Trade policy review report by the secretariat

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4.2  Energy

4.2.1  Oil and gas

              1. India's oil and gas industry can be broadly divided into three subsectors: exploration and production; refining; and marketing. In exploration and production, the two national oil companies accounted for 74% and 11.3% of total recoverable reserves (onshore and offshore) of crude oil and natural gas in 2014.28 Of the 22 refineries, 17 were owned by the public sector and account for about 56% of total refining capacity as at 1 April 2014. India is a net importer of petroleum, which accounts for 75% of domestic consumption. A significant share of explicit subsidies is accounted for by petroleum. Since its previous Review, India has adopted measures to deregulate petrol and diesel prices (Section The price controls on petrol and diesel were abolished on 26 June 2010 and 19 October 2014, respectively.

              2. The oil and gas sector in India is regulated by the Ministry of Petroleum and Natural Gas (MoPNG), and the Petroleum and Natural Gas Regulatory Board, which was established under the Petroleum and Natural Gas Regulatory Board (PNGRB) Act 2006; the Act was implemented partly in 2007 and in 2010. The MoPNG administers exploration and production of oil and natural gas, their refining, distribution and marketing of petroleum, petroleum products and natural gas. It also regulates the allocation and pricing of natural gas produced in the country through policy and administrative orders. Under the administrative control of the MoPNG, the Directorate General for Hydrocarbons (DGH), as an upstream regulator, was established in 1993, and it is responsible for promoting the New Exploration Licensing Policy (NELP) for new exploration programmes, and managing the Production Sharing Contracts (PSCs). The PNGRB was established in 2007 to regulate the activities of the midstream and downstream oil and gas sectors. The PNGRB is the statutory regulatory board under the PNGRB Act 2006. The PNGRB's main responsibilities include: granting authorizations to the entities selected to develop common or contract carrier pipelines for transportation of petroleum, petroleum products and natural gas, or city or local natural gas distribution networks (CGD networks); declaring existing pipelines/CGD networks as common or contract carriers; regulating access to common or contract carrier pipelines/networks with a view to ensuring fair trade and competition amongst entities; determining the transportation rates (tariffs) for usage of common or contract carriers; and registering eligible entities for establishing liquefied natural gas (LNG) terminals.

              3. Regarding exploration and production activities in India, the main legislation includes: (i) the Oil Field (Regulation and Development) Act 1948 and Petroleum and Natural Gas Rules 1959, which govern inter alia granting of petroleum exploration licences, mining leases, and royalty; (ii) New Exploration Licensing Policy (NELP), which allocates exploration blocks through international competitive bidding; and (iii) Coal Bed Methane (CBM) Policy, which allocates coal blocks for extraction of methane gas from coal seams through international competitive bidding.

              4. Regarding refining and marketing activities in India, the main legislation include the Industries (Development and Regulation) Act 1951 and its rules, and the Petroleum Act 1934, which regulates importation, transport, storage, production, refining and blending of petroleum. For gaining marketing rights for transportation fuel by private investors, including by foreign investment, a minimum threshold of investment (Rs 20 billion) must be made (and/or committed to be made). A number of specific product-wise regulations and rules framed under the Petroleum Act 1934 have been issued with a view to controlling adulteration and ensuring quality of the product.

              5. Over the past years, several laws, regulations and the rules concerning India's oil and gas sector have been adopted.29 They include: the Petroleum & Natural Gas (Safety in Offshore Operations) Rules 2008, the Petroleum & Natural Gas (Amendment) Rules 2009 specifying, inter alia, granting of exploration licences; and the Petroleum Amendment Rules 2011.

              6. FDI is allowed through the automatic route for a number of activities in the petroleum and natural gas sector. Up to 100% FDI is allowed under the automatic route for: (i) exploration activities of oil and natural gas fields, (ii) infrastructure related to marketing of petroleum products and natural gas, (iii) marketing of natural gas and petroleum products, (iv) petroleum product pipelines, (v) natural gas/pipelines, (vi) LNG re-gasification infrastructure, (vii) market study and formulation, and (viii) petroleum refining in the private sector. Up to 49% FDI is allowed under the automatic route in petroleum refining by public sector undertakings (PSUs), without any disinvestment or dilution of domestic equity in the existing PSUs. FDI is subject to the existing sectoral policy and regulatory framework.

              7. Prices of LPG for domestic use and kerosene are controlled. A two-price regime exists for natural gas, involving gas priced under the administered pricing mechanism (APM), and non-APM gas (Section The price of gas produced by ONGC and OIL under the APM was fixed at US$4.2/MMBTU in 2010. This was increased to US$5.61/MMBTU (on net calorific value) since 1 November 2014, to be valid until 31 March 2015, and decreased to US$5.18/MMBTU from 1 April 2015; the authorities indicate that the price was set by a prescribed formula related to international gas markets. The prices are to be revised every six months.

              8. At present, there is no gas pipeline connected to India’s neighbouring countries. Pipeline transport for petroleum and gas is regulated by various laws, regulations and rules including: the Petroleum and Minerals Pipelines (Acquisition of Right of User in Land) Amendment Act 2011; Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand Natural Gas Pipelines) Regulations 2008; and Petroleum and Natural Gas Regulatory Board (Determination of Natural Gas Pipeline Tariff) Regulations 2008 (Table A4.1).30

4.2.2  Electricity

              1. Electricity generation in India during 2013-14 grew by 6.0% (compared with around 4.6% in 2012 13).31 While production has been increasing, inefficiency due to transmission and distribution losses continues to hamper supply in India.32 The increased supply has also been unable to keep up with rapidly growing demand which has implications for economic growth. Around a quarter of the population still does not have access to electricity and supply can also be intermittent in urban areas. The electricity grid is connected to India's neighboring countries including Bangladesh, Bhutan, and Nepal; cross-border supply of electricity is under bilateral agreements between national governments.

              2. Under the Indian Constitution, electricity is regulated by both the central and State Governments. The Electricity Act 2003 governs generation, transmission, distribution, trading and use of electricity in India.

              3. In recent years, various regulations that are mainly concerned with technical standards and provision of information have also been adopted.33

              4. At the central level, the Ministry of Power is responsible for the administration of the Electricity Act 2003 as well as issues related to the Central Electricity Regulatory Commission (CERC) and rural electricity schemes. The CERC is responsible for regulating the tariff of generating companies owned or controlled by the central Government and those that operate in more than one State; it is also in charge of regulating inter-state transmission, including the issue of licences for transmission and trading, specifying the grid code and enforcing standards with regard to quality, continuity and reliability of service. The State Electricity Regulatory Commissions (SERCs) administer electricity firms (generation, transmission, and retail) operating in a single state. According to the authorities, the State Electricity Boards (SEBs), which used to be responsible for generation, transmission and retail in the States and were a significant source of inefficiency, have been unbundled to a large extent, with most States separating the transmission part from the rest; even after the unbundling, most of the State-owned distribution companies are loss making.34 In 2012, the Government adopted a Financial Restructuring Plan (FRP) for turnaround of the State distribution utilities by giving incentives from the central Government if the state distribution companies and the State Government follow some pre-specified mandatory conditions, including reduction of transmission and distribution losses. India's national grid is based on five inter-connected regional grids for transmission. Other related Ministries include the Ministry of Coal, the Ministry of Petroleum and Natural Gas, and the Ministry of New and Renewable Energy.

              5. Power exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations 2010 are subject to 49% foreign equity limit (FDI up to 26% and FII/FPI up to 23%). 100% foreign equity participation is allowed in all other segments of the industry (e.g. generation, transmission, distribution, and trading) under the automatic approval route. Certain fiscal benefits, in the form of duty concessions and tax holidays, are provided.35 In addition, all electricity projects have a 100% corporate tax exemption for ten consecutive years, within 15 years of commencement or from undertaking a substantial renovation or modernization of existing transmission lines. However, when not paying corporate tax, they are subject to minimum alternate tax (MAT).

              6. Competitive bidding guidelines issued in 2005 provide for the determination of tariffs for purchasing electricity by distribution companies; the CERC and SERCs are required to adopt tariffs determined through the bidding process. Exceptions include the one-time expansion of existing projects, i.e. existing generation projects can expand 50% of their current capacity within the present tariff regulation regime, or where a state-controlled company is identified as the developer of the project. A cross-subsidy is applied with industrial consumers subsidizing others, particularly in agriculture.36

              7. Recognizing that cross subsidies hide inefficiencies and losses in operations, the national electricity policy acknowledges the urgency of reducing such subsidies. However, the policy stipulates that consumers below the poverty line and consuming electricity below a specified level may receive cross-subsidies in the form of tariff reductions, which should be at least 50% of the overall average cost of supply. As the authorities considered that the complete elimination of cross subsidies would not be feasible in the near future, the Act was reviewed by the Government, and was consequently amended in 2007 to, inter alia, necessitate reduction of cross subsidies to around 20%, rather than the previously required "reduction and elimination of cross-subsidies".37

              8. India's electricity generation is highly dependent on coal, which forms almost half of the country's source of fuel and around 74.7% (between April 2014 and January 2015) of electricity generated.38 The Government has encouraged the development of alternative sources of energy, with the Electricity Act of 2003 providing a preferential tariff for renewable-based electricity and a mandatory renewable purchase obligation (RPO) for State utilities. The Jawaharlal Nehru National Solar Mission (JNNSM) was established in 2010 and aimed to accelerate the development of solar capacity in India's energy mix by providing subsidies and customs duty exemptions for capital equipment. The JNNSM further required that in order to avail of the subsidies all solar projects should use cells and modules manufactured in India, and 30% local content was required for plants or installations for a solar thermal project. The National Tariff Policy of 2011 further amended the RPO by adding a solar purchase obligation (SPO) as part of the RPO of 0.25% by 2013 and 3% by 2022. Grid-connected renewable energy generation constituted 5.65% of total energy produced between April 2014 and January 2015.

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