A new study from Lawrence Berkeley National Laboratory highlights the enormous potential growth for air conditioning in India.
Globally, 2017 will likely end up one of the three hottest years on record. Nowhere does this matter more than India, where temperatures last year in Rajasthan reached 124 degrees Fahrenheit (51 degrees Celsius). By any measure, India is one of the hottest countries in the world. Chennai, Mumbai, Kolkata, and Delhi all rank among the top 10 hottest large cities globally, as measured by cooling degree days.
Air Conditioner Sales Are Booming
Not surprisingly, air conditioner sales in India are booming. Only 5% of households in India currently have air conditioning, but this is poised to increase dramatically as incomes rise and air conditioners get cheaper.
This is mostly great news. Air conditioning brings relief on hot and humid days. During extreme heat events, air conditioning can even make the difference between life and death. In the United States, for example, heat-related mortality has decreased more than 80% with the spread of air conditioning.
At the same time, air conditioning also raises large challenges. Air conditioning is extremely energy-intensive. A typical room air conditioner uses 20 times as much electricity as a ceiling fan, and 10 times as much as a typical evaporative cooler. So we are talking about an immense amount of electricity. By one estimate, the potential cooling demand in Mumbai is one-quarter the demand for the entire United States. Meeting such a large increase in electricity demand will require rapid investments in generation, transmission, and distribution.
Environmental costs are also significant. With its population of 1.3 billion people, India will soon pass Russia to become the third-largest source of carbon dioxide emissions. Coal and other fossil fuels dominate Indian electricity generation, so more air conditioners means increased emissions. In addition, the refrigerants used in air conditioning are themselves a potent greenhouse gas.
A new study from Lawrence Berkeley National Laboratory (LBNL) asks whether energy efficiency could help mitigate these impacts. Over the last few decades, air conditioners have become much more energy-efficient. Today’s most efficient air conditioners use about half as much electricity as in 1990.
Interestingly, however, many of the air conditioners for sale today in India fall well short of this technological frontier. India uses a 5-star label system, with “1-Star” serving as the minimum allowable efficiency level.
What is striking here is the wide range of efficiency levels. While the most efficient air conditioners sold in India are on par with the most efficient units sold anywhere in the world, the bottom of the market is lagging behind, roughly equivalent to a 1990-era U.S. model. From the top to the bottom the ratio is about 2:1, so the most-efficient units use half as much electricity as the least-efficient units. According to the LBNL report, these least-efficient units have significant market share, so that the market average is close to the bottom of the range.
The LBNL report then points out that there could be large gains from removing those inefficient units from the market. Simulating air conditioner sales out to 2030, they calculate that if average energy-efficiency could increase at 6% per year, compared to this historical average of 3%, this would save a whopping 63 TWh/year by 2030 — equivalent to total electricity consumption in the state of Oklahoma.
How Does India Get There?
I agree there is a lot of potential here, but I would have liked the LBNL to say more about how India can reach this goal. The LBNL study envisions ratcheting up minimum efficiency standards, essentially eliminating the bottom half of this market. The concern with this, of course, is that these air conditioners tend to be the cheapest, so stricter standards will likely increase appliance prices.
But to me the elephant in the room is electricity prices. India subsidizes electricity for residential customers. The tariffs are complicated, but in Delhi, for example, households pay only about 75% of the private cost of electricity generation. Moreover, many households in India are not billed at all, or don’t pay their bills.
Why should anyone invest in energy-efficiency if they aren’t paying the full cost of electricity? To the contrary, your incentive is to buy the cheapest, least-efficient air conditioner available. No wonder there continues to be a market for these sub-standard air conditioners.
Yes, these electricity tariffs are intended to achieve distributional goals, but there are far better ways to improve equity than via electricity tariffs. For example, India is beginning to experiment with a universal basic income (UBI), in which every individual would receive a uniform stipend (see here and here). The UBI would be a much more direct approach for redistribution, and could be funded, in part, by savings from electricity tariff reform. Alternatively, even without the UBI, marginal electricity rates could be increased while lowering fixed charges, or by levying fixed charges that depend on income. Building institutional capacity will also be necessary to improve bill collection and enforcement.
Tariff reform will not be easy, but would yield large benefits, encouraging a whole set of more efficient behaviors. Households make choices not only about which air conditioner to buy, but also between fans, evaporative coolers, air conditioners, as well as complementary investments in cool roofs, efficient building design, insulation, and natural shading. Raising minimum efficiency standards can’t address all these other tradeoffs; India needs energy pricing that reflects the true costs.
Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is Faculty Director of the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Faculty Research Fellow at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. Prior to joining Haas in 2009, he was an assistant professor of Economics at the University of Michigan. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.