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The Perils of Being an Economist in the Energy Industry

Dr. Arvind Subramanian, chief economic advisor to the Government of India, delivered a terrible lecture on August 17, 2017, “Renewables may be the Future but are they the Present? Coal, Energy, and Development in India.” It shows the limits of classic, zero-sum, conventional, neoclassical economic thinking. In his analyses, what is notable are not the variables considered but those omitted, not necessarily intentionally, but because he is unaware of them. The lecture is full of “unknown unknowns” to him. 

If the consequences of poorly formulated propositions were limited to fashionably “controversial” academic debates, it might be amusing. When there are real-world consequences of amateur thinking, especially when delivered from the pulpit of the 16th Darbari Seth Memorial lecture at TERI from New Delhi, it is difficult to forgive the resulting irresponsibility.

Just as everyday economists typically do not venture into commenting on Artificial Intelligence or Space Exploration, so also “Energy and Renewables” should be out of bounds for such as Dr. Subramanian; he does not “get it.” Let me illustrate.

He proposes a global organization for cleaning coal, to quote: “to clean and green coal —the world collectively needs to embark on a program akin to the Manhattan project that produced the first nuclear bomb. This would require investment from both public and private sectors, in advanced and developing nations, as well as a range of policy instruments.” Cleaning coal might have been a good idea decades ago, but not in the age of renewables. Equally implausible is post burning carbon sequestration and storage. Vaclav Smil said, and I paraphrase: If you believe in carbon sequestration and storage, you may as well believe in immaculate conception! Thankfully, no one in the world will buy “clean coal” arguments anymore. 

The presentation has nuggets like, “India cannot allow the narrative of “carbon imperialism” to come in the way of rational, realistic planning for the future.” Carbon imperialism?! The world has the opportunity to be rid of smoke, soot, smog, pollution, and pre-mature death of especially women and children, through getting rid of fire-based coal electricity and wood, kerosene, and coal burning based cooking. Coal-burning power plants account for ~40 percent of all warming emissions and fuel burning transport accounts for another ~40 percent. When faced with existential threats to livelihood on the planet through a Hot War of us vs. us, who thinks “imperialism?” I would rather Dr. Subramanian advocate “solar imperialism” for India rather than fight phantoms.

Inter-regional inequities and give and take will always exist; what eastern Indian states have, coal, the other states may not. So should the eastern states continue with coal mining in today’s industrial context? The more important question is: What would you recommend to ameliorate inter-regional disparities? Do not the coal-rich regions also have sunlight? Those regions could deploy solar, preferably on rooftops, and generate thousands of jobs.

Dr. Subramanian’s narrative has little room for distributed generation and its consequences, say, the impact on industrial structure of the several colliding industries that constitute the emerging complex new industry — we don’t even know what to call it — incorporating Electricity, Transport and ICT, information and communications technologies. What are the policy and regulatory consequences of this? Not a word.

Yes, there will be stranded assets. Do we not routinely write off stranded assets, for instance, the paging infrastructure in the telecom industry, or cassette tapes in the home? This is normal Schumpeterian creative destruction, simply business. So the challenge is: How to write off assets such as over-capacity thermal power plants such that they don’t burden the banking system? Arguing for keeping banking industry solvent by encouraging coal plants to operate at capacity is throwing good money after bad. And worse, there are opportunity costs: timely, clean, renewable investments may be crowded out as a result. Dr. Subramanian’s argument for coal burning power plants makes no sense.

Consider the terms of debate: coal vs. renewables. Apples and oranges, because both are fruits? Utterly different industrial systems give rise to the two electricity production systems. Dr. Subramanian only considers select social costs of the most obvious kind — loss of livelihood for people in the coal regions. Worse, no social benefits of non-traditional kinds are considered, such as reduced barriers to entry in electricity, or entrepreneurial opportunities from technological advances in solar, batteries, smartphones, and LED lights, to mention only a few.

There are no novel hypotheses about why after 70 years of independence, close to 300 million Indians have no electricity access. As students of telecom networks know, the economics of networks deteriorates at a rate proportional to the square of the distance from the population center. This is a reason for no grid extension to rural areas — it is costly. The U.S. solved this problem through urban-rural cross subsidies in telecom and electricity through elaborate regulations. Does this hold meaning for India, today? In the age of renewables? Why did India miss the boat? Dr. Subramanian’s proposal is simple-minded: Extend the grid! But we don’t need to! I would argue, we should re-think the grid from first principles. 

What is remarkable about the lecture is what it does not contain. For instance,

  • There is no talk of industry fracturing and splintering because economies of scale do not matter.
  • There is no talk that barriers to entry in the new electricity business have disappeared; we are all in the electricity business.
  • There is no talk of “application” being more important than “kWh” or traditional measures of consumption or generation.
  • There is no mention of microgrids and their role in the infrastructure of the future. 
  • There is no discussion of the strategic implications of storage, for electricity, transport, and new applications, such as cooking, or for diesel substitution, for instance.
  • There is no discussion of the implications of the change in grid topology — from hierarchical to a federation of smaller grids and microgrids.
  • There is no discussion of the vulnerabilities of the traditional grid — security breaches and blackouts from hacking, for instance.

Clearly, I do not expect Dr. Subramanian to address all such complex issues. But what he has offered is a high schoolish static, status quo view of a traditional industry with merely the arithmetical addition of renewables as a variable. Such an industry does not exist. The emerging industry is dynamic, more revolutionary than that, with beneficial consequences for India if the nation gets its policies right.

Traditional economists likely do not have the frameworks and tools necessary for creative analyses, synthesis, and policy recommendations in the complex emerging energy industry. That makes economists with the pretense of knowledge a dangerous breed, the more so for being affable and well-intentioned, as Friedrich von Hayek warned in his Nobel acceptance speech in 1974. That such a high-profile forum is offered to such a well-meaning economist who lacks insight into industrial processes shows India’s intellectual bankruptcy.

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