Budget 2016: Reduce & refocus power & diesel subsidies

Brookings India Fellow Dr. Rahul Tongia’s energy wishlist for Budget 2016 may be difficult to pull off in a single budget, it gives a pathway to energy sustainability

There’s a budget around the corner, and energy scholars/economists/etc. all have a number of wishes they hope can be announced, often related to pricing, subsidies, etc. Of course, the Finance Ministry can only do so much, so this wish list encompasses energy-related ministries as well (power, oil/gas, coal, renewables). This also is mindful that many challenges are at the state level, especially for electricity.

Energy in Context: There are two dimensions of energy that are key to understanding the road ahead. First is Access. Many citizens lack access to quality modern energy services, like electricity, cooking gas, LPG, etc. Access in India is more than theoretical availability: One might have a wire to the home but load-shedding means they aren’t meaningfully electrified. Second is Pricing. Indians pay the highest in the world for their electricity when adjusted for incomes. Even in absolute terms, our costs are higher than many countries when we consider prices for so-called “paying customers” like commercial and industrial users — a distortion that hurts the economy. All this even before we factor in the poor quality of supply, necessitating expensive back-up power.

While this wishlist may be difficult to pull off in a single Budget, it gives a pathway to energy sustainability (spanning economics, environment, and equity) that can also be tackled through other means, even via the respective ministries. Of course, new ideas shouldn’t displace good schemes that are already there. Some haven’t yet finished, and may require review, enhanced funding, and even mid-course corrections.

Wish List:
– Reduce, rationalize, and refocus subsidies, especially for power and for diesel
– End the use of “funny money” in accounts of DisComs
– Extend improved accounting by thinking holistically across oil/gas, coal, power, and renewables
– Penalise bad quality power and energy services
– Support Innovation and Clean tech, including hybrid/electric vehicles, smart grids, storage, etc.
– Strengthen oil and gas through a national gas grid and meaningful strategic petroleum reserves

1. Rationalize agricultural energy subsidy. Free or heavily subsidised power to irrigation pumpsets is a major contributor to the poor finances of the power distribution companies (DisComs). But if we examine data from the Socio-Economic and Caste Census, half the farmers don’t own their land, and of the other half, half don’t have pumpsets. Hence, we’re serving only the upper quarter. The budget should:

a. Set limits on subsidies for large/commercial farms;
b. Convert support as chosen into Direct Benefit Transfer (DBT) type mechanisms instead of free power. The problem with free power is that in these cases utilities don’t meter the consumption, leading to operational and accounting problems, and users have no incentives to put in efficient pumpsets. Let farmers pay for power, but support them with transfers. Yes, some of this is under the purview of the states and Electricity Regulatory Commissions, so the Center can tie Central support for other schemes to such steps.

2. Improve transparency in utility accounting. Utility accounts have assumptions, loopholes, and unknowns (including not receiving promised subventions from the state governments) that make analysis of health difficult. In addition to the normal accrual accounting, cash accounting audits can be mandated to help benchmark utilities. Ending “funny money” extends to regulators who should be limited in their creation of IOUs to utilities, euphemistically dubbed “regulatory assets”. The Center should disallow such IOUs without a credible plan for paying these off in a reasonable time frame. States still creating such IOUs should have these reflect on their books (maybe with tweaks to FRBM).

3. Create holistic energy accounting instead of today’s ministry-level books. Link the energy and financial implications across fossil fuels, electricity, etc. For example, according to the National Sample Survey Organisation, some 88% of rural homes use kerosene for lighting, either primary or as a backup. If we could provide them with limited power, the savings are in the hundreds of rupees per household per year. Electricity is far more efficient, less expensive and safer than kerosene. This could justify not just better service but even pay for smart systems that can help limit consumption to lifeline (for subsidised/free users, or during periods of shortfall). This requires the Ministry of Petroleum and Natural Gas to pass on annual savings to the Ministry of Power. We may eventually want a Ministry of Energy, with coal, oil, power, renewables as departments.

4. End diesel “subsidy” for SUVs. While low oil prices have allowed deregulation of diesel prices, differential taxes and other distortions mean diesel is measurably cheaper at the pump, despite a litre of diesel having 15% more energy than a litre of petrol. While raising diesel taxes/prices could be one answer, to protect other segments of the economy, we could levy a national consumer-diesel tax on the registration of all diesel personal vehicles (and possibly commercial vehicles). Less diesel vehicles will also have enormous co-benefits of reducing local air pollution.

5. Support Hybrid and Electric Vehicles. Not only do these save energy, but these also reduce local air pollution significantly (if not entirely). While there are grand plans for these under the National e-Mobility Mission, these will take time to materialise. We could simultaneously give much higher incentives for such vehicles made in India and also waive import duties.

6. Create a national sustainable energy innovation and deployment fund. Many of the needs are long-term, and we need both R&D and commercialisation of future technologies, else we risk importing “clean tech” and more. This fund should be large, yet innovative, e.g., through the use of challenge grants. One could list the top 10 challenges (e.g., batteries, smart meters, solar thermal cooling systems, clean coal, etc.) and offer a prize of, say, Rs 20 crore for solutions. Some solutions require science innovation, while others need engineering to reach target price-points.

Promising technologies often languish because we can’t move down the learning curve fast enough (see figure). One solution is for the government to pay for the learning, the dead-weight loss. For example, if we believe 1 million smart meters as a tipping point, it could pay today’s (estimated) Rs. 2,000 extra per meter while things are still at the pilot or expensive level, in addition to subsidising or waiving compliance testing and certification costs.

Any such fund could not just cover innovation, but the risks involved with scaling clean energy. While renewable energy is variable (we know the sun doesn’t shine at night), it is also random (e.g., a cloud cover, or the wind dies unexpectedly). Known or expected variations must be planned for by the utilities – a national fund could support unknown costs (sort of like a hedge or risk pooling mechanism). A government-supported foreign exchange hedging fund/instrument could also help take advantage of negative rates seen in some countries, with interest rates being a key challenge for viable renewable energy.

7. Create a power quality failure tax. While load-shedding is an unfortunate artifact of supply-demand mismatches, it is remarkable that there is no cost or penalty on DisComs for load-shedding. Just like low oil prices gave space for diesel deregulation, low shortfalls of power today make it more feasible to mandate service quality. A first step should be penalizing utilities for unscheduled load-shedding. Power quality monitoring (through instrumentation) is a basic requirement, and the Center should simply pay the (less than) hundred crores it would cost to instrument all the feeders in the country with real-time data. This will spur solutions for peaking power, in addition to energy saving measures, storage technologies, etc., and help improve our generation portfolio (not everything can or should be coal or solar).

8. Create a national gas grid. The center should fund this, as natural gas is not just an ideal fuel for peaking power, it is relatively clean from a carbon and other pollution perspectives. Syncing this with LNG plans will also enhance energy security. Similarly, today’s low oil prices would be the right time to build a significant strategic petroleum reserve.

Energy is a fundamental driver of economic growth and human development. This Energy Wishlist may not materialise soon, but the government needs to be bold and innovative, since Business As Usual is too slow to meet the aspirations of the people while also balancing sustainability demands.