Medium-term energy strategy imperatives

Nov 10, 2004 01:00 AM

by S. Narayan

High oil prices are likely to stay. Growing demand, particularly from India and China, absence of any significant new finds, and continuing complications in Russia and Iraq will contribute to this. If one adds the frantic high cost exploration activity being contemplated by global oil majors, and the lovely flow of earnings to oil producers, it is easy to conclude that the days of $ 24 to $ 28 a barrel of crude are gone for a long time.
For India -- which imports over 70 % of its requirements of crude -- this is a matter of concern.

Any attempt to examine coping strategies available on the energy front, must, regretfully, recognise all the opportunities lost in the last decade. Low crude prices in 1997 and 1998 coupled with expansion of refining capacity and an abundance of petroproducts had given rise to sense of false security.
Investment and demand remained low during these years, and ONGC’s abysmal lack of success in exploration was never a matter crying for correction. Coal production exceeded demand in 1998 and 1999, and there was very little investment in additional capacity or on improving quality. Large promises of private sector power production failed to materialise, and the hydro- as well as nuclear generation sectors languished. Performance in every part of the energy sector was below target. It was possible to carry on because there was a global slowdown post-2000 and the Indian economy was recording only 4 % growth.

The picture has changed dramatically. The economy has grown rapidly since 2002 and the fundamentals have become strong. Infrastructure improvements and corporate restructuring have led to a more efficient manufacturing base, and trade is growing. Simultaneously, there has been global growth led by China.
It is necessary to recognise that there isn’t likely to be any incentive for oil-producing countries and oil companies to lower prices of crude. Getting medium-term energy strategies right is therefore vital for our economy, which isnow poised for sustained growth. India annually consumes about 3 % of the world’s total energy. It is a net energy importer, and economic growth will increase dependence on imported fuels.

Energy demand could be disaggregated into transportation, industry, power and domestic requirements, and a holistic strategy should attempt to maximise opportunities and strengths. The transportation sector consumes 40 % of total petroleum products, which is likely to continue.
The domestic sector is dependent on kerosene, agro fuels and LPG, of which the last, to some extent, can be replaced by natural gas. The electricity sector faces capacity problems, poor reliability and frequent blackouts. The Tenth Five Year Plan has projected additions to generation capacity of around 41,000 MW, which seems unlikely to materialise.
-- There’s still no single focal point for energy strategy in the country;
-- The need to get it right is vital for an economy poised for sustained growth;
-- The PM should perhaps chair a cabinet committee of all his energy colleagues.

Rethinking of the power strategy has currently been on lines of unbundling generation and transmission, allowing private operators to distribute and collect power charges. This is no doubt important; at the same time, a paradigm shift in policy is essential.
Nuclear power has been the monopoly of the Atomic Energy Commission (AEC). India has 14 nuclear reactor units in operation with a total capacity of 2,720 MW, with a number of projects in execution. India has the expertise, resources and the capability of enlarging this capacity significantly. Recently, China has called for global bids for three nuclear power stations of 10,000 MW. This could be a good example to follow. There is no need to continue AEC’s monopoly, and private players including multinationals could be enthused to invest in nuclear generation.

There have been significant discoveries of gas, mostly by the private sector. It is important and urgent to have a coherent policy on gas use. These would include decisions on use for power generation and downstream products, between generation, domestic and industrial use, and most importantly, on the regional distribution of the resource.
The new initiatives in LNG of expanding Dahej to 10 mm ton, of setting up an LNG facility in Kochi, of enabling gas to be the fuel of choice in these regions are all steps in the right direction. There is need to pursue this further, and all options for additional gas, through pipelines, or LNG or, the best of all, new exploration, need to be pursued vigorously.

Geographical disposition of coal resources makes it a natural power generation fuel in several states. Coal production was around 393 mt in 2002, with demand at around 420 mt. Traders and producers alike have exploited supply shortages, and it is now necessary to open up this sector to private investment. Initiatives recently begun need quick implementation.
Interestingly, there have been significant technological improvements in photovoltaics, leading to improved efficiencies and lower costs. There are significant commercial opportunities there, and could be exploited through public-private partnerships. India is also among the select few countries that are members of the hydrogen fuel initiative, and breakthroughs can be expected in the next few years.
Hydroelectric potential remains untapped. Some estimates place the potential as much as 1,50,000 MW. As decisions are with state governments, a mix of incentives and private participation would work.

It is a pity that there is still no single focal point for energy strategy. The Planning Commission has been burdened with many tasks, and there is need for a focused approach at the highest level. Perhaps the Prime Minister should chair a cabinet committee of all his energy colleagues.
There is some movement seen in articulation of policy in the coal and power sectors. In the petroleum sector, on the other hand, there does not appear to be any cohesive approach, with the oil majors pulling in different directions. This time, the problem is not going to go away. There is an urgent need to find solutions.

The author is a former finance secretary and economic advisor to the PM.

Source: Indian Express Newspapers
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