Modi's one year: Mixed bag of success in energy sector

Pratim Ranjan Bose

Having come to power in May 2014, the Narendra Modi government was faced with the unenviable task of clearing the mess left behind by the Congress-led UPA in the energy sector.

Eleven months down the line, the Modi government is now left with a mixed bag of some extremely bold statements and, a few confusing policy outcomes.

Among the positives, I will rank the change in gas pricing policy at the top. It signaled a significant departure from the known paradigms of corporate influence on public policy in India.

Natural gas pricing – significant step

Readers of this blog may remember my scathing criticism on UPA’s domestic natural gas pricing policy. It was designed to benefit a few, to earn super normal profits at the cost of scores of user industries.

It was a wrong policy and, the Modi government rightly amended the formula for better. UPA used price paid by Japan for imported fuel (liquefied natural gas) as one of the benchmarks to decide well head price in India. 
Modi replaced it by reference price in Russia - which is one of the largest gas producers in the world - in setting a market linked theoretical price benchmark for India.

The new formula, implemented last year, reduced the impact of domestic gas price rise to a little over 30 per cent from $ 4.2 a mmBtu  (million metric British thermal unit) to $ 5.61 a mmBtu (million metric British thermal unit). The rise was way too low when compared with the 100 per cent price hike (to $ 8.4 mmBtu) proposed by the UPA.

What made the initiative out of the ordinary is the political part of it. Private sector energy behemoths are globally known for maintaining strong grip over public policy and, India is no exception to that.

By forcing them to accept a huge cut ($ 2.6 a mmBtu) on projected returns, Modi government signaled the beginning of a new paradigm in business-politics relationship in India.

 The benefit is accrued by the Indian economy. For the first time in history gas prices dropped to $ 5.18 mmbtu for April-September 2015 period. 

Considering that imported (spot) LNG is now selling in Gujarat coast at $7.5 a mmBtu and is projected to be available at $ 5.5 a mmBtu in the lean season of May-June; Indian natural gas producers should also be happy to earn a well-head price of $ 5.18 per mmBtu for next six months.

How successful is Coal auction?

On paper, the boldest policy statement, however, came in the coal sector.

Approximately 42 years since nationalization in 1973; a new law has thrown the coal sector open to competition in March this year. 

But, the government is not yet ready to invite private sector in commercial mining and, is more excited about the coal block auction that they claim as the single biggest achievement in the energy sector in the past eleven months.

However, I am not yet convinced about the success of the auction. True, it created a projected revenue stream (for 25 years) to coal bearing States.  Better still, it has ended the entire discussion on Coalgate and lack of transparency in natural resource allocation that I was complaining about for last few years.

On the flip side, the auction was conducted at a time when bidders - especially those owning stressed assets and those who were allotted mines in the past - were desperate to get a coal asset. It was an abnormal scenario. And, that invited abnormally aggressive bids.

Rating agency ICRA feels successful bidder in the electricity sector may face serious viability concern. The scene is more or less similar in steel and cement sectors, where companies promised to pay more than they earn.

Auction ensures transparency not viability of a policy. The auction of CBM assets (especially in the third round of bidding) and tariff-based bidding in the electricity sector, during the UPA rule, illustrates this adequately.

More than 15 years since CBM (coal-bed-methane) assets were put on the block; the total methane gas production of the country is yet to touch one mmscmd (million metric standard cubic metre a day). The government got some money but user industries are left high and dry.   

The levelised tariff-based bidding proved a disaster, as power plants are now demanding a dynamic cost pass-through.

Momentum is back in coal

There is, however, no denying that the growth momentum is back in the coal sector. The credit at this point of time goes to the State-owned Coal India (CIL) and Modi’s ability to run the government as a single cohesive unit.

Though coal fuels over 70 per cent of electricity consumed in India; stiff rivalries between coal and power ministries often inhibited the prospect of a synergic growth.

The current demand-supply mismatch in coal production, leading to stranded capacities in the power sector, is partly a result of such inter-ministerial rivalries.

Modi attacked the root cause by bringing both the ministries under a common minister. The results are visible in the recent love story between the State-owned majors Coal India and NTPC.

That’s not all, in a sharp departure from the UPA rule; crucial ministries like environment and railways now work in tandem with the coal sector. This coupled with a sincere effort to improve the rail infrastructure should go a long way in improving availability of cheap domestic coal. 

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(Disclaimer: Graphics are collected from the web. Will be removed in case of any objection)