Energy policy preparedness

The ongoing recovery and the medium-term growth potential of the Indian economy could be adversely affected by the unfavourable energy sector outlook. Deficient coal supply is affecting power availability in many states and could hurt industrial production at a crucial juncture. The government has now asked power generators to import coal for blending in order to address the shortage. The present condition has emerged because of a combination of factors. Power production has not kept pace with industrial demand, while delayed rains affected coal production. Although Coal India, which caters to over 80 per cent of coal demand, is increasing production, the present problem clearly is a result of poor coordination and planning among government agencies. Asking power generating companies to import coal for blending at this stage also highlights how the sector is managed. The government had last year announced a target date to end coal imports. Besides, international coal prices are near record highs and have gone up by about 36 per cent over the last month.

It is likely that the domestic coal production will be ramped up and the condition will improve in the coming weeks, but India’s problem is not limited to coal. Global crude oil prices have doubled over the last year, while those of natural gas have also increased significantly. Prices are likely to remain elevated in the foreseeable future because of both cyclical and structural factors. The global economic recovery has pushed up demand and the supply is unable to keep pace, partly because of disruptions. Hurricane Ida, for instance, disrupted most of the production in the Gulf of Mexico. The supply side is also facing fundamental problems. Lower energy prices over the last several years and the ongoing shift towards renewables have resulted in a significant decline in investment to build fossil fuel capacity. Thus, a sustained higher demand, with increasing economic activity, could keep energy prices elevated in the medium term. The focus on clean energy will continue to constrain investment in fossil fuels. A material reduction in dependence on fossil fuels, however, would happen over time. According to a study presented in the latest World Economic Outlook of the International Monetary Fund, the prices of lithium, nickel, and cobalt, which will be required for the energy transition, could increase substantially and delay the process. A slower than expected transition would keep the demand for fossil fuel elevated. All this will have implications for India and the policy establishment would do well to prepare for the emerging situation. Since India is dependent on imports for the bulk of its energy requirement, it would need to prepare for sustained higher prices. This will have direct implications for inflation, growth, and current account management.

India would also remain dependent on imports for clean energy transition because most of the basic material required is produced by a handful of countries. Thus, it needs to prepare on multiple fronts to secure the supply of both fossil fuel and the material needed to push renewables. Climate change-related systemic vulnerabilities in renewables, like slowing wind speed across Europe currently threatening the world's largest wind energy capacities, will also need to be baked into our long-term energy security plans. At the same time, the country would need to reform the pricing of energy, particularly in the case of power. Generators in circumstances like these should be able to pass on the higher input cost to consumers, which will ensure a steady supply. This would warrant reforms in distribution companies. Overall energy policy preparedness would help reduce the impact of global market disruptions on the Indian economy.