The power sector in India plays afundamental role in the economic development process.Thecountry faces formidable challenges in meeting its energyneeds in an environmentally sustainable manner and atreasonable costs.The planning and operation of the sectorhas hitherto been conducted without due regard to theenvironmental consequences.As a result, additions tocapacity in recent years have been sub-optimal.Moreoverdifferent types of capacity are treated differently.Hydropower is required directly to bear more of its externalenvironmental costs than other sources.The recent SupremeCourt ruling has reinforced this tendency.Looking forward,much of the large capacity additions required over the nextfew years are likely to be coal-fired, with concomitanteffects on the country's environment. Against thatbackground, the paper looks at India's power generationplanning process; whether and how it might adapt in thelight of increased attention to environmental costs andbenefits; and if there are other, better ways ofinternalizing environment externalities.It takes as itsstarting point the conclusions of the companion paper byAnil Markandya. These are that the external environmentalcosts of fossil fuel generation are as high or higher thanestimates derived for developed countries; that estimates ofthe external costs of both fossil-fuelled and hydro forIndia should now be determined more precisely and used atthe strategic level in planning, at the regulatory level insetting standards, in designing economic instruments and inplant sitting decisions; and that the polluter paysprinciple, which currently applies in the case of hydro,should also be applied in other power sector developments.
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