Want to make it easier for business? Make energy cheaper! (REODB 5)

Does cost of energy matter?

The cost of energy is crucial for some businesses and not so critical for others. On one end of spectrum is Aluminum smelting. The cost of electricity is the most crucial cost in this process. That is why Aluminum smelting plants are located next to cheap sources of electricity. On the other end of the spectrum are high value businesses such as software. Electricity costs are a very small proportion of their total costs. Many businesses fall in between, where energy costs are of significant concern but are not the biggest one. Let us look at some examples.

Why is coal more expensive than it could be?

India meets most of its energy requirements from coal. According to Coal India, 55% of energy requirements of the country and 69% of electricity requirements are met by coal. [1] In 2020–21, Coal India Limited contributed nearly 42, 000 Crores by way of duties, Royalty, GST and other taxes and levies. Additionally, the company paid Rs. 5,300 Crores of Income Tax and made dividend payments of Rs. 7,700 Crores. Note that the price of coal is fixed by the government at a high level so that Coal India Limited is in a financial position to pay the Income Tax and the Dividend. Total amount of money that the central and state governments got from the company was more than Rs. 50,000 Crore.

Why are petroleum products more expensive?

Hindustan Petroleum publishes the breakdown of pump prices in Delhi. I have given this breakdown as of March 16th.

Why is Electricity more expensive than it could be?

Commercial and industrial customers are charged at a much higher rate than domestic and agricultural customers.

Aggregate Technical and Commercial losses

The efficiency of distribution companies in India is measured using the Aggregate Technical and Commercial Losses (AT&C). This measure combines technical losses and commercial losses. The AT&C losses for 2019–20 were 20.93%. Revenue foregone because of each percent of AT&C loss is approximately five to six thousand Crores!

Uneconomic decisions made

As discussed, more than two thirds of electricity generated in India is from coal fired power plants. The coal for most of these plants comes from coal fields in the Eastern part of the country. It is costlier to transport coal than to transport electricity. However, for various historical reasons, we have coal power plants based in as far-flung states as Haryana and Punjab and the cost of electricity generation from these plants is higher than if the same plants were located near the coal mines.

Renewables — driving the cost of electricity higher

Renewable energy already makes electricity more expensive than it could be and as we increase the proportion of electricity from wind and solar energy, the price of electricity in our grid will increase further. Let me explain.

Cross subsidy

As we saw, the electricity rates for industrial and commercial customers are way more than those for domestic and agricultural customers. This is true across the country. In a few states electricity is free for farmers and for very poor households. In many others, it is unmetered and provided at a flat rate. The utilities providing this free electricity are compensated by state government subsidy and by charging a higher tariff to industrial and commercial customers (Cross subsidy). Anytime the cost of electricity increases in the country, the burden is taken disproportionately by businesses. That is, a cost increase will fall much more on businesses and on state government subsidies than it does on agricultural and poor domestic consumers. This is true across states as this table shows

Summary and discussion

Energy in India comes mainly from coal and petroleum products. Businesses use coal directly or they use electricity and most of electricity is generated using coal. Businesses also use petroleum products. The energy cost for business is much higher than it could be because

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Yogesh Upadhyaya

Yogesh Upadhyaya

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Entrepreneur. Economist. Investor. Actor. Technophile. Policy wonk. Comedian. I love to explore places where these worlds intersect.