Why it makes sense to keep energy prices on par with international rates

Indian Oil | The board has approced implementation of Petrochemical and Lube Integration Project at lndianOil's Gujarat Refinery at an estimated cost of Rs 17,825 crore. (Image: PTI)

Shishir AsthanaMoneycontrol Research

Niti Aayog, government’s think tank, had in June 2017 released a draft National Energy Policy (NEP) after working on it for nearly two years. A final policy is not yet announced as changes are being made based on the feedback received by the think tank. Reports say that the policy will now incorporate aligning energy prices with international rates.

This will be a big plus for the entire energy sector as producers like ONGC and OIL will be able to get international prices for their oil and gas output. Currently, they feed the downstream sector at a subsidised rate which is later paid back by the government.

The report, however, clarifies that the impact of higher prices will not be felt by the segment of the society which still uses subsidized fuel and energy. Targeted subsidies only to the end user help stop leakages and reduce government subsidies.

The key to the NEP is that a policy has been made keeping in mind the energy requirement of the country as a whole. Structurally, there are various ministries that cater to energy requirements like the Oil and gas Ministry, Coal Ministry and supporting ministries that provide logistic support like the railways, shipping and surface transport.

Each ministry was working in isolation and at times competing with each other. Thus, a need for a comprehensive approach was felt. The result of government’s effort was the NEP. Four key objectives of the NEP are affordable prices, improved energy security and independence, greater sustainability and economic growth.

While releasing the draft policy the government in a statement had said that energy is handled by different ministries that have the primary responsibility of setting their own sectoral agenda, an omnibus policy is required to achieve the goal of energy security through coordination between these sources. This is also expected to mainstream emerging energy technologies and provide consumer energy choices.

The difference between the old and new policies, as per minister Piyush Goyal is that the new policy differs from the previous one while including the issue related to sharp decline of crude oil prices, change in solar energy technology, heightened concern of climate change issues, ambitious target of renewable energy and rural electrification agenda adopted by the government.

A national policy is necessary as competing fuel will thrive to supply energy at various price points. The job of the government is to strike a balance between the cheaper sources of power and the cleaner sources of power.

Aligning international rates for energy prices and keeping the poor sections of the society protected would mean that the producing industries have a better chance of improving their profitability. Also, fuels which were subsidised, like coal for a long time might now be able to compete with other fuels.

This might bring in temporary volatility as one form of energy competes with the other, but forces of supply and demand and the overall cost of producing energy given the landed price of fuel at the factory gate will play an important part. But the net result will be that the most economical and environmentally friendly source of energy will be available in the country.

It is necessary for the government to get its act in place as by its own estimate all the Census villages are planned to be electrified by 2019, and universal electrification is to be achieved, with 24x7 electricity by 2022. This has to be met by an international commitment of reducing emissions intensity by 33-35 percent by 2030, achieving a 175 GW renewable energy capacity by 2022, and share of non-fossil fuel based installed capacity in the electricity mix is aimed at above 40 percent by 2030. Aligning fuel prices to international rates will make India join the world energy market and make the domestic energy market more efficient.

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