The Union Budget for 2021-22 sets the broad policy direction of the government. A revamped UDAY, sell-off of Central-sector energy PSUs, push for electric vehicles, and so on, show India is headed towards both reform and privatisation of the energy sector, writes SWATI DSOUZA.
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BUDGET 2021-22, presented by Union Finance Minister Nirmala Sitharaman on 1 February, was one of the most eagerly-anticipated events in recent months, particularly as India battled the fallout of the COVID-19 pandemic and the resultant lockdown. For the energy sector, this budget represents the broad direction the government is likely to take in a post-Covid world. The budget has several proposals for the energy sector, some of which are likely to have a positive impact.
First the good news. The budget provides a boost to renewable energy development with allocations to SECI and IREDA, the PLI scheme which includes EV and battery manufacturing, increasing custom duty on imported solar invertors and lanterns, and setting up the green hydrogen mission.
“Despite the seriousness of the problem, it is still not clear how the government plans to solve the crisis. The government has not only reduced the allocation (Rs.4,000 crore in the previous budget) but has also not shared how this money was used (if at all). Further, flip-flops on the stubble burning issue also showcase a lack of planning.
The budget also allocates Rs.18,000 crores to increase the number of public buses, although it is unclear if these are to be electric or CNG-powered buses. One hopes it is the former as it would provide an additional boost to electrifying transport under the existing FAME-II scheme. India's deteriorating air quality received a mention, with the vehicle scrappage policy and an allocation of Rs.2,217 crores for 42 urban centres aimed to tackle the issue.
Despite the seriousness of the problem, it is still not clear how the government plans to solve the crisis. The government has not only reduced the allocation (Rs.4,000 crore in the previous budget) but has also not shared how this money was used (if at all). Further, flip-flops on the stubble burning issue also showcase a lack of planning.
Similarly, in the case of LPG, increasing the number of connections by an additional crore will help spread of clean energy. Despite this anticipated increase, the subsidy allocation has been reduced from INR ~38,000 crore in the FY21 to INR 14,000 crore in FY22.
This budget coupled with various sectoral developments over the past year has made one thing certain—the Government of India (GoI) wants to get out of the business of producing and distributing energy. Whether it can or not, is another question.
“There are two aspects to the divestment policy. To liberalise the energy sector, it makes sense for GoI to function solely as a regulator. But implementing this has been a challenge as seen in the divestment rounds in the past few years. Moreover, from a revenue perspective, it may be akin to selling off the family jewels.
The fine print on the Strategic Divestment Policy has classified Central Public Sector Enterprises (CPSEs) into strategic and non-strategic sectors. Power, petroleum, coal, and other minerals come in the strategic sector list which the budget document states, "will have the minimum presence of CPSEs with the remaining privatised or merged or subsidiarised with other CPSEs or closed".
There are two aspects to the divestment policy. To liberalise the energy sector, it makes sense for GoI to function solely as a regulator. But implementing this has been a challenge as seen in the divestment rounds in the past few years. Moreover, from a revenue perspective, it may be akin to selling off the family jewels. CPSEs like CIL, NTPC, IOCL, BPCL, ONGC, and GAIL dominate the energy production and distribution mix.
These CPSEs also provide a generous dividend to the government, especially to make up for revenue shortfall. For example, the cohort of CIL, ONGC, IOCL paid the central government over Rs.13,000 crores in FY20 as a dividend.
Likely, the government may not divest these CPSEs given their balance sheet and market dominance right away. But if these CPSEs are to remain, then it is likely that the other assets being privatised will not see many takers given their smaller market share, books, and networks.
Distribution companies are known to be the weak link in the electricity supply chain. To improve their finances, increase efficiency and reduce Aggregate Technical and Commercial (AT&C) losses to 15%, the GoI initiated the UDAY scheme in 2015.
“However, without correcting the underlying issues of low tariffs, theft, manpower, and the political economy surrounding power distribution at the state level, it is difficult to assess how successful this scheme will be.
Five years on, the scheme failed to achieve its objectives as AT&C losses across states stood at 23.9% in FY20, and the gap between average power procurement cost average revenue was 0.53 paisa per unit of power. With the announcement of the new "revamped reform-linked scheme", it seems that the sector has found a second chance to restructure itself.
However, without correcting the underlying issues of low tariffs, theft, manpower, and the political economy surrounding power distribution at the state level, it is difficult to assess how successful this scheme will be. The second lever that is being used to improve the condition of DISCOMs is to privatise existing utilities and allowing multiple distribution licensees in one area.
Mumbai is one of the few cities to have competition in electricity distribution. However, studies have shown that this competition while improving power supply, did not lead to lower tariffs for consumers. Another concern on this front has been the geographical spread of multiple utilities.
It is assumed that private companies would prefer geographical areas with denser connections and higher demand, therefore leaving the less dense areas to be serviced by state utilities. This will mean that state DISCOMs will have a lower share of paying consumers in areas of high demand but will have to continue servicing areas where demand will be lower. This will have a cascading impact on revenues, and eventually on their efficiency and quality of power being supplied.
Proponents in the natural gas sector will be disappointed as the primary demand of including gas in the GST regime has not been met. On the other hand, the budget document shows the government's commitment to promoting natural gas.
Last year, India launched its first gas exchange—IGX. Through this platform, buyers had multiple options to buy and trade natural gas. This digital hub was supposed to be one of the first steps in liberalising the gas market.
The budget proposal to set up an Independent System Operator (ISO) is the next step on this journey. To understand this, one must understand that most gas pipelines in India are built and operated by GAIL. Therefore, GAIL not only sources but also distributes and markets natural gas.
In the past, this has caused some issues in the industry, especially if the buyer chooses a supplier other than GAIL who nonetheless has to use the GAIL pipeline to transmit gas. While the regulation for open access has been in place, setting up an ISO will make it possible to implement it.
The FY22 budget document shows a clear focus towards privatisation in the energy sector, both of assets and of supply chain, especially in the existing sectors of power, coal, and natural gas. While it has provided some allocation and measures for clean energy, it likely not enough in the direction that the sector was hoping for.
(Swati Dsouza is the Research Lead, Climate Change at National Foundation for India. The views are personal.)