Date: 15 Feb 2006

Approach Paper on Energy Security

Unclear Energy Policy: Indias Energy Security at Risk

Energy Efficiency and Alternative Energy Development must be topmost priority for Energy Policy By Chandra Vikash

1. Energy Security for India Key Issues

Oil prices do have an inflationary impact. I have no control over oil pricesdeveloped nations were not doing enough to restrain oil producing countries from pushing up prices. Oil prices hurt developing countries. We are very unhappy the way oil prices are behaving. We wish they will moderate.
- Sri Palaniappan Chidambaram, Finance Minister of India, speaking at the 3-day conference of the ruling Congress party in January 2006 to review the performance of government and to chart policy. (1)

Whichever way the pendulum of crude oil prices swings in coming months, India will be better off taking much needed measures to plug in holes and to tie up existing loopholes that lead to fuel wastage and to further improve the aggregate fuel efficiency of vehicle population in the economy. It may be prudent to be prepared for the worst case scenarios that project crude oil price of USD100 a barrel (2) and to ward off nightmarish events of 2-day long queues at petrol pumps in the near future. As our oil companies continue to bear the brunt of oil subsidies (3) and with the oil import bill getting out of hand (4), such a scenario may precipitate much sooner than we might ever bargain for.

At present, for every incremental unit of GDP growth, we consume three-times more fuel than Britain, France or Italy and twice more than the United States. (5) China has made significant gains in lowering its energy intensity in past two decades. As a study suggests, much of this reduction comes from real change in energy intensity in chemical, mining and manufacturing sectors and little from structural changes which would imply that the country has moved out of such sectors. (6) Our GDP growth also comes at higher carbon intensity, amongst the highest in the world, as Figure 1 suggests. What is particularly noticeable is that even though China has higher carbon intensity than India till the year 2000 and has been one of the biggest polluters, it has made significant improvement over past 3 decades in its carbon intensity even as it has grown at phenomenal rates in the same period. TEN Systems 1

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Figure 1: Comparison of Carbon Intensity of major economies

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2. Making every drop of oil count

What is indeed in the governments control is to take suitable policy measures to crackdown on rampant fuel adulteration in the country and to bridge significant gaps between the rated fuel efficiency of vehicle fleet in the country and their fuel efficiency in operation. It also needs to create favorable environment

and incentives to minimize wastage of fuel as well as road space to floating empty seats or empty load in vehicles. This paper proposes following policy initiatives that focus on fuel use in the transportation sector : One, every vehicle should have a legitimate and readable license number plate and should be issued a tamper-proof tag that stores key vehicle related information. Vehicles must carry this tag for identification and should present it for purchase of fuel as well as for inspection. Two, similar to the way government requires households to disclose their electricity consumption through household electricity meters and similarly, for water or telecom services, vehicle owners should be stipulated to disclose road usage through working, accurate odometers. Three, based on parameters such as vehicle footprint, its weight and emission level, every vehicle should be assigned a Vehicle Index that reflects their cost to the wear and tear of road infrastructure, to traffic flow and to the environment. Four, government should create a new category of registration of privately owned vehicles as shared use vehicles (SUVs). These are operated by licensed fleet operators for high occupancy usage based on prescribed terms and conditions. Five, public transport vehicles bus, taxi as well as shared use vehicles should have higher consumption level, for which no fuel surcharge is applicable than general category of privately owned vehicles. These vehicles should be provided further incentives in form of reserved and concessional parking in public places.

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3. Background Fuel Pricing In India

The proposed integrated energy policy, the draft of which has been circulated by Planning Commission member, Dr Kirit Parikh is deficient on key demand-side issues. It is surprising that even in light of scientific findings that the world has less than 10 years to reverse runaway climate change as well as forecast about rising oil prices fuelled by dwindling oil reserves; Mr. Parikhs report makes marginal entries for vital investments required for energy efficiency and in renewable energy developments that will reduce Indias dependence on oil and coal as well as mitigate their growing environmental burden due to poor grade of the remaining oil and coal reserves. These measures need to be combined with promotion of post-industrial lifestyles closer workplaces and schools, bicycles and light vehicles for neighborhoods, emphasis on locally produced food and other supplies, well-knit communities that reduce dependence on fossil fuels for lighting, cooking, heating, cooling and commuting etc. requirements. None of this finds any mention in the draft report or in its purported objectives. The reason is not difficult to find. In one of his recent statements, the elderly Dr. Parikh says: Reduction of requirement is always possible not in the sense of becoming an austere person renouncing things. What is this supposed to mean? Deconstruct this statement and you discover a mental model that denigrates rightful lifestyle choices of austerity. The uncouth and vague approach of such experts is the biggest threat to Indias energy security.

Administered Pricing Mechanism

India had an Admistered Pricing Mechanism (APM) that continued through the late 1970s to mid 1990s. The salient features of the APM were as follows (7): 1) The pricing of petroleum products for the refining and marketing units was based on the retention concept where under oil refineries, oil marketing companies and the pipelines were compensated operating costs and return @ 12% post tax net worth. 2) The ex-storage ceiling selling prices were uniform at all the refineries. 3) For consumers, the selling price of a product was arrived at by adding the applicable freight from the oil refinery to the Depot and from Depot to the Retail Outlets or direct consumers. Dealers commission wherever applicable was also added. 4) The prices of certain petroleum products like kerosene, LPG (domestic) and feed stocks for fertilizer units were subsidized for socio economic

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reasons. Similarly, fuels like petrol, ATF, LPG for industrial use were priced above the cost of production to discourage their inessential use. 5) The prices of petroleum products were reviewed and revised from time to time to see that oil pool accounts were balanced.

Unclear Transition to PostAPM Scenario

Prodded by investment needs of oil companies and market compulsions, the government set up an industry study group in 1995, to prepare the blue print of the deregulation and tariff reforms required in the oil sector. The report of this Study Group formed the main input for the Strategic Planning Group on Restructuring of the Indian Oil Industry headed by the then Secretary, P&NG, Dr. Vijay Kelkar. It submitted its report in September, 1996, recommending dismantling of the APM for the following main reasons: A. Cost Plus compensation did not provide strong incentive for cost reduction thereby breeding inefficiencies. B. Absence of internationally competitive petroleum sector in the context of global economy. C. With the entry of private sector, gold plating of the costs would be encouraged. D. Wide distortion in consumer prices due to subsidies/ cross subsidies. E. Adverse impact on oil companies due to huge deficits in Oil Pool Accounts as price revision was not timely. The groups recommendations were approved by the Government in principle in September, 1997 and further action was started. The Government appointed an Expert Technical Group (ETG) to study the phasing and tariff structure of the oil sector. The recommendations of this group were notified in November, 1997. The ETG headed by Mr. Nirmal Singh, Joint Secretary Refineries, MOP&NG recommended, inter-alia, the following: 1) There should a phased deregulation of the sector spread over a period of four to five years, culminating in total deregulation by 1st April 2002. 2) The first phase should encompass full deregulation of upstream/ refineries and partial deregulation of marketing sectors, 3) The customs tariff structure, which provided for a negative duty protection needs to be amended so as to attract investments to the sector, 4) Changes in tariff structure may be done over the transition phase, keeping in mind the equilibrium to be maintained between the Governments revenue needs, necessity to keep low consumer prices and the need to increase the profitability of the companies. 5) Subsidies should be phased out gradually to within acceptable limits which will be provided through the budget. 6) In the end, on deregulation, the duties be so positioned that the tariff protection becomes 25% of the value addition while the Government revenue is maintained.

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Accordingly, in the first phase, effective 1st April 1998, the APM was dismantled for the upstream and refining sector and a partial deregulation took place for the marketing sector. Subsequently, effective 1st April 2002, the Government announced complete dismantling of APM. (7) Since, the government has gone back and forth on this issue and a Post-APM fuel pricing mechanism hangs in balance as of date. So far, Fuel pricing policy in India has been lopsidedly supply-minded. Various committees to date have focused on issues like facilitating investment in oil sector in India, phasing of deregulation, subsidies and tariff structure that are the key words in the deliberation so far. The approach so far reeks of either lack of awareness or oversight of key demand-side issues such as: A. Assess how much fuel tax should the government charge and for what purpose such as for road construction and upkeep; develop energy system based on alternative energy sources that are sustainable, cover economic losses in natural disasters caused by the effect of fossil fuel emissions on climate change. B. Explore how fuel pricing as well as transaction records could be an effective instrument to crackdown on fuel adulteration and spurious usage, and to manage fuel demand to meet objectives of fuel efficiency and energy security.

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4. FuelSaver - New Fuel Pricing Mechanism

Fuel prices should be measured not on the basis of how much it costs to buy one liter, kilogram or kilowatt of petrol, diesel or any other fuel, but on the basis of how much it costs to move one passenger-kilometer or one load-kilometer based on best practice data. It should then be left to market forces to determine what kind of vehicles or transportation services will minimize cost based on this new metric. This is the central premise of the FuelSaver pricing mechanism (See Figure 2) that we propose as the new mechanism for transport fuel pricing in India.

FuelSaver Transport Fuel Pricing Mechanism

Consumer Fuel Price (CFP)* = Fuel Price x Fuel Quantity + Fuel Tax x Fuel Quantity x Vehicle Index** + Fuel Surcharge x Extra Fuel Quantity*** x Vehicle Index
Figure 2: Methodology for FuelSaver Mechanism * CFP is the price that a consumer pays at the petrol pump. ** Vehicle Index is a weighted index for each vehicle based on its seating/ load carrying capacity; weight, volume and emission level. *** Extra Fuel Quantity is Quantity above Specified Monthly Consumption Level. This level is set higher for public transport or for Shared Use Vehicle. SUVs are a new category, as we propose, in which private vehicles can be registered. These vehicles are available for shared use based on terms, conditions and preferences mutually agreed by vehicle owner and fleet operators that are licensed to provide such services.

In the FuelSaver scenario, further to the policy measures proposed in the earlier section, petrol pumps record odometer data, Vehicle Index and fuel quantity purchased (making it mandatory to fill-up tank once every month or every two months and provide incentive/discounts for fill-up tank every time a vehicle comes to refuel) and upload this data to a National Fuel Information Center every day. This data is collated to generate accurate and reliable measure of fuel efficiency for every vehicle. This data is analysed for causes and the extent of fuel efficiency variation across vehicle models, fuel, traffic and road conditions and driving quality for vehicle population in the country. TEN Systems 7

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5. Key Benefits
Key benefits of the FuelSaver transport fuel pricing methodology are: Check fuel adulteration and spurious use: By real-time monitoring of supply and offtake of fuel through the supply chain, it is possible to check fuel adulteration. Making it mandatory for vehicle identity tag to be presented for purchase of fuel will check spurious use of fuel by unauthorised vehicles or for illegal purpose. Eliminate unwanted diesel subsidy: Government gives diesel subsidy for goods distribution. It is inadvertently availed of by private vehicles cars and SUVs - in absence of alternative method to pay the full price. This will now be done away with. This has also been demanded by key parties supporting the present government (8) but can now be effected. Allow increase in fuel price: Higher fuel prices in tandem with rising crude oil prices is required to keep the oil companies in business, to allow government to raise fuel tax revenue as well as to manage demand. Coupled with incentives for greater fuel efficiency and vehicle occupancy and focus on fuel expense per passenger (or load) kilometer, oil companies and government can mitigate resistance to any increase in fuel prices. Increase in fuel tax revenue will particularly be necessary if the forecast about decline in oil supplies after the peak oil point are correct as it is increasingly becoming plausible. Improve fuel efficiency: By diagnosing why a vehicle may be losing fuel to its rated fuel efficiency based on the fuel efficiency database for vehicle population in the country, it will be possible to prescribe remedial steps for the vehicle owner/driver; for choice or quality of fuel; or for agencies responsible for traffic and road conditions. The government will, for instance, get better feedback about the quantum of loss due to poor road infrastructure in an area. Public Transport buses, taxis as well as Shared Use Vehicles are also more likely to switch to more energy efficient and environment friendly fuels such as CNG or to hybrid as mobility service providers will have better economies in purchasing petrol-to-CNG conversion kits, original CNG or Hybrid/Plug-in-Hybrid vehicles, as well as economies in refueling CNG, Hybrid/Plug-in Hybrid vehicles. World over - in San Francisco, London, and Vancouver, more and more taxis are now Hybrid Electric Vehicles. New York City, the city that many consider the taxi cab capital of the world, is getting ready for a hybrid revolution. (9) Improve vehicle occupancy: Incentives for higher fuel efficiency such as Shared Use Vehicles category registration for private vehicles as well as parallel measures to improve load factor in public transport services will go a long way to manage fuel demand in the country.

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Protect environment: Vehicular emissions and other transport sector related pollution will significantly reduce in this scenario. This is due to the rigorous check on fuel adulteration; measures to improve fuel efficiency, as well as focus on using appropriate vehicles and fuels such as Hybrid/Plug-in-Hybrid, CNG, electric-solar or even human power- cycling and walking. Improve affordability: For the large majority of Indians, fuel prices will not impact their affordability for commuting or for price of goods, in this scenario. Progressive taxation benefits: a. Government can implement differential fuel taxation based on Vehicle Index which accurately reflects their cost to the road infrastructure, to traffic flow and to the environment. Vehicle Index factor vehicle characteristics
for fuel tax calculation e.g. SUVs, big cars pay more taxes on fuel consumption ; motor-cycles and small cars and space efficient vehicles such as buses and trucks pay less b. It can also levy a fuel surcharge if fuel consumption is above a

consumption level set for each vehicle/user category on a monthly basis.

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6. Why the Government needs to increase its fuel tax collection?

Despite high decibel calls to reduce taxes and duties on fuel making inappropriate comparison of fuel tax rates with other commodities, the government must charge fuel tax as a special case. The rationale for higher fuel taxes in much of Europe is well established with recent research studies suggesting higher fuel taxes can lead to higher productivity. (10) The government needs to bring far greater transparency purpose and accountability in directing fuel tax to well-defined objectives.

Road User Charge

Fuel tax is a primary means of funding road construction and maintenance. It is a proxy for road user charge. The proposed system will allow government central and local authorities to more efficiently map revenue collected in each area, impact of road and traffic conditions on fuel efficiency and the need for investment based on existing and projected demand.

Energy Transformation Cess

The Energy Transformation Cess covers the cost to replace fossil fuel based system with sustainable energy, once the fossil fuel supply begins to run short of the overall energy demand or its cost of extraction becomes economically prohibitive in comparison to other sustainable energy resources. The revenue from this account is dedicated to: a. Vehicle and fuel innovation such as hybrid, plug-in hybrid electric and fuel mix with bio-fuel and other additives, fuel quality control and other measures to improve fuel efficiency which will enable us to get the most out of the remaining fossil fuel reserves. b. Development of sustainable energy systems based on number of different fuel sources such as bio-fuels, hydrogen fuel cells, electric and plastic solar technologies which may be used for charging of batteries with plastic solar charging stations connected to the grid supply as shown in Figure 3.

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Plastic solar film

GRID

Figure 3 : Solar Charging Station for Neighborhood Electric Vehicle

Environment Cess
The lifecycle environment cost of emission and other wastes created in its consumption and in production such as toxic spills, mining waste, acid rain, smog - till they are naturally absorbed must be covered. Scientific findings on man-polluted climate changes, to which vehicular emission and automobiledependent, sedentary lifestyles are a significant contributor, portend dire economic consequences in near future, with large-scale disruption in climateextreme temperatures, flash floods, water shortages etc. The economic loss due to overuse of cheaply priced oil must stop and fringe treatment of alternative energy sources must stop as historical evidence of development of solar energy suggests.(11) This will help channelise resources and attention to sustainable energy development. Environment Cess is used to compensate for environmentled disasters as well as for environment conservation programs.

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Oxygen Valley The new mantra for Energy and Environment Policy
"The good news is that a host of energy efficiency, renewable energy, and other clean technologies are available to reduce heat-trapping-gas emissions substantially without impeding economic growth. These technologies often produce net savings to consumers, when compared to continued reliance on inefficient, polluting technologies. As a statement released in February by over 2,000 US economists put it, "Sound economic analysis shows that there are policy options that would slow climate change without harming American living standards, and these measures may in fact improve US productivity in the longer run." Source:http://go.ucsusa.org/publications/nucleus.cfm?publicationID=215 Concerned Scientists", 1997 ,"Union of

The difficult and humiliating truth is that Indian leadership in government, industry or media, with honorable exceptions, is poorly informed and foolhardy in reiterating that reducing emissions come in the way of economic growth or that energy efficiency or alternative energy technologies are far away in the horizon. On the other hand, the prevailing leadership has summarily failed to test the hypothesis over the last decade put forward by eminent experts around the world even as these measures are already taking centre stage with Oxygen Valley likely to outdo what Silicon Valley achieved in terms of fueling innovation entrepreneurship and economic boom. This requires primarily a reassessment of the yardsticks that we set for economic development. So far, we have failed to make the necessary investments for "course correction" even if it opens up opportunities of much accelerated and well-rounded growth opportunities, particularly for India, which has key advantages in this regard such as: 1. India does not have sunk costs in energy-heavy infrastructure (though it may soon fall into the trap if government policies fail to take notice). 2. It has a rich heritage that emphasises on holistic living - that has been finding popular followership in recent times as the example of Swami Ramdev suggests (even as government policies continue to mindlessly favor the western "cola and car" culture and fails to learn from its brigther side - such as its religious support for research and innovation with a rich network of government, industry and academic institutions. This is a vision of India that nurtures a variety of lifestyle choices that appeal to the cross-section of Indian population and to international tourists and are yet sustainable in their demand on fuel or electric power or in their environmental costs. In my view, it presents unprecedented opportunities for Indian media for the domestic as well as international markets to showcase the economic, social, cultural and political dimensions of these choices, to project an "Indian Dream" and to create a market for Indian lifestyle products. Is this a recipe for over 20% GDP growth over next 15 years for India? Can India leverage a proactive commitment to emission reduction for international trade and geo-political negotiations, beginning NOW?

(Chandra Vikash is CEO, contact@mobilityxs.com.)

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References
(1) Govt. says oil price rise could boost inflation Reuters, January, 2006 (2) Oil prices surge to new records April 2005, BBC News
Crude oil prices hit record levels with leading investment bank Goldman Sachs warning the cost of a barrel could eventually top $100.

(3) Oil firms brace for crude shock February 2006, The Telegraph
The third quarter of the current financial year was bad for national oil marketing companies. But it seems the fourth quarter will be worse with the average price of the Indian basket of crude imports shooting past $60.5 per barrel in January. The January price is over $5 higher than that in December. The January surge has brought us down to our knees and unless the government takes drastic steps to redress the situation, the oil marketing companies will turn sick, According to a senior Indian Oil official. Indian Oil, Bharat Petroleum, Hindustan Petroleum and IBP have suffered a combined loss of Rs. 2,898 crore during the April-December period this fiscal and these losses are mounting further. The same companies had clocked a profit of Rs 5,223 crore during the corresponding period of the previous fiscal. Upstream oil companies ONGC and OIL and gas firm GAIL have already forked out Rs 9,751 crore as subsidy.

(4) Net oil import bill to go up 21% January 2006, Financial Express
The government has revised the net oil import bill for 2005-06 to $33.2 billion (Rs 1,48,269 crore), up 21% against its original estimate of $27.4 billion (Rs 1,192,94 crore). This is almost 50% higher than the actual net oil import bill of $22.9 billion (Rs 1,03,462 crore) last fiscal.

(5) There is life after fossil fuels - Budget 2006 must help to rearrange Indias energy basket - February 2006, The Indian Express (6) Why Had the Energy Intensity Fallen in Chinas Industrial Sector in the 1990s? - The Relative Importance of Structural Change and Intensity Change, ZhongXiangZhang, Faculty of Economics and Faculty of Law, University of Groningen, The Netherlands
" Based on the data sets of value added and end-use energy consumption for the 29 industrial subsectors and using the proposed decomposition method of giving no residual, we have examined this disagreement by investigating the relative importance of structural change and real intensity change to the change in energy consumption in China's industrial sector in the 1990s. Our results show that 93.2% of the cumulative energy savings in the industrial sector for the period 1990-96 were attributed to real intensity change, with about three quarters of such savings from the four chief energy using sub-sectors (i.e., chemicals, ferrous metals, nonmetal mineral products and machinery)."

(7) Ministry Of Petroleum & Natural Gas - Pricing of Petroleum Products (Sixth Report), August, 2005

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(8) Left Parties' Note on Resource Mobilization, January 2006

Increase Excise Duty on Luxury Vehicles Run on Diesel: Diesel prices in India are kept low through subsidies in order to facilitate affordable public transport, low-cost carriage of goods across the country and benefit the farmers who use diesel in running pumpsets and tractors. The price differential between petrol and diesel, however, is exploited by the auto industry to produce diesel run models of their popular cars, which have less running costs. These private vehicles running on diesel get undue advantage from the subsidy. Besides, this segment should be taxed with a higher rate in order to discourage private cars and encourage public transport, keeping in mind the immense damage that vehicular pollution is doing to the environment in our cities. The Central Excise Duty levied on luxury cars and SUVs run on diesel should be increased from the current rate of 24 per cent. The customs duty on imported cars as well as imported components for luxury cars should be increased as well.

(9) Taxicabs Start to Turn Green - Cities around the world are looking to hybrids and natural gas-powered vehicles to cut costs for their cabs Dec. 2005, Business Week (10) "Motor Fuel Taxation and Economic Development: A Regional Approach", Professor Richard England, UNH, January 2006
It covers both the economic and environmental advantages to raising the gas tax. It touches upon the benefits of rewarding conservative drivers with a rebate, stimulating greater interest in public transportation and boosting skilled employment.

(11) Was Jimmy Carter right? October 2005, Energy Bulletin

After Jimmy Carter lost re-election to Ronald Reagan in 1980. The solar panels at the White House eventually came down - and Reagan and his aides gutted the solar research programIn June or July of 1981(at the) the Solar Energy Research Institute,(they) fired about half of our staff and all of our contractors, including two people who went on to win Nobel prizes in other fields, and reduced our $130 million budget by $100 million," recalls Denis Hayes, the founder of Earth Day, who had been hired by Carter to spearhead the solar initiativeReagan and Congress stopped aggressively pushing new auto efficiency standards, acceding to Detroit's desire to leave them at Carter-era levels. They let the solar tax benefit expire, and the nascent solar industry went belly- up. Copyright (C) TEN Systems & Services Pvt. Ltd. 2006

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