High Octane Crisis

The 9-plus per cent GDP growth has its own fallout. Sustaining this calls for urgent action to source, supply and price energy. At the 11th hour the Government is scurrying for solutions.

PICTURE SPEAK

FIERY POTENTIAL: Gas being flared at RIL’s KG-6 field off Andhra Pradesh

The trick isn’t without explanations. Over 50 per cent of the GDP growth is fuelled by services which consume less power than say manufacturing which has been rocking steady at 24 per cent. Captive power capacity now exceeds 50,000 MW as industry sets up its own plants to power its units. Indeed, shortage has spurred new business segments like inverters and diesel gensets that power homes and colonies. Private India has found solutions to public problems.

FOR SECURING A BRIGHT FUTURE...

1 Merge coal, petro and power ministries for a coherent approach. 2 Privatise coal sector totally to inject investment and technology. 3 Restructure the subsidy regime to enable product pricing. 4 Draft an energy resource allocation plan. 5 Incentivise use of green energy in homes via tax sops.

THE CHALLENGES

To sustain growth at 8 per cent for the next 25 years, India has to ramp up energy supply by four times. By 2031-32, India must hike power generation from current 1,60,000 MW to 8,00,000 MW. No major oil discovery has been made in 29 years since Bombay High, and oil production is stagnant. Even with a 20-fold increase in nuclear power, it will contribute only 4-4.6 per cent of need in 2031-32. Thanks to nationalisation, despite proven reserves of 95 billion tonne, annual output of coal is only 361 mt. As crude prices touch $70, India has to import 72 per cent of its 115 mt of petroleum consumption. Gas availability will treble in the next five years but there is no pricing policy in place. Rising incomes will trigger the prosperity factor and push demand for oil, gas and electricity further.

There is a limit to defying gravity though. Sustaining the growth would require more than private ingenuity and enterprise. Belatedly the Government has woken up to the possibility of a shutdown bringing the economy crashing. And the imperative to grow cannot be overstated in a country where 260 million people live below the poverty line, where nearly 60 per cent of the population survives on 20 per cent of national income. As we add over nine million workers to the job rolls every year, the economic potential of demographic dividend also becomes the political imperative.

PICTURE SPEAK

TRIPPED FOR FUEL: Dabhol plant is among those badly needing gas

The numbers present a frightening spectre of neglect and need. The Planning Commission’s Integrated Energy Policy (IEP) report states that if India is to grow at a sustained 8 per cent for the next 25 years, it must quadruple its energy supply. It must ramp up electricity generation from 1,60,000 MW to 8,00,000 MW, expand coal consumption to over 2 billion tonne from the current 432 mt, expand the use of renewable energy through direct tax sops and engineer an energy regime that ensures supply, manages demand and balances pricing to enable growth. And growth will trigger the prosperity factor pushing demand for electricity, cooking gas and fuel as people opt for personal transport.

On July 12, Prime Minister Manmohan Singh is scheduled to chair the Energy Coordination Committee meeting and review energy security. Every report states unambiguously that there has been little progress. To start with there is no one estimate of energy need. The IEP document cites 11 different scenarios of demand. As Manmohan recently said the “business as usual approach will not work”.

MEGA WATT HURDLES

Different fuels, disparate pricing and poor fuel linkage deter investors from setting up new capacities. Despite the Electricity Act of 2003, private players are unable to use grid to supply power directly to consumers. Lack of gas supplies impacts 12,000 MW of generating capacity; 16,000 MW could be added if gas is assured. Reforms to reduce transmission and distribution losses too slow, SEBs are financially weak. Development of hydro power is hindered by international and environmental concerns.

The Indian energy landscape is littered with a plethora of problems, natural and man-made. Geological resource crunch is worsened by somnolent policy. It is crippled by controls ranging from who will produce what, how much and where to what price it can be sold. Power, whether it is produced at 50 paise per unit at Bhakra or Rs 5.10 at Dabhol, is sold at an administered price and supplied according to the political diktat of the day. India is blessed with indicated coal reserves of a whopping 252 billion tonne and proven reserves of 95 billion tonne. It offers the cheapest option for generation of electricity, yet annual production is only 361 mt. Thanks to militant unionism, the scope for injecting technology or private investment is stifled. A Coal Mines (Nationalisation) Amendment Bill, which would enable entry of private players, is pending since 2000.

The Electricity Act of 2003 promised that private producers including those with captive power plants could wheel their power on the national grid and sell it directly to big-tag consumers. This would have earned state electricity boards (SEBs) some revenue through wheeling charges, enabled supply of power to starved units and created a mechanism for private producers to set up capacity and sell directly to bulk consumers. The SEBs justifiably worry that if this happened, the cream of their clientele would migrate to better suppliers triggering a collapse of the boards. This politically-sensitive issue has hampered better utilisation of capacity and creation of new capacities. The trick is in pricing the wheeling charges but successive regimes have failed to negotiate this.

Indeed, the political calculus that holds up pricing of gas symbolises the rot in the system. India has been lucky to locate gas on the east coast in the Krishna Godavari basin triggering hopes of further finds. The new finds by Reliance Industries (RIL), ONGC-GSPC and others are expected to treble gas availability from 91 mmscd to 279 mmscd by 2012. The increase is equivalent to nearly a fifth of the current crude consumption and enough to fuel a 50,000 MW capacity power plant. Although the first big find by RIL was in 2002, till date there is no clarity on who this gas can be sold to and at what price. A Gas Linkage Committee, which was assigned the responsibility of assigning gas among various sectors in July 1991, was disbanded on November 9, 2005 apparently because new gas was to be supplied to consumers on purely commercial basis.

COMBUSTION CHAMBER

Current reserves are worth seven years of current consumption and will last only 23 years. Demand for petro products is expected to rise from 115 mt now to 281 mt in 2032. Gas requirement is estimated to rise from 91 mmscd to 430 mmscd in 25 years. New supplies like the Iran pipeline need to be tied up for comprehensive energy security.

But that is not how it pans out. RIL has stated that it has done price discovery and the gas would be sold at $4.79 per mmbtu but consumers like Reliance Energy dispute this pricing and cite an earlier price discovery of $2.74 per mmbtu. The matter is now in the courts. Media coverage may suggest that gas pricing is a private battle between the Ambani brothers but it isn’t. Consider this confusing scenario: ONGC sells gas for fertiliser plants and power producers for $1.80 per mmbtu, India buys LNG from Qatar at $3.8, Petronet LNG at $7 per mmbtu and gas from Iran could cost $7.9 mmbtu. In a perfect market, pricing is based on adequate return on investments and is best left to the players but this is not a perfect environment.

PICTURE SPEAK

FUEL HUNT: Deora (centre) with Iranian and Pakistani officials

Politics will not allow pass-through economics for producers of fertilisers to be charged market-determined rates as that would push fertiliser prices and the subsidy up. Higher cost of power, says V. Krishnamurthy, chairman of the National Council for Manufacturing Competitiveness, “will hurt the resurgence in manufacturing” besides, of course, hurting the power subsidy regimes of states. Add the problem of gas promised to power and fertiliser plants and the issue of local interests. Andhra Pradesh Chief Minister Y.S.R. Reddy who raised the issue of gas pricing at the chief ministers’ conference has shot off three letters to the prime minister urging caution and also demanding profit from petroleum for gas produced off the Andhra Pradesh coast. The Gujarat Government, whose PSU Gujarat State Petroleum Corporation has struck gas, has another view. Chief Minister Narendra Modi wants a “nationalistic approach to gas pricing”. Typically, the Government has now asked a committee of secretaries to come up with a pricing mechanism. To calm frayed tempers, Petroleum Minister Murli Deora has said that “a formula that takes care of all stakeholders will be put in place soon.”

Pricing of any fuel is complicated by existing regimes. Although the administered price mechanism has been dismantled, fuel prices are still administered by the Government through the oil PSUs. Ergo, if the gas price is unnaturally high, there could be a surge in companies setting up captive power plants using diesel distillate. Or there could be excessive increase in use of diesel for power generation.

In the Indian context, every debate in the economic policy domain reverts to reforms in generating and distributing resources. The critical impulse in ensuring energy security is equity in allocation of resources and pricing. As long as India doesn’t fix its subsidy regime, this cannot be ensured. Free power should be paid for by states, farmers should be compensated for fertilisers not the companies, subsidy on diesel or LPG for the poor has to be shifted from the producer to the benefactor which is the Government. This could be done by coupons or smart pay cards. It is only when the Government can decide what it will pay whom for what in which form that market economics can come into play. Market economics in a half way house of reforms is a recipe for disaster. Energy security is not simply a matter of acquiring assets or developing new fields. It is that and, more importantly, a question of managing priorities and the assets.

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