Unusually Quiet June 2015

Lydia Powell and Akhilesh Sati, Observer Research Foundation

In general energy news in the month of June is dominated by statistics on thermal power plants having little or no coal stock and stories of long power outages even in privileged urban areas. These news stories are followed by numerous articles on the causes of these problems and how they must be sorted out. The words that one would often see in these articles included ‘privatise’, ‘govern’, etc. This June has been unusually quiet. There were almost no stories on coal shortages and there were only a few isolated stories of power outages in privileged urban areas. Instead we had many stories on numerous thermal power generating stations sitting with idle capacity and the availability of surplus power on India’s many power exchanges at throw away prices.

On the oil front, the price (at Delhi) of petrol was increased by Rs 0.64 per litre and the price of diesel was decreased by Rs 1.35 per litre on June 16, 2015. This was around 1% increase in petrol price and around 2.6% decrease in diesel price if we compare it with prices last revised on May 16, 2015. But if we compare the prices of June 16 prices with the prices during the beginning of the year (Jan 17, 2015) then both Petrol and Diesel prices show significant increase of around 14% and 6% respectively.

Chart 1: Change in Petrol & Diesel Prices (at Delhi)

image (1)

image (2)

What was surprising was the explanation given for the change. Media reports said that ‘petrol prices were increased because international petrol prices had increased and that diesel prices were decreased because the international price of diesel had shown a downward trend’. This is probably the first time domestic price changes are being linked to product price changes in the international market rather than crude price changes.  Given that India is not a net importer of petrol or diesel this line of reasoning is strange.

Chart 2: Foreign Trade in Diesel & Petrol (in ‘000 Tonnes)

image (3)

The depreciation of the Indian rupee was also given as a reason but once again the depreciation of the rupee should have translated into an increase in the price of both rather than an increase in the case of petrol and a decrease in the case of diesel. A closer look at the data may reveal the rationale behind the changes but for now all we know is that there is more than what meets the eye when it comes to changes in product prices. It is a known fact that while the petrol is considered as the fuel of the rich, diesel is considered as a fuel for mass consumption. Thus decreasing the diesel prices and increasing petrol prices was good for political and economic mileage.

There was also news that only 0.35 per cent of domestic LPG users gave up subsidy voluntarily. Given that even the former Prime Minister’s wife was upset with subsidy reductions for domestic LPG this is not difficult to understand. On the international front, we saw efforts by India to leverage its position as the largest growth market for oil imports to ask OPEC to stop charging a premium from Asian importers. We also saw import of crude increasing from Iran as the probability of a nuclear deal between the USA and Iran increased.

On the gas front the most significant development was that of India trying to navigate the price storm that is sweeping global markets. On the international front India pressed Qatar for a reduction of LNG prices and on the domestic front it gave a pass to the proposal that sought to charge a premium for ‘difficult-gas’.

On the coal front the most important news in June was that of BP declaring India as the fastest growth market for coal. This is not news that agencies of the rich world such as the International Energy Agency (IEA) liked and so they promptly declared that India’s coal dominated strategy is a big risk in the context of negations on carbon emissions reduction in Paris towards the end of this year.

On the power front, we saw more signs of pain. Ultra mega power projects (UMPPs) that were projected, ten years ago as symbols of India coming of age in the power sector were being declared as unviable. A decade ago, these 4 GW coal based plants with tariffs lower than Rs 2 per Kwh were said to indicate the absence of downside risk in the sector. Demand was seen to be so deep and so large that it was believed to be the ultimate insurance against any downside risk. With the benefit of hindsight few would now say the same thing. Ratings agencies declared that even the LNG based price pooling scheme was not capable of injecting momentum into the system. However electricity continued to charge politics as leaders from Mayawati to Kejriwal boldly declared that power tariff increase was anti-people. For its part the central government declared that it will not bail out debt ridden state utilities and also reiterated its commitment towards universal energy access.

As it has been the case since the new government took charge, news on foreign investors queuing up to invest in solar energy projects in India continued in June. One of the big announcements involved soft bank of Japan seeking to invest over USD 20 billion. Given that clean energy is the Prime Minister’s alibi among the international audience for what is described as his not so clean domestic ideologies, we can hope to see more and more news on the same lines in the future.

Views are those of the authors                    

Authors can be contacted at lydia@orfonline.org, akhileshs@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 2

 

Advertisements

Ruling out funding for coal projects is unfair!

Ashish Gupta, Observer Research Foundation

Fossil fuel (especially coal) based growth which laid the foundation for almost all the richest economies is now being criticised by them in the wake of changing climate dynamics. Many institutions are advising investors not to invest in coal resources or in case they have already invested they must divest from the same. If these institutions are convinced of the same then they should first stop using coal in their own countries. Simply restricting funds for these projects in the poor countries is not a justifiable approach. The World Bank for instance in its Energy Direction Paper, 2013 has taken a firm stand not to finance any coal projects worldwide unless there is no alternative. Many other International Financing Institutions in United States, Denmark, Finland, France, Netherlands, Norway, Sweden, and Switzerland are also supporting the approach. Their support for the clean cause is good but it would be a mistake to definitively rule out coal in all circumstances. Any artificial restriction would defy its own principal of impartial support. Any restriction must be supported by a reasonable logic wherein due importance must be given to the country’s ability to absorb cost of clean technologies.  This logic is simply missing in the approach as restricting funding for cheap coal projects would be bad for the sustainable and inclusive development.

The International Institutions Funding in coal projects by type from 2007 to 2014 is given below:

image (1)

Source: Natural Resources Defense Council, Oil Change International, World Wide Fund for Nature, 2015

It is clear from the chart that 77 percent of the funding is flowing towards the coal power plant construction and only 23 percent for coal associated activities. This indicates that there is enough space for efficiency. The improvement of efficiency in thermal power plants by 4-5 percent can cut down carbon emissions by 15 percent[1]. The 1972 Stockholm conference demonstrated why the effort to restrict energy sources is the real anti-environment movement because less modern energy is equal to more dependence on the environment.  In poor countries where electricity supply is a constraint to growth and both hydro and geothermal resources are limited, coal based electricity is necessary for “firm capacity”. Why has this wisdom been forgotten?

The African Development Bank estimates the economic cost of the lack of energy, measured as the cost of running backup generation and the foregone production from power outages, at 1 to 4 percent of GDP in African countries[2]. As per the World Bank’s Enterprise Survey electricity is at the top of obstacles facing businesses in low income countries, with nearly one in four businesses identifying it as their biggest obstacle. Many countries who borrow from the World Bank Group on concessional rates are both poor and energy deprived. The clientele base of these poor nations is 82 and home to 1.8 billion of the world’s poorest people. As per the International Macroeconomic Data of Department of Agriculture Research, United States the developing world, for instance, has an average GDP/capita of just $3,000 (real 2005 $), compared to $40,000 in the developed nations, which is an indicator that they cannot absorb the higher cost of less reliable, naturally intermittent energy.

Underlying this view there is no country which has yet to demonstrate a growth strategy that does not rely on fossil fuels. Even Denmark, Portugal, Spain, Ireland and Guadeloupe which have committed to limit support for coal power plants have 80 percent of the electricity generation coming from a combination of fossil fuels. Therefore why only coal is targeted?

image (2)

Source: Natural Resources Defense Council, Oil Change International, World Wide Fund for Nature, 2015

What happens if coal investments are ruled out by these institutions in poor countries? Is it fair to those countries? It is not the environment, but the poverty, that is a greatest threat developing nations face today. A lack of cheap energy is the silent killer that leads to poverty, hunger and easily preventable diseases.

Views are those of the author                    

Author can be contacted at ashishgupta@orfonline.org

[1] Zamuda, Craig D.  et al, August, 2007 “A Case for Enhanced Use of Clean Coal in India: An Essential Step towards Energy Security and Environmental Protection” U.S. Department of Energy

[2] http://www.forbes.com/sites/judeclemente/2014/10/04/remembering-stockholm-the-environment-is-people-and-their-necessity-for-more-energy/

Courtesy: Energy News Monitor | Volume XII; Issue 2

 

 

Energy Subsidies: Tailoring Definitions to Influence Outcomes

Lydia Powell and Akhilesh Sati, Observer Research Foundation

As the 21st Conference of Parties (COP) draws nearer, industrialised nations are stepping up the pressure on poor countries to confess their carbon sins and embrace the gospel of de-carbonisation. Industrialised countries treat their dependence on fossil fuels in the past and continued dependence in the present as irrelevant but see no contradiction in treating the dependence on fossil fuels by poor countries as cardinal sin (Chart 1). Ignoring intrinsic values such as fairness, they limit their focus exclusively to the instrumental goal of forcing poor countries to do what they would not have done had they been at the same stage of development through reports that supposedly estimate the cost that the poor countries are imposing on the world. Their development funds (including that of Australia, a country with the highest per capita carbon emissions among industrialised countries which is also heavily dependent on coal and gas exports to other countries) self righteously declare that they no longer support any work on coal by poor countries. Their civil society movements go about spreading the gospel of de-carbonisation with the same zeal as they spread Christianity centuries ago. Their media and the institutions that they set up and continue to control such as the World Bank, the International Energy Agency (IEA) and the International Monetary Fund (IMF) bring out reports to condemn the use of fossil fuels and the use of subsidies for fossil fuels in poor countries using what they want us to see as objective academic language.

Chart 1: Per Person Dependence on Oil, Gas and Coal in Select Countries

image (1)

Source: BP Statistical Review of World Energy 2015 & World Bank

One such report is the IEA’s forthcoming free report on Energy and Climate Change. The press release on the report observes that it sees four pillars as essential requirement to make COP 21 a success: (1) Setting conditions to achieve an early peak in global energy related emissions (2) Review of national actions every five years (3) translate the world’s climate goal into collective vision (4) establish a process for tracking achievements in the energy sector. It then goes on to say that a peak in energy emissions can be achieved in five years if governments implements ‘just five’ measures:

  1. Increase energy efficiency in the industry, buildings and transport segments
  2. Reduce use of least efficient coal fired power plants and ban their construction
  3. Increase investment in renewable energy technologies in the power sector from USD 270 billion to USD 400 billion
  4. Gradually phase out fossil fuel subsidies by 2030
  5. Reduce methane emission in oil & gas production

According to the IEA, these measures are all based on proven technologies and none of them will compromise on economic growth. The target of these messages is poor countries because rich countries have completed the process of using fossil fuels to industrialise and grow. Now they want to kick down the ladder that they used to climb on to their self-righteous perches. They have done this in the economic realm (as the South Korean economist Ha-Joon Chang as eloquently explained in his book) and now they want to do the same for energy.

One of the latest IMF reports on subsides seeks to estimate the magnitude of energy subsidies. The title of the report suggests that it is estimating ‘energy subsidies’ in general but its contents exclusively focus on subsidies for fossil fuels. The opening remarks of the report make that very clear as it observes that subsidies (1) damage the environment (2) cause premature deaths through local air pollution (3) cause congestion of vehicles that use fossil fuels (4) impose fiscal costs that consequently reduce investment in vital public services (5) discourage investment in energy efficiency and renewable (6) and that subsidies are invariably appropriated by rich households.

One of the key tools industrialised nations use to attack energy subsidies is to define it in such a way that poor countries come out looking bad. The way they do this is by limiting the definition of subsidies to economic and environmental outcomes while leaving out social outcomes. The IMF report defines pre tax consumer subsides as the ‘price paid by consumers (firms, households etc) that is below the cost of supplying energy’. It defines post tax subsidies as the ‘price paid by consumers that is below the supply cost of energy plus an appropriate ‘Pigouvian’ or ‘corrective’ tax that reflects the environmental damage with associated with energy consumption and an additional consumption tax that should be applied to all consumption goods for raising revenue.

As per the IMF definition irrespective of whether we use the pre-tax or the post tax definition of subsidies, the question of whether we subsidise or do not subsidise energy can be answered only when we know the cost of supply. According to the IMF consumer subsidies arise when the price paid by consumers is below benchmark prices which are taken as the supply cost. The IMF says that it used country specific data for OECD countries and closest prices adjusted for shipping and margins for other countries. On the basis of this definition, the IMF report concludes that pre-tax subsidies were 0.7 percent of global GDP in 2011 and 2013 and that these subsidies will decline by about a third to 0.4 percent of global GDP in 2015 on account of the decline in international energy prices. 63 percent of the reduction in pre-tax subsidies is attributed to the fall in the price of oil, 9 percent to the fall in the price of natural gas and 28 percent to the fall in the price of electricity.

As the IMF report is obviously hoping to influence outcomes at COP 21 in December 2015, it highlights the magnitude of post tax subsidies that is eight times as large as pre-tax subsidies in 2011 and 16 times as large in 2015. The report observes that despite the sharp drop in international energy prices, post tax subsidies have remained high at 5.8 percent of global GDP (USD 4.2 trillion) in 2011 and 6.5 percent (USD 4.9 trillion) in 2013 and 6.5 percent (USD 5.3 trillion) in 2015. It assigns blame for the growth in post tax subsidies almost entirely to ‘high growth in energy consumption, particularly coal, in countries with relatively high environmental damage from coal’. This is probably a new and improved way of shaming by not naming because we all know that the countries IMF report is targeting are China and India. The report observes that coal is the biggest source of post-tax subsidies amounting to 3 percent of global GDP in 2011 and rising to 3.9 percent in 2015. Petroleum and gas follow with a subsidy of 1.8 percent and 0.6 percent of GDP respectively. The only observation in the IMF report that implicates rich countries is when it says that the rich countries account for about a fourth of post tax subsidies while developing Asia about half.  If one balances this observation for population (or present it in per person terms) rich countries may come out worse than poor countries.

Turning to the benefits of removing subsidies the IMF report provides a long list of favourable economic and environmental outcomes such as revenue gains, reduction in CO2 emissions, and reduction in premature deaths. If all countries are in the same stage of development there would be little reason to quarrel with the conclusions of the IMF report. Unfortunately all countries are not in the same stage of development. Developing Asia dominated by India and China has the largest number of people without access to modern energy sources. Subsidies, especially energy subsidies, were designed to increase access to modern energy sources. While it is an established fact that there are economic and material leakages of energy subsidies, it has contributed to increasing energy access in a big way. This is an outcome all the reports on energy subsidies choose to ignore. A study that compared energy access in neighbouring regions in India and Nepal that share the same ecological, economic and social characteristics has shown that the Indian part shows high penetration of modern cooking fuels such as LPG and modern lighting sources such as electricity compared to Nepal which showed zero penetration of these fuels.  The difference in terms of energy access is attributed primarily to Indian policies that subsidise access to LPG and electricity. Does this positive social externality of subsidies not matter?

The IMF report shows that most of the subsidies are appropriated by not so poor and sometimes even rich households. This may be true as they consume more energy and consequently more subsidised energy.  However this cannot be treated as an important argument for killing energy subsidies. There is evidence to show that a temporary withdrawal of subsidies for LPG in India pushed many households back in time as they were forced to use firewood and dried animal dung for cooking.

There are other definitions of subsides such as that of the World Trade Organisation (WTO) which defines subsidies as ‘financial contribution from the government which confers a benefit’. Under this definition, if subsidies confer a benefit to the poor it must be treated as violation of WTO norms. This makes meeting WTO norms more important for governments than keeping the social contract of providing basic necessities to people.

Chart 2: Share of Daily Wages Spent to by One Liter of Petrol in Select Countries

image (2)

Source: Bloomberg

The definition of subsidies today is tailored to meet instrumental goals of industrialised nations. The definition assumes a uniform and equitable world where everyone is more or less in the same economic and social state.  Under this definition, an average American is the same as an average Indian even though the American consumes twenty times more energy and so the American and Indian must be subjected to the same policies.  This fallacy of equality pervades all global policy making endeavours but this cannot continue if we are serious about a socially and ecologically sustainable world.

Poor nations must call for a per person income floor below which global definitions such as those for subsidies cannot be applied.  In the case of energy, when a person has to spend more than 20 percent of his income on energy he should be declared as energy poor and be freed from the constraints of global subsidy definitions.   Bloomberg’s ‘pain at the pump’ index that tracks petrol prices in over 60 countries ranks Pakistan and India as the most energy poor because an average person must spend more than a day’s wages to buy a gallon of petrol (Chart 2). This is in spite of the fact that India and Pakistan ‘subsidise’ petrol prices. If they withdraw subsidies to keep the IMF happy they can do so only by making petrol inaccessible to the poor. As per the proposed floor, both India and Pakistan will not qualify as subsidisers of petrol.

The attacks by industrialised nations, motivated by the great and the good, assume that the guilt from the large carbon foot print of their lives can and should be off-set by preventing an Indian village from getting its first light bulb. These well known attack lines used by apostles of de-carbonisation must be countered by poor nations in the long term interest of their own people.

Views are those of the authors                    

Authors can be contacted at lydia@orfonline.org, akhileshs@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 1