Viewpoint: Indian energy policy confounds investors

India's energy policy is at a crossroads. Different ministries are proposing conflicting policies governing fuel use, angering large investors. And the government is on a collision course with the judiciary over environmental issues, as efforts to reduce air pollution in the capital Delhi threaten to disrupt economic growth.

The lack of co-ordination over energy policy extends to the top levels of government. Oil minister Dharmendra Pradhan announced plans in December 2015 for a 1.2mn b/d refinery, potentially one of the world's biggest plants, on the country's west coast. The oil ministry expects India's refining capacity to rise to 12mn b/d at an undisclosed date from current levels of about 4.6mn b/d, led by investments at state-controlled firms. The new capacity is needed to meet forecast domestic demand growth of 8pc/yr, from 3.9mn b/d now.

But the big increase in refining capacity appears to run counter to plans for India to embrace electric vehicles (EVs). Transport minister Nitin Gadkari, an influential politician and former president of the ruling BJP, wants to phase out gasoline and diesel vehicles in favour of EVs, a move that threatens 1.6mn b/d of diesel and 600,000 b/d of gasoline demand.

Fuel producers were further rattled after rail and coal minister Piyush Goyal announced plans to electrify India's entire rail network by 2020. This would affect around 52,000 b/d of diesel demand and could lead to a dispute with US firm GE, which has a contract to build and supply 1,000 diesel locomotives in India over 10 years.

The government is facing external pressure to clean up India's polluted cities. Delhi in November brought forward plans to supply cleaner Bharat Stage 6 (BS-6) fuels in the capital by two years to 1 April 2018, after criticism from the Supreme Court over its lack of intent to curb pollution. The BS-6 regulations, which cap sulphur content at 10ppm (0.001pc) with low levels of particulates and nitrogen oxide, are the equivalent of the Euro-6 vehicle emissions standards.

Court clashes

The conflicting policy pronouncements and clashes with the judiciary have created uncertainty for investors. State-run refiners are planning to spend 280bn rupees ($4.4bn) to upgrade their plants to produce BS-6 fuels. And the price tag for the new 1.2mn b/d refinery and petrochemical complex, which will be built by IOC, Bharat Petroleum and Hindustan Petroleum, runs to $40bn. But there are major doubts about whether the huge refinery will be profitable if gasoline and diesel vehicles are phased out.

Foreign automakers including Mercedes-Benz, Toyota and BMW are already rethinking investments because of uncertainty over India's fuel mix given the absence of a clear-cut policy. The plans to switch to EVs, and to curb vehicle emissions and pollutants, come as Indian courts have criticised the BJP government and penalised the environment ministry for moving slowly to frame laws to reduce pollution.

The business-friendly BJP government has delayed appointing judges to the High Courts and Supreme Court, and has not filled vacancies on the National Green Tribunal, the country's top environment court. This is preventing the judiciary from taking up some environmental cases, critics say.

But India's Supreme Court has nevertheless aggressively pursued a few cases relating to pollution, particularly after severe smog in Delhi in November led to a health emergency.

The Supreme Court has banned the use of petroleum coke and furnace oil with 15,000-70,000ppm sulphur levels in Delhi, Uttar Pradesh, Haryana and Rajasthan, with some exemptions. This will force industries to burn coal or other fuels in place of petroleum coke, which is cheaper and has a higher heating value. The court has also asked state governments to consider banning petroleum coke across the country. India has been the world's largest petroleum coke importer in recent years, importing about 14mn t in 2016.

The Environment Pollution Control Authority, a body appointed by the Supreme Court, has also asked state-run refiners led by IOC to stop selling petroleum coke in the northern region.

The judgements threaten hundreds of millions in dollars in investments on delayed coker units at state-controlled refiners and private-sector producers such as Reliance Industries. A nationwide ban, or continued restrictions, would hurt refiners even more and add further uncertainty to the government's confused energy policy.