The Planning Commission approved the Integrated Energy Policy over the weekend, setting the stage for a final approval by the Union Cabinet. The policy document, drafted by a committee chaired by Kirit Parikh, has been in circulation for a couple of years now, but the debate on the issue has been overshadowed by the global oil scenario and the Indo-US nuclear deal. With political and bureaucratic attention being focussed on the immediate, longer-term concerns about energy security and sustainability have been given short shrift. In approving the policy, the government has brought these issues back on to the front burner. If, in the process, it ends up raising some political hackles, that is a price that must be paid.
The basic premise of the integrated policy is, indeed, integration, on a number of dimensions. Two critical elements of the policy are that the price of all energy from all sources must be determined by markets and that sources should be taxed differentially based on their negative externalities, mainly contributions to local and global pollution. The immediate implication of this is that subsidies on all energy sources should cease. Consumers should pay what it costs to supply energy in a competitive market situation as well as for the damage that they do to the environment as a result of their consumption. If implemented in the letter, this will immediately raise the prices of some of the petroleum products, which are currently subsidised, including LPG and kerosene. It will also lower the price of petrol relative to diesel (or, more correctly, raise the latter vis-à-vis the former), since the two currently bear differential taxes. While the policy does not call for a complete end to subsidies, it does favour limiting their scope through better targeting. All these measures will stir up a hornet’s nest on account of various vested interests and it is going to take strength and determination on any government’s part to see it through. The merit of the exercise is that the goalposts have been laid down. But while it will be difficult for any government to challenge the underlying rationale, don’t expect any price action from a government battling high oil prices and readying for general elections.
One important set of recommendations relates to the administrative structure for energy. Currently, each source is looked after by a different ministry, while all tax matters are the domain of the finance ministry. While stopping short of asking for an energy “super-ministry” — similar demands have been made in the past for infrastructure as well — the policy calls for the application of a consistent set of economic principles across all investment, pricing and regulatory decisions. Whether this is achievable within the existing framework remains to be seen. Somewhat less controversial is the proposal to bolster energy security by acquiring energy assets abroad, a process that has already begun in the form of oil equity investments in Sudan and Russia. Ultimately, as the proponents of the nuclear deal with the US have emphasised, energy security is not just an issue of guaranteeing one source of supply; it is also about diversifying options and establishing bargaining power with suppliers. In today’s environment, with the compulsion to find new sources of energy being driven by both environmental, and security as well as cost compulsions, the most appropriate policy regime is one that will encourage investment exploration across a range of sources and locations. The policy that was approved last Saturday certainly does that, but, as always, the proof will be in the implementation.