| Rising costs
We are very short of electricity in India. The reasons are the low levels of investment and the poor generation of surplus funds within the sector. These are caused by populist pricing so that much power sells below cost, the inability of political leaderships to create public opinion to pay costs for services, high costs of staff and administration, inefficiencies ' particularly in transmission and distribution, and high levels of theft with collusion from distribution company staff. However, the other reason for shortages, which will confront us increasingly in the coming years, is the shortage of the inputs of fuels or water required for generating electricity. The present nuclear agreement under negotiation between India and the United States of America will, if ratified by us and the Americans, enable us to generate nuclear energy and to that extent diminish the effects of the restrictions posed by high costs of oil and gas.
The major power generation in India is by burning coal and using stored or running water in hydroelectric projects. Coal has been dominant for many years. From the time Minoo Masani wrote Our India almost 70 years ago, we have been brought up to believe that India has unlimited reserves of coal, of low quality in calorific value, high ash, but quite capable of generating as much electricity as we need for centuries. Recent articles ' by S.K. Chand, not denied by the government, suggest that extractable/recoverable coal reserves are perhaps enough to meet demands for 30 years ahead (the best estimate of others is 60), not the hitherto projected 200 years or more. India imported 13.5 million tonnes of coal in 2005-06 which will rise to 40 million tonnes next year. Global coal prices more than doubled between 2003 and 2004. Oil and gas prices have gone up by more.
In some locations in India there is relative parity between imported coal and gas. Long-term contracts for gas at lower than present market prices and the higher calorific value of gas-yielding higher energy output in relation to coal are the cause. However, foreign suppliers are beginning to back out of long-term contracts, as Iran has just done with us, tempted by the large profit from rising gas prices. It is not surprising that private gas producers in India are trying to do the same.
Domestic or imported coal is the better option at present prices in most of coastal Gujarat, coastal Maharashtra, Karnataka, Kerala and the southern tip of Tamil Nadu. For them, gas is not the optimal option even if available at $4.50/MMBTU. It is not. At present, the price is almost double. But imported coal after freight costs is unaffordable in most of North India.
However, imported gas is not the only choice available to us. There is also domestic coal and domestic gas. The lesson is that we must not avoid using any fuel source for generating electricity, since we are short of all fuels.
State governments have put rigid caps on prices of electricity. These are meant to support the poor and needy, though there is substantial leakage to better-off groups. Inefficiency and theft raise costs. Neither free or below-cost supplies to some nor theft is going to change dramatically for many years. Yet, we must generate electricity for economic growth and the well-being of our people. Electricity cannot therefore afford sharp escalations in fuel costs. Escalations will further raise subsidy costs. Subsidized end prices to some at below cost to serve them are met largely by higher prices to other electricity consumers. Subsidy costs will remain high in this situation.
How do we resolve the conundrum of capped electricity prices and uncapped coal and gas prices and yet meet the growing demand for electricity' Prices of imported gas or coal are not within our control, except when they are from overseas fields owned by us. We own little and there is little coming from them today. We do not have control on imported liquified natural gas prices except with long-term contracts. There is not much of that and suppliers might well, like Iran, renege on contracts to take advantage of the high prices in the market. Profiteering owner nations rig the international 'market' prices for gas. They want to make as much money as possible, as do refining and distributing companies that want the same.
What we must do is segment both the supplies and uses of gas in India. This requires regulation of use and regulation of energy prices. Fuel usage is and will be for transportation (small today but will grow for environmental reasons), urban domestic/household consumption (small today but set to grow), and other uses ' by industry, railways, farmers, and so on. LNG is the most expensive. Its use could be largely confined to uses like transport and household uses. These have no cap on their end prices. It is possible for pipeline operators to exactly determine whose gas has gone to which user and so differential pricing for gas is perfectly feasible.
Electricity generation must use domestic and imported coal, and domestic gas (apart from others like hydro, renewables, and so on). Domestic gas must be reserved for electricity generation. Imported coal will go to such locations for generating electricity where it is economical. Independent regulation must transparently approve the input prices of all of them in relation to electricity tariffs. It must also recognize the huge exploration risks for gas. The returns must provide adequate margins to allow gas exploration risks to be undertaken.
Imported gas prices have a close relationship with ruling international 'market' prices. These are subject to manipulation by a cartel of suppliers and to variation depending on the international situation. The consequent windfall profits have made producer countries and foreign companies very rich. We must not allow Indian firms supplying gas from Indian gas fields to make such windfall profits. They must sell only in India.
As of now, electricity generation in India is increasingly using coal. In future years, if the nuclear powers agree, India might also generate more nuclear power. We must use all possible sources. We must also generate as much electricity at least from domestic gas as we can, to meet the huge demand for power.
In sympathy with rising gas prices, prices of other fuels like imported coal and uranium are also rising. There is no option but to prepare Indian consumers to pay much higher prices for electricity than they are paying today. This is a job for the political leadership. There has been none of that until now. It cannot be postponed any further.
Energy pricing policy for India must have the following features until electricity retail prices can be uncapped:
a) Claim all gas discoveries in India as national resources and reserve their use for power generation only.
b) Regulate gas prices in relation to regulated end-user electricity prices, providing adequate incentive to cover future risks in further exploration and discovery.
c) Reserve the use of gas coming by sea as compressed natural gas, primarily for users who can afford its price. These would be mainly transportation and domestic household uses, and for these uses domestic gas must not be made available.
d) Prices of other input fuels, particularly domestic coal for electricity, must be regulated in relation to electricity prices. The unfortunate turf protection between ministries (coal, power, petroleum) has prevented this obvious integration at the level of regulators.
These suggestions are certainly interferences with 'market' determined prices. They are unavoidable in India's present circumstances. They might require legislation and renegotiation of some contracts. Our political leadership should also together work to change price, supply and demand constraints.