A new plan for gas

And why not link coal to world prices?

The continuing controversies surrounding the oil and gas sector will only be solved through stronger, independent regulation. That, in a nutshell, should be the takeaway from reading the report of the committee set up by the last government, and headed by a former finance secretary, Vijay Kelkar, to investigate reform of the sector so as to enhance energy independence. The committee insists the only fair price for gas is “the best price a gas molecule can command, or the price that is market-determined in a transparent way on an arms-length basis”. This is true in general, but questions remain as to how to determine this price when there is no such thing as a genuine global market for natural gas, a commodity that is difficult to transport. While the committee insists that “at the end of the new gas pricing period, producer prices for natural gas should be unfettered”, the government must temper this recommendation with the basic economic understanding that government-granted monopolies are something to be avoided. Yes, of course, the Kelkar committee is right to argue that monopolistic price-setting will incentivise private exploration of natural gas. But that will also, obviously, impose other costs on the economy, and the incentives for private exploration of natural gas are better evaluated by comparison of profit margins from other similar wells.

Certainly, if the government moves towards such a “market-linked” approach in the gas sector, reasonable questions will be asked as to why it has not done so in the coal sector, especially given that coal can indeed be transported in a way that gas cannot, and so the idea of a “world coal price” has meaning. In other words, the recommendations of the committee could more fruitfully be applied to other energy sectors. After all, why should coal prices domestically not reflect the highest prevailing world price? Similar points can and should be made about the committee’s sensible recommendation to dismantle end-user rules that privilege sectors like power and fertiliser. These must end, certainly, for they distort the supply of natural gas. However, the equivalent must apply to other energy sectors, too. Thus, coal prices should reflect the highest prevailing world price (which is what is recommended for gas) and all end-use restriction as through coal “linkages” to specific factories or power stations should go.

In general, the government should see the report as the first step in working out the exact costs to various stakeholders of different policies of energy pricing. How much do consumers lose or gain? How much does the exchequer lose or gain? And what would be the loss or gain of individual companies – whether producers or users of energy? The absence of such examination in the coal sector has led to much spin and confusion about the economic consequence of the ongoing auctions. The public should be more properly informed about such issues, and it would have been useful if the committee itself had done such an exercise.

https://www.business-standard.com/article/opinion/a-new-plan-for-gas-115022401422_1.html