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Seeking clarity on energy

We need a coherent political message on demand,cost and pricing reform: Varun Gandhi

September 20, 2013 3:46:47 am

We need a coherent political message on demand,cost and pricing reform.

India’s tryst with destiny is running out of fuel. We are sleep-walking towards an energy crisis. Our energy security is buffeted by rising prices,growing fuel imports and a troublesome current account deficit that is pushing us into regional competition with China. India’s energy sector is a mishmash of partially liberalised segments with minimal private sector contribution and energy access policies,inducing insolvency through rising subsidies and revenue leakage. The lack of long-term planning,given this sector’s long lead times,means that supply will not meet demand over the medium term. We now hanker after Iran’s rupee-denominated oil; we ignored them until recently.

Energy is an expensive commodity,not an entitlement. We need a strong political leadership that can craft and convey a clear,integrated energy policy focused on local needs and global practices. Our fragmented energy policy infrastructure,split across five ministries,empowered groups (gas pricing,power plants,etc) and the Planning Commission,is in the doldrums. Our energy policy needs to meet demand at market-determined prices,while ensuring energy security. Affordable energy to the poor,an admirable goal,should be addressed through other social policies.

Power fuels growth,theoretically. The Electricity Act reformed the power sector,but undue government influence remains,leading to distorted pricing,fuel shortage,insufficient infrastructure and financial insolvency. On the demand side,plant load factors (PLFs) for our power plants have been declining,particularly due to coal/ gas shortage and fuel quality issues. Ultra Mega Power Projects (UMPPs) were grandly announced in 2005 but only one of the 16 has been commissioned (at Mundra,by Tata Power). Mandated pricing inflexibility has trapped this plant between Indonesia’s coal price hikes and end-user prices. While state electricity boards (SEBs) were theoretically unbundled,most remain integrated and insolvent. The transmission sector is beset by the high upfront capital investment for transmission lines,low returns and land acquisition issues. Our distribution companies (DISCOMs) face financial woes,given low tariffs,below generation costs and cross-subsidisation by industrial users. Our high aggregated transmission and commercial (AT&C) losses,at $17bn (31 per cent) compared to China (5 per cent),undermine commercial viability,weakening institutional and regulatory credibility.

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We need a clear political message about energy demand,cost and pricing-side reforms. Mandatory allocation of fuel is a temporary fix. Coal and gas production needs to increase and imports supported. While supporting BHEL is important,banning Chinese power component imports will increase generation costs,exposing us to local bottlenecks. Value chain management must be improved — the PLFs must increase significantly and AT&C losses curbed through smart grids. The often quoted $1 trillion investment can only be attracted by removing regulatory and logistical obstacles. Adani Power found it cheaper to import Indonesian coal rather than transporting it across India. Flexible pricing will allow generation costs to be passed on to end users — a cost-plus principle will not do. We cannot give out free electricity any more.

Coal is our primary energy provider and our biggest growth bottleneck,with sectoral inefficiencies and inherent monopoly causing severe power shortages. Private participation in an open manner,with due concern to local and environmental rights,is urgently needed. The New Coal Distribution Policy (2007) put a legally binding Fuel Supply Agreement (FSA) mandated onus on Coal India (CIL) to fulfil the demand for power,fertiliser and large consumer sectors,with severe penalties for shortfalls. Domestic production has stagnated,with land acquisition issues,frequent strikes,strong unionisation,limited rail infrastructure and supply bottlenecks in mining equipment acting as significant constraints. While CIL has tried to import coal,price disparities ($38/ tonne vs $210/ tonne in Australia) lead to severe losses. Consequently,CIL has shirked from future FSAs and focused on less demanding MoUs. CIL’s production utilises inefficient open-cast mining,sparking protests and environmental devastation. Private investments,through the draft Coal Mines Bill (2000),have been stymied by the coal allocation scandal and incalcitrant unions. As is well known,of the 208 allocated captive blocks,only 28 actually started production by 2011. Prices of coal were deregulated in 2000,using a cost-plus approach; in practice,CIL’s monopoly leads to a limited flexibility. End CIL’s monopoly and embrace market-linked pricing and private sector participation,introducing new technology and bettering infrastructure. If Coal India cannot exploit its leased areas,auction them in an open manner.

India has just 0.3 per cent of the world’s oil reserves; mostly offshore. We import 75 per cent of crude demand,exposing us to geopolitical risks in Nigeria and Iran. Our production stagnates,with transmission infrastructure limited. Liberalisation was partial,with a regulatory straitjacket and populist subsidies determining prices. We force OMCs to sell crude products at a loss,while taxing the end-product heavily (37 per cent for petrol and 17 per cent for diesel). We ask upstream players like ONGC and GAIL to shoulder the burden of the OMCs while providing delayed subsidies to OMCs. Domestic gas is highly regulated with irrationally low prices ($4/ MBtu; imported LNG is $12/ MBtu). Gas allocation is weighted towards the price-sensitive power and fertiliser sectors and away from industries. Maintaining this complex system,with little revenue addition,entails significant administrative costs; monitoring cost recovery,under-recoveries and pricing. Why would anyone invest in the exploration or retail segments?

Dismantle this complex regime and replace it with market-determined diesel and gas prices,poor-focused fuel cash vouchers and a production-focused open leasing exploration policy. Populist fuel subsidies for the middle class and the fertiliser sector will not do any more. Let the market determine gas allocation,with sufficient investment encouraged in LNG terminals. Privatise the OMCs and ONGC; give them managerial autonomy and production-focused incentives. ONGC Videsh must be encouraged to continue investing in Russia and Africa. Encourage investments by E&P firms like Cairn,BP and Reliance,particularly in Enhanced Oil Recovery (EOR),coal bed methane and shale gas.

Reforming these three energy segments is critical to economic growth. As the IEA notes,our energy players need to be commercially viable,with managerial autonomy and access to financing. Ownership should not imply ministerial fiefdoms. Pricing mechanisms should not be rigid,with end-use prices supporting realistic opportunity costs and a rational allocation of resources and value. Implementation of energy policies through enhanced intra-ministerial coordination is required on a timely basis,cutting down on cost escalation. These are hard measures,which call for significant sacrifice and adjustment. But rebuilding India was never supposed to be easy. We have lost decades in ignoring our energy needs while handing out subsidies; we cannot afford that any more.

Varun Gandhi

The writer is a BJP MP in the Lok Sabha

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