India needs a comprehensive energy policy
24 October 2011
With an ugly power crisis rearing its head, most citizens have braced themselves for a Diwali of blackouts. What threatens the country's energy security today emanates not from volatile markets, or from an inimical state across the Himalayan border, it arises purely from regulatory and policy uncertainty. It arises of an organic incapacity to keep and to clear longterm policy goals.
When the crash of 2008 came, it saw some of the most aggressive and coordinated interventions across the developed world. In spite of these interventions, the year 2009 saw the first real decline in global GDP since 1946. The decline, more significantly, was uneven. Economic powerhouses like India and China continued to see substantial growth in their national GDP.
The story of that growth, at least for India today, seems about to be interrupted. Traditionally, both China and India have been dependent on coal to fuel their energy needs. However, in spite of large domestic reserves, both countries are today faced with a shortage of supplies because of constraints in production as well as bottlenecks in transporting it to distant centres of consumption.
Both are forced to import increasing quantities. China already produces almost half of all the world's coal and annually increases production by close to 9% each year. India, on the other hand, has been more erratic. From growing steadily at 6-8% in the past, growth sharply decelerated to just 2.1% last year. Indications are that in the first five months of the current fiscal year, domestic production declined by 2.5%.
The emphasis on imported coal is, therefore, inevitable even for India's existing and planned capacities. China and India together account for 25% of the global coal trade pegged at about 800 MMT per annum. It's little wonder that movements in global coal prices are determined by what happens to demand for the commodity in these two countries. This causal relationship is likely to be exaggerated as India strives to quadruple its present power generation to an annual 3,200 TWH as it seeks to provide a modest 250 watts of usable capacity per person.
The big question is what fuels are going to be used to fire this huge capacity addition. Nuclear as well as renewable energy are not seen to be making a very significant dent in the net share of fuels over the next two decades. Within this period, we have to either rely on coal or turn to gas, which is today recognised as the most important bridge fuel.
Attempts to get private sector involved in coal mining have not been too successful. So far, of the 215 coal blocks allocated under the captive mining policy, only 26 are reported to have begun production by end of 2010. Even for these few, the time taken to reach production has varied from two to 12 years due to delays in statutory approvals; land acquisition and multiparty approvals.
But more importantly, the questionable rationale of a captive coal policy that treats coal mining as an add-on secondary activity rather than a commercial activity may in itself be responsible for the current stalemate.
Finally, it is illogical to expect that reforms will, can or should happen in the coal sector in isolation. If we think reforms, then we need to look at the entire energy space as an integrated whole. The policy uncertainty we are faced with today is largely the result of trying to manage this most vital critical infrastructure space by desegregating it into independent silos and sectors. Pricing across all sectors needs to become far more rational and market-oriented; the linkages across fuels, their substitutability has to be allowed to be reflected in price signals.
This is not being unpragmatic in any way. In a country like India, with vast inequalities and disparities, subsidies cannot be wished away. However, the costs of subsidies have to be clearly and transparently borne upfront. Subsidies cannot be administered by sleight of hand.
The present forms of subsidies have created disparities not only across sectors but between segments of the same sector. They create vast opportunities for arbitrage and rents, and have made some grow at the cost of others. More dangerously, by completely distorting price signals, they are now severely limiting long-term access to fuel supplies.
The administration of subsidies through price controls does little to solve far more pressing problems that have to do with issues of access and entitlements to energy resources. Therefore, even where we recognise the need for subsidies, we need to overhaul them to address issues of access directly.
Today, in the face of global recession, we face a double jeopardy. The impact of the slowdown threatens our export markets. It puts a big question mark on how far our service sector-led growth will take us down the road to employment generation for the millions entering our workforce each year.
If recovery is a longer haul, then the only solution will be to stimulate the domestic economy by higher spending on infrastructure. This only can sustain growth in employment and mitigate the effects of slowdown across the world. Let us recognise that in the coming time, our efforts to sustain even a decent modicum of growth is going to be severely hampered by our ability to access energy.
We need to think in terms of a comprehensive energy policy rather than work in such complete disarray having fractious policies for coal, power, fertiliser, oil and gas, and so on.
(Sunjoy Joshi is Director, Observer Research Foundation)
Courtesy: The Economic Times