Power and energy rise in India
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.
ISSUE DATE: July 16, 2007
UPDATED: October 14, 2011 19:09 IST
RIL KG-6 field off Andhra Pradesh
Call it the modern version of the great Indian rope trick. India's 9-plus per cent GDP growth for two successive years despite an acute deficit of infrastructure, particularly power, is cited as a case of economic enigma. Even as foreign investors ooh and aah about the stupendous growth of the economy, economists and analysts wonder "how come!" Whether it is the peakhour shortage of over 13,800 MW or the rising dependence on petroleum imports that fuel 72 per cent of its 115 mt consumption, an energy crisis is staring at the economy.
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. 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.
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".
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.
Mega watt hurdles
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 politicallysensitive 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. 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.
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