Why coal, power and oil prices have nowhere to go but up

A stitch in time saves nine. The UPA government didn’t stitch a viable energy policy together in time over the seven-and-odd years it has been in power. It is thus reaping the consequences: rising energy prices and power shortages - and higher inflation. Any realistic solution to the energy problem calls for higher tariffs and it will definitely push up inflation and slow down growth in the short run.

Maharashtra’s industry is facing 16-hour power cuts in some areas. Outside Kolkata, West Bengal faces power cuts of four to five hours daily. The situation isn’t too different in many other states. Tamil Nadu has a 4,000-mw power shortfall, Uttar Pradesh 2,500 mw, Karnataka 3,000 mw, Madhya Pradesh 1,500 mw, West Bengal 600 mw and Delhi 400 mw.

Two reasons why: One is the bankruptcy of state electricity boards, which do not have enough money to pay for coal and hence are not getting any. According to Enam Securities, the ministry of finance has asked banks to stop lending to state electricity boards unless they raise tariffs and return to profits. The other reason is the shortage of coal due to heavy rains in eastern and central India, plus the Telangana agitation, which have disrupted production and movement of coal.

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However, when we look away from the immediate crisis in the power sector, one fact stares us in the face: energy prices - whether it is coal or power or oil - are decided not by supply and demand, but political expediency. And this is the core reason for India’s deepening energy crisis.

The fundamental point is this: when you have a super-loss-making energy sector, how do we expect it to keep on producing more and more just to keep our fans, lights and ACs going, and industry and farms humming? Someone’s got to pay - or else, the sector will splutter and die.

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Here are some numbers:

• In 2010-11, the state electricity boards, lost a collective Rs 70,000 crore, according to Business Standard. This year they may lose less, but only because power tariffs have been raised. Over the past 18 months, according to Motilal Oswal Securities, 22 states have raised power tariffs. All this will feed through to prices, if it hasn’t already done so.

[caption id=“attachment_107225” align=“alignleft” width=“380” caption=“Coal isn’t losing money. But will soon do, if the government does not change pricing policies. Reuters”]  [/caption]

This year, the oil marketing companies will lose Rs 1,21,000 crore - which will be subsidised by ONGC and the finance ministry. Every Re 1 fall in the rupee costs the oil marketing companies Rs 8,000 crore. Due to this loss, neither ONGC nor the marketing companies have enough money to invest in improving oil discoveries or invest in new refineries. The only way to have abundant petro-products is to raise prices for the non-poor.

• Coal isn’t losing money. But will soon do, if the government does not change pricing policies. Thanks to controlled pricing, Coal India, which produces 80 percent of India’s coal, sells the stuff at deep discounts to world prices. According to Firstpost calculations, Coal India would have lost Rs 2,45,000 crore in potential earnings over the last four years by underpricing coal relative to world prices. Little wonder, the coal shortage is already 80 million tonnes annually and could rise to 600 million tones by 2017. Coal imports will happen only at world prices - which means prices will effectively be up for new power plants - never mind whether Coal India gains from it or not.

• Nuclear power, the great white hope for India, is turning out to be a major battleground. Thanks to the Fukushima disaster, local groups are opposing nuclear power plants in Kudankulam in Tamil Nadu and Jaitapur in Maharashtra, and these conflicts are only likely to escalate. Germany plans to shut down all its nuclear reactors by 2022 due to meltdown worries. Nuclear power is increasingly looking like a no-hoper unless safety issues are addressed first. Renewable sources are looking better. In nearly 50 years of nuclear power, India has an installed capacity of 4,780 mw, when Suzlon has installed 17,000 mw of windmills (in India and outside) in 15 years. The future of nuclear power is bleak. Ironically, the Indo-US nuclear deal was sold by Manmohan Singh as vital for cheap power. The big achievement of UPA-1 appears to have been a pyrrhic victory for the PM.

The crux of the problem is this: coal prices need to go up, oil prices need to go up, nuclear power will cost more as safety concerns rise, and solar and wind power are anyway expensive. When every energy cost has to go up, power tariffs have to rise. Subsidies have to be restricted to the really poor.

Whichever way we look at it, the only way to fix our energy sector is by raising prices. If not, power shortages will bring growth down further.

The short-term fallout of any viable energy policy is higher inflation as fuel and power add up to as much as 15-16 percent of the wholesale prices index (WPI).

If the UPA had spaced out these pricing reforms during the course of its seven-year rule, we would not have come to this pass. Today, we have no option but to raise prices of coal, power and oil just when inflation is close to double-digits.

The wages of populism are that they come back to bite you exactly at the worst possible time.