Unwise pooling

| Updated on March 24, 2013 Published on March 24, 2013

If public utilities make their infrastructure available for third party sales, then power produced from expensive imported gas is still viable.

The proposed price ‘pooling’ mechanism for gas, aimed at improving the viability of power plants that have come up in different parts of the country, is a really a euphemism for state subsidy and should, therefore, be given up. True, many of these units are either idling or running way below capacity for want of cheaper domestically produced gas. While imported liquefied natural gas (LNG) is available, it costs roughly three times more. By having a common pooled price for domestic and imported gas, the proponents say that it will not only bring down power production costs, but would also prevent the estimated 24,000 megawatts of capacity turning into non-performing assets for banks.

The obvious question is: If imports are so expensive, what made these power companies set up the above capacities, and banks fund them, in the first place? Even if they came up primarily on the assumption of increased domestic gas availability from the Krishna-Godavari fields — which did not materialise — that cannot still be an argument for ‘price pooling’. If the promoters as well as bankers made certain projections that backfired, they should be prepared to face the consequences and not expect a bailout, which is what gas price pooling ultimately amounts to. If, on the other hand, the producers had been assured of gas supplies through contractual commitments, they should resort to legal remedies that may be available under such contracts, rather than look for a state bailout. The right course, otherwise, is for the companies to exit the projects and take losses on their books. The banks can, then, offer the plants to any willing operator acquiring them at the going enterprise value. After all, isn’t this what was done with the Dabhol Power Company, where a consortium led by NTPC and GAIL took over and revived the failed venture of a US corporation, which itself went bust?

But then, it can be asked whether running a power plant fired on imported LNG is viable. The short answer is yes. Even at a landed cost of $13 per mmBtu, electricity can be supplied at Rs 7-8 a unit. There is certainly a market for this, especially among those now using gen-sets to produce own power at Rs 13-14 a unit. Moreover, such power is most useful to meet peaking requirements that coal-based plants cannot, since they largely cater to base load demand. If State power utilities sincerely make available transmission facilities for third-party power sales, there is no reason why electricity cannot be sold at Rs 7-8 a unit, making gas price pooling unnecessary. Pooling also has no meaning when the Government intends to anyway move to a market-driven pricing regime for domestically produced gas, which was actually promised under the New Exploration and Licensing Policy. By reneging on it, and now talking of pooling, the Government is sending wrong signals to those still interested in exploration and development activity in the country.

Published on March 24, 2013

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