CHAPTER II

ENERGY PERFORMANCE OF INDIAN MANUFACTURING:

AN ANALYSIS OF SUBSTITUTION AND TECHNICAL CHANGE

CHAPTER II

ENERGY PERFORMANCE OF INDIAN MANUFACTURING:

AN ANALYSIS OF SUBSTITUTION AND TECHNICAL CHANGE

2.1 INTRODUCTION

Energy Policy discussion since the oil shocks of the seventies centres around the

problem of choice of the proper mix of energy conservation and energy supply. The

question is whether consumption demand should be curtailed without sacrificing the level

of economic output by appropriate change of technology or whether domestic energy

production should be increased to meet the demand as per the pre-existing efficiency of

energy use in the economy. Given a pattern of economic growth and the corresponding

increase in demand as per a frozen efficiency scenario, the economic choice is to find

the cost minimising solution between demand reduction and supply expansion.

The supply management concentrates on domestic production because supply

enhancement through import would bring in a reverse impact on the macroeconomic

balance, viz., the balance of payments position. To strike the proper balance between

energy conservation and supply expansion is the key issue of the energy policy, in any

part of the world after the successive oil shocks.

The proponents of increased energy supply would argue that energy conservation

cannot be achieved without a fall in the GDP because of the strong correlation between

energy consumption and the GDP. Although a high correlation does not prove causality,

the fact still remains that energy consumption and economic growth are intertwined.

Conservationists on the other hand, would point out several 'wasteful'

consumption of energy which can be curtailed by minor changes in life style, even in a

growing economy. Increasing energy supply also calls for increased expenditure.

2-1

Furthermore, energy sources in the form of fossil fuel has a limited base which cannot

be expanded indefinitely. Market prices may not be reflective of the real situation too.

The capital may be undervalued while the import price or balance of payments may be

overvalued for foreign exchange fluctuations. Moreover, the exhaustible resources need

to be considered with the true shadow prices to reflect the economy's true resource cost.

These may all push the cost of energy supply upwards. All these warrant energy

conservation.

Energy conservation may be practised through substitution of a particular fuel by

another or that of energy by other non-energy inputs in the production process. Energy

substitution is a direct reaction to the hike in the relative energy price. This has been

the experience in many countries of the world in the post-oil shock era.

The other alternative is supply expansion through technical change instead of

increasing production or import. Energy saving technical change may be defined as an

advance in knowledge and skill which allows the economy to produce a constant type and

quantity of output by using less of the same type of energy input. This may be

represented by a production function

Q=f {k,l,m,eA(t)} (1)

where A(t) is the technical change over time. An energy-saving technical change would

imply A'(t) > 0 so that energy requirement (e) in the productiort process goes down,

while energy substitution would increase the relative use of the factors capital (k). labour

(I), materials (m) vis-a-vis energy (e). However, many analysts argue that energy-

saving technical change is also induced originally by increases in energy prices. Thus,

both technical change and substitution of energy by other factors, reduce the amount of

energy required to support production of economic activities. However, the relative

2-2

contribution of these two factors vary from situation to situation depending on the various

economic factors and res~urce availability. A price-rise has a direct bearing on energy

consumption in the form of factor substitution and an indirect intertemporal outcome like

technological innovation towards energy-saving. The two constitute the two aspects of

energy conservation.

The question of substitution and/or technical change focuses on the possible

reduction in the amount of energy required to support a unit of economic activity. Such

efforts would mean a fall in the ratio of energy use to economic activity, viz GDP. At

a disaggregated level, the ratio of sectoral energy use per unit of sectoral GDP or output

will reveal the energy conservation effort in the respective sector.

The intertemporal behaviour pattern of industrial energy consumption per

industrial output has been studied in this chapter for both across countries and also across

industries within India. The preliminary analysis rests on such a study of inter-country

panel data. The objective has been to find out whether the energy/GDP ratio in the

industrial sector has declined over time within and across nations. The Indian

_manufacturing sector has been examined in the same light too. The energy-intensity vis-

a-vis other factors in the aggregate manufacturing sector has also been studied to find out

any possible trade-off between fuel and other inputs. The final section deals with a factor analysis for energy conservation in the top ten fuel-intensive industries, chosen

from the aggregate manufilcturing sector. Both interfuel substitution and energy-saving

technical change have been examined as the integral parts of the overall energy

conservation efforts in these industries.

2-3

2.2 INDUSTRIAL ENERGY CONSERVATION IN A GWBAL PERSPECTIVE

2.2.1 The Theoretical Background and the Model

· At the macroeconomic level, the per capita energy consumption per real per capita

GDP is an S-shaped curve which first goes up, attains a peak and then declines. The

point of inflexion varies from country to country. The average energy-intensity curve

goes up to a peak and falls thereafter. In newly developing countries, the energy intensity

per GDP (i.e., E/GDP) increases with industrialisation due to often import substitution

and urbanisation. The developmental process leads to a shift in favour of energy-

intensive industrial products, thus augmenting the demand for energy. As a result, the

energy GDP ratio increases. Similar is the pattern of development and change in the

manufacturing sector. Import substitution changes the composition of domestic

production and energy-intensive infrastructural industries like steel, aluminium, cement

etc. are set up, increasing the use of commercial energy and augmenting the E/GDP ratio

in industries. The aggregate and industrial energy intensity start falling only after a peak

is attained and the organic composition of the growth process changes. The extent of

saving in energy consumption in the declining phase as per the frozen efficiency scenario,

varies across, and within different countries.

Physical energy use in any particular sector is measured in terms of the heat

content of the total fuel used. Consumption of different fuels, such as, coal, oil, gas and

electricity, . is summed up in terms of their heat equivalent to give the total fuel

. consumption in the respective sector. All fuels thus converted to a single heat unit, say

coal or oil equivalent, represents the total energy used to support the respective economic

activity, measured in real currency unit Similarly, the E/GDP ratio for the industrial

2-4

sector is the ratio of total industrial energy consumption in heat units to the real industrial

GOP. The E/GDP ratio may be called energy intensity and henceforth will be referred

as EI of the sector under question.

The factors influencing the energy intensity in industries are (a) the energy price

relative to the overall industrial prices and (b) technical change as reflected by the proxy

variable, time (Kaufman, 1995). The energy price relative to industrial prices may also

be called the real energy price as it captures the movement of the aggregate energy price

. vis-a-vis the price of other industrial inputs. According to economic principles, a change

in the relative energy price, should push the energy intensity in the opposite direction.

Technical change will also have an inverse relationship with energy intensity if it is

energy-conserving in nature.

The econometric model used to estimate the effects of real energy prices and

technical change on energy intensity is given by the following equation :

where EI : industrial energy use in heat units per unit of real industrial GDP,

P e : energy price index

P : industrial price index

t : time as a proxy measure of technical change.

2-5

... (2)

This can further be re-written as :

In (E/) = In A + a I + /3 In r; l ... (3) The coefficient of time, viz a, the instantaneous rate of growth, will be negative for an

energy-saving technical change in the industrial sector and vice versa. the estimate of

6 is also expected to be negative, giving the price elasticity of energy-intensity in

industries. An energy conservation effort over time will thus be reflected in negative

estimated values of a and 6~

2.2.2 Data and Variables .

The sample under study involves ten countries over the period of 1973 to 1990.

The nations have been so chosen as to cover developed and developing countries as well.

Taking India as the base case, country dummies have been used to the other nine,

namely, China, Korea, Japan, Malaysia, Mexico, Brazil, Egypt, USA and the European

Union. The econometric model, as given by equation (3) has been fitted on a pooled

sample of cross-section and time-series data for the aforementioned period across these

ten countries. The same model has separately been fitted for a sub-sample of five nations

in which India is placed against the developing ones, viz, USA, Japan, Korea and the

European Union. The estimates of the rates of growth a and price elasticity 6 are

expected to be different according to the difference in sample. Results are also expected

to vary when the model is fitted for individual countries. In other words, the use of both

slope and intercept dununy variables instead of intercept country dummies, has given

individual regression equations for each. The signs of the a and 6 estimates along with

their magnitudes reflect the difference among countries.

2-6

The industrial energy consumption figures in million tonnes of oil equivalent

(MIDE) for the individual countries have been computed from the available

disaggregated data on OECD and non-OECD countries. The industrial GOP figures in

1985 US dollars have been calculated from the total GDP figures available as above,

multiplied by the industrial share in GDP, obtained from the World Tables. The

construction of the real energy price index involves (a) an index of fuel prices and (b)

an index of industrial prices. The energy price has been calculated from the UN

Yearbook of National Accounts as an index with 1985 = 100 by dividing the private final

consumption expenditure on fuel, light and lubricants in current prices by the same in

constant prices. The index of industrial prices with 1985 = 100 has been calculated from

price deflators given in the World Tables. The ratio of these two series of price indices

give the relative energy price as an index too, with 1985 = 100~ The figures for industrial

energy consumption, industrial GDP, energy price index and industrial price deflators

for some selected countries at selected years are given in Table 2.1. The entire time-

series and cross-section pooled data series is too long to be presented here.

2-7

Table 2.1 : Industrial Energy Use Indices for Selected Countries at Selected Years

Industrial Industrial Energy Industrial Energy Use GDP Price Price Index

Year Country (MTOE) (1985 US$) Index (1985=100) (1985=100)

1973 India 27.34 29.14 32.25 34.78 Korea 7.44 11.56 32.98 19.90 Japan 188.10 597.90 40.92 59.70 USA 511.37 1180.77 56.70 44.26 European 432.58 1730.30 53.39 40.56 Union China 167.87 39.56 34.68 86.78 Malaysia 1. 75 4.71 34.68 44.44 Brazil 14.21 52.30 34.68 0.05 Egypt 2.67 3.44 34.68 28.18 Mexico 11.91 33.22 34.68* 2.39

1990 India 71.94 77.17 137.23 143.59 Korea 30.26 77.21 140.54 126.37 Japan 177.93 1064.07 71.75 101.93 USA 469.01 1507.23 79.86 104.57 European Union 369.65 2115.22 69.40 120.63 China 320.36 131.78 75.20 129.90 Malaysia 5.97 11.86 75.20 131.70 Brazil 31.72 93.33 75.20 5448.89 Egypt 12.61 11.68 75.20 209.61 Mexico 37.38 60.41 75.20* 1197.57

*Due to non-availability of data, a common energy price index for non-OECD countries have been used for these nations.

2.2.3 Results and Discussion

The results of the regression analyses indicate that the model of equation (3) can

be fitted very well to the panel data for both samples. All the variables have the signs

expected in economic theory and are statistically significant, at 5 percent level. The

estimates for the dummy variables have also been significant except for Egypt. This

implies an overall inverse relationship between industrial energy intensity and relative

energy prices on one hand and an energy saving technical change on the other

irrespective of nations. The estimates of the different intercept dummy variables account

2-8

for the inter-country difference caused by factors other than price and time. The

estimates of the parameters are summarised in table 2.2.

Table 2.2 : Regression Results of the Inter-Country Model

Sample I (10 countries) Sample II (5 countries)

Coeffi- t- Coeffi- t-cient statistic cient statistic

Constant 0.1227 2.741 1. 5830 2.906 time(t) -0.0153 -3.645 -0.0311 -5.254 ln(Pe/P) -0.0220 -2.927 -0.3140 -2.779 Dummies Korea -0.5496 -8.656 -0.5477 -8.845 Japan -1.4008 -22.054 -1.4404 -22.552 USA -0.9922 -15.626 -0.9954 -16.070· European union -1.5637 -24.625 -1.5764 -25.376 China 1. 2142 19.117 Malaysia -0.8975 -14.132 Brazil -0.9671 -14.704 Egypt -0.0390 0.540* Mexico -0.5539 -8.707

Dependent Variable: Industrial Energy/Industrial GDP i.e., energy intensity in industry. *Statistically insignificant.

A fall in energy intensity in industries can be obtained from Table 2.1 for Japan,

~orea, China, USA and the European Union over the period 1973-90. India's

experience has been one of fluctuations, although the energy intensity figure for 1990 has

been marginally lower than that of 1973. The time series for Mexico, Egypt, Brazil and

Malaysia show an increase in energy-intensity over time. However, the pooled data has

estimated a negative time trend for energy-intensity. Table 2.2 shows that the rate of

decline of energy intensity in the industrial sector of the group of developed countries

(sample II) is 3 percent and the price elasticity is as high as -0.314. The group of ten

countries (sample I) reports a rate of intensity decline of only 1.5 percent and a lower

price-elasticity of -0.02. The difference in results over the two samples clearly indicates

2-9

the difference in the level of energy conservation efforts between the developed and

developing nations. The OECD countries spent more on energy conse_rvation measures

because the cost share of energy became too high in energy-intensive industries. A

sample comprising of the industrial giants of Asia, namely, Japan and Korea on one hand

and the western world on the other, registered a higher rate of decline in industrial

energy use. The energy-intensity in industries is more elastic to prices in these countries.

This has resulted in a higher overall energy-saving or a fall in energy intensity over time.

The period under study refers to one starting immediately after the oil-shock till the end

of the decade of the eighties. The regression results have shown a price-responsiveness

and energy-saving technical change over the two decades. In other words, conservation

efforts have been launched in. all countries in the industrial sector, which is the bulk

consumer of energy, after the world wide oil-price hike. The saving in industrial energy-

use has been higher in the more technically advanced countries than the developing ones.

The fall in intensity of energy-use over time and price-elasticity indicate substitution of

fuel in industrial processes and upgradation of the technology. An increasing industrial

GDP along with a falling energy to GDP ratio simply indicates a less than proportionate

growth in energy consumption, or energy conservation.

The overall result of energy-saving and price-responsiveness for the pooled

sample have not been obtained for individual countries. Regression results for individual

countries have shown a falling energy-intensity for almost all countries except Egypt,

Brazil and Mexico. The price-responsiveness has been in compliance with economic

theory in case of five countries while the others have shown no relationship with price.

Table 2.3 presents the results of individual regressions.

2-10

Thble 2.3 : Regression Results for Individual Countries

Constant t ln ( Pe/P)

Esti- t- Esti- t- Esti- t-mate statistic mate statistic mate statistic

India 0.258 0.165 -0.013 -3.00 -0.048 -0.143*

Korea 2.683 3.000 -0.066 -6.83 -0.059 -3.245

Japan 0.451 2.113 -0.039 -9.60 -0.402 -4.501

USA -0.231 -0.185* -0.025 -2.26 -0.243 -2.563

Euro. Union -0.082 -0.118* -0.039 ::-3.81 -0.280 -2.031

China 1.529 9.360 -0.043 -21.91 -0.002 -0.065*

Malay 2.311 1.799* -0.017 -1.25* -0.696 -2.641

Brazil -1.258 -9.41 0.014 1.44* 0.003 0.481*

Egypt -1.346 -1. 51* 0.022 1.21* 0.227 1.398*

Mexico -1.078 -23.73 0.039 13.99 -0.015 2.767

Dependent Variable : Energy Intensity in Industries. *Estimates are statistically insignificant.

Table 2.3 reveals expected signs of estimates for each of the countries of sample I, i.e.,

a decline in energy-intensity over time for all and moderate price-responsiveness except

for India. Among the residual countries of sample II, Malaysia revealed no time trend

but a negative price-elasticity, while for China price has no signifi~. However,

China has achieved a reasonable decline in industrial energy intensity of 4 percent.

Brazil and Egypt have revealed no relationship among any of the variables. Better

technology and higher price-responsiveness has caused significant fall in the use of

energy in industries in the developed countries, while the developing countries have

shown poor energy conservation efforts. The inadequacy of available data for the latter

2-11

may also have contributed to the dismal findings. However, all the results have been

either statistically significant for the . normal relation or have been statistically

insignificant. None has given a significantly inverse relationship.

To summarise, it can be said that there has been a definite technical change in

favour of energy-saving in industries all over the world in the post-oil shock era. There

has been a price-responsiveness in industrial energy consumption per unit of output for

the various countries as a whole. Energy-substitution and energy-saving technical change

as reflected by a fall in the energy/GDP ratio have been achieved during the seventies

and eighties across countries, barring a few. In spite of some individual exceptions,

there has been a significant amount of energy conservation efforts.

2.3 ENERGY USE IN THE AGGREGATE INDIAN MANUFACTURING

2.3.1 Behaviour of Fuel Intensity over time vis-a-vis Other Factors

The country study of India in the earlier section has revealed a 1. 3 percent decline

in energy intensity in the industrial sector over time. The coefficient of price has been

statistically insignificant. A close look at the time-series of Indian data reveals a

continuous increase in energy prices and fluctuation in the relative energy price index

vis-a-vis industrial prices. Table 2.4 presents the time-series of price and energy

intensity data. As a result of the increase in energy prices, the fuel bill of the

manufucturing sector has gone up over this period. Therefore, fuel intensity in currency

units has gone up too. The energy consumption in physical units (MIDE) has registered

a negative instantaneous rate of growth of 1 percent over 1973-90. However, fuel bill

per industrial value added at constant prices has gone up over this period at a compound

rate of 0. 2 percent.

2-12

Table 2.4 : Energy Price and Intensity in Indian Manufacturing in Selected Years

Energy Price · Industrial Energy Fuel

Year Index Price Index Intensity* Intensity® (1985=100) (1985=100) MTOE/Rs. Rs.lakhs

lakhs

1973 32.25 34.78 0.94 0.24

1978 52.57 50.50 0.99 0.28

1983 91.11 85.40 0.85 0.29

1988 126.60 121.85 0.77 0.31

1990 137.23 143.59 0.93 0.32

*Energy Intensity refers to the total energy consumption in the industrial sector in heat units (MTOE) per industrial GDP at 1980-81 prices.

@Fuel Intensity refers to the expenditure on fuel in the industrial sector per industrial value added, both at 1980-81 prices.

An examination of the time-trend of fuel intensity in currency unit thus reveals

a threat for Indian manufacturing in terms of cost. This further calls for an examination

of fuel intensity at a disaggregated level, i.e. for various industries, as well as the

intensity of use of other factors, viz, capital, labour and materials. The objective of such

a comparative analysis is to find out a possible trade-off between fuel and other inputs,

if at all, over this period. Table 2.5 summarises the intensities of use of various factors

in the aggregate manufacturing sector in India. The factor intensities have been

calculated as the ratio of expenditure on that to the industrial value added at constant

prices after making the necessary adjustments and deflation.

2-13

Thble 2.5 : Factor Intensity in Aggregate Manufacturing in Selected Years

Intensity* in Use of Year

Fuel Fixed Working Labour Raw Capital Capital Rs/Rs Materials

Rs/Rs Rs/Rs Rs/Rs Rs/Rs

1973-74 0.24 2.65 1.14 0.38 2.86

1978-79 . 0. 28 3.04 1.19 0.38 3.14

1983-84 0.29 3.49 1.42 0.38 2.93

1988-89 0.31 3.72 1.36 0.34 3.29

1990-91 0.32 2.38 0.82 0.31 2.74

1992-93 0.32 2.76 0.98 0.29 2.63

*Original figures were in Rupees lakhs at 80-81 prices.

The factor intensity behaviour for the aggregate manufacturing sector reveals an increase

in fuel-use and decline in labour over time. The ratio of capital, fixed as well as

working, to industrial value added have not shown any particular time trend. Nothing

can therefore be inferred about the trade-off between the use of fuel vis-a-vis, capital

and/or materials in the aggregate manufacturing sector. However, it is clear that the

Indian manufacturing industries have recorded an increase in fuel-use in tenns of

expenditure on fuel. Fuel intensity (F) growth and labour intensity (L) decline over time

is supported by the following regression equations :

F = 0.24570 + 0.01329 I ... (4) (25.051) (7.186)

and

L = 0.44135 - 0.01622 I ... (5) (38.121) (7.894)

where figures in the brackets denote the respective t-values.

2-14

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{}) p::

II.) :>, I .w ......

·r-l lJ1 {})

Q Q) .w ~ H

0.36

0.34

0.32

0.3

0.28

0.26

.. fuel_intensity .. ~

.013289*x+0.2457

~-----L----~L-----~----~~--~~----~ 0.24 82-83 85-86 88-89 92-93 73-74 76-77 79-80

time

FIGURE 2.1 Fuel Intensity Behaviour of Aggregate Ind ian Manufacturing over 1973-74 to 1992-93

Ul ~ .........

Ul tv ~ I -...... >,

0\ .w ·.-I Ul ~ (1) .w ~

·.-I

4

3.8

3.6

3.4

3.2

3

2.8

2.6 73-74 . 76-77 79-80 82-83

time

11 fixed_capital_intensityn ~

85-86 88-89 92--93

FIGURE 2.2 Fixed Capital Intensity Behaviour of Aggregate Indian Manufacturing over 1973-74 to 1992-93

Ul p::; .........

Ul IV p::; I -1-' :>, ...J .w

·r-i Ul ~ Q) .w 1=:

·r-i

1.6

1.5

1.4

' 1. 3

1.2

1.1

1

0.9 73-74 79-80 82-83

time 85-86

ital intensity" ~

88-89 92-93

FIGURE 2.3 Working Capitai Intensity Behaviour of Aggregate Indian Manufacturing over 1973-74 to 1992-93

r-v · I

...... co

3.5

2.7 -

2.6 73-74 76-77 79-80 82-83

time

"raw_material....,.intensity" ~.

85-86 88-89

FIGURE 2.4 Raw Material Intensity Behaviour of Aggregate Indian Manufacturing over 1973·74 to 1992·93

92-93

-. (I) ~ ........,

• (I)

~

>, ~ .1-)

I ·r-1 ..... (I) ID ~

OJ .1-)

~ H

0.44

0.42

0.4

0.38

'

0.36

', .........

"labour_intensity" ~ -0.016221*x+0.441357

0.28 L----------L----------~--------~----------~--------~----------~ 73-74 76-77 79-80 82-83 85~86 88-89 92-93

time

FIGURE 2.5 Labour Intensity Behaviour of Aggregate Indian Manufacturing over 1973-74 to 1992-93

Figures 2.1 through 2.5 represent the graphs of the intensities of use of the

different factors in the aggregate manufacturing sector over time. Figures 2.1 and 2.5

also show the fitted lines for time trend in the intensity of use of fuel and labour

respectively.

2.3.2 Fuel Intensity Behaviour of Disaggregated Industries

The growth in the ratio of fuel expenditure to industrial value added for the

aggregate manufacturing sector is well reflected at a micro level for most of the

industries, except for a few. Dividing the entire manufacturing sector into twenty major

industries, it has been examined whether these sub-sectors have been facing an increasing

fuel bill per value added over time. The twenty major industries so constructed are

sugar, cotton textiles, woollen and silk textiles, synthetic fibre textiles, pulp and paper,

petroleum refinery, rubber-plastic and coal products, heavy chemicals, fertilizers and

pesticides, glass and ceramic products, cement, other non-metallic minerals, iron and

steel, copper, aluminium, zinc, other non-ferrous metals, non-electrical machinery,

electrical machinery and transport machinery. The other ten industries put out of this

analysis on fuel intensity are food products including beverage and tobacco, other textiles

including jute, kemp and mesta, wood and furniture, leather, light chemicals, gas and

steam, water works and supply, storage and warehousing, repair services and electricity.

While the last one has bee1,1. excluded from manufacturing industries because it is a sector

sector and the time trend analysed. The observation reflects that the industries with the

highest fuel intensity remain at the top throug~out the period, although the relative

positions among them might have altered. One can therefore choose them as the top ten

fuel-intensive sectors. Figures 2.6 through 2.9 graphically show the relatively higher

position of them vis-a-vis the others. Since all the twenty could not be put in one graph,.

five industries have been clubbed in each graph so that at least two of the top ten

industries clearly reveal their high position with respect to the rest. The top ten

industries in terms of fuel intensity in real units so chosen are - iron and steel, cement,

fertiliser, paper, heavy chemicals, glass and ceramic, aluminium, zinc, copper and sugar.

It should be mentioned here that sugar manufacturing has been included in the list despite

its relatively low fuel intensity because it has several other energy-advantages to be

'examined in the latter parts of this thesis.

Although, these ten selected industries have maintained their top position vis-a-vis

others, some of them have experienced a decline in fuel intensity over this period. While

some have undergone increases, the rest have recorded fluctuations. Table 2. 6 presents

the figures for fuel intensity of the top ten energy-intensive industries over time.

2-21

Ul ~

' Ul p::: ->. .w .,.., Ul

t'V c I Q)

t'V .w l\.) c .,..,

I r-i

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4-1

2.5

2

1.5

1 -------------------r---

0.5

0 73-74 76-77 80-81

naluminum_manufacturingn 11 Cement 11

11 COpper_manufacturingn 11 non metallic_mineralsn

11 petroleum_refineryn

8--- --- · -··--·-

84-85 88-89

···· ···· ··· ···

time FIGURE 2.6 Fuel Intensity of Selected Manufacturing Industries in India ov~r 1973-74 to 1992-93:

: Aluminium, Cement,Copper, Petroleum Refinery, Non-Metallic Minerals

-+--· ' -0.- ·:

' ··K··, ~

' -f::n'.-

'

92-93

Ul ~ .......

Ul ~ -~ .w ·~

N Ul I ~

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~ ·~

I .-l (]) ::I

4-1

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0.7

0.6

0.5

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,.,., .... '

" ' " ' " ' " ' " ' " ' " ' " ' .... ' " ' .... '

.... ' " ' " ' " ' .... ' " ' " ' .... ' " ' " ' " ' '+- __

.8.

··· ·· ··· ····· ·-- -- ·· ··· ·· ·X .. .... . -- ---- -·····----···· ···X····-- ----··- -·· ···

·······

0.1 73-74 76-77 80-81

---

"cotton_textiles" "glass+ceramics"

· "iron+steel" "rubber"

"synth_fibre_textiles"

" " .... " " " "

.... ...... .... ....

"

---¥ -----........ __ _ ........ _ ----

.... '···

time

....

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4-1

0.7

0.6

0.5

0 • 4

0.3

0.2

"fertilizers" "heavy chemicals"

- 1 n --+---------------on~r non_ferrous_meta s ------ ',:- "sugar"

----------- "wool'ien+silk extiles" .. , -.. , .... ... ........... ....

' ' ' ' ' ' ' ' ' ' ' ' ' ' \ ' \

' \

~

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\ . \ X _../Ja..:..-._·-·-·-·-·-·-·-·~ ... _ ...... _··.·_ ...... _ .... ·=···=·.·~·:~:._ :·::.··. ....-·-·--·--·

............................................. ~................. ·...;.·...... ....-·--· -.......... ... .. ·':":':.::-.:::::.-. -.- ......... 0.1

-·-·-·-·-·-·-·-·-·-·-·..Q-· ... .. .. ···)(..................................... .. .................................. .

0 73-74

........ :)(•""

76-77 80-81 84-85 88-89 time

FIGURE 2.8 Fuel Intensity of Selected Manufacturing Industries in India over 1973-74 to 1992-93

Fertilizers, Heavy Chemicals, Sugar, Woolen & Silk Textiles, Non-Ferrous Metais

92-93

Ul ~ .........

Ul ~ ->, +J ·r-i

·tv Ul I s::

IV Q) Ul +J

s:: ·r-i

I r-1 Q)

::I 4-l

0.7

0.6 1-

0.5 1-

0.4 1-

/

0.2 1- / / ·~ · - · - . ....... _._ / /

/

/

/

/ /

/ /

/

I

D.

/

I

I

a

I I

I I

· ··/ I

I I

I I

I I

"electrical_machinery :'.-~ "nofr·.....electrical_macl}j..ne·ry" -+--·

/ - .................. "pwer+pulpll ·D·· / "trans'i~ro;cJ:::machinery II ·· x-- ... -

_I II zinc raanu'f-a._cturing II -A-·-/ ,7 · ... , .. ...

. . ... -... ... ...

-

-

--·- /

0 73-74

FIGURE 2.9

·-·-. /. - - ~

I I I I

. 76-77 80-81 84-85 88-89 92-93 time Fuel Intensity of Selected Manufacturing Industries in India over 1973-74 to 1992-93

Pulp & Paper, Zinc, Electrical, Non-Electrical & Transport Machinery

Table-2~6: Fuel Intensity* of Top Ten Energy Intensive Industries in Selected Years.

1973-74 1980-81 1992-93 Rs./Rs. Rs./Rs. Rs./Rs.

1. Cement 1.023 1.034 1.152

2. Aluminium 0.768 2.257 0.761

3 0 Glass and Ceramic 0.598 0.578 0.696

4 0 Fertiliser 0.403 0.566 0.261

5. Iron and Steel 0.365 0.534 0.521

6 0 Heavy Chemicals 0.386 0.617 0.378

7. Pulp and Paper 0.329 0.546 0.688

8 0 Zinc 0.182 0.341 0.468

9. Copper 0.159 0.613 2.332

10. Sugar 0.144 0.198 0.121

*Original figures for fuel expenditure and industrial value added were in Rs.lakhs at 80-81 prices.

The above analysis of the most intensive fuel-using sectors is based on the fuel

cost intensity with respect to value added. Whether these industries have experienced

such behaviour in physical units needs a deeper investigation. As a result of the oil-

shock in the seventies and eighties, Indian industries are expected to have responded by

initiating energy conservation measures. In the next section, such an analysis is done tOr

these ten industries over the same period.

2.4 CONSERVATION EFFORTS IN THE ENERGY-INTENSIVE INDUSTRIES: A FACfOR ANALYSIS

2.4.1 The Methodology

Energy in heat units is generally measured as an equivalent of a common fuel,

say, coal or oil. In India, where the major energy resource is coal, the measure is in

2-26

terms of coal equivalent. The conversion of any fuel f from its original units to million

tonnes of coal equivalent (MTCE) is done as follows:

MTCE/ = Calorific value of fuel f

Calorific value of coal ... (6)

A superior common factor for conversion, as per the Working Group on Energy Policy

(1979) and the Advisory Board on Energy (1985) is the replacement unit, viz., million

tonnes of coal replacement (MTCR). It is defined as:

(efficiency in\ X (calorific value)

MTCR / = use of fuel J1 of fuel f ·( efficiency in ) X (calorific value) same use of coal of coal

... (7)

The inclusion of the efficiency factor along with the heat value makes MTCR a superior

measure of unit and conversion factor than MTCE. Different fuels have different

replacements according to their efficiency in use in a process, and therefore are liable

to periodic changes. These definitions have been utilised in this section to undertake the

factor analysis of energy conservation. The total fuel consumption in any industry in

MTCE can be written as:

MTCE = Output x MTCR x MTCE Output MTCR

... (8)

The measure ·of output of an industry may be the gross value added at real

currency units or the physical level of output or an index of production. Any of these

can be used for the purpose. In this analysis, all have been used as alternatives. The

second term on the right hand side of equation (8) reflects the total useful energy

consumed in that particular industrial process per unit of output. Since, MTCR takes the

efficiency factor into account, it implies the net useful energy requirement per output

2-27

with coal as the unit of measurement. The ratio of MTCE to MTCR reduces to the ratio

of efficiency in use of the total fuel consumption in the process. This ratio will change

over time if there is a change in the fuel-mix within the process, resulting in a different

replacement in terms of coal. Since MTCE and MTCR of the total fuel consumption is

the sum over the fuel types, the MTCE/MTCR ratio can change only as a result of an

inter-fuel substitution. A particular fuel-mix has a different efficiency-in-use than ......... ........ .. ..

another while the net useful energy requirement remains the same.

Equation (8) can be translated to a growth equation as

... (9)

where

r : rate of growth in MTCE

r 1 : rate of growth in output

r2 : rate of growth in MTCR/output

r 3 : rate of growth in MTCE/MTCR.

The change in the total energy consumption (r) over time is thus the sum of the rate of

~rowth in output (r1), rate of change in the useful heat requirement per output (r2) and

the rate of change in fuel-mix (r3). In other words, r3 represents the effect of inter-fuel

substitution and r2 signifies any change in technology for energy-saving per unit of

output. The overall change in energy consumption (r) is thus caused by the changing

level of output, energy conservation effort and an interfuel substitution.

2.4.2 Data Generation

To examine the energy conservation efforts in the energy-intensive industries in

India in the post-oil shock era, a twenty-year time series has been analysed. However,

it has been divided into two halves - 1973-74 to 1983-84 and 1984-85 to 1992-93 for

2-28

which the availability of data has been the main reason. Figures for consumption of

individual fuels in each industry have been collected from the 4-digit level classification

of the five yearly Annual Survey of Industries for 1973-7 4 and 1983-84. For the latter

period, coal, oil and gas figures have been collected from the various issues of the Coal

Directory and the Indian Petroleum and Natural Gas Statistics respectively. Data on

electricity consumption were compiled from the. yearly summary results of the Annual

Survey of Industries, the latest year being 1992-93.

To measure the change in output over the concerned period, three alternatives

have been studied. Gross value added in current prices figures were available in the

Annual Survey of Industries. The indices of industrial production with 1970 = 100 have

been collected from the India Data Base while the quantities of output have been chosen

from the Trends in Industrial Production, CMIE. The relevant price deflators have been

computed from various issues of the Report on Currency and Finance.

The total fuel consumption, summed across fuel types after conversion into coal

equivalent and coal replacement units are presented in Table 2.7 and 2.8 for the two

periods respectively. The tables also' contain the alternative measures of output.

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Table-2. 7: Fuel Use in Industries: 1973-74 to 1983-84

Industry Year MTCE MTCR Value added Output Index (Rs. crores. (million (70-71= at 80-81 tonnes) 100) prices)

Iron & Steel 1973-74 11.22 13.97 631.13 4.26 101.5 1983-84 17.40 22.51 1579.50 6.99 166.3

Sugar 1973-74 0.86 1.27 326.91 2.76 86.1 1983-84 0.89 1.18 892.52 5.19 184.4

Aluminium 1973-74 2.65 3.30 72.59 0.276 104.9 1983-84 4.46 5.32 77.22 0.38 147.4

Fertiliser 1973-74 3.19 4.52 295.69 1. 71 149.9 1983-84 10.10 15.77 740.23 5.23 458.7

Cement 1973-74 5.59 6.86 117.24 18.54 107.6 1983-84 9.08 9.65 296.51 31.40 182.2

Heavy 1973-74 0.66 1. 35 198.81 0. 891 113.4 Chemicals 1983-84 5.78 8.51 325.91 1.462 185.9

Glass & 1973-74 0.28 0.68 57.89 0.012 118.3 Ceramic 1983-84 0.89 1. 98 58.30 0.019 198.4

Paper & Pulp 1973-74 2.19 2.93 220.49 0.104 109.4 1983-84 3.45 3.89 238.86 0.134 140.9

Zinc 1973-74 0.10 0.11 15.06 N.A. N.A. 1983-84 0.38 0.44 43.78

Copper 1973-74 0.13 0.21 34.71 N.A. N.A. 1983-84 0.26 0.57 36.51

2-30

Thble-2.8: Fuel Use in Industries: 1984-85 to 1992-93

Industry Year MTCE MTCR Value added Output Index (Rs.- cr.at (million (70-71= . 80-81 prices) tonnes) 100)

Iron & Steel 1984-85 24.56 25.13 1601.78 7.78 167.8 1992-93 48.07 49.09 3494.72 15.20 327.8

Sugar 1984-85 1.25 1.52 672.54 4.04 143.4 1992-93 2.39 3.01 971.78 10.07 247.6

Aluminium 1984-85 5.89 5.94 102.86 0.41 183.4 1992-93 9.53 9.69 409.06 0.76 338.2

Fertiliser 1984-85 11.46 11.71 925.33 5. 72 545.2 1992-93 9.43 9.57 598.00 4.10 390.9

Cement 1984-85 10.66 11.40 322.07 29.5 212.5 1992-93 18.71 20.02 830.15 54.7 392.7

Heavy 1984-85 7.09 8.09 367.64 1. 75 209.7 Chemicals 1992-93 6.04 7. 72 732.65 4.63 554.7

Glass & 1984-85 1.50 1. 82 63.35 0.027 206.1 Ceramic 1992-93 1.49 2.01 184.89 0.043 324.4

Paper & 1984-85 5.45 5.45 326.25 0.18 168.5 Pulp@ 1992-93 6.36 6.36 386.49 0.28 260.2

Zinc* Copper*

@Fuel consumption figures include .pnly coal and electricity. *Figures not available

2.4.3 Results and Discussion

The magnitude of r represents the instantaneous rate of growth in total fuel

consumption in the industry over the period under study. None of the ten industries have

undergone a decline in fuel consumption in the first period, i.e., no industry has

registered a negative r. A negative r 2 reflects an energy conservation effort while a

negative r3 implies that a change in fuel-mix has contributed to every-saving. The sign

of r 1 is generally expected to be positive showing a growth in the production in output.

The results are furnished in tables 2.9 and 2.10 for the two periods respectively.

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Table 2.9 : Rates of Growth of Energy-Use Components in Industries: 1973-74 to 1983-84

Measure Industry of Output r, r2 r3

Iron & Steel V.A. 0.0630 -0.0150 -0.0038 v.o. 0.0490 -0.0018 Ind. 0.0490 -0.0017

Sugar V.A. 0.0840 -0.0910 0.0114 V.O. 0.0630 -0.0710 0.0114 Ind .. 0.0760 -0.0840

Aluminium V.A. 0.0250 0.0220 0.004 v.o. 0.0340 0.0130 Ind. 0.0340 0.0137

Fertilizer V.A. 0.0917 0.0331 -0.0106 v.o. 0.1117 0.0131 Ind. 0.1117 0.0131

Cement V.A. 0.0927 -0.0587 0.0144 v.o. 0.0526 -0.0186 Ind. 0.0526 -0.0186

Heavy V.A. 0.0580 0.1250 0.0317 Chemicals v.o. 0.0490 0.1340

Ind. 0.0490 0.1350 Glass V.A. 0.0430 0.0627 0.0071

V.O. 0.0456 0.0600 Ind. 0.0510 0.0520

Pulp & Paper V.A. 0.0220 0.0060 0.017 v.o. 0.0250 0.0031 Ind. 0.0250 0.0031

Zinc V.A. 0.1060 0.0310 -0.0077 Copper V.A. 0.0260 0.0690 -0.0302

Note : V.A. = Value Added; V.O. =Value of Output; Ind. = Index of Industrial Production; r, = rate of growth in output; r2 = rate of growth in MTCR/output; r3 = rate of growth in MTCE/MTCR; r = rate of growth in MTCE.

r

0.043

0.0035

0.0519

0.1143

0.0484

0.215

0.1134

0.0454

0.1305 0.0658

In the earlier period (1973-74 to 1983-84), immediately after the oil shock, all the

industries have increased their output as well as fuel use as a part of the developmental

process. However, most of the industries, except for aluminium, pulp and paper, glass

and ceramic, heavy chemicals, have made efforts on energy conservation either through

technology or by fuel-substitution (shown by negative values of r2 and/or r3). As a

result, the total growth in energy consumption (r) has been lower than the growth in

2-32

output (r1). On the other hand, the aforementioned four industries have reported positive

values of r2 and r3 and subsequently higher values of r than r1. In these sectors, output

growth has been lower than energy consumption, pushing the energy intensity high.

In the iron and steel industry, output has gone up by 4.9 to 6.3 percent (varying

according to alternative measures) while fuel consumption has increased only by 4

percent. This less than proportionate increase has been due to the effect of both fuel-

switching and energy conservation techniques which have been at the rates of 0. 3 percent

and 1.5 percent respectively. Iron and Steel has been the only industry to initiate both

energy conservation technology and fuel-substitution. Sugar and cement industries have

adopted energy conservation to' the tune of 7. 1 to 9. 1 percent and 1. 8 to 5. 8 percent

respectively. The resulting rise in fuel consumption have been 0.3 percent and 4.8

percent despite output growths of 6.3 to 8.4 percent and 5.2 to 9.2 percent respectively.

Fertilizer, zinc and copper manufacturing sectors have enjoyed the effects of fuel-svvitch

of an order of 1.1 percent, 0. 7 percent and 3 percent respectively and of no conservation

technology.

2-33

Table 2.10 : Rates of Growth of Energy Use Components in Industries: 1984-85 to 1992-93

Measure Industry of Output rl rz r3 r

Iron & Steel V.A. 0.0910 -0.0073 0.0002 0.0839 v.o. 0.0840 -0.00003 Ind. 0.0840 -0.00003

Sugar V.A. 0.0620 0.0220 -0.0045 0.0808 v.o. 0.0624 0.0229 0.0114 Ind. 0.0680 0.0170

Aluminium V.A. 0.1810 -0.1200 -0.0011 0.0601 v.o. 0.0770 -0.0150 Ind. 0.0770 -0.0150

Fertilizer V.A. -0.0567 0.0303 0.0008 -0.0240 v.o. -0.0420 0.0164 Ind. -0.0420 0.0164

Cement V.A. 0.1180 -0.0480 -0.00012 0.0707 v.o. 0.0770 -0.0063 Ind. 0.0770 -0.0063

Heavy V.A. 0.0860 -0.0921 -0.014 -0.0200 Chemicals v.o. 0.1210 -0.1270

Ind. 0.1210 -0.1270 Glass V.A. 0.0750 -0.0630 -0.0128 -0.0008

V.O. 0.0560 -0.0440 Ind. 0.0570 -0.0440

Pulp & Paper V.A. 0.0480 -0.0290 0.0192 v.o. 0.0540 -0.0350 Ind. 0.0540 0.0350

Note : V.A. = Value Added; V.O. = Value of Output; Ind. = Index of Industrial Production; rl = rate of growth in output; rz = rate of growth in MTCR/output; r3 = rate of growth in MTCE/MTCR; r = rate of growth in MTCE.

However, the industries with no energy conservation either via fuel-switching or

through technical change have exhibited such efforts in the latter years. Aluminium,

heavy chemicals, pulp and paper and glass manufacturing industries have adopted fuel

conservation measures during 84-85 to 92-93 while cement and iron and steel have

continued with such efforts. Among the late starters, the chemical industry and the glass

and ceramic industry have performed very well on the energy front to reduce their fuel

consumption despite output growth. In the glass industry, an output growth of 5. 7 to 7.5

2-34

percent has been marginally offset by a 4.4 to 6.3 percent reduction in fuel use due to

conservation effort and 1.2 percent due to fuel-substitution. This has resulted in a 0.08

percent fall in total fuel consumption. Similarly, the chemical industry has been able to

reduce fuel consumption by 2 percent, caused by a 9.2 to 12.7 percent reduction due to

conservation technology and 1.4 percent due to fuel-switching, despite the output growth

of 8.6 to 12.1 percent. In the aluminium industry, fuel consumption has gone up by 6 .. . - ~

percent, less than the growth in output of 7 percent, because of a 1.5 percent fall due to

technical change and 0.1 percent fall due to interfuel-substitution. Oil and gas figures

were not available for the paper industry over this period. Since coal and thermal power

both have conversion factors of 1 to MTCE and MTCR, the effect of fuel-switch could

not be captured. Technology on the other hand has pushed energy consumption down_

by 2. 9 to 3. 5 percent. The output growth of 4. 8 to 5 .4 percent has thus been higher than

the 1. 9 percent growth in energy-use. The cement industry in the earlier period initiated

conservation measures but had no advantage of fuel-switch. In the latter period, it has

done both although the effect of substitution has been nominal (0.01 percent). The

conservation effort in the sugar industry observed in the earlier period is however absent

in the latter. Only a 0.4 percent fall in energy-use has been recorded due to fuel-switch,

and the overall increase in energy consumption has been 8 percent as compared to a mere

0.3 percent over 1973-74 to 1983-84. The iron and steel industry no more enjoyed any

advantage due to fuel-switching over 1984-85 to 1992-93 in contrast with the earlier

period. The conservation effort has been lower too, 0. 7 percent against the earlier 1

percent. Growth of output and fuel-use have both been higher in the latter years. The

fertiliser industry has registered a negative growth rate for output ( -5 percent) and fuel

consumption ( -2.4 percent). The relative inefficiency in fuel-use may be explained by

2-35

the perverse scale effects. In other words, a fall in output has not brought in a

proportionate decline in input-use because of the fixed components irrespective of the

scale. Data for zinc and copper manufacturing were not available for the latter period.

The striking feature in the factor analysis of industries is the energy conservation

effort in some form in all the industries over at least one period. Some sectors like iron

& steel, cement, sugar have continued with energy conservation all through the period

in varying extent. The other sectors have been late starters in the direction of

conservation but performed significantly well over the period of mid-eighties to mid-

nineties. These industries may be said to have a lagged effect of oil-shock while some

had responded immediately afterwards. The top ten energy intensive industries in Indian

manufacturing can therefore be termed as energy-conserving units on the whole either

through inter-fuel substitution and/or energy-saving technical change during the last two

decades.

2.5 SUMMARY

The Indian manufacturing sector has been examined in this chapter both as a

~acroeconomic aggregate and at a disaggregated industrial level. The Indian

manufacturing sector along with other developed and developing countries have registered

a decline in physical energy consumption per industrial value added over 1973 to 1990.

The inter-country pooled data have reflected a moderate price-responsiveness and decline

in energy intensity over time. However, the fuel bill per industrial value added has gone

up for the aggregate manufacturing sector. The individual industries have shown varying

performance in terms of fuel intensity. Top ten energy-intensive industries over this

period have been selected. An investigation of energy intensity behaviour of these

chosen industries over the two periods 1973-7 4 to 1983-84 and 1984-85 to 1992-93 have·

2-36

revealed adequate energy conservation efforts. While some have performed well through

out the period, the rest have been late starters. Two industries among these selected top

ten, viz., iron and steel and sugar, have been further examined for their energy

conservation efforts, in the following chapters. These industries have high potential for

energy conservation both in terms of reducing own energy demand as well as for

additional energy supply. Due to their process peculiarities, these industries offer

significant potential for extra power generation without burning extra fossil fuel. This

makes them attractive from the view point of energy conservation.

2-37