India's strategic energy policy framework

The Draft National Energy Policy outlines bold initiatives that can transform the sector

The Draft National Energy Policy brought out by NITI Aayog strives to set a new agenda for India’s energy sector and provide a medium to long-term policy direction for stakeholders, in line with new developments in this arena. The integrated policy that holistically examines the critical issues in achieving the objectives of energy affordability, security, sustainability and growth is indeed a welcome step.

A number of proposals in the draft policy have the potential of transforming energy markets in India. Removing distortions between competitive energy prices and subsidies through direct subsidy transfers, operating coal mining and power generation at arm’s length and development of gas markets are examples of some of the bold aspects that the policy recommends.

Coal is the mainstay of India’s energy sector. Commercial mining of coal can result in higher coal production, as a mine need not cater to the demand of one plant only, but can develop a production plan that meets the needs of multiple consumers. Further, there would be greater choice for power producers to source coals with different specifications and blend them to get a feed optimum for the design of the thermal plant. This will increase operational efficiencies. In addition, the policy suggests the appointment of a coal regulator.

India’s experience with regulated tariffs has been a mixed story, with prices often determined by the higher courts after a long-drawn-out legal process. Examples from the electricity and aviation sectors bring out the challenges of tariff regulation. Ideally, the government should regulate prices for only those businesses that are natural monopolies and leave the rest to market forces. Given this, should the government be regulating tariffs for liquefied natural gas terminals? Are they natural monopolies or subject to competitive forces? Similarly, as the government develops a model for commercial mining of coal, would prices be determined through a market making process or regulated by allowing for a reasonable return? Internationally, coal prices are being indexed to marketplaces. It would help if the role of the coal regulator in the Indian context is defined sharply.

Black Diamond Coal is the mainstay of India’s energy sector. The policy points out that coal production may plateau by 2035 and suggests the appointment of a coal regulator

The policy points out that the coal production may plateau by 2035. The bulk of coal resources were discovered in the 19th century and the focus has been on developing them expeditiously. Expenditure on finding new mineral resources in India has been low. Globally, US$7 billion was spent on mineral exploration. In India, exploration expenditure, especially by private players, is minuscule. However, the policy is silent on economic incentives for exploration of additional coal resources by the private sector. This is a subject that requires deliberation.

For attaining energy security, Indian companies (both in the public sector and the private sector) have been investing in developing energy resources in other regions of the world. Despite investments, market prices have to be paid for importing fossil fuels, as host countries look to capture the economic value of the resources through arm’s length market prices, attendant royalty and tax revenues. However, the producer’s profit margin can be captured by Indian companies. The integrated energy policy is silent on acquisition of resources overseas. There are other measures that can be taken to achieve energy security such as diversifying supply, bringing greater transparency in pricing of fuels and developing a more robust understanding of energy markets.

Tax rates vary widely across the category of fossil fuels. Further, some fuels are within the purview of the goods and services tax (GST), others are outside it. For example, while fuel oil is under the GST, natural gas is outside its purview. This can lead to price and consumption distortions. Any change in bringing uniformity of tax rates in the energy sector also has implications for the fiscal health of the government. This is an area where the policy is silent.

The policy suggests that decarbonisation can be achieved through energy efficiency and promoting renewable energy. It mentions that the cost of power generation using fossil fuels is lower than the cost of generation through renewables. For achieving energy efficiency, the policy suggests command and control type measures such as setting efficiency standards, mandatory standards and goals for achieving energy efficiency and norms for end-of-life vehicles. The government could consider bringing in market measures to control emissions such as by pricing carbon and having users pay for emissions.  This could be helpful not only to reduce emissions but also to promote the usage of renewable energy and natural gas, whose carbon footprint is lower than that of other fossil fuels.

Overall, the policy paper is a welcome step and outlines a number of bold initiatives that can transform the Indian energy sector and make it more competitive and transparent. The government should also put together an institutional mechanism for evaluating India’s integrated energy policy on an ongoing basis.

The author is executive director, Tax & Economic Policy Group, EY India