflation desirable?

Sometime back people were real scared first to see double digit inflation rates in most of the economies and then a negative inflation rate. According them a moderate inflation is what is needed for a healthy economy. I am again confused. Consider a basic question related to demand and supply. According to my knowledge the rate of increase production (call it supply) of things has definitely outstripped the rate of increase of market size (demand) i.e. increase in the rate of production is definitely more than the rate of increase of customers (because of increase in population and change in economic conditions).

So according to me if the things are left for free markets (i.e. in absence of central banks and government's intervention) to decide, the natural direction for inflation has to be negative.

Q3) Is a country's higher GDP per capita better for its residents?

I think possessing a BMW or a Merc will not necessarily make a person happy or unhappy. To me it all depends on the reference frame of the person. If a person doesn't possess a BMW or a Merc, he will not be unhappy till the repeated commercials of TV/magazines/newspapers and society brainwash him to believe that being happy and successful means being able to buy a BMW or a Ferrari. My great grandfather never wanted to posses a Porsche because he didn't know about its existence. Probably he was happier with his bicycle.

If my analysis is correct, why ruin the earth due to all this rat race to produce more. Just ban all the damn media houses and their commercials.

Q4) Black Swan or White Swan. About whom we should care more?

After reading Taleb's Black Swan, I am even more convinced that we cannot predict highly improbable events, termed as "Black Swans" by Taleb, though they have a very high consequence. I completely agree with him in all his analysis but again the question is that do we really care of such rare event. May be Tsunami killed over 3,00,000 people in a single assault but if we were to make one choice, should we prepare our self better for terrorist attacks, which happen every now and then or prepare our self for the Tsunami which may NOT come for next 100 years. So I strongly think that the prediction business is very much needed in finance particularly but only thing is that we should not always try to justify our wrong predictions. So indeed we should care more about White Swans and make our economic system robust for them. To me even the current recession is a White Swan only as it was foreseen by many in 2001 itself when Fed reduced the interest rates to zero (Q2 becomes relevant again).

PS: Please see that I am not a socialist or communist. I am a staunch capitalist but I believe in real free markets i.e. markets devoid any external interferences of central banks and governments. Call it Utopia, if you may!!!

From Economic Gloom to Economic Doom

Its been so long since I wrote anything on my blog apart from poetry. So I thought I will take a break from my poetry (which is anyways not so great that anyone is ever going to miss it if I did not write more) and write something about the job cuts (over 80,000) which has happened over the last two weeks. This particular news has disturbed me much more than any other news of past few days. Not that I didn't abhor the attacks on women in Mangalore pubs or that I didn't hate the grim response of Pakistan to the proofs provided by India, its just that this particular news forced me to question the wisdom of the very people whom I always considered as the smartest people around.

Let us do some analysis of the issue. Open any business newspaper and the first thing you will notice is that company XYZ announced 10,000 job cuts owning to bleak consumer spending forecast for next year or company ABC announced 15,000 job cuts to cut down the operational cost and boost up the profits. A close look at the solution used for a bleak consumer spending will simply reveal that by firing people companies are themselves making the future even bleaker. Say, company XYZ fires 10,000 people because it thinks that demand will go down next year but by firing 10,000 people isn't it aggravating the problem by reducing the purchasing power of 10,000 families (or roughly 40,000 people assuming avg. family size to be 4)? So over that past 1 year, the corporate America has simply pushed out 2.3 mn families (roughly 1 crore people) out of the consumer segment. Just to make the things worse, it will further create a panic among the people who have a job but will try not to spend on anything non-essential so that they can survive the bad times in case they also lose their jobs.

Now let us look at the problem from companies point of view. They claim that they are reducing the headcount to reduce their operational expenditure. I still wonder if it is really going to solve any purpose. Open ANY companies' financial statement, you will notice that employee costs are hardly a fraction of overall expenditure. So even a 20% reduction in headcount won't do any good to the company. Yesterday only in Economics Times I found the financial results of following companies and I am putting the expenditure numbers and employee costs numbers to just prove my point typically how insignificant the employee cost contribution is to the total expenditure. Though the table below shows only Indian companies and were profitable in 2008 but I am assuming that same pattern will also hold true for US companies and the cost split will remain more or less similar even for a loss making company. The companies I have mentioned below belongs to diverse sectors like Infrastructure, FMCG and Electronics etc, which means that my hypothesis that normally contribution of Employee costs to total expenditure of a company is valid across the sectors:

Company name	Total Expenditure 2008 (in Lakh INR)	Employee Costs 2008 (in Lakh INR)	Other expenditure (general/administrative expenditure) 2008 (in Lakh INR)	Ratio of Employee Cost to Total Expenditure 2008 (in Lakh INR)
GMR INFRA	67,136	7,476	7,672	0.111356053
Refex Refrigerents	1,718	56	322.62	0.032433062
Bartronics India Ltd.	10,915.02	646	1005.85	0.059181751
Daawat LT foods ltd.	23,916.87	583	3631.4	0.024370246
Selectron EMS India Ltd.	3,800.67	173	596.03	0.045489348

So looking at the table above, it is clear that even if these companies were to fire say 40% of their staff to save costs, they can hardly save say 4.5% of the total expenditure which, according to my opinion, can easily be saved by reducing the next column i.e. general and administrative expenses.

Now going a step further, a keen observation at the staff fired will reveal that these jobcuts are mainly for the people at lower section of company's hierarchal pyramid who are anyways not paid much. So for example, Bank of America announcing a job cut of 35,000 people over the next three years is a outright foolishness which they might regret once the markets pick up again. To prove my point, I will use some real statistics and few assumptions. My assumption is that people being fired mainly belong middle level management to employees who work at the lower level positions. I will assume that the average expenditure Bank of America incurs on these 35,000 employees is 100,000 USD per year, which is indeed a very liberal assumption cosidering that average salary of people passing out from HBS is roughly 100,000 USD per year. So the total cost savings by firing 35,000 employees over three years will be roughly 3.5 bn USD over three years. So yearly savings are roughly 1bn per year. Now how does that compare with the total salary offered to the top people of the company, I putting the following table from Bank of America's 2007 annual report:

Name	Base Salary ($)	Cash Incentive ($)	Restricted Stock ($)	Total Cash Incentive & Restricted Stock ($)	Stocks Options (#) shares	Value of stock options (as of end 2007)
Kenneth D. Lewis (CEO)	1,500,000	6,750,000	11,750,000	18,500,000	333,333	13333320
Joe L. Price	800,000	3,245,000	3,955,000	7,200,000	166,667	6666680
Amy Woods Brinkley	800,000	3,245,000	3,955,000	7,200,000	166,667	6666680
Barbara J. Desoer	800,000	3,245,000	3,955,000	7,200,000	166,667	6666680
Liam E. McGee	800,000	3,700,000	5,000,000	8,700,000	208,333	8333320
Brian T. Moynihan	700,000	3,310,000	3,990,000	7,300,000	166,667	6666680
R. Eugene Taylor	800,000	3,700,000	5,000,000	8,700,000	208,333	8333320
Total	6,200,000	27,195,000	37,605,000	64,800,000	1,416,667	56,666,680

The table above shows that only top 7 persons of BoA were given total benefits of about 112 USD at a time when the turbulent environments were approaching. It wouldn't surprise me if top 1000 people in the organization were given total benefits of say around 1 bn USD (though I must admit these emoluments are very less when compared with some of the other CEO of companies of equal size). The table on the left shows the highest paid CEOs of 2007.

That shows how irrational it is to cut jobs to reduce the costs specially the people whose costs hardly have any impact on the company's balance sheet. I am sure these kind of actions will push not only the company but also the whole economy from gloom to doom.