Prisoners of policy

Coal supply and fuel subsidy issues need out-of-the box solutions

The energy scenario in India today presents a bleak picture, especially of fossil fuels. Coal India, the PSU behemoth, is unable to meet the current coal demand. It has enough resources deep underground but its ex-tractable reserves do not allow for more than a marginal in- crease in production.

Blocks awarded to captive units are being taken away for non-development. There is no indication of opening coal mining to the private sector and Coal India does not like importing coal. However, coal imports will need to grow substantially to meet demand, and exporting countries will be laughing all the way to the bank.

The euphoria generated by the discovery of offshore gas in the K-G basin has evaporated due to a steep drop in production. The sanctity of production sharing contracts is being questioned by government. Pipelines from Iran and Central Asia, are now becoming pipe dreams. LNG plants are slow in coming up. Because of coal and gas shortages, existing power plants do not get their full sup- ply while plants under construction do not know how they will get fuel. The loss of unserved power is higher than the cost of power itself. The ad-hoc arrangement of upstream oil & gas companies and government sharing the under recoveries incurred by marketing companies on fuel sales is messy Government payment to the marketing companies are often delayed, leading to higher borrowings by them. Their gross under recoveries are in the region of R1,50,000 crore.

The first pilot project to pro-vide direct cash subsidies on kerosene is being initiated in the Alwar district of Rajasthan by the three public sec-tor marketing companies. Kerosene will be sold at the market price of R43/litre and a subsidy of R28/litre will be directly transferred to the beneficiaries’ bank accounts. The subsidy regime has resulted in diesel being cheaper than fuel oil. It is like selling tap water at a higher price than bottled water. Another distortion, is that airlines are now being allowed to import aviation fuel to replace domestically available fuel.

The upstream regulator is not at an arm’s length distance from the petroleum ministry and is a wing of it. The downstream regulator has no teeth and its role is restricted to gas pipelines. It is only the refining sector that is doing well. This is be-cause market prices prevail for crude oil imports and refined products, and India has become an exporting hub that outshines Singapore. However, the investment of around R30,000 crore made by refineries to produce high-quality Euro-III and Euro-IV diesel is being negated by adulteration of diesel with kerosene. The government now wants refineries to produce Euro-V fuel. These show the energy sector faces serious governance and policy issues. There is still time for the government in the remaining two years to come up with innovative thinking, out-of-the box solutions and to tackle the subsidy issue head on.