Energy: The Key Theme To Play In 2008

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Long term vision and adequate policy & regulatory support necessary to achieve sustainable self-sufficiency in the energy sector: CII - KPMG Report

The Indian energy sector is exhibiting a rich potential for investment in diverse streams, driven by the surging economy and the resultant demand supply gap in the short run; and by the need to achieve sustainability and self-sufficiency in the long run.   A long term vision, and adequate policy and regulatory support is necessary to realize this potential, according to a report jointly released by CII and KPMG. The report titled ‘India Energy Inc. – Emerging Opportunities & Challenges’ was released recently at the CII - India Energy Conclave 2007.   India’s power and upstream energy sectors need investments to the tune of US$120 – 150 billion over the next five years. The report emphasizes the need for strong private sector participation to complement public sector and to bring in the required capabilities & technologies.   Policies have increasingly recognised the need to promote private investment. Private interest in captive coal mining, oil and gas exploration and in power sector has shown significant progress and is also envisaged in nuclear sector.   By world standards, India’s current level of energy consumption is very low. For the year 2004 – 05, the total annual energy consumption for India is estimated at 572 Mtoe (million tons oil equivalent) and the per capita consumption at 531 kgoe (kilograms oil equivalent).   With a target GDP growth rate of 8-10% and an estimated energy elasticity of 0.80, energy requirement is expected to grow at 6.4-8.0%. This would mean a five-fold increased in India’s energy requirement over the next 25 years.   Energy transport infrastructure such as ports, railways, pipelines and power transmission networks need significant investment. The policy now allows private participation in all these areas and some private sector activity is already under way.   Tariff reform in the energy sector and distribution reform in the power sector are two important steps that need to be successfully carried out. Tariff reform to phase out subsidies or to target them effectively and distribution reforms to bring efficiency in the power sector are vital.   Along with private participation, there is a move to bring in market mechanisms in the energy sector under an independent regulatory oversight. A gradual approach is important till the supply side position improves and more players enter the sector so that markets can work effectively.   The report also highlights the key opportunities in the sectors:   Coal - India has vast reserves of coal and participation of the private sector in captive mining, across different user industries, is an immediate opportunity for investment. 38 coal fields have been identified and are in the process of being allocated, involving a total capital requirement of around USD 1.5-2 billion. Investment activity is also seen in other parts of the value chain including washeries.   Oil - A number of private investors have entered this segment attracted by the government’s policies for upstream exploration and production. There is a huge potential in refining due to the strategic advantages of low cost and location; and India is already a net exporter of products. The downstream marketing sector is also now open to private participation.   .Gas - Gas discoveries of around 700 bcm in the last decade point towards a tremendous promise. While in the near term, potential for LNG may be limited due to inability of key sectors such as power to absorb high international prices, in the longer term there would be place for LNG as the share of Natural Gas in India’s energy mix increases. Gas coverage in at least 30 cities, is likely to see active interest from both private and public players in the next few years.   .Nuclear - India has one of the largest reserves of the nuclear fuel - thorium. However, the nuclear energy programme will continue to be uranium based until commercial production based on thorium becomes feasible. If the Indo-US nuclear deal goes through, there will be a boost to nuclear energy and private participation in this sector would be expected. . Hydro - India is endowed with a hydroelectric potential of about 150,000 MW. However, only 17 percent of the hydroelectric potential has been harnessed so far; with another 5 percent under various stages of development. Private participation in the hydro sector will be important to meet the target of an additional 45,000 MW of hydro capacity within the next ten years.   . Renewable Energy - India has a vast potential for renewable energy sources, especially in areas such as solar power, biomass and wind power. The current installed capacity of renewable energy is around 9220 MW, constituting about 7.3% of India ’s total installed generation capacity.  India is already the fourth largest in the world in terms of wind energy potential and we are seeing significant investment activity in this area. There is a huge potential for development of solar power and bio-fuels.   According to the report, to meet its large and growing energy needs, there are certain key imperatives for the Indian energy sector:   Private sector investment needs to complement public sector - Reliable and economic energy supply will require investment of capital as well as capabilities and efforts from both public and private sectors. The government is taking the right steps to attract private players to this sector which will need investments of around USD 120 to 150 billion over the next five years. Further clarity in areas including pricing of products and stability in policy framework is essential to further encourage private investment.   Encourage market mechanisms with a credible and independent regulatory oversight - Market mechanisms will bring in efficiencies, and also encourage investments by minimizing regulatory risks. With an improving supply-side situation, market mechanisms have been gradually introduced in the various segments of the energy chain, and this needs to be extended to other left-out sectors like coal block allocation to encourage private sector participation.   ·Reduce vulnerability to price and supply shocks - The biggest challenge is to replace coal (exhaustible in 40 years), representing 51% of the energy basket, and oil which is heavily dependent on international supply in the short term towards Natural Gas, Hydro and renewable sources. Apart from diversifying the basket, enhancing domestic production and taking equity positions in energy resources abroad are also necessary steps in reducing the effects of fuel price shocks.   .Bringing in efficiency and enhancing capacity in energy transport infrastructure - To reduce the high inter-regional disparity to match demand and supply centers, significant investments in ports and railway, pipeline and storage network and infrastructure are underway.   .Tariff reform and power sector reform - Heavily distorted power and energy prices have resulted in inefficient end-use and energy choices. Policy measures with sufficient political will are required to address these issues. Distribution reforms to cut down on network losses due to theft and pilferage are also necessary.   .Provide Government Support for Energy Efficiency - Policy framework incentivising energy efficiency is an urgent requirement. The environment should encourage energy efficiency companies to come up and operate profitably.