India’s Energy Sector Reforms: A wish List

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TOPIC:

General Studies 2

• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

General Studies 3

• Infrastructure: Energy

In news: Recently, PM said that the status of energy sector in India has been highly uneven and the scope of reforms in many areas still exist. There is a need for a comprehensive energy policy. Subjects such as need for unified energy policy, requirement of seismic data sets and encouragement of biofuels, improving gas supplies, setting up of gas hub and regulatory issues were discussed.

Need for reforms

India imports about 80% of its crude oil requirement. This needs to come down by 10% by 2022 as suggested by PM. For this, the exploration opportunities in India has to be explored. About 50% of sedimentary basins are yet to be surveyed. About 75% of sedimentary basins are yet to be explored properly. So the need for acquiring, processing data, interpreting is urgent. Similarly, exploration efforts for the last 20 years had a policy called NELP. This has not yielded any significant production to the country. Thus there is new exploration policy- Hydrocarbon Exploration Licensing Policy (HELP). They started with discovering small fields policy which has yielded encouraging results.

One major reform gradually happening in petroleum sector is deregulation of diesel and petrol prices. This was major as till then private sector was not interested in entering the downstream business. Only LPG remains in distortion which is on decline curve and kerosene is practically disappearing. For exploration, there is a revised framework in position. The stakeholders have been consulted. There is expectation of better response.

The energy sector which includes oil, gas and electricity has to be brought into the GST framework as soon as possible. The oil and gas sector provides lot of tax revenues to the government. But electricity has not yet been tax friendly.

If the tax rates can be gradually brought down, within a forceable time future, there will be a roadmap for bringing it towards highest level of GST which will be beneficial.

Major chunk of revenue comes from petroleum and its by-products. The GST is difficult to apply as the taxes are more than 100% of refinery gate prices of petrol and nearby to diesel. To bring it down to 28% is not easy. This is one of the reason it is kept out. Overall energy reform issue is how much renewables- thermal, natural gas will contribute.

The stranded gas based power plants. They have about 25000MW capacity which needs attention. If it is gone bad, there will be huge NPAs and clean energy production assets will be missed.

Securing energy future

India is going to be largest consumer of energy in the years to come as per capita income rises. India has relatively free and open market situation as far as energy supplies are concerned. As long as international market system for energy sources works reasonably well, India’s needs can be taken care of.

India has to look beyond fossil fuels. The price of renewable fuels is slowly coming down. India has to increase share of clean energy fuels like natural gas in energy composition.

Clean energy did not appear viable initially to India for sometime. But the way energy economics is currently operating in a way which is increasing the viability of renewable energy. The existing projects which are reliant on fossil fuels are actually beginning to look uncompetitive. The large number of utilities in the state sector in various states which are keen on renegotiating their power purchasing contracts because they find that new renewable energy sources are going to be cheaper.

With success of electric vehicles, there can be a situation where road transport is free of fossil fuels. There can be a situation of carbon free economy. India has to think and act strategically and try in leapfrog in forefront. Leapfrogging also helps in creating domestic manufacturing capacity. For now, India’s all solar equipment are imported from china. However, India produces wind power which cannot satisfy adequate energy needs.

There is need for factor reforms- land, labour capital reforms are long overdue. For this, the enablers- infrastructure and energy requirement should be made right. Till all this is going, domestic manufacturing remains a problem. The need for next generation reforms is to look at factors, improve efficiency and productivity and India has to become globally competitive.

Natural gas and electricity to be brought into GST. From economics perspective, it is a much needed reform. To get Input Tax Credit, it is necessary to have all under GST.

If this reform is done, there is major finance challenge to conquer. Only 43% tax from GST and cess may not be enough. 3/4^th of states and centre revenue is on this one sector. So, proper

There is major investment drive in infrastructure sector. The technology is changing rapidly and investment priorities are not reflecting the same direction. There is 300billion dollars of investment in energy sector. But there is a need to project a scenario how much of that capacity is present and needed.

Way forward

• Short term reforms on pricing and subsidies
• Energy sector can give subsidies as cash transfers and get rid of pricing distortions in short run.
• There is a need to think strategically for next 15-30 years. No car registration which is not an electric vehicle by 2040 in UK.
• China has invested heavily in increasing its solar manufacturing capacity. Today it is largest exporter of solar equipment. India can do same.
• India’s dependence on imports in crude and gas sector is not expected to come down soon. Japan imports coal yet it is one of the most efficient coal producers. So India needs to get its economic strategy right.
• The energy sector needs the regulator. Only power sector till now has the regulator. Hydrocarbon sector is yet to see such effective regulator.

Connecting the dots:

• India’s energy needs have to be diverse to fulfil India’s Energy Mix. Explain in detail with suitable examples.