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Will gas price pooling rescue India's power sector?
Wed, 28 Aug Pre-Open

India's power sector is a glaring example of Government's lack of proper policy framework, planning and execution. It has not been too long when everyone was gaga over gas discoveries in the Reliance's KG D6 basin. A lot of infrastructure was set up anticipating the easy availability of fuel, be it the gas pipelines in the country or gas based power plants. However, the gas supply commitment was not met and this entire infrastructure is lying either idle or underutilized, thus becoming a huge drag on domestic economic health.

It would not be an exaggeration to call the power sector the backbone of Indian economy. It is for this reason that power sector is one of the priority sectors (ranked post fertilizer sector) as far as gas allocation is concerned. However, as domestic gas sources have dried up, the sector is hardly receiving any domestic gas and most of the gas based power generation capacity has been left stranded.

As per an article in Livemint, the Power Ministry is considering a proposal to add imported gas into the system. The idea is to pool the prices of domestic and imported gas to solve the issue of domestic gas shortages and capacity underutilization. It is important to note here that currently; imported gas costs around three to four times the domestic gas. India's share of imported gas is only going up since there is not much hope in the near to medium term as far as domestic gas supplies are concerned. All this means that in case pooling happens; the cost of producing power will go up significantly. We wonder how the sector will bear such costs (as the power ministry had earlier stated that a base price above US$ 5 per mmbtu will be unviable for the sector).

Recently, the government had announced a hike in the domestic gas prices to be applicable from next year. While this is likely to narrow the difference, we should not forget that the imported gas supplies or prices (absolute prices and exchange rate vulnerability) will be totally beyond our control. As such, the arrangement will make the power sector extremely vulnerable and volatile. Since imported gas will have a better acceptability post price pooling, gas importing companies will be left with little incentive to negotiate for lower prices in the long term gas import contracts.

Also, it is unlikely that end users will be ready to pay very high costs. It is quite probable that the Government ends up bearing subsidy burden (power being a priority sector). With country's fiscal health already in a mess, we will not be surprised if such a move will do more harm than benefit. Not to mention the associated implementation risks and transparency issues with pooling concept.

We believe that unless domestic gas supply scenario improves, it is difficult to be optimistic about gas based power generation capacity. However, there are some lessons to be learnt from this situation. It is important that the Government allocates resources of national importance to players that can deliver on their commitments. Because of execution failure on part of private gas exploration company, the entire nation is suffering and no serious action is being taken by the Government. As far as current crisis is concerned, perhaps it will be better to look at alternative sources like coal where we can have better control over resource and pricing. But that again will need a lot of reforms from the Government to facilitate the coal production and ensure self reliance. Hope the policy makers are listening.

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Feb 23, 2018 (Close)