Dialogue January-March

At the outset, let’s look at the meaning of affordability-which is critical for our mapping of the issues and their analyses. Affordability is a variable function of - first the level of criticality and then - the quality of cultural or societal response. How does India fare on this equation- is the first more important or the second? Not an absolute, as it is an inseparable mix of both and it would be appropriate to say that a large population struggles with existence and sustainability, and yet a significant part enjoy the benefits of being avoidably labeled across in terms of non-affordability.

Assuming 120 crore population translates into 24 crore households and also let’s further assume 10% is under the affordable category- returns a massive 2.4 crore domestic LPG population who can afford market price for LPG. Considering an average LPG cylinder Re-fill of 8/ household/ annum, number of LPG cylinder/ annum would translate into 19.2 crore for the affordable category. If the LPG subsidy (difference between the actual import parity price of LPG and subsidized domestic cylinder price) is Rs.500/ Cylinder, an unintended and also avoidable subsidy outgo of Rs.9,600 crore can be saved. Do we need a policy directive or a voluntary action to forego this by the fortunate affordable category? - Clearly this is more of a cultural or societal issue- Has a single MP/ MLA, bureaucrat, businessman, service class citizen ever voluntarily foregone the subsidy of Rs.4,000/ annum (Rs.500/ cylinder X 8 Cylinders) or a little above Rs.10/ day, cost of foregoing one cigarette or a paan (wrong example as all of us don’t smoke or chew paan, yet quite a few of us do!). Should it not hurt my “pride” that inspite of affordability, I claim the benefits of subsidy, just because it is available- temptation is more of a cultural & societal issue, less of a policy one. Occupation of decision-making or policy level by the affordable section has an in-built vested interest for extension of this subsidy to themselves. Therefore, at a different level, voluntary affirmative action does apply to me, to you and all readers of this article. Can we look at a voluntary renunciation action or a societal leader-induced action, whichever it be; it is welcome for the country’s overall fiscal deficit and for the oil marketing companies bottom lines. Am I a holder of vested interest as an OMC employee in extension of subsidy to myself? No. Nevertheless it burns my heart and soul that we are collectively (me included as a consumer) destroying the intrinsic net worth of the nationally acknowledged entities by claiming unintended LPG subsidies. So I am honestly addressing this issue at the conscious core of an affordable consumer-employee level and also to the much larger numbers of the affordable consumers to go in for an affirmative action and voluntarily give up claim of LPG subsidies.

* Shri Vijay Duggal, works with Bharat Petroleum Corporation Limited as DGM (New Initiatives) Gas and has extensive experience in monitoring of the erstwhile controlled pricing mechanism for the petroleum sector, evolving mechanism for subsidies fixation & administration, shaping policies and evolving a regulatory mechanism for the downstream petroleum sector thoughts expressed in the article are personal. He can be reached at duggalv@bharatpetroleum.in or duggalvj@gmail.com

Let us now have a look at the large 90% non-affordable section of the society, most of which is in the unorganized category. Affording food first and then sustenance is a daily struggle for the unorganized workforce. Now assume that the so-called non-affordable category either through policy action or a voluntary action does not get LPG subsidy and these funds of Rs.9,600 core are available for utilization for reducing the subsidy burden of the non-affordable category as under-

Therefore, a self-affirmative action itself can bring in a relief to the non-affordability segment in as much as Rs.8/ cylinder! Not bad.

Let us extend this self-affirmative logic across to Diesel (HSD) / MS (Petrol) now.

To start with, let us look at the debate from the affordability point of view. In case we all endeavour to consciously cut down on automotive fuel consumption, maybe we all can effectively contribute in subsidy reduction- look at an internally organized car-pooling system for office usage or over a common social gathering or alternatively patronizing the mass rapid transport system. Savings in conspicuous consumption is a saving at both at the individual and national (in terms of subsidy outgo) levels. Now let us combine the pooling impact and look at current in-principle decision of the Government to increase the diesel price by Rs. 0.45/ Litre each month over the next 20 months to totally remove the subsidy and the resultant impact on fuel economics at an individual end. Let us assume an owner of a diesel car, which returns a fuel average of 13 Km/ Litre with 1,000 Km running/ month and requires ~77 Litres of HSD/ month.

Impact of calibrated monthly price increase in diesel price over 20 months can be analyzed as under-

discount

Equivalent upfront increase in the running cost of diesel vehicle by Rs./Km 0.22

l An upfront one-time additional pay-out of Rs.1,883 by the diesel car owner (over the next 20 months period) – Seemingly quite affordable assuming the owner has paid much higher in purchase of the car!

l Now considering this diesel car is put on commercial use as a taxi, an upfront one-time increase in the vehicle running cost would translate in a corresponding hike passenger fare by Rs.0.22/ Km of running, which again is a marginal hike (and affordable) considering the existing fare is in the range of Rs.8-10/ Km of running!

Further extending the above analysis to large diesel commercial vehicles, like, buses and trucks and also to the Railways- the impact on the end-user for removal of subsidy considering the economies of scale is not going to be as alarming as very often being perceived in our politically motivated debates. We need to bite the bullet as containing the subsidy outgo is our prime concern; we also need to manage stable country ratings (periodically carried out by international rating agencies); incentivize investment inflows and also simultaneously ensure annual GDP growth rates of at least 5-6% p.a. till 2020. Imagine the financial leveraging that can be offered to the oil marketing companies and upstream oil and gas producers in their efforts to long-term securitize energy needs of the country. How? Look at OVL (100% subsidiary of ONGC) or BPRL (100% subsidiary of BPCL)- together they have demonstrated and would continue to do so that oil and gas assets can be acquired by Indian companies abroad to hedge the country against volatile crude oil or gas prices and supply disruptions. The investment requirement in such oversees acquisitions is very high as also is the Indian demand for energy and therefore more such acquisitions are required in future. What may happen if one imagines that either the energy subsidies disappear or we as a nation is able to mitigate the same- Balance Sheets of these companies, if healthy, would help India in reaching long-term energy security goals. To recollect from the past- Indian Oil’s credit rating as a company in 1991 (just before liberalization kickoff in India) was higher than the country’s sovereign ratings and in a situation of virtually empty exchange reserve coffers, IOCL was still able to import crude oil and petroleum products for a long period of time by leveraging loans on it’s the then healthy Balance Sheet. If one looks at the Balance Sheets of the Oil Marketing Companies today, they are in serious debt catch and consequently we may be forced to forego some of the finest opportunities available now for acquisition of E&P assets abroad. So uncontrolled subsidies not only bleeds the entities but also the nation in the long term.

Let’s now look at energy in a broader context- Power impacts all of us considering its unmatched versatile and convenient usage. Affordability issue is primarily centered on the cost of generation, transmission and distribution of power and the combined impact on fixing power tariffs for the cross-section of the society. With a growing economy, increase in energy consumption, more in power, is understood by all. How do we get more generation capacity while also addressing the twin issues of an efficient T&D infrastructure besides evolving & managing a rational power tariff policy?

On the generation side- creating capacities for the base load versus peaking load can be answered by distributed power solutions, best addressed by gas based open cycle engines hybridized with wind and solar. How? Let’s see the compelling arguments below-

a) Hydel-based power generation has huge socio-environmental costs, besides long gestation period and messing-up with silting & uneven rainfall/ snow melting in catchment areas (thanks to carbon footprint impacting weather patterns).

b) Nuclear power, a great advantage in terms of low variable cost of power generation; yet high on gestation period for commissioning and poor on waste fuel disposal (imagine the cost of unsafe disposal of nuclear spent fuel, besides unethical alternative and prohibitive alternative usage) and above all, access to fuel with possible international blackmail in fuel access! Please let us not mix up issues with Japanese nuclear disaster at Fukushima, which happens once in a lifetime. Not still a great solution in the medium term.

c) Coal-based- a great solution for base load, provided we have an answer to the qualitative & quantative ability to provide domestic coal linkages on a sustainable basis, transportation & coal stacking issues; ash disposal and on the imported coal front – commodity cost, ocean freight, exporting countries domestic compulsions and change in law adding to costs (Indonesia changed the coal mining policies retrospectively and thereby adversely impacting cost of Indian imports); and above all highest cost in terms of carbon footprint.

d) Hydrocarbon based power generation; Naphta, HSD & Furnace Oil based- both being crude oil based derivatives - fail on economic front, as their pricing are based on notional cost of imports of these fuels; and since domestic crude oil production is woefully inadequate to meet the crude oil demand of domestic refining capacity and situation is likely to be so in the future, domestic production of these fuels cannot be subsidized. Therefore, all existing power generation capacities based on these liquid fuels are not economically justifiable and must either close or convert to gas.

e) Renewable (solar & power) is the best solution with a near zero variable cost; yet has very high fixed cost besides suffers from a big limitation on the base load power generation. Both the limitations of the high upfront fixed cost and base load problems can best be addressed through hybridized gas-based distributed power solutions. How?

India is benevolently blessed with huge nearly year-around hard sunshine in most parts of the country, especially in the North-west & Northern regions and also with wind in most of the south-western and southern regions. Having gas-based power generation back-up for wind and photovoltaic power generation capacities can significantly help building base-load power generation capacities on renewable sources. Let’s see the relative advantages-

generation solution. connectivities being achieved by 2014/ 15 in both solar and wind power regions

ii) Gas (including Re-gasified LNG imported by ships in liquefied form to land-based terminals-R-LNG) is the cheapest and most versatile back-up fuel solution

It emerges from the above that natural gas and R-LNG are notably the only two options for energizing India through hybrid solutions riding on solar & wind considering that we need both quick generation capacity ramp-up and also cheaper fuel prices. What about the cost of developing infrastructure for handling LNG imports and pipelines and the commodity price- R-LNG- Relatively is high on infrastructure cost; yet lower on the commodity price when compared to crude oil and petroleum products. So a zero variable cost for solar and wind can not only absorb the high infrastructure cost of solar/ R-LNG and high commodity price of R-LNG but also bring benefits of zero carbon footprint. R-LNG cost of $10/ Million British Thermal Unit (MMBtu) translates into Rs.3/ Kwh of variable cost of power and for each 1$/ MMBtu increase in price of R-LNG, the variable cost goes up by 10%. Therefore, if the variable cost of solar/ wind is nil, a much higher cost of R-LNG can be absorbed although the fixed cost of solar/ wind power would be nearly Rs.6-8/ Kwh. Even considering an additional fixed power cost for having a gas-based back-up of Rs.2/ Kwh, a solar-wind hybrid solution based on gas can afford R-LNG price of up to $15-18/ MMBtu to break-even with Diesel based DG power cost of Rs.15-18/ Kwh. Can we now think of addressing acute power shortage in Gurgaon, where nearly all offices and residences use captive diesel-based gen-sets to meet the perennial power shortages? So what is required? Change in the mindset- power sector regulatory reforms to allow hybrid power generators to lay their own transmission lines in the nearby industrial/ residential clusters (on a distributed load basis) without SEBs interference to load high costs of T&D losses (nearly 39%).

Is energy conservation another solution in the way forward? Yes. Incorporation of contemporary Indian construction wisdom in architectural designs can drastically cut down on energy consumption. TERI building at Gwalpahari, NCR is an example where air-conditioning load requirement has been trimmed through wind tunnels, which helps in reducing the day temperature by a few degree centigrade and the upfront additional capex cost is recovered in a few years’ time by savings in power consumption. Can we make it mandatory for all new residential houses and buildings to have an additional artificial mud pack layering of the roof and placement of inverted earthen pots to provide a natural exhaust for hot air so that air-conditioning requirements can be minimized? Similarly, adoption of natural water harvesting techniques at minimal cost can save lot of energy in water drawal, storage and re-distribution through tankers (energy guzzlers). Look at the massive water accumulation and wastage in concrete pavements, parks, flyovers and building areas in and around Delhi during monsoon season- so create water harvesting wells to charge the underground aquifers and supplement water requirements in case of shortage. Stringent fuel consumption norms, integrated traffic light signals, well paved roads and staggering of business office time for offices in central business district to manage peak traffic loads can contribute a lot in saving on wasteful consumption of automotive fuels. Going for LED lighting solutions in place of florescent bulbs can drastically bring down electricity consumption- instead of fully subsidizing PDS Kerosene and domestic LPG, use a part, say 20% spent on subsidizing this fuel, to subsidize purchase of LED bulbs and see the intended end-user getting 100% benefit of the subsidy with no in-between siphoning off of subsidies. Besides, there would be additional savings through avoidance of huge cost of administering energy subsidies. I recently came across an innovative experimental case where a budding young entrepreneur has evolved a concept of pelletization of pine tree leaves by the rural folk in remote-hilly regions of the country for fuelling re-engineered “chullahs” – an excellent solution for a region where logistic costs for making available domestic LPG cylinders throughout the year is very high. Besides, the pelletization of pine tree leaves also has employment generation potential for the rural folks in the hilly regions. Can we not look at using a fraction of the LPG subsidy to fund a credible alternative and locally sustainable cooking fuel solution?

To conclude, what is seemingly impossible can become possible (and very often it requires a simple solution approach) backed with a strong will towards implementation and also self-affirmative action by the so-called non-affordability sections of the society. There would, of course, be problems from vested interests, but good governance can address this and then the issue of “affordability” of energy prices be addressed for the nation.