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Fuel Concerns: Rising diesel prices add to operator woes

October 31, 2011
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Vikas Singhal, Head, Power and Fuels, ICF International

In India, the demand for diesel has been growing steadily at 4-5 per cent over the past few years. This demand is expected to remain strong throughout the country in the short and medium terms. According to Twelfth Five Year Plan estimates, it is expected to reach 80 million metric tonnes (mmt). By the end of 2011-12, the demand is likely to reach 62 mmt.

The crude and diesel prices have moved at a close linkage. The margin between crude and diesel has been quite high, especially in 2008-09. In 2009-10, however, the prices and the margin between crude and diesel decreased. The movement of oil and crude prices in the global market is an important phenomenon as it can affect the operational costs of the telecom industry.

The high duties levied on diesel and value added tax (VAT) have been the key factors driving up diesel prices. If these components can be rationalised, diesel prices can be brought down. Higher state taxes are leading to a further hike in diesel prices. Due to the difference in VAT and duties across states, diesel prices vary by up to Rs 6 per litre between states. Karnataka, Gujarat, Maharashtra and Madhya Pradesh top the list of states with high diesel prices. The lowest prices, in the range of Rs 40-40.50 per litre, are charged in Haryana, Punjab, Assam, Meghalaya and Mizoram. Diesel prices are the highest in the southern and western regions, and comparatively lower in the northern and eastern states.

With oil prices increasing globally, the union government has continuously worked towards driving down the central sales tax and duties on diesel. There exists a sound rationale behind its intervention in rationalising diesel prices. Currently, 85 per cent of the total crude oil refined in India is imported. The price of crude oil constitutes a substantial portion of the diesel cost, and the high crude prices in the global market lead to an increase in diesel prices in India. Therefore, to reduce the impact of the high international crude prices on the domestic diesel market, the government stepped in to control retail prices.

The government has taken a number of measures to rationalise taxes and duties for keeping diesel prices within reasonable limits. The customs duties on diesel decreased from 20 per cent in 2002 to as low as 2.5 per cent in 2008. Going forward, the government will perhaps do away with subsidies by enabling the sale of diesel at market prices and bring about a further reduction in taxes.

In the telecom industry, diesel is consumed primarily by tower companies. The tower industry’s demand for diesel is expected to increase from 2.2 billion litres in 2010 to 2.9 billion litres by 2012 and go up to 3.8 billion litres by 2015. This demand will grow in tandem with the increase in the number of tower sites. India had a portfolio of 337,000 towers as of end-2010, and this number is expected to grow to 452,000 by 2012 and 582,000 by 2015.

Energy costs account for a substantial 52 per cent of the total operational cost of a tower site. The typical energy costs for a telecom site, when power is supplied by the electricity board, are estimated at Rs 26,179 per month and Rs 22,774 per month for an indoor site and for an outdoor site respectively. When there is no supply of power from a state electricity board, these numbers inflate to Rs 37,787 per month and Rs 33,029 per month for an indoor and outdoor site respectively.

Operators need to take several measures to manage their energy costs. On the supply side, alternative sources of energy like solar hybrids, wind energy and gas turbines can be used instead of conventional sources. Hybrid projects of solar panels and diesel generators can be deployed at cell sites that are located farthest from the nearest available grid supply in rural areas. Small wind turbines (3 kW) for harvesting wind energy are typically deployed in areas where the average wind speed is over 4 metres per second. A gas-based generator or a microturbine works on natural gas and is a lot cheaper than diesel oil.

Energy efficiency measures that can be adopted by operators include integrated cell site power management, usage of direct current diesel generators, adoption of fuel catalysts, and remote monitoring of diesel generator runtime and fuel consumption. Such measures can increase the operational efficiency and bring down energy costs at the site.

The government must also be proactive in reducing diesel costs for telecom operators. Since the telecom industry is the third largest consumer of diesel in the country, some portion of the cess (Rs 2 per litre) that is collected on diesel and used for the development and maintenance of national highways, state roads, rural roads and safety should be allocated to the telecom sector for improving energy efficiency and reducing energy costs.

The telecom industry should be classified as an industrial consumer category instead of a commercial consumer category.

The industry needs to build up a case for obtaining government incentives for using alternative energy sources. This includes various options suggested by the Bureau of Energy Efficiency. Energy management services should be procured through a specialised independent solutions provider, where the agency implements and manages the projects. International climate funding options need to be explored for such project-based approaches. Experimenting with new models supported by multilateral funding agencies should be considered by operators. These organisations finance projects that are consistent with environmentally sound energy use.

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