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India’s oil, gas, coal subsidies more than triple the value to renewables, electric vehicles

Counterview Desk
A recent research paper, "India’s Energy Transition: Subsidies for Fossil Fuels and Renewable Energy, 2018 Update", published by the International Institute for Sustainable Development (IISD), an independent Canada-based think tank, has said that though fossil fuel subsidies are on decline, subsidies to oil, gas and coal were more than triple the value of subsidies to renewables and electric vehicles in India in FY2017.
Authored by Abhinav Soman, Ivetta Gerasimchuk, Christopher Beaton, Harsimran Kaur, Vibhuti Garg and Karthik Ganesan, the paper says, that while subsidies for oil and gas decreased by 76 per cent between FY2014 to FY2017, from INR 1,57,678 crore (USD 26.1 billion) to INR 36,991 crore (USD 5.5 billion), subsidies to coal mining and coal-fired power remained stable, at INR 15,992 crore (USD 2.4 billion) in FY2017.
According to the paper, government support for renewables grew almost six-fold, from INR 2,608 crore (USD 431 million) in FY2014 to INR 15,040 crore (USD 2.2 billion) in FY2017, but subsidies to electric vehicles are still relatively small in scale, at INR 148 crore (USD 22.1 million) in FY2017.
It regrets, India’s subsidies to oil, gas and coal (INR 52,983 crore or USD 7.9 billion in FY2017) remain more than triple the value of subsidies to renewables and electric vehicles (INR 15,188 crore or USD 2.2 billion in FY2017).

Excerpts from the paper:

The total value of quantified energy subsidies has declined from INR 2,15,974 crore (USD 35.7 billion) in FY2014 to INR 1,51,484 crore (USD 23.0 billion) in FY2017. This can be explained by the following trends:
  • Electricity transmission and distribution becoming the largest recipient of subsidies, growing from INR 40,037 crore (USD 6.6 billion) in FY2014 to INR 83,313 crore (USD 12.9 billion) in FY2017. A major share is subsidies for electricity distribution companies (“discoms”), selling electricity at below-market rates to certain consumer groups. A much smaller component goes to expansion of infrastructure and thereby household electricity connections. 
  • A major cut in oil & gas subsidies: INR 1,57,678 crore (USD 26.1 billion) in FY2014 to 36,991 crore (USD 5.5 billion) in FY2017. This is largely driven by a decrease in world oil prices and various reforms of subsidies for the consumption of petrol, diesel, LPG and kerosene. 
  • Relatively stable support for coal mining and coal-fired power: INR 15,650 crore (USD 2.6 billion) in FY2014 to INR 15,992 crore (USD 2.4 billion)1 in FY2017. 
  • An almost six-fold increase in support for renewables: INR 2,608 crore (USD 431 million) in FY2014 to INR 15,040 crore (USD 2.2 billion) in FY2017. 
  • Nascent subsidies to electric vehicles are gaining momentum, but are still relatively small in value: INR 1.7 crore (USD 0.3 million) in FY2014 to INR 148 crore (USD 22.1 million) in FY2017. 
Unlike most other fossil fuel subsidies, the value of quantified coal subsidies has stayed stable from FY2014 to FY2017, although some non-quantified subsidies may have declined. The biggest coal subsidies are concessional customs and excise duties for coal, which reduce input costs for coal-fired power generation—in FY2017, worth INR 7,523 crore (USD 1.1 billion) and INR 6,913 crore (USD 1 billion), respectively.
Coal has significant external costs, including local air pollution and greenhouse gas emissions. Studies suggest that the local health costs of coal are even larger than climate impacts. Coal subsidies benefit coal through the entire value chain, from mining to the construction and operation of coal power plants.
The level of quantified subsidies to coal has remained relatively stable, at INR 15,650 crore (USD 2.6 billion) in FY2014 and INR 15,992 crore (USD 2.4 billion) in FY2017. The biggest subsidies in the coal sector were focused on lowering input costs for coal-based electricity generation. In FY2017, these were:
  • Concessional custom duty on imported coal, as compared with other minerals, at INR 7,523 crore (USD 1.1 billion). 
  • Concessional excise duty on coal production, at INR 6,913 crore (USD 1 billion). These policies saw large changes following tax reforms, but the net value of subsidies is not expected to significantly change in FY2018. 
The major tax reforms were the abolition of the concessional custom duty rates and the introduction of the GST, which established a new concessional sales tax rate for coal of 5 per cent. While the former change eliminated one subsidy, the latter change created a new subsidy provision that largely made up the difference, INR 12,122 crore (USD 1.9 billion) for FY2018.
Another important group of coal subsidies in India is linked to non-compliance with environmental norms. The conservative approach used in this paper only defines non-compliance as a “subsidy” if a law exists, and special exemptions have been granted or good data exist on non-compliance.
The largest subsidy identified in this group is the lack of penalties for non-compliance with coal-washing requirements. This resulted in cost savings for thermal power companies of INR 853 crore (USD 141 million) in FY2014 and INR 981 (USD 146 million) in FY2017. In addition to this, unwashed domestic coal in power generation also results in reduced efficiency of power plants, requiring coal imports to improve the overall combustion characteristics.
Subsidies associated with non-compliance would be larger if a less conservative approach adjusted the “subsidy” definition to include external costs (“externalities”) associated with coal, regardless of whether a benchmark policy exists. The main external costs are negative impacts on air quality and associated health problems, environmental problems caused by the fallout from fly-ash around power plants and greenhouse gas emissions.
In India, 34 coal power plants with a total capacity of 40,130 MW are currently defined as financially “stressed” for a variety of reasons. These include the absence of assured sale of power through power purchase agreements (PPA); an unsteady supply of coal leading to reliance on high-priced imports; inability to infuse further equity and working capital; regulatory and contractual issues; delays in project implementation; aggressive bidding leading to unviable tariff rates; and rising rail freight charges.
In order to avoid insolvency, government-owned banks have been working on a scheme to bail out these “stressed” plants. Schemes under consideration include debt-equity swaps and setting up an Asset Reconstruction Company (ARC). Banks would then either sell assets or partner with third parties to operate and manage projects. However, these stop-gap solutions do not address the fundamental drivers that have created the problem.
Moreover, as India continues to internalize the social costs of coal, there will likely be added pressure on cost-competitiveness. For example, to meet India’s goal of reducing emissions intensity by 33–35 per cent, it is estimated that new coal plants can likely only run at 65 per cent of their rated capacity.

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