Energy Policy Preparedness

Context: The ongoing recovery and the medium-term growth potential of the Indian economy could be adversely affected by the unfavourable energy sector outlook.

Issues in energy sector

• Deficient coal supply is affecting power availability in many states and could hurt industrial production at a crucial juncture.
  • Underlying factors: Power production has not kept pace with industrial demand, while delayed rains affected coal production.
• Coal imports are also met with challenges:
  • Policy inconsistency: The government had last year announced a target date to end coal imports. Now it is waging for imports to meet shortage.
  • High prices: International coal prices are near record highs and have gone up by about 36% over the last month.
• Challenges associated with rising crude oil prices: Global crude oil prices have doubled over the last year, while those of natural gas have also increased significantly.
  • The global economic recovery has pushed up demand and the supply unable to keep pace, partly because of disruptions.
• Fundamental problems in supply side: 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.
• Material reduction in dependence on fossil fuels happens over a period of time: According to a study presented in latest World Economic Outlook of International Monetary Fund, prices of lithium, nickel, and cobalt, which will be required for energy transition, could increase substantially and delay process.
• Economic challenges with higher fuel prices: Direct implications being inflation, growth, and current account management.
• Import dependence likely to continue: 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.
• Climate change-related systemic vulnerabilities in renewables, like slowing wind speed across Europe currently threatening the world’s largest wind energy capacities.

Way forward: Overall energy policy preparedness is the key to reduce impact of global market disruptions

• India needs to prepare on multiple fronts to secure the supply of both fossil fuel and the material needed to push renewables.
• Reform 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.