Energy imperatives that will drive India’s economic transformation

The Economic Times

There is no doubt that India is on a trajectory to become one of the largest economies in the world. But the country’s per capita energy consumption today is a third of the global average. Energy will play a critical role in supporting — or hindering — India’s economic growth. The country’s energy needs include electricity for rural areas, fuel for greater mobility and the power to develop and run modern infrastructure.

The government has identified the power sector as a key area of focus to promote sustained growth. The draft five-year plan for India’s power sector looks at efficient supply and an optimum generation mix. To generate and deliver power successfully, rationalised tariffs and last-mile infrastructure are critical.

India’s energy sector of the future will be noticeably different from its current version. There is a need for new technology, business models, and policies that are specifically tailored to the country. There is also a need for regulatory frameworks to deal with institutional changes and building infrastructure.

We need to ask ourselves these basic questions: Do we have the right products and services for the market? Is the pricing right? And are the delivery channels appropriate for the age that we live in? Renewable energy and energy storage will become key factors. Navigating the new world of energy will determine how the economy will perform. And one thing is certain energy, and electricity in particular, will be a principal resource lever in the next phase of economic development.

According to KPMG’s recent report, for India to garner competitive advantages in production and bring about economic transformation, the country needs to focus on four imperatives from an energy standpoint: The large consumption base creates the opportunity for energy goods to be substantially produced in India; energy prices for the producing sectors must be lowered and artificial cost build-ups removed; energy services must be modernised to allow for efficiency and innovation in consumption; and energy markets must be further developed to allow for flexibility and lowering of transaction costs.

Producing energy goods
It is estimated that in the coming years, energy projects will need Rs 200,000 crore annually through the electricity value chain. In solar, for example, the cost of capital equipment constitutes most of the overall project costs. India imports more than 90 per cent of its modules, mostly from China. We must emulate China, which has taken a quantum leap in renewable energy, and aim to manufacture new energy products to establish ab initio technological leadership. This technological leadership, if achieved, needs to be nurtured and expanded through large-scale manufacturing.

Lowering energy pricing
Infrastructure in India, including power, is expensive and taxes are high. While the government has brought down the tax rate for new manufacturing units to 15 per cent to enable a better market for domestic manufacturers, India expects industry to subsidise other sectors through electricity tariffs. If India is looking at manufacturing prowess, this approach is untenable. The solution for manufacturing competitiveness lies in reducing industrial electricity tariff for all producing activities, especially priority sectors, where the end-use market is large and employment generation and economic multiplier effects are high.

Modernising electricity service
Electricity delivery in the country is in urgent need of modernisation. Pricing needs to be competitive and the retail electricity supply market needs to open up to usher in competition and innovation. It is envisaged that as supply-side options increase, electricity will be delivered increasingly as a complete service, facilitated to a great extent by competition and innovation in the supply side. What the government needs to bear in mind is that while privatising the whole sector may be a difficult proposition given the political compulsions, ‘legacy arrangements’ may not be enough for economic growth and transformation.

Opening up energy markets
For greater flexibility and lower transaction costs, energy markets must be opened and deepened. Several things, however, need to be done to make this a reality. According to the report, India — which has the largest synchronous power system in the world — needs to put in place the building blocks of modern power systems such as universal service obligations, planning regimes, data disclosure, capacity-adequacy statements and appropriate penalties to load-serving entities for default. Along with the power sector, fuel markets must be liberalised because vibrant power and fuel markets can support India’s transition to clean energy.

As we gaze into the proverbial crystal ball, we see that energy will continue to remain a sensitive commodity. India’s energy governance must measure up to world standards. Modernising India’s energy sector will go a long way in meeting the requirements of a dynamic and responsible economy.


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