Is there a looming energy crisis? Some analysts tracking the global energy sector believe so. Closer home, India seems to be already on its knees. The government has hiked petrol and diesel prices close to 70 times this year. Coal shortage in the country has forced-shut several thermal power plants.
The precarious situation puts a question mark over India’s long-term planning to attain energy sovereignty. It also calls into question not only policy regimes but also the way successive governments have taxed energy products over the years.
De-Regularisation And End Of Under-Recoveries
In June 2010, the Central government led by Manmohan Singh had de-regularised the price of petrol in India. It was projected that if Indians began to pay more for petrol and diesel, the government would have enough money to invest in energy infrastructure to meet domestic demand. In the same year, a clean energy cess of Rs 50 per tonne on coal was also introduced to help the government of India generate revenues to fund clean energy technologies.
Despite having just a third of average global per capita income, Indians pay the highest taxes on petroleum products. In 2014, when international crude oil prices fell to historic lows of below $30 a barrel, the Centre instead of passing on the benefits to consumers, raised excise on petrol and diesel, milking the situation to its benefit. Between 2014 and 2021, the excise duty on petrol has increased by 247%, while that on diesel, a whopping 794%. As a result, the centre’s excise collections from petroleum products that grew at a CAGR of just 1.51% between 2010 and 2014, started growing at a compounded rate of 22.5% thereafter.
In absolute numbers, the Centre has accumulated Rs 19,23,197 crore in excise duty in the last 11 years of which Rs 15,59,104 crore came between 2015 and 2021. Excise duty from petroleum products contributes 85-90% of all excise collected by the Union government. (See chart 2)
Differs Surya Sethi, former principal advisor, power and energy with the Indian government. He says that while excise duties on petro products have increased in the last seven years, if one takes into account the overall increase in government’s revenues (including cess, royalty, service tax etc) the overall growth rate will be much less and commensurate with historical increases.
The production in the oil and gas sector has been abysmally low in the past 11 years. While crude oil production from Indian oil fields has declined from 38 mmt (million metric tonnes) to just 30.49 mmt, the production decline of natural gas has been starker in the past decade, falling from the level of 47,555 mmscmd to 28,672 mmscmd. (See chart 1).
The case of coal, which fires 70% of India’s power plants, is no different. Coal production in India has grown at a meagre compounded rate of just 3% from FY11 to FY21.
Swachh Bharat And The Burden Of GST
Achieving energy security requires consistent public and private investments in the sector. In India, though, energy companies are the golden goose that should serve every sector. Sample this: Soon after the country’s thermal power plants started shutting operations due to coal shortage, former Coal Secretary, Anil Swarup in a spate of tweets blamed the centre for the country’s ongoing energy crisis. He alleged mismanagement and diversion of funds from Coal India’s cash flows towards government’s flagship programmes like Swach Bharat Mission.
“Are you aware Coal India Limited had reserves of in excess of Rs 40,000 cr in 2015. Now around Rs 10,000 cr…was trading at Rs 400 in 2016. Now below Rs 200…was kept without regular CMD for a year...was pushed to invest in fertilizer plants… managers were asked to monitor school toilets,” Swarup tweeted earlier last month.
Swarup’s criticism of government policies echoes with the criticism against the centre for diverting coal cess collections to meet revenue shortfall under GST. In 2018, the government diverted 65% of the funds collected through coal cess to clear its indirect tax dues to state governments. The purpose of cess is to spend money on the activities that it’s meant for. Questions have been asked why this is not followed by the Indian government.
Miscalculating Green Power?
The Centre committed to an aggressive target of installing 175 GW of renewable energy (excluding large hydro) by 2022. Out of this, solar target capacity was set at 100 GW to be met by March 2023 -- 40 GW rooftop solar and 60 GW ground-mounted. Despite its best efforts, the country has managed to install around 43.94 GW till July 31. Some experts call this a case of over promising and under delivering on the green energy front. And, its impact has been borne by the coal and gas-based power plants in the country. “In the last 10 years, coal-based energy became a bad word and even import of coal was discouraged. The power evacuation system, primarily planned to match the coal-based capacity addition, became congested, as the focus came on solar and other forms of energy being evacuated through the same transmission lines,” says Arup Roy Choudhury, former chairman of India’s largest thermal power producer, NTPC.
The government wanted to use thermal plants to meet only the country’s peak power demand (when solar energy is not available), and it was a technical blunder.
“Thermal plants cannot be switched on and off frequently and tend to deteriorate if not allowed to function at an optimum efficiency,” adds Roy Choudhury.
Cost To Economy
Energy security or lack of it has an economic cost. Consistent high cost of fuel in the country is causing macroeconomic disruptions. Lydia Powell, fellow at Observer Research Foundation, in a recent article said, “India ranks low in affordability of petrol, notwithstanding the claims of high subsidies to oil. In 2017-18, a litre of petrol cost about 25% of average daily per capita GDP in India.” Powell adds that within India, there were large variations in the affordability of petrol. In Bihar, an average person had to spend 94% of daily state domestic product to buy a litre of petrol while in UP it is over 50%. Compare it with our neighbours: In China this is about 4%, Vietnam 8% and Pakistan 17%.
High prices of petroleum products directly contribute to higher retail inflation. High fuel prices also contribute to inflationary pressure on several other sectors, including FMCG, paints, fertiliser and automobiles among others.
Suresh Khosla, secretary of Bombay Goods Transport Association says, “On one hand the government wants to reduce the cost of freight in the country, on another the massive hike in the price of diesel is making everything expensive. Diesel prices account for 60-70% of the freight cost in India. Higher cost of freight contributes to price rise for products in every sector.”
Energy Sovereignty: Can Dreams Come True?
Former principal advisor, Sethi, argues that India’s sedimentary basins have neither oil nor gas. It’s simply not possible to make India less dependent on imports in the near future. For ONGC, India’s biggest upstream company, 40% of the wells have turned out to be dry, increasing its cost of production. Private sector companies like Cairn India (now acquired by Vedanta) and Reliance Industries, too, have failed to go beyond one or two major discoveries. In the coal sector, despite the hype around allocating blocks to the private sector to break Coal India’s monopoly, there seems to be no hope of any significant increase in production over the next decade.
Where does this leave India?
Hetal Gandhi, director at CRISIL Research offers a not so negative view. “We believe that there would be an incremental increase in the production of oil and gas from the new fields that are coming up, but the ratio would be tilted towards integrated petrochemical plants. As far as fuel demand is concerned, we believe that it will stabilise on the back of blended fuel till 2025.” She is also betting on higher EV usage to taper demand for petrol while diesel demand will go up incrementally with staggered adoption of new fuel options.
Can it be safely accepted that India is nowhere close to achieving energy security even in the next decade? In years when energy prices shoot up in international markets, the incumbent prime minister can just sigh and say: “this too shall pass.”