India: Freeing coal imports makes gas pricing a non-issue

2013-07-01

The government continues to weigh its options on the issue of gas pricing with a Cabinet Note acknowledging the political compulsions in arriving at the solution. The note goes on to say that the economic role of rational energy pricing is not adequately appreciated.

While the gas producers wants the gas to be priced on landed cost basis, the Rangarajan panel has suggested a pricing based on prices prevailing in certain countries. While the landed price is around $13-14 per mmBtu, the Rangarajan panel price, which is likely to be the price announced by the government, is around $6.775 per mmBtu.

There is however, an important aspect of pricing that has been missed out and might need consideration, which is substitutable value. This comes in play when gas is being used as a fuel stock. It cannot be easily substituted as feedstock in the fertiliser industry for production of ammonia.

Gas as a fuel can be substituted by any other fuel which is comparable in pricing. Essar Power has announced that it will be switching two gas-based power plants to coal. The company operates two units of 515 mw and 500 mw, which will come down to 430 mw after conversion in three years. Importantly, the cost of power will come down dramatically from Rs 9-10 per unit to Rs 4 per unit. The company uses this power for captive consumption in Essar Steel.

The government's allowing imported price of coal to be passed on to the consumer makes coal more economical as compared to gas. The logistical cost involved in transportation of gas is high given not only the cost of infrastructure to be set up at ports but also that of transporting it inland.

Essar Power's decision suggests that even though it is situated at the port and has an established supply of gas, imported coal is still cheaper.

Allowing coal imports and the cost to be passed on is clearly beneficial to those units which produce and consume power for captive usage and do not need to compete with other units consuming subsidised coal.

Since both gas and coal are burnt to produce steam which in turn produces power by passing through generators, it is the fuel that burns at the lowest cost that will be in demand. Technology for converting gas-based plants to coal-based one is available off the shelf, thus the choice of shifting fuel will only be a commercial decision.

Rather than solving a problem by allowing coal imports at actuals, the government has added a new one for gas producers. But then this government has always been short-sighted to see the impact of its policy over the longer term.

Source from : Business Standard

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