Coal is the most important & abundant fossil fuel in India and accounts for 55% of India's energy need. India's industrial heritage was built upon indigenous coal, largely mined in the eastern and the central regions of the country. Thirty per cent of commercial energy requirements are met by petroleum products, nearly 7.5 per cent by natural gas and 3.5 per cent by primary electricity. 

India is, however, poorly endowed with oil assets and has to depend on crude imports to meet a major share of its needs (around 70 percent). A large population of India in the rural areas depends on traditional sources of energy such as firewood, animal dung and biomass. The usage of such sources of energy is estimated at around 155 mtoe per annum or approximately 47 percent of total primary energy use.

Coal has been recognized as the most important source of energy for electricity generation in India. About 75% of the coal in India is consumed in the power sector. In addition, other industries like steel, cement, fertilizers, chemicals, paper and thousands of medium and small-scale industries are also dependent on coal for their process and energy requirements. In the transport sector, though direct consumption of coal by the Railways is almost negligible on account of phasing out of steam locomotives, the energy requirement for electric traction is still dependent on coal converted into electric power.

Inspite of various policy initiatives to diversify the fuel mix but considering the limited reserve potentiality of petroleum & natural gas, eco-conservation restriction on hydel project and geo-political perception of nuclear power, it is becoming increasingly evident that coal will continue to occupy centre-stage of India's energy scenario. Indian coal offers a fuel source to domestic energy market for the next century & beyond. Based on estimates, the consumption of coal is projected to rise by nearly 40 percent over the next five years and almost to double by 2020.

Energy Security

Increasing pressure of population and increasing use of energy in agriculture, industry and the domestic and public sectors is an area of concern. At the same time, the need to meet energy demand has created huge capital requirements needed for setting up power plants, pipelines, ports, terminals, railway tracks to move fuel etc. 

As India continues to grow at the rate of 7-8 percent, energy security has become a core focus. To alleviate concerns over energy security, the Government of India has taken multiple steps in recent years which include encouraging private sector participation, a more holistic approach towards broad basing its supply base, and improving efficiency in the sector as a whole. Although India has made a start in this direction, the Government would need to further its initiatives in three areas:

• The Government would need to increasingly enter into alliances and partnerships with key nations in Asia, Africa, Latin America, etc. to diversify the energy supply base and improve long term supply security.

• Currently, different energy segments are viewed independently from a policy and regulatory perspective. The importance of cross linkages between different energy segments is now being appreciated and the importance of developing an integrated energy policy to meet the common objective of energy security is recognized.

• At an operational level, commensurate investment would be required in developing infrastructure viz. rail, road, port and power transmission which are critical for efficiency in the energy value chain.

Looking at the subject in totality, the Government has developed a comprehensive planning framework through the Indian Hydrocarbon Vision 2025 that provides a detailed road map for Indian hydrocarbon industry to enhance the country’s Energy Security.

The principal objectives of the Indian Hydrocarbon Vision 2025 include:
• Developing the sector as a globally competitive industry, ensure healthy competition and improve product standards
• Ensure energy security keeping in view strategic and defense issues
• Creating infrastructure to meet the demands for coal, petroleum products and natural gas
• Rationalizing tariff and pricing policy to promote investment
• Putting in place necessary regulatory system
• Exploring new resources of hydrocarbons such as CBM and Gas Hydrates

It is evident that one of the principal focus of the Indian Hydrocarbon Vision is to draw private investments through structural and pricing adjustments in specific energy sub sectors.

Key Imperatives for India

To meet its large and growing energy needs, there are certain key imperatives for the Indian energy sector:

• Provide impetus for Private Participation

Private participation in the form of financial, technological and managerial are needed to meet the challenging growth targets. This would also bring in right competition and efficiencies, needed in the sector. Recognizing this, the GOI has allowed private participation in Oil and Gas exploration and production, coal mining (albeit for captive use) and in hydro power and renewable energy. NELP for oil and gas allows 100 percent foreign equity investment and is liberal in allowing self-marketing by the investors.

To sustain continued private participation, a number of important steps have to be taken further.

• Clarity in Policy Framework

There is a need to evolve a clear policy framework for the energy sector. Clarity is required in matters related to pricing of energy, the target market structure, cross-border investments and imports and exports of energy products. In India, clarity is beginning to emerge in some of these areas and debates have been initiated in others.

• Independent Regulatory Mechanism

An independent regulator is required for the energy sector to determine prices in the first instance and once competition develops to ensure that there is a level playing field for all. Today there is much inefficiency in energy sector pricing due to the monopolistic market structure. Prices are either self determined by the monopoly companies or in some cases inappropriately priced according to import parity prices. There has been adequate debate on this issue and it appears that sooner than later India will have full fledged regulators for the energy sector.

• Develop Energy Markets

Well functioning energy markets are important to attract investments and bring efficiency in the sector. Currently, there is limited market activity (examples are an internet portal based trading for a limited quantity in case of coal and auctioning in case of gas for limited quantities). Markets will be facilitated and effective when there are many players and there is an organized marketplace for energy products.

• Actively pursue cross-border investments in Energy Sector

Energy equity in overseas assets is part of India’s strategy to acquire energy security. This includes Indian companies such as ONGC, Coal India, GAIL, Reliance etc. acquiring or seeking to acquire equity through joint ventures in oil and coal rich nations. The Government is also pursuing strategic alliances with various countries. The recent memorandum of understanding with China on this issue is an example. As per the Indian minister for petroleum and natural gas, “We have realized that when we compete in an unhealthy manner to acquire oil fields in third countries, we only end up driving costs for each other. We have ended up paying billions of dollars more by trying to outbid each other everywhere. This will end, as co-operation will precede competition.”

Besides, the Indian Government is also seriously exploring the nuclear option to meet its energy needs and it is looking at co-operation in this area with the nuclear suppliers’ group countries.

• Create an enabling infrastructure for Energy Sector growth

Investments in ports, railways, pipelines and power transmission are urgently needed to attract energy sector investments in the first place and to enable efficient energy choices. Today, the capacities of these infrastructures are fully stressed and there is much inefficiency. Recognizing this, the Government has announced policies to involve private participation and India is witnessing private investment in ports, pipelines and power transmission. Even in case of railways, the Government has recently announced a policy decision to open container transportation to private sector on a common-carrier principle using the existing railroads.

• Rationalize taxes and subsidies to allow efficient pricing

The taxes and duties levied on energy products are lopsided leading to inefficient energy choices. Taxes on petroleum products such as aviation fuel for example are among the highest in the world while railway passenger tariffs are highly subsidized. Likewise, there are high subsidies for household cooking fuels such as kerosene and Liquefied Petroleum Gas (LPG) and even electricity for domestic consumption. The need for cost reflective pricing is being increasingly recognized as exemplified by the recent Rangarajan Committee Report, the Roadmap for LPG price rationalization by the Government as well as the recent notification of the power tariff policy of the Government.

• Provide government support for energy efficiency

The Government needs to create a policy framework that provides incentives for energy efficiency. This could for example mean providing incentives in urban areas for mass transport systems, and promoting R&D in energy efficiency. The environment should encourage energy efficiency companies to come up and operate profitably. Awareness has been steadily increasing and policy makers are now thinking on how this can be achieved.

In parallel, India is also emerging as a significantly active market in terms of Clean Development Mechanism (CDM) projects being conceptualized and registered with the Executive Board (EB). The growing awareness of the CDM benefits would make this an important area for investments in the Indian energy sector. CDM should also give the necessary fillip for energy efficiency measures in India.

The Government of India is recognizing the importance of private sector participation, and independent regulation in the energy sector. The future holds a lot of opportunities for international and domestic private participation.