1. Editorial: Limited gas solution

Editorial: Limited gas solution

No alternative to hiking gas and electricity prices

By: | Updated: March 27, 2015 1:00 AM

A long-term solution to the gas shortage in the country appears out of reach since the government’s pricing formula hasn’t made it worthwhile for producers to explore in the deep seas, where most of India’s gas is. As an interim measure, the government has proposed that gas be imported to fuel the stranded and unutilised power capacity—if 24,000MW of capacity gets to operate at a 50% PLF, the plants will be able to at least service their debt. Wednesday’s proposal, cleared by the Cabinet Committee on Economic Affairs, envisages imports of LNG at a lower landed cost, with GAIL not charging for transporting the gas, the states not levying VAT and the re-gasification terminals offering concessions; in other words, it is just a temporary, patch-up job. Power producers, for their part, have to forego the return on their equity and participate in a reverse-bidding process that buys the electricity from the one that asks for the least subsidy, given the R5.5 per unit cap put on power prices. The subsidy will be given from the Power System Development Fund.

Should an additional 78 billion units of power be generated, as is being talked about, at a landed gas price of $10 per mmBTU, the subsidy bill could be approximately R8,000 crore if this is R1 per unit of power; at R2, the amount will double. Given the size of the banks’ exposure, of around R85,000 crore, to gas-based power plants—all of which can become non-performing if the units operate at their current capacity levels—this is probably money well-spent even if it is, in some senses, a bailout. But the money won’t last forever and, therefore, it is important to find a permanent solution. This means fixing gas prices at levels that incentivise producers to drill in the deep waters. Abandoning the Rangarajan price formula was a bad idea which, implicitly, the government also accepted when it said it would fix a premium for deep-sea wells; that premium, however, has still not been declared. Equally important, until the government ensures state-level regulators bring electricity tariffs to remunerative levels, even the extra gas production in the country won’t help the power plants as there will be few buyers for the electricity. Tough decisions on gas and electricity prices can’t be postponed indefinitely.

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