(i)  Wherever possible, energy markets should be competitive. However, competition alone has been shown to have its
      limitations in a number of areas of the energy sector and independent regulation becomes even more critical in such
      instances.

(ii) Pricing and resource allocations that are determined by market forces under an effective and credible regulatory oversight.

(iii) Transparent and targeted subsidies.

(iv) Improved efficiencies across the energy chain.

(v) Policies that reflect externalities of energy consumption.

(vi) Policies that rely on incentives/disincentives to regulate market and consumer behaviour.

(vii) Policies that are implementable.

(viii) Management reforms that create accountability and incentives for efficiency.

• Domestic coal production should be stepped up by allotting coal blocks to central and state public sector units and captive mines of notified end users. Coal blocks held by Coal India Limited (CIL) that cannot be brought into production by 2016-17, either directly or through joint ventures, should be made available to other eligible candidates for development and for bringing into production by 2011-12.

• At the same time the needed infrastructure must be created to facilitate thermal coal imports. This will facilitate coastal power generation capacity based on imported thermal coal. Imports of thermal coal will also put competitive pressure on the domestic coal industry to be more efficient.

• A system of pricing coal on its gross calorific value must replace the current system of pricing coal on the basis of broad bands of its useful heat value.

• Coal companies must be asked to conform to international practice of preparing coal prior to its sale. Washed coal must become the norm and use of unwashed coal should become the exception.

• The current system of coal linkages should be replaced by long-term coal supply agreements with strict penalties for not meeting contracted supplies, quality and offtake commitments.

• Coal must be brought under independent regulation to improve exploitation and allocation of available resources, and to regulate e-auctions and coal prices and to enable a competitive coal market to take shape.

• By the end of 2007-08 the quantity of coal sold through e-auction must reach 20% of domestic production.

• Ideally, the Coal Mines (Nationalisation) Act, 1973, should be amended to facilitate: (a) private participation in coal mining for purposes other than those specified in the Act and (b) offering of future coal blocks to potential entrepreneurs. A consensus should be built on the need to reform this Act.

• To control AT&C losses, the Committee recommends that the existing Accelerated Power Development and Reform Programme (APDRP) be restructured to ensure energy flow auditing at the distribution transformer level through automated meter reading, a Geographical Information System (GIS) mapping of the network and consumers and the separation of feeders for agricultural pumps. Investment in developing a Management Information System (MIS) that can support a full energy audit for each distribution transformer is essential for reduction in AT&C losses. This will also fix accountability and provide a baseline which is an essential prerequisite to management reform and/or privatisation. The revised APDRP will provide incentives to State Electricity Boards (SEBs) that are linked to performance outcomes and will also include incentives to staff for reduction in AT&C losses.

• The Committee also recommends that the liberal captive and group captive regime foreseen under the Electricity Act 2003 be realised on the ground. India’s liberal captive regime will not only derive economic benefits from the availability of distributed generation but will also set competitive wheeling charges to supply power to group captive consumers. This will pave the way for open access to distribution networks. It will also facilitate private generation that limits its interface with the host utility to the use of the distribution network for a fee and thus can be realised even before AT&C losses are reduced.

• To achieve these objectives, the Committee feels that it is essential to separate the cost of the pure wires business (carriage) from the energy business (content) in both transmission and distribution at different voltages. The Electricity Act 2003 recognises such separation for the transmission sub-segment. Separation of content from carriage in the distribution sub-segment, however, is considered only as a means to the provision of open access. The wires business within the distribution sub-segment is also a natural monopoly and must be regulated. Further, introduction of Availability Based Tariffs (ABT) for the intra-state sales and the upgrading of State Load Despatch Centres to the technological level of Regional Load Despatch Centres should be realised.

• Open access is resisted by incumbents as they fear that all the high value paying customers would go away and they would be left with small and subsidised agricultural and domestic customers. Since these customers have strong political constituencies, it may be difficult to raise their tariffs when needed and the incumbent utilities would not remain viable for long. These concerns can be taken care of if the cross-subsidy surcharge, wheeling charge and back-up charge are set properly. However, if these are set too high, open access could be effectively thwarted. These charges need to be periodically revised and independently regulated.

• A robust and efficient inter-state and intra-state transmission system with adequate surplus capacity that is capable of transferring power from surplus regions to deficit regions is a must for ensuring optimal operation of the system.

• Rehabilitation of existing thermal stations could raise capacity at least-cost in the short-run. Similarly rehabilitation of hydro stations could yield much needed peak capacity at negligible cost. Both these steps must be taken up urgently.

• The Government Policy should ensure that all generation and transmission projects should be competitively built on the basis of tariff-based bidding. Public Sector Undertakings shall also be encouraged to participate in such bids even though the tariff policy allows them a 5 year window wherein projects undertaken by the public sector need not be bid competitively.

• In cases where tariff continues to be determined on the basis of costs and norms, regulators may either adopt a return on equity approach or return on capital approach, whichever is considered better in the interest of consumers. In deciding the level of return provided, the regulator should interalia take into account the return available on long-term government bonds and reasonable risk premiums associated with equity investments.

• The current practice of state regulators not allowing state public sector power utilities the same returns as the central public sector utilities should be strongly opposed in the interest of strengthening fair competition which alone will bring down prices in the long-run. Similarly differential payment security structures for Central Power Sector PSUs and the private sector should be abolished.

• Consumer prices for electricity are currently set by State Electricity Regulatory Commissions on cost plus basis. Regulators should set multi-year tariffs and differentiate them by time of day.

• Government should seed the capital markets to develop market-based instruments that effectively extend the tenure of debt available to power projects to, perhaps, 20 years. This will reduce the capacity charge in the earlier years and spread it more evenly over the life of the project.

• Unit sizes should be standardised and global tenders invited for a number of units to get substantial bulk discount.

• Distribution should be bid out on the basis of a distribution margin or paid for by a regulated distribution charge determined on a cost plus basis including a profit mark up similar to that paid for generation as suggested above.

• Prices of different fuels should not be set independently of each other. As a general rule, all commercial primary energy sources must be priced at trade parity prices at the point of sale, namely the Free-on-Board (FOB) price for products for which the country is a net exporter and Cost, Insurance and Freight (CIF) price for which it is a net importer. The price of a product for which the country is self-sufficient in a competitive market with many suppliers and buyers would fluctuate between the two depending upon the ease of import/export and reliability of supplies. In a situation with a monopoly supplier with exportable surplus at import parity price, the price would be in between the two depending on the price elasticity of domestic demand. This principle is extremely relevant for the petroleum sector wherein bulk of the crude oil is imported and India has become a net exporter of petroleum products.

• To cushion domestic prices against short-term volatility of prices on the international market (FOB or CIF) domestic prices can be set on the basis of median prices over the previous month or a three month period.

• The petroleum and natural gas sector is, once again, devoid of any competition and independent oversight of either upstream or downstream activities. On the upstream side, Directorate General Hydrocarbons (DGH), an arm of the Ministry, oversees allocation and exploitation of oil & gas reserves and enforces profit sharing with exploration & production companies. The current arrangement needs to be strengthened and made independent. On the downstream side, despite the dismantling of the Administered Price Mechanism, the GOI continues to control the pricing of automotive fuels, LPG, large part of domestic natural gas and PDS kerosene. There is no real competition in the sector other than in some peripheral products such as lubricants, despite the presence of a large domestic private player in refining and the likely emergence of other private players in this field. In fact, the prevailing pricing and taxation policies and the market structure provide significant protection to the private refineries. The result is that India’s refining capacity exceeds the demand by 18% already. There is an urgent need to have an independent regulator for both upstream and downstream sectors. The notification of the Petroleum & Natural Gas Regulatory Board Act, 2006, is thus welcome.

• In the petroleum sector, full price competition at the refinery gate and the retail level would lead to trade parity prices as described above. Thus instead of administering prices, full price competition should be introduced.

• Coal prices should ideally be left to the market and trading of coal, nationally and internationally, should be free. Only a competitive free market can do an efficient job of price determination. A competitive market requires that there are multiple producers and that there are no entry barriers to new producers or to importers. Pending the creation of such a competitive market, independent regulation of coal prices becomes essential.

• Apart from CIL’s virtual monopoly in coal supply, coal prices cannot be determined in a competitive market open to all users as long as the largest coal consuming sector, i.e. power, has coal cost as a pass through. However, since other users of coal are numerous and consume substantial quantities of coal, a strategy for competitive price discovery is possible. We recommend as follows:

• High quality coking and non-coking coal which are exportable may be sold at export parity prices as determined by import price at the nearest port minus 15%. This practise is currently being adopted for supply of good quality coking coal to the steel industry.

• 20% of the production may be sold through e-auction. Quantities to be sold through e-auction from different mines must be determined annually with a monthly mine-wise schedule to be independently monitored and enforced by a coal regulator.

• Remaining coal should be sold under long-term Fuel Supply and Transport Agreements (FSTAs). Regulated utilities should be allowed upto 100% of their certified requirements through FSTAs. Other bulk consumers could be allowed partial FSTAs based on coal availability. Any shortfalls should be met through e-auction supplies or imports.

• Pithead price of coal under FSTAs should be revised annually by a coal regulator on a basis that inter-alia takes into account prices obtained through e-auction, FOB price of imported coal (both adjusted for quality) and production cost, inclusive of return based on efficiency standards.

• Coal prices may be made fully variable based on Gross Calorific Value (GCV) and other quality parameters.

• Natural Gas is not an easily tradable commodity. Making gas tradable requires significant investments in pipelines or, alternatively, in liquefaction, cryogenic shipping & regasification. Comparing local gas prices to spot LNG prices in the international market is grossly misleading. Again, linking gas prices to crude price movements is also misleading. Long-term supply contracts such as those in Europe are more representative of natural gas prices. Natural gas price can be determined through competition among different producers where multiple sources and a competitive supply-demand balance exist. As long as there is shortage of gas in the country and the two major users of gas, namely fertiliser and power, work in a regulated cost plus environment, a competitive market determined price would be highly distorted. Such distortions would get further amplified by the prevailing regime of fertilisder subsidies & power sector subsidies and cross subsidies. In such a situation price of domestic gas and its allocation should be independently regulated on a cost plus basis including reasonable returns.

• Another option could be to price gas on a net-back basis. If gas becomes a key component in India’s energy mix, it is pointed out that beyond the level of gas consumption in the fertiliser, petrochemical, automotive and domestic sectors, gas must compete with coal as the key alternative for power generation. This implies that the cost of generating peak or base electricity using gas cannot exceed the cost of peak or base electricity from coal, the cheapest alternative. A competitive coal market is thus important for setting a proper price of natural gas on a net-back basis. An alternative for a gas producers is to export gas, in which case the domestic gas price could be the net realisation of the domestic natural gas producer after investing and getting a return on the investment needed to make the natural gas tradable across borders in either a trans-border pipeline or through liquefaction and shipping facilities. For the foreseeable future, domestic gas supplies to both the fertiliser and the power sector, that together account for about 80% of the current gas usage, would need to be allocated based on availability and charged at regulated price that reflects cost of production and a reasonable profit.

• Central and State taxes on commercial energy supplies need to be rationalised to yield optimal fuel choices and investment decisions. Relative prices of fuels can be distorted if taxes and subsidies are not equivalent across fuels. This equivalence should be in effective calorie terms. In other words they should be such that producer and consumer choices as to which fuel and which technology to use are not affected by the taxes and subsidies. Socio-economic benefits such as employment generation and positive impact on energy security may support differential taxes on alternate fuels.

• Environmental taxes and subsidies, however, are levied precisely to affect choices. Differential taxes can be justified here if they appropriately reflect environmental externalities. A consistent application of the "polluter pays" principle or "consumer-pays" principle should be made to attain environmental objectives at least-cost where prescribed environmental norms are either not applied consistently or not being adhered to.

• Merge Petroleum Conservation Research Association (PCRA) with Bureau of Energy Efficiency (BEE). The merged entity should be an autonomous statutory body under the Energy Conservation Act, be independent of all the energy ministries and be funded by the Central Government. It must:

• Force the pace of improvement in energy efficiency of energy using appliances, equipment and vehicles, and create "golden carrot" incentives in the form of substantial rewards to the firm which first commercialises equipment that exceeds a prescribed energy efficiency target.

• Enforce truthful labelling on equipment, and impose major financial penalties if the equipment fails to deliver stated efficiencies. In extreme cases, resort to black listing of errant suppliers on consumer information web sites and in government procurement.

• Establish benchmarks of energy consumption for all energy intensive sectors.

• Disseminate information, support training and reward best practices with national level honours in energy efficiency and energy conservation.

• Increase the gross efficiency in power generation from the current average of 30.5% to 34%. All new plants should adopt technologies that improve their gross efficiency from the prevailing 36% to at least 38-40%.

• Require a least-cost planning approach to provide a level playing field, to Negawatts and Megawatts so that regulators permit the same return on the investment needed to save a watt as to supply an additional watt.

• Promote minimum life cycle cost purchase instead of minimum initial cost procurement by the government and the public sector.

• Promote urban mass transport, energy efficient vehicles and freight movement by railways through scheduled freight trains with guaranteed, safe and timely deliveries. Enforce minimum fuel efficiency standards for all vehicles.

• Institute specialisations in energy efficiency/conservation in technical colleges and commence certification of such experts.

• Covering all coal bearing areas with comprehensive regional and detailed drilling could make a significant difference to the estimated life of India’s coal reserves.

• India’s extractable coal resources could be augmented through in-situ coal gasification which makes use of those coal deposits which are at greater depth and cannot be extracted economically by conventional methods.

• Extracting coal bed methane before and during mining could augment the country’s energy resources.

• Enhanced oil recovery and incremental oil recovery technologies could improve the proportion of in-place reserves that could be economically recovered from abandoned/depleted fields.

• Isolated deposits of all hydrocarbons including coal may be tapped economically through sub leases to the private sector.

• Require compulsory land consolidation and impose a betterment levy in kind of (say) 5 percent of land on the command area farmers. Use this land to resettle and compensate all PAPs.

• The Committee recommends that for promoting renewables, incentives should be linked to outcomes (energy generated) and not just outlays (capacity installed). Even when a capital subsidy is needed, it should be linked to outcomes. For example, capital subsidy could also be given in the form of a Tradable Tax Rebate Certificate (TTRC) that could be based on actual energy generated. The rebate claim would become payable depending upon the amount of electricity/energy certified as having been actually supplied.

• Power Regulators must create alternative incentive structures such as mandated feed-in-laws or differential tariffs to encourage utilities to integrate wind, small hydro, cogeneration etc. into their systems.

• An annual renewable energy report should be published providing details of actual performance of different renewable technologies at the state and national levels. This should include actual energy supplied from different renewable options, availability, actual costs, operating and maintenance problems etc. It should also report on social benefits, employment created, and women’s participation and empowerment.

• Policies for promoting specific alternatives are suggested in the main text. These include fuel wood plantations, bio-gas plants, wood gasifier based power plants, solar thermal, solar water heaters, solar photovoltaics, bio-diesel and ethanol.

• It is also recommended that the Indian Renewable Energy Development Agency Ltd (IREDA) be converted into a national refinancing institution on the lines of NABARD/National Housing Bank (NHB) for the renewable energy sector. IREDA’s own equity base can be expanded by the financial institutions of the country instead of continuing the current system of GOI support.

• Maintain a reserve, equivalent to 90 days of oil imports for strategic-cum-buffer stock purposes and/or buy options for emergency supplies from neighbouring large storages such as those available in Singapore. The buffer stocks could be used to address short-term price volatility. Operating the strategic/buffer reserves in cooperation with other countries who maintain such reserves could also increase their effectiveness.

• Since 80 percent of global hydrocarbon reserves are controlled by national oil companies controlled by respective governments, oil diplomacy establishing bilateral economic, social and cultural ties can reduce supply risk.

• A National Energy Fund (NEF) should be set-up to finance energy R&D. Our expenditure on R&D excepting for atomic energy, which as of today provides less than 3 percent of our total electrical energy supply, is miniscule compared to what industry and governments spend in developed countries. In the latter, firms generally spend more than 2 percent of their turnover for R&D. The total expenditure on R&D in 2004-05 was Rs.610 crores* for Atomic Energy and Rs.70 crores for Ministry of Power, Coal and Non-Conventional Energy Sources. Even at one-tenth of the rate at which firms in developed countries spend on R&D, i.e. 0.2% of the turnover of all energy firms whose turnover exceeds Rs.100 crores a year, we end up with Rs.1000 to Rs.1200 crores per year which will increase overtime. We should be spending much more than this on R&D. Much of R&D can be considered a public good. It is thus better financed by the Government. Initially an allocation of Rs.1000 crores should be made for energy R&D excluding atomic energy. To begin with, individuals, academic research institutions, consulting firms, private and public sector enterprise, should all compete for this fund. Firms may also be encouraged to enhance their expenditure on R&D through tax incentives.

• The resources devoted to research in different areas depend on the economic importance of that particular area, the availability of technology and the likelihood of success. The latter changes with time as new developments in science and technology take place and uncertainties reduce. R&D *Only about 15% of this amount or about Rs.90 crores, was for R&D on nuclear power. The rest of the expenditure is for R&D on non-electricity applications of Radiation Technology and Fundamental Research. priorities have to be based on a dynamic strategic vision which is frequently updated. Of critical importance is research and analysis for the energy policy to outline technology road maps. The NEF should encourage and fund such studies on a regular basis in a number of institutions and should also commission them from experienced and qualified individuals.

• The NEF should support energy policy modelling activities in a number of institutions on a long-term basis. The different modellers should be brought together periodically in a forum to address specific policy issues.

• A number of technology missions should be mounted for developing near-commercial technologies and rolling out new technologies in a time bound manner. These include coal technologies (where India should focus) for efficiency improvement; in-situ gasification; IGCC and carbon sequestration; solar technologies covering solarthermal and photovoltaics; bio-fuels such as bio-diesel and ethanol; bio-mass plantation and wood gasification, and community based bio-gas plants.

• Coordinated research and development in all stages of the innovation chain to reach a targeted goal (such as that in place in the departments of atomic energy and space research) should be used to develop more efficient industrial plant, machinery & processes, efficient appliances, hybrid cars, super batteries, nuclear technologies related to thorium and fusion, gas hydrates, and hydrogen production, storage, transport and distribution.

• The NEF could provide R&D funding in support of applications, innovative new ideas, fundamental research etc. to researchers in different institutions, universities, organisations and even individuals working independently.

• A number of academic institutions should be developed as centres of excellence in energy research.

• Electrification of All Households: The government has announced its commitment to ensure this by 2009-10.

• Provision of Cooking Energy: We may set a goal to provide clean cooking energy such as LPG, NG, biogas or kerosene to all within 10 years. It may be noted that the requirement of cooking energy does not increase indefinitely with income. Thus the total amount of LPG required to provide cooking energy to 1.5 billion persons is around 55 Mtoe.

• Other Sources: We may provide fuel wood plantations within one kilometre of all habitations. Those who do not have access or cannot afford even subsidised clean fuels, rely on gathering wood. Neighbourhood plantations can ease their burden and the time taken to gather and transport wood.

• The best way for providing subsidy for electricity and cleaner fuels, kerosene or LPG, is to entitle targeted households to 30 units of electricity per month and LPG, kerosene or bio-gas purchased from a local community size plant equivalent to 6 kg of LPG per month. A system of debit cards may be introduced to deliver such a subsidy. The entitlements can only be used for purchase of these products. With modern ICT, debit card readers operated on battery and feeding data using mobile technology, can work in rural areas of the country as well.

• Finance a large scale socio-economic experiment to operate communitysized bio-gas plants as a commercial enterprise either by a community cooperative or by a commercial entrepreneur. Bio-gas plants on this scale could meet the need for clean cooking energy of a sizable segment of the rural population.

• Even with subsidies for clean fuel, it may not be easy to reach clean fuels to the poor and they may continue to use fuelwood. As part of the above programme, improve the efficiency of domestic chullahs and lanterns from the prevailing 10-12% to 20-25%, which is easily attainable and couple this to improving ventilation in the cooking area of the dwellings. The surplus biomass released as a result of better efficiency could be used in gasifiers for generating electricity.

• Generate electricity through wood gasifiers or by burning surplus biogas from the community bio-gas plants. Such distributed generators may be able to take electricity to villages sooner than the grid. This will encourage local generation and could conceivably feed the grid with surplus power at an agreed feed in tariff at a future date. Formulate a tariff policy for such distributed generation for both household and productive use including agriculture.

• To reduce drudgery of those who still need to gather fuel, develop woodlots within one kilometre of the village. Provide finance through self-help groups to transform women, who, today are only energy gatherers, into micro-entrepreneurs engaged in rural energy markets and energy management. Women’s groups can form co-operatives for developing and managing fuel wood or oil seed plantations with the same effort that they put towards searching and gathering fuel wood today.

• For setting up of off-grid generation facilities in rural areas, encourage the organised sector to adopt rural community/communities in their areas of operation.

• The regulatory responsibility/functions of the State are separated from the Ministries that control the Public Sector Units dominating the energy sector; and

• Till effective competitive markets emerge, independent regulators should fix prices or price caps to mimic competitive markets based on principles summarised in para (v) above. Even when competitive markets emerge, the regulators’ role will continue to remain important.

- Energy efficiency in all sectors
- Emphasis on mass transport
- Active policy on renewable energy including bio-fuels and fuel plantations
- Accelerated development of nuclear and hydro-electricity
- Technology Missions for clean coal technologies
- Focussed R&D on many climate friendly technologies