(1888PressRelease)
May 01, 2007 - Price Control Mechanism for gas infrastructure:
One set of concerns in the gas and energy sector clearly relates to whether the development of the gas market should be based on some kind of price control mechanism or we are going to actually decontrol it and essentially let gas prices reflect market conditions.
I think the present policy is that there is the historic bits of gas that are linked to the Administered Price Mechanism APM, but for the rest all the new gas is essentially being priced at market prices. So I don’t see that there is a difference of view between present policy and what most people seem to think is necessary.
Investments in infrastructure: Investments really should come from people anticipating profitability in the market. We should make it attractive for investors to get into this area. That is where our policies must look not only at domestic investment, but global investments as well. We need to keep in mind the framework within which investment policy decisions are taken both for upstream and downstream. This should be comparable with what is being done elsewhere. Indian investors as much as foreign investors can go anywhere in the world and so it makes sense that we try to simulate best practice.
Self sufficiency in gas: There is a lot of talk about self sufficiency. I would love to be self sufficient in any valuable resource but it doesn’t mean that I am going to spent an infinite amount of resources to try to become self sufficient. So quite frankly, I don’t think it’s worth pursuing this issue from that point of view. What is more important is that its quite clear that our ratio of gas to total energy is much lower than the average from the rest of the world, and even lower than what is the case in developed countries I think therefore we should assume that with a bit of luck we can do much better in gas.
Public – private exploration: I think it’s also clear that serious exploration of gas possibilities is much less than what it should be but the solution I think is not that we puts lots of public sector money into it. I think we should just let companies explore and the NELP provides the framework that enables that kind of exploration to take place. Private companies are perceived as good at managing resources and extracting them at lowest cost. I think that’s consistent with the general policy that we are following. There are public sector companies which have the resources and want to invest in finding gas. They are welcome to do so but private sector companies wanting to do the same thing should be able to do it on a competitive basis. I think that present policy should continue.
Role of Regulator: There seem to be some lack of clarity on what the regulator will do. I think that the idea of the regulator is not that he is going to substitute competition in the market but just provide some underpinning or fairness mainly in connection with access to pipelines without which it is very difficult to have a gas market. The role of the Regulatory Board should be benchmarking against established international practice. We should not re-invent the wheel.
End user access: This is a general problem, a sort of separating carriage from content. Since pipeline networks are a natural monopoly you are trying to create an environment where there will be some requirement to generate excess capacity and then assure people access to that on a fair basis. Presumably that would have to be regulated. So one of the things the regulator would do would be to set the charges or cap the charges in some way so that you don’t deny people the opportunity to use the pipeline network simply by overpricing - pretty much the way let’s say in the electricity sector reeling charges etc are set by regulators.
Free market dynamics: But other than that you have to leave it really to the system. If for example nobody finds it worthwhile to set up a pipeline I am not sure that we should be intervening in this area.
My feeling is that in this area once you get enough large players actively investing, hopefully a bullish view on how much gas they are going to find they will set up the pipelines etc to get the gas from the production stage to the marketing stage. But the key issue really is the investors judgement of do they know, do they think they can find a saleable product which is gas at a reasonable cost and I think that’s something where the best way to do that is to open it up to competitive bidding and let whoever thinks they can do it do it.
As far as APM is concerned, in any system changing from one source to another source always generates political pressure. Sometimes you choose one sometimes you choose the other way. As long as the APM regime is restricted to the gas that’s already been found, and that gas is actually found by the public sector, and the government decides that this part of the system is going to be allocated, the rest of the system is free then for all those who are in favour of the free market. I recognize that you can raise the question why you are not doing this for APM? But it doesn’t affect anything over any medium term or long term perspective. This is a problem that will just disappear.
APM gas will automatically be declining over time. I don’t think it’s going to be substituted by any kind of price control on what currently is not controlled. That would not at all to my mind is sensible.
Pricing of gas: One of the key issues really is the pricing of gas. I mean our own experience historically with the Administered Price Mechanism is that it created an expectation somehow that gas would be available at relatively low prices. This led to a lot of power capacity being set up based on rather loose assurances of availability of supply which were not actually legally enforceable.
Power Sector: For the moment there is very little investment being planned for gas use in power simply because the present gas price is so high. I am not sure that one can respond to this in any way other than let the market make up its own mind. I mean in that sense gas for power has to be its opportunity cost is really going to be determined by the price of coal.
The country has huge supplies of coal. If coal based power can be produced at price x and price x does not sustain gas based power, then the market says there shouldn’t be any gas based power.
The only thing that will change that is if either you have a huge increase in the supply of gas or alternatively, if the premium on gas being a clean fuel relative to coal is somehow internalized in economics. That can only happen if we decide to impose a carbon tax or if there is some carbon trading and clean development mechanism, which enables us to internalize the benefit of cleanliness in project economics. In the absence of that I don’t think we should shed any tears that no coal plant will buy gas if they have got a cheaper fuel.
Global warming: One important issue in all this is the premium you place on clean fuel. That is very much connected with what is going on in the world about global warming. One stream of the global warming debate obviously is how the framework convention on climate change will unroll and what it would do in terms of incentivizing people to move away from coal. Another is simply that irrespective of what happens to national standards and guidelines and environmental norms all of which will certainly raise the cost of producing power from coal. So I think the premium that gas would enjoy as a cleaner fuel than coal is something, which over a 20 years horizon, is going to get factored into the price.
Petroleum industry: The key issue really is whether we should retain the present system where the price of gas is as much related to market conditions as possible. I think in the case of petroleum we have been moving in that direction although that movement has not really culminated in a petroleum prices being entirely linked to market prices. One issue, which sometimes comes up is that if you have price control of a kind in the petroleum sector should you do a parallel control in the gas sector or should you leave the gas sector unregulated and let the market determine price.
Gas-based thermal power: Looking at 800,000 MW by 2030 and with about hydro availability being around 70,000 MW, coal will continue to play a certain role. Even with imported coal we are still looking at 300,000 MW by 2012. We definitely need to think in this transition phase how the gas based thermal stations can survive. As an economist I need to think of some of the ideas thrown up today - maybe some carbon tax, may be some CDM, may be some other alternatives.
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