Seeking clarity on energy

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

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.

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,

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