SURVEY SIGNALS REDUCED HEFT OF OIL PRICE IN POLICY SPACE
NEWDELHI: The second volume of Economic Survey 2016-17 presented on Friday signalled the reduced heft of crude oil prices in India’s national economic policymaking. “It has become almost an involuntary reflex to cite geopolitics in the list of risks to oil prices, and hence to domestic inflation. But these risks may well be diminishing substantially,” the Survey said.
“The oil market is very different today from a few years ago in a way that imparts a downward bias to oil prices, or at least has capped the upside risks to oil prices,” it added. This is a marked shift from the survey’s cautionary stance in January on rising oil prices presenting a challenge to India’s growth, as articulated in its first volume.
“Some possible challenges to growth exist. For example, the prices of crude oil have started rising and are projected to increase further in the next year. Estimates suggest that oil prices could rise by as much as one-sixth over the 2016-17 level, which could have some dampening impact on growth,” the Survey had said on January 31.
The importance of crude oil prices in the policy space stems from India’s oil and gas import bill, which was ₹4.16 lakh crore and ₹43,782 crore, respectively, in 2015-16.
However, this is set to change with the National Democratic Alliance (NDA) government’s ambitious plan for a mass shift to electric vehicles by 2030, so that every vehicle on roads by then— both personal and commercial— is powered by electricity. Also, India has started selling petrol and diesel in sync with global rates from June as part of the strategy to completely overhaul the retail market.
Experts remained circumspect. “There is a view that oil prices will be down for a longer time. However, it is better to look at demand rather than prices,” said Saurabh Chandra, former petroleum secretary.
The average price of crude oil in the Indian basket has fallen from $52.49 per barrel in April to $47.86 in July. The price was $51.82 on Thursday.
“In sum, geopolitical risks are simply not as risky as earlier. Technology has rendered India less susceptible to the vicissitudes of geo-economics (OPEC) and geo-politics (Middle East). If, and to the extent that changes prove permanent, the consequences for the inflationary process need to be taken into account,” the Survey said. NEW DELHI: India’s focus on increasing its renewable energy capacity may further exacerbate banks’ bad loan woes, according to the second volume of the Economic Survey 2016-17, released on Friday.
The Survey said the social cost of producing renewable energy is around three times that of producing coal-fuelled electricity at ₹11 per kilowatt-hour (kWh).
Although solar and wind power tariffs have dipped to ₹2.44 per kWh and ₹3.30 per kWh, respectively, making renewable energy cheaper than coal-fuelled electricity, these low tariffs do not reflect the costs of integration with the grid, and other costs such as those of stranded assets and land opportunity costs.
“A shift to renewables is likely to render a part of the assets in conventional energy-generation plants idle or result in them being used at a much lower level than their maximum technically feasible level. The investments in these plants being sunk, it is no longer possible to recover any returns from them although their useful life is still not over,” the Survey said.
Of India’s installed capacity of 330,153 megawatts (MW), 59% or 194,432MW is coal-fuelled. The plant load factor (PLF) of India’s thermal projects has been falling steadily from 78.9% in 2007-08 to 62% in 2015-16. PLF is a measure of a power plant’s output. A higher PLF indicates more output at a lower cost.
“In our estimates, these stranded assets are estimated as the lost revenues due to the suboptimal utilisation of coal-based power generation assets as a result of shift to renewables,” the Survey said.
The National Democratic Alliance (NDA) government has set an ambitious clean energy target of 175 gigawatts (GW) by 2022.
Of this, 100GW is targeted from solar projects and 60 GW from wind projects.
The share of renewable energy in India is expected to grow from 17.65%, or 58,303 MW, now to around 43% in 2027.
“The stranding of assets can have implications for the banking system depending on their exposure to the sector. In a situation where the banking system is already facing a stressed assets problem, stranding of assets could have considerable impact,” the Survey added.
At a time when India is trying to tackle the issue of stressed assets, the status of 34 coal-fuelled power projects, with an estimated debt of ₹1.77 lakh crore, have been reviewed by the government after being identified by the department of financial services. According to the Survey, non-performing assets (NPA) in electricity generation accounted for around 5.9% of the total outstanding advances of ₹4.73 lakh crore. Of the ₹5,732 crore advanced to the coal sector, the NPA ratio was 19.8%.
“Overall, cost of stranded assets account for a large portion of discounted social costs for renewables between 2017 and 2030,” the Survey said, adding, “This indicates that while investments in renewable energy are crucial for India to meet its climate change goals, such investments be made at a calibrated pace looking into the total cost accrued to the society.”
“In recent years there has been a considerable push towards renewables as a sustainable source of power generation all around the world. The choice between alternative sources of energy has to be based on a thorough analysis of the impact each has on the economy. A clear quantification of the social costs of the alternatives gives us a rational way to identify the merits and demerits of each alternative on a holistic basis,” the Survey said.