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Ajay S Shriram , President, Confederation of Indian Industry (CII)

01 May 2014

New President of Confederation of Indian Industry (CII) Ajay S Shriram answers questions on a range of issues in energy sector – from the need for an integrated energy policy, sovereign fund to acquire assets abroad to the urgency to move towards costreflective multi-year, time-of-day tariffs – in an interview with Deepak Sahu.

In your opinion what are the key challenges on the energy front and whether the licensing policy for all hydrocarbons will solve the purpose?

Coal, oil and natural gas are the most important sources of primary energy in India. Inadequate domestic supplies of these are forcing the country to increase imports. Also, the supply of natural gas which was expected to alleviate our energy security from the new domestic fields remains well below projections. Of late, driven by accelerated capacity addition in power generation and decline in domestic coal production, India’s imports of coal have risen and the country had amongst the highest energy import bills globally at $120 billion in 2012-13 accounting for 8 per cent of its GDP. This has adverse implications for the country’s energy security and current account deficit. In addition, with an installed capacity of over 230 gw, India’s power generation capacity has struggled to keep pace with rapid economic and population growth. Currently 400 million people in the country are yet to get electricity and we have been battling peak power shortages of 10-12 per cent. India’s annual per capita electricity consumption is around 900 units which is amongst the lowest in the world. Consequently, our energy architecture has been under severe strain. As far as the uniform licensing policy is concerned, CII welcomes the government’s draft policy. It will be a positive step towards streamlining the operational aspects of production sharing contracts (PSCs) and energy sharing contracts (ESCs). This draft policy includes several commendable proposals which will give an impetus to investments in the upstream sector. It will enable contractors to explore and extract all hydrocarbon resources throughout the mining lease period in the area and it also proposes to apply zero rate of royalty for offshore blocks. This draft policy will incentivize investments with a 10 and 7 year tax holiday for ultra-deep water blocks and for other oil and gas blocks, respectively, and will be governed by an inter-ministerial committee.

There is no national policy on energy endorsed or supported by Parliament. Nor is there any official body authorised and accountable for overseeing the country’s energy policy. What do you think the new government should do towards this?

Yes, there is no integrated energy policy in India. Five different ministries look at various facets of the energy policy and try to optimize their own areas. The Planning Commission did create an “Integrated Energy Policy-Report of the Expert Committee” but such initiatives have failed to yield any result. Lack of integrated thinking sometimes results in inconsistent policies and sub-optimal solutions and non-usage of inter-linkages and synergies, as also corroborated by the Kirit Parekh report. This is important as different fuels can substitute for each other in both production and consumption. Alternative technologies are available and there is scope for exploiting possible synergies to increase energy system efficiency and to meet requirement for energy services. Several countries have shown thatan integrated strategy for energy can solve similar problems. The cases of North America, which is expected to be self-sufficient in energy by 2030 from being the biggest importer in the world and China, which has also significantly reduced import dependence, are examples of this. We at CII have recommended an institutional mechanism (a body or agency) which looks at energy issues in an integrated manner on a continuous basis. Corporates, industry experts and policy makers need to work together to create a healthy environment for the energy sector. An integrated energy policy which covers all sources of energy and addresses all aspects including energy security, access and affordability and pricing, efficiency and environment is critical for India to facilitate growth in supply to match demand growth.

There is overlap, and on occasion, contention over matters like the setting of prices and tariffs. How do you generalise the whole scenario and what is the way out?

Pricing continues to remain a key concern in the Indian hydrocarbon and coal sector. In the hydrocarbons sector, the domestic gas prices are significantly lower than the international prices and India needs to move towards achieving market determined pricing under gas-onwas done in 2010 after a gap of seven years. State governments do not raise power tariff because it is a politically sensitive issue. While the financial recast package introduced in September 2012 is a step towards putting the state electricity boards on a stable financial footing, we hope that reform measures including regular tariff revisions will be undertaken by state electricity boards. We at CII have been advocating the need to move towards cost-reflective, multi-year time-of-day tariffs.

Do you think there is a need for development of an international energy strategy and resources of India Inc need to be leveraged to maximise international competitiveness?

As I said earlier, due to continuing uncertainties in energy supply, energy security has emerged as a matter of priority and concern for India. Acquisition of energy assets overseas and diversification of oil and gas supply base therefore, assumes greater importance. Though traditionally India is dependent on the Middle East for its petroleum supply, this region is volatile which compels India to diversify its sources of supply. India has to develop in an energy constrained world and has to compete for global energy resources with many other developing and developed countries. In order to succeed in winning international energy assets, India needs to engage with energy rich countries strategically backed by energy diplomacy and foreign policy. We may look at some of the key measures to ensure India’s energy security: ?? An enriched sovereign energy fund should be created to provide financial backing for Indian companies looking to acquire oil and gas assets abroad. Besides easy financing, it would also provide the confidence to compete in the global oil and gas asset market. ?? Leveraging the strengths of the private sector is crucial in increasing our competitiveness in overseas energy acquisitions and government support particularly by the local diplomatic missions and the ministry of external affairs would be of great help. ?? India needs to develop a strategy specifically focused on acquiring assets, particularly gas assets, in neighbouring countries so that equity oil and gas can easily be imported into India at low transmission tariffs. There needs to be national strategy for long-term gas / coal supply contracts. ?? Public-private partnerships and domestic energy companies should be permitted to enter into joint ventures to create the financial leverages required to bid for overseas investments.

What is your take on power transmission and power trading issues in the country? Is there still a long way to go?

Our transmission network is the third largest in the world at 28 gw and we are looking to enhance it to 66 gw over the next five years. In a potential gamechanger, South India was connected to the national electricity grid, completing the integration of the entire country into one seamless network for delivering power to consumers. This will improve transmission and facilitate better management of demand. However, with an estimated capacity addition of 88 gw targeted in the current Plan period, augmenting the transmission capacity is critical to enabling evacuation of excess power to regions that face shortages. In addition, as more renewable power gets connected to the grid in the near future, grid integration will become a challenge. Recognising the need for augmenting transmission capacity to accommodate the renewable capacity, the government plans to roll out a `43,000- crore ‘green energy corridor’ project to facilitate the flow of renewable energy into the national grid’. In addition, there is a need to promote greater private participation in the power transmission sector. As far as power trading is concerned, the Electricity Act (EA) 2003 had laid down key enabling provisions to promote competition in the sector. The provision of nondiscriminatory open access is one such statutory provisions to promote competition and enhance the quality of service to customers. The Act also directs state electricity regulatory commissions (SERCs) to formulate open access regulations. Considerable efforts have been undertaken by the Commissions towards ensuring that open access is allowed in principle. However, there are still several impediments before it realizes its true potential as granting open access may result in revenue losses for discoms. However, when an industrial consumer in a state is denied access to competitive power leading to lower turnover, the economy of the state is hampered leading to lesser income from taxes for the state and increased unemployment. The discom is also deprived of wheeling and other charges applicable on the consumer availing open access. Therefore, unless issues related to various facets of distribution sector are addressed, challenges to harness the full potential and benefits of power trading will continue.

Renewable sector is not catching up that fast. What extra needs to be done to make it a more favourite destination for investments?

The renewable energy sector in the country has witnessed rapid growth particularly in the preceding Plan period, largely driven by a conducive policy framework. The installed capacity of grid connected renewable energy capacity in India has grown from around 7.7 gw to over 30 gw today and accounts for about 13 per cent of India’s fuel mix. Going forward, India has amongst the most ambitious renewable energy programmes in the world and has targets of achieving 15 per cent of renewable energy by 2020 (National Action Plan on Climate Change). India can potentially increase grid-connected solar power generation capacity to over 200,000 mw and wind energy to over 100,000 mw by 2030 with the implementation of appropriate energy policies. To achieve this growth the government will need to ensure removal of existing bottlenecks and create an environment which will spur greater investment in the sector. A critical step in this direction would be putting in place an effective mechanism to ensure Renewable Purchase Obligation (RPO) compliance. The RPOs was introduced to facilitate the growth of renewables. However, most states do not meet their RPOs resulting in uncertainty amongst the developers. Some other steps that will give an impetus to this sector include reducing energy financing costs; making land available for renewable energy projects(land acquisition has emerged as a key issue and measures like zoning of areas as potential renewable energy parks will be efficient) and ensuring an efficient evacuation system.

How serious is the situation related to coal imports? What solution do you suggest to come out of this?

Power generation companies have been procuring coal under coal linkages / fuel supply agreements with Coal India Ltd, captive mine blocks and through imports. However, over the last few years, fuel availability has emerged as the biggest risk that the thermal power generation projects in India are facing. The coal linkages awarded to projects under construction are far too large visa- vis the quantum of domestic coal that is expected to be produced in the next few years. This is primarily due to the mismatch in the growth rates of domestic coal production at 5 per cent and the growth rate of capacity addition at 10-15 per cent witnessed by the power sector in the preceding five year plan. Consequently, most power developers have been importing coal and imports are likely to more than double from 70 million tonne to about 185 million tonne by 2017. This has adverse implications for energy security and balance of trade. In addition, discoms find it difficult to buy power from power plants using imported coal or blending imported coal as the cost is significantly higher than power produced from domestic coal (up to 100 per cent higher). This results in a huge off-take risk being borne by the developer. There are also logistical issues in transporting imported coal to the interiors of the country. In order to address the acute shortages of domestic coal and to decrease the dependence on imported coal, it is important to promote the creation of proper mining industry in the country. In the absence of mining industry, companies that have been allocated coal blocks have to look for appropriate business structure to accommodate partners with mining expertise. There is also a need to develop port and handling infrastructure for coal imports by ensuring investments in overhauling of coal berths at greater sea depths, deeper ports and new coal berths. Also road infrastructure needs to be developed to facilitate the movement of larger trucks within the country for last mile connectivity. This would also allow evacuation from coal mines with no existing rail infrastructure.

The government has also drawn an aggressive model of PPP to spur coal production. How many feasible options do you think is it possible to have to actually increase coal production in the country?

The government’s plan to have public private partnerships in coal mining is the right move to boost coal production and to draw in private investment in the sector. The estimated shortfall of 204.1 million tonne -- the total domestic demand for coal in 2012-13 stood at 772.84 million tonne against supply of 568.7 million tonne – can be met with necessary policy interventions given that the country has one of the world’s largest coal reserves. For blocks allocated to government companies and having majority clearances in place, introducing a mine developer and operator (MDO)-based structure with aligned incentives to be selected through a standardised competitive bidding process needs to be facilitated. This could be done for both public and private mines. MDO would mine on behalf of the mine owner and will get mining charges in return. The mine owner could then sell the coal to Coal India Limited (CIL) at mutually agreed prices, until the designated end use project gets commissioned. The coal would be diverted back to the designated end-use project post this. Some additional measures that could be undertaken by the government to further alleviate the fuel supply risk in the country include the identification and incentivization of mines which are producing less than their potential. A robust pricing methodology could be created which helps the developers gain a reasonable premium on the extra mined coal, without severely impacting the cost of end-user (CIL to sell this coal as linkage or through e-auctions at normal prices). Moreover, to ensure success of PPP projects, it needs to have all the clearances specially environment & forest before the licences are issued. Logistics requirements of the project need to be mapped and factored in.