The South Asia Channel

Can India's Energy Problems be Fixed?

Energy sector reform has been one of the top priorities of India's new Prime Minister, Narendra Modi. One major step in this direction has been combining previously separate ministries that deal with energy matters in India. This is in keeping with his election promise of a dynamic and efficient government.

Modi and the ruling National Democratic Alliance (NDA) have chosen only 45 ministers. The cabinet of ministers for the Union government includes 23 cabinet ministers, 10 ministers of state with independent charge, and 12 ministers of state. Unlike ministers of state, ministers of state with an independent charge do not have cabinet ministers associated with them. By comparison, the outgoing Congress-led United Progressive Alliance (UPA) government had 78 ministers in addition to then Prime Minister Manmohan Singh. In fact, the present government of the largest state in India, Uttar Pradesh, has 58 ministers in the state government.

While Modi has kept up his predilection towards a small cabinet size from his days of being the chief minister of the western state of Gujarat (his state government had 16 ministers), it was widely thought that Modi's election to prime minister through the formation of a coalition government would force his hand and require him to dispense cabinet posts to various allies. However, with Modi's Bharatiya Janata Party (BJP) winning a clear majority in the parliament the onerous task of streamlining the cabinet became easier.

One of the largest efficiency improvements in minister portfolios between previous Indian governments and the present one has been in the energy sector. In 1992, the Ministry of Power, Coal, and Non-Conventional Energy Sources was split into three separate ministries with separate cabinet minister positions. In the years since the split, the policy objectives of these three separate ministries (power, coal, and renewable energy) have often been at odds with one another, and have added more bureaucratic hurdles to an already convoluted energy sector.

The Indian electricity sector is dependent on coal for almost 70 percent of its total generation, which is in line with other countries having large coal reserves like China, South Africa, and Australia. India, having the fourth largest coal reserves in the world, established a large coal generation fleet to provide cheap and domestically sourced coal. The coal was supplied by Coal India Limited (CIL), a government controlled company responsible for all the coal producing and pricing in India. However, while electricity demand increased rapidly during the 1990s and early 2000s, domestic coal production has lagged behind. This is for a variety of reasons including general bureaucratic hurdles facing a monopolistic government controlled organization, the lack of superior quality coal (used for power generation and industrial use), and the lack of payments from the government controlled electricity companies.

The Ministry of Coal under the previous administration was caught up in corruption scandals (aptly named ‘Coalgate' by the media) under which they allotted coal blocks to electricity generators and other companies under the auspices of increasing coal production in India without a competitive bidding process. As these issues were further exacerbated by the general corruption charges against the UPA-led government, India started importing significant quantities of coal to make up for its domestic production deficits.

Importing coal at high international market prices has lead to cost increases for the power and other industrial sectors. The Planning Commission estimates that coal imports will keep increasing in the future to meet domestic production targets. India's largest coal consumer, the National Thermal Power Corporation (NTPC), has had to import twice as much coal during the 2013-2014 fiscal year.

Due to fuel shortages and general infrastructure build out issues, access to electricity in India still lags behind OECD countries significantly. Even the official estimate of 75 percent nationwide electricity access masks the irregular delivery of electricity. While the official overall deficiency in electricity supply over demand is estimated to be 5.1 percent for the fiscal year 2014-15, this data conceals the greater deficits in the southern and north-eastern regions of India, which could exceed 22 percent at peak load times.

The electricity sector is the largest buyer of coal in India with NTPC being the largest single buyer (85 percent of NTPC's generation is coal based). The relationship between the two public sector enterprises, CIL and NTPC, has been strained after NTPC accused CIL of not providing adequate and appropriate quality coal for it to run its power plants between October 2012 and September 2013. CIL, on the other hand, accused NTPC of not paying according to the fuel supply agreement that was signed between the two entities. The dispute revolves around the gross calorific value (GCV) that coal quality is usually measured by. NTPC claims that the coal it was supplied had a significantly lower GCV than it paid CIL for. While some of the unpaid amount is in dispute, and approximately $500 million was settled in part earlier this year, the rest of the amount continues to be under arbitration. The integration of the coal and power ministries under one minister will help resolve these issues since the policy incentives for both these organizations will be integrated rather than run parallel to each other.

Further, the New and Renewable Energy Ministry has thus far had a hard time moving forward on projects under the Jawaharlal Nehru National Solar Mission (JNNSM) since it has not been included in the official power ministry. The solar scheme envisions 20,000 MW of grid connected and 2000 MW of off grid power by 2022, which has been further increased by the Modi government to three percent of total electricity generation in India (about 35,000 MW). However, progress on the scheme has been slow under the previous UPA-led government with only about 80 percent of the yearly projected solar power even under construction at this point. Thus the much needed integration of renewable resources into the power grid has taken longer and has run into more bureaucratic issues. The integration of this ministry will lead to better implementation of central government renewable energy policy in India.

This has been the stated goal of Modi who during his time as the chief minister for the western state of Gujarat, was responsible for formulating policy that led to the largest solar power build out in India. The integration of all power and coal policies under one ministry will streamline the implementation of very ambitious energy goals that the Modi government has outlined as part of its general economic growth plans. Modi has also made sure that he has direct control of the energy ministries in question by appointing ministers of state to the energy ministries as opposed to cabinet ministers. This gives him the ability to intervene directly in the workings of these ministries. Much the same way he did as chief minister of Gujarat.

Modi's policy integration process is admirable at the central level but it remains to be seen whether it can do away with endemic issues that have plagued the energy market in India. The biggest hurdles that still remain are at the state level. States own and operate their own distribution companies that are responsible for more than 20 percent losses caused in electricity transmission in India. These companies are also often bankrupt due to lax implementation of bill collection and corruption at the local levels. As such they cannot pay the producers for the electricity supplied. Additionally, coal mines and power plants constructions have to go through a state approval process, which results in delays and furthers issues around corruption.

While some issues like transmission losses and coal mine allocations will be easier to solve at the central level, issues like state power distribution, company bankruptcy, and local clearances will require state government cooperation, which the central government doesn't have. This is specifically true in the worst affected areas in the northeast India and states like Uttar Pradesh, Bihar and Karnataka.

Although Modi has made a great start in his quest for energy reliability in a country that still lags behind most of the developing world in indicators of energy access, it remains to be seen whether factors like inflation, opposition parties, and state governments will derail his policy objectives before they get off the ground.

 

Kartik Misra analyzes global gas and LNG markets for Energy Intelligence. He is a graduate of the Fletcher School of Law and Diplomacy at Tufts University. All views expressed are his own.

SAM PANTHAKY/AFP/Getty Images