Securing affordable energy is a precondition for sustainable growth of a higher order. In the past 40 years, GDP has grown by 5.5% per annum. In contrast, the consumption of conventional energy (coal and lignite), crude petroleum, natural gas and electricity (hydro and nuclear) has grown by 6% per annum, but production by only 4.5% per annum. The overshooting of consumption over production has led to a heavy dependence on imports for some forms of energy like crude and coal. This makes the economy vulnerable to fluctuating prices of these commodities in the international markets and can have serious macroeconomic ramifications.

Energy efficiency at the all-India level

In this context, efficiency in energy use assumes a lot of importance. Energy intensity (EI), which measures the amount of energy consumed for producing one unit of GDP is a popular indicator of energy efficiency. A fall in EI over time suggests an improvement in energy use. The evolution of EI for India suggests that efficiency in energy use had deteriorated between 1971 and 1986, but has improved since then. EI deteriorated from 0.128 KWh in 1970-71 to 0.165 KWh in 1985-86. It improved from 0.159 KWh in 1991 to 0.155 KWh in 2001. The pace of improvement in energy efficiency improved at a faster pace after 2001 and reached 0.1167 KWh in 2010-11. How has the scenario been in the states in this period of improved energy efficiency at the all-India level? We examine the efficiency in energy use in the industrial sector between two time points?2002 and 2010?for 20 states. For this, we consider per capita industrial output in the states and per capita consumption of electricity in the industrial sector. We measure the efficiency by computing the industrial output per unit of electricity consumed in the states in these two time points. Before we consider the state-level scenario, let?s have a look at the all-India picture. On an all-India basis, between 2002 and 2010, the per capita industrial consumption of electricity increased by 1.6 times from 109 KWh to 179 KWh. Between these two time points, per capita industrial output increased by 1.73 times. Thus, industrial output per unit of energy consumed increased from R58 to R61, an increase by a multiple of only 1.05.

Energy efficiency at state level

Amongst the 20 states under study, Gujarat had the highest industrial output per unit of electricity consumed in 2002 and continued to be the most efficient state in 2010. Goa was the least efficient in 2002 and continues to be the worst performer in 2010. Second, 11 states improved their efficiency in electricity use and 9 states witnessed deterioration. Although 3 out of these 11 states?Punjab, Goa and Tamil Nadu?increased their industrial output per unit of electricity consumed, the numbers were much below the national average. Third, Kerala, followed by Delhi and Madhya Pradesh, witnessed the maximum gain in efficiency in energy use. In contrast, Uttarahand, Himachal Pradesh and Chhattisgarh posted the maximum fall in descending order.

Role of tariff

What explains this inter-state variation in efficiency in electricity use? A number of factors, like the quality of labour force, the capital-labour ratio employed by industries, the availability of energy and, above all, the regulatory environment might have an influence on the efficiency. In addition, pricing can play a very important role. To examine the role of pricing in guiding efficiency in energy use, we consider the increase in electricity tariffs for industry in the states between 2002 and 2010.

We find electricity tariffs for industry have actually declined in the case of four states?Andhra Pradesh, Chhattisgarh, Haryana, and Uttarakhand. All these 4 states have witnessed a deterioration in their efficiency in energy use. We also find that the 11 states that witnessed an improvement in efficiency had also raised their tariffs. However, there are some states?Himachal Pradesh, Jharkhand, Uttar Pradesh and West Bengal?where, though tariffs have increased, the efficiency has declined. The decline in energy use efficiency in some of these states can be explained by two other dimensions of pricing: the absolute tariffs and the frequency of revisions in tariffs. Apart from the increase in tariffs, the absolute tariff can have an important role. For instance, in the case of Himachal Pradesh, the electricity tariff for industries was the lowest amongst all states in 2002 and second lowest by July 2006. The cheaper tariffs might have induced increased consumption of electricity in the state, but not a proportionate increase in industrial output. The non-revision of tariffs at regular intervals to reflect the resource scarcity might also be leading to an over-use of electricity and a drop in efficiency. For instance, in the case of Jharkhand, there was no revision in prices between 2004 and 2010, for Haryana since 2006, for West Bengal between 2007 and 2010, and all these states have suffered a decline in their efficiency. While pricing might not be the only guiding factor driving efficiency, allowing it to reflect the scarcity can go a long way in improving efficiency in electricity use.

The author is associate dean, Xavier Institute of Management, Bhubaneswar. Views are personal