India’s energy price reforms face hurdles

August 8, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

India has raised gas prices and also made it easier for power companies to pass on the rising costs of imported coal to customers – two policy steps aimed at boosting fuel supplies and helping to minimize the country’s chronic power shortages.

However, the reforms are unlikely to be a quick fix for India’s blackouts. It may take at least two years for the gas price rise to boost fuel supplies as investments in output and import facilities bear fruit, but even then the key to the plan may lie with distribution companies.

The state-owned distributors – known as discoms – will have to find money to buy the more expensive electricity from power stations. But passing on too much of the costs to consumers will be politically unpopular and the discoms may opt instead to simply halt supply.

Reuters spoke to Vinayak Chatterjee, the head of Feedback Infra consultants about the reforms.

Chatterjee said the coal policy change was an imperfect solution but better than nothing.

“In our view it is the second-best solution, with the caveat that extensive power is better than no power,” he said. “One reason I’m saying it is second best, is because the ideal solution really would have been a complete pooled coal price by Coal India. Because that would have made the task of the pass-throughs far simpler.”

Coal price pooling was a policy option being considered by the government, which would have set a uniform price for imported and domestic coal for the customers of Coal India, the world’s biggest coal miner. The plan was ultimately shelved.

Allowing companies to pass on the cost of coal will be done on a case-by-case basis at the discretion of state regulatory authorities, something that makes the policy trickier to implement, Chatterjee said.

“It does two things. It puts a huge degree of burden on regulatory authorities in giving tariff dispensation, and lays every decision open to charges of crony capitalism, because anybody can find fault with any dispensation,” he said.

Chatterjee said the gas price rise would give an incentive to boost exploration but warned that raising fuel prices puts a question mark over whether discoms will be able to muster up the cash.

“If you are to get fresh investments coming in for what is called a highly risky business enterprise which is the exploration of gas, then you need to give some incentives to attract people so that India becomes less dependent on imports and more self-sufficient domestically,” Chatterjee said.

“So higher cost gas-based power and higher cost imported coal average power is a serious concern as to who will pick it up,” he added.

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