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Groping in the dark as usual

India's power sector must return to the path of pricing and regulatory reform.

india Updated: Jan 01, 2012 21:29 IST

India traditionally has low energy demand in winter, but this year blackouts have accompanied the dropping mercury. This follows an autumn in which almost every state carried out rolling power cuts. This is not a temporary affair: one of the worst policy failures of both central and state governments the past few years has been in the power sector. The Dark Ages threaten India once more.

Good news is hard to find in the Indian energy story. Power stations live hand to mouth when it comes to coal stocks. India’s vaunted offshore gas production is plummeting. Oil subsidies cripple domestic petrochemical investment. India’s dependence on imported fuel is skyrocketing because of the domestic sector’s paralysis. There is a sense of déjà vu. Just as they did a decade back, State power utilities are swimming in red ink again. Their aggregate losses were Rs 138 billion in 2006-07. Last fiscal year, they reached Rs 445 billion.

The power sector is creaking in every rivet. The ultra-mega power projects are an example of the rot that has spread through the system. These showcase power projects lie largely stillborn thanks to fixed power prices that guarantee losses, interest rates that none had dreamt of a half-decade back and a dearth of stable fuel sources. A core problem is the issue of pricing. Both industry and government seem to have made absurdly rosy assumptions about the future of fuel prices, especially regarding that of coal.

Natural gas pricing has become a Gordian knot of a wrangle that none can cut. Oil prices are set by a global market that is outside New Delhi’s control, but thanks to a perverse subsidy and tax regime they have become a political hot potato for both Centre and the states. The coal crisis is a unique product of several years of poorly conceived and poorly coordinated policies in both pricing and sourcing. Plentiful coal has become artificially scarce by whim-sical environmental policies and exacerbated by a continuing failure to break the monopoly of Coal India, a firm the government admits wastes 25% of what it mines.

With domestic coal achieving the status of reserve gold and investment fleeing natural gas, Indian industry turned overseas for both. The price of such assets has jumped and foreign countries are limiting such buys. High interest rates, a falling rupee and the country’s current account deficit are placing such overseas purchases beyond India’s reach. India is now more dependent on oil and gas imports than it has ever been before — and is now also a major coal importer as well. Power is a slow-burn crisis in which long-term plans go slowly awry and build up to a major breakdown in the future. India needs to return to the path of pricing and regulatory reform from which it strayed before its energy production goes off a cliff as it did two decades ago.