Budget 2022: Reading the Fine Print on the Energy Sector


By Swati D’Souza

Budget 2021 presented by Finance Minister Nirmala Sitharamanwas one of the most eagerly anticipated events in recent months, particularly as India battled the fallout of the COVID19 pandemic and the resultant lockdown.
For the energy sector, this budget represented the broad direction the government is likely to take in a post-COVID world. The budget did have a number of proposals for the energy sector, some of which are likely to have a positive impact.

Highlights

  • Air pollution: Allocation of INR 2217 crore in FY22 to tackle air pollution in 42 urban centres with a population exceeding 1 million.

  • Vehicle Scrappage Policy: Applicable to private vehicles over 20 years and commercial vehicles over 15 years. Details on this are awaited.

  • Production-Linked Incentive Scheme (PLI): Allocation of INR 1.97 lakh crores over five years which could support localisation of the Electric Vehicle (EV) supply chain.

  • National Monetisation Pipeline: This will include monetising transmission assets worth INR 7000 cr via the Power Grid Cooperation of India (PGCIL) InvIT along with oi land gas pipelines owned by Indian Oil Corporation Limited (IOCL), Hindustan Petroleum Corporation Limited (HPCL) and GAIL India. 

  • Strategic sector monetisation in power, petroleum, and coal.

  • Increasing public transport: Allocation of INR 18,000 crore to finance, build and operate 20,000 public buses.

  • Power Infrastructure: Allowing consumers to choose from multiple distribution utilities, thus ensuring competition.

  • Power Distribution: Revampingthe existing scheme UDAY with another reform-linked scheme for DISCOMs with an outlay of INR 3,05,984 crores over five years.

  • Green Energy: Allocation of INR 1000 crore to SECI and INR 1500 cr to IREDA and setting up a national green hydrogen mission.

  • Increasing Ujjawala coverage to an additional 1 crore households.

  • Natural gas: Including 100 more districts in the city gas network in 3 years, setting up an independent system operator to facilitate and coordinate gas supply under open access regulations and building a gas pipeline in Jammu and Kashmir.

Fine Print
Green Energy
First, the good news. The budget provided a boost to renewable energy development with allocations to SECI and IREDA, the PLI scheme which includes EV and battery manufacturing, increasing custom duty on imported solar invertors and lanterns, and setting up the green hydrogen mission. The budget also allocated INR 18,000 crores to increase the number of public buses, although it is unclear if these are to be electric or CNG-powered buses. One hopes it is the former as it would provide an additional boost to electrifying transport under the existing FAME-II scheme.  India’s deteriorating air quality received a mention, with the vehicle scrappage policy and an allocation of INR 2217 crores for 42 urban centres aimed at tackling the issue. Despite the seriousness of the problem, it is still not clear how the government plans to actually solve the crisis. The government has not only reduced the allocation (INR 4000 crore in the previous budget) but has also not shared how this money was used (if at all). Further, flip-flops on the stubble burning issue also showcases a lack of planning.
 
Monetisation Policy
This budget coupled with various sectoral developments over the past year has made one thing certain – the Government of India (GoI) wants to get out of the business of producing and distributing energy.Whether it can or not, is another question. The fine print on the Strategic Divestment Policy has classified Central Public Sector Enterprises (CPSEs) into strategic and non-strategic sectors. Power, petroleum, coal, and other minerals come in the strategic sector list which the budget document states, ‘will have minimum presence of CPSEs with the remaining privatised or merged or subsidiarised with other CPSEs or closed’. There are two aspects to the divestment policy. In order to liberalise the energy sector, it makes sense for GoI to function solely as a regulator. From a revenue perspective, it may be akin to selling family jewels. CPSEs like CIL, NTPC, IOCL, BPCL, ONGC and GAIL dominate the energy production and distribution mix. These CPSEs are also ones that provide a generous dividend to the government, especially to make up for revenue shortfall. For example, the cohort of CIL, ONGC, IOCL paid the central government over INR 13,000 crores in FY20. It is likely that the government may not divest these CPSEs given their balance sheet and market dominance right away. But if these CPSEs are to remain, then it is likely that the other assets being privatised will not see many takers given their smaller market share, books, and networks.

Power Infrastructure: old wine, new bottle
Distribution companies are known to be the weak link in the electricity supply chain. To improve their finances, increase efficiency and reduce Aggregate Technical and Commercial (AT&C) losses to 15%, the GoI initiated the UDAY scheme in 2015. Five years on, the scheme failed to achieve its objectives as AT&C losses across states stood at 23.9% in FY20, and the gap between average power procurement cost and average revenue was at 0.53paisa per unit of power. With the announcement of the new ‘revamped reform-linked scheme’, it seems that the sector has found a second chance to restructure itself. However, without correcting the underlying issues of low tariffs, theft, manpower and the political economy surrounding power distribution at the state, it is difficult to assess how successful this scheme will be. The second level being used to improve the condition of DISCOMs is privatisation of existing utilities and allowing multiple distribution licensees in one area. Mumbai is one of the few cities in India to have competition in electricity distribution. However, studies have shown that this competition while improving power supply, did not lead to lower tariffs for consumers. Another concern on this front has been the geographical spread of multiple utilities. If state DISCOMs are dislodged from cities with paying consumers, they will have to rely on geographies with lesser revenue which may not see adequate competition. This will have an impact on their bottomline, and eventually on their efficiency and quality of power being supplied.

Oil and gas sector
Proponents in the natural gas sector will be disappointed as the primary demand of including gas in the GST regime has not been met. On the other hand, the budget document shows the government’s commitment towards promoting natural gas. Last year, India launched its first gas exchange - IGX. Through this platform, buyers had multiple options to buy and trade natural gas. This digital hub was supposed to be one of the first steps in liberalising the gas market. The budget proposal to set up an Independent System Operator (ISO) is the next step on this journey.To understand this, one must understand that most of gas pipelines in India are built and operated by GAIL. Therefore, GAIL not only sources, but also distributes and markets natural gas. In the past, this has caused some issues in the industry, especially if the buyer chooses a supplier other than GAIL who nonetheless has to use the GAIL pipeline to transmit gas (common carrier). While the regulation for open access has been in place, setting up an ISO will make it possible to implement it.

February 3, 2021
First published in The Leaflet.