Trump’s trade jolt should spark off reforms in India’s energy sector

Both our main products of mass consumption, electricity and motor fuel, suffer from price distortions and subsidies that reflect state neglect of free market efficiency. In the case of electricity, energy-intensive industries resort to setting up captive capacity; this beats buying power from state-run utilities that overcharge them to cross-subsidize household consumers.

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This subsidy is getting hard to sustain as commercial users look for alternatives while subsidized home usage grows. Over the past five years, states across India have been running to stay at the same place: the weighted average charge paid by all categories of consumers remains about 22% shy of the weighted average cost of supply. The subsidy bills of utilities can’t be allowed to balloon any further. 

As for hydrocarbon fuels, fiscal subsidies now take the form of cash transfers (for cooking gas), but petrol and diesel remain overtaxed, with their retail prices kept not just high, but also too rigid to modulate demand. 

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In the power sector, the weak finances of  utilities is forcing them to embrace central prescriptions, as the Centre offers them financial support to improve revenues and reduce losses. Better metering and upkeep of equipment like transformers are part of a drive that needs to be hastened. The government could use its  leverage to encourage a wide gamut of actions, from subsidy reduction to greater opening of retail electricity markets for private service providers to compete on offering users the best deal. 

Utilities could use their scale advantages to stay in the game while charging other players for using their supply infrastructure. Clear targets should be set for all this, just as we have for renewable energy, the result of which is evident in the fact that clean electricity now makes up half the country’s installed capacity for generation. 

In the case of petroleum products, we have no clear pathway to reduce our import dependence—we ship in 88% of our crude oil—but have stepped up the blending of petrol with ethanol. The gains of this mission are debatable, though, given the farm acreage that ethanol takes and complaints of poor mileage at the usage end.  To help align our fuel bills with those in other countries, we await a shift in taxation to GST plus flexible pricing, with appropriate carbon levies slapped on to deter overuse.

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Over time, fossil fuels must be replaced with clean sources of energy. For this, transportation and India’s power grid both need clean-ups. While fast-tracking the adoption of electric vehicles (EVs) will help lift our foot off the hydrocarbon pedal, tailpipe carbon exhaust would fall faster if we incentivize EV conversion by ride-hailing platforms, as cabs cover long distances daily. 

Utilities could also be pushed by the Centre’s power-reform package to bill EV charging stations less. Reduced tailpipe emissions will have a muffled impact on the climate so long as 70% of EV power is produced by coal-fired plants. To ease this green transition, low-carbon pathways should act as Bailey bridges. For example, trucks, the backbone of our road haulage, could use LNG before going electric, which is an uphill task despite the Centre’s new push. All in all, we must optimize our energy path to meet both economic and climate goals.