Although the power sector is the single largest consumer of natural gas in India, the hike in prices of that fuel will have a limited impact in the medium term for generators. Yes, prices will increase, but consumers are likely to be shielded to a great extent.
There are only about 20,359 megawatts (MW) of gas-fired power plants that are operating today. That’s just 9% of the country’s installed capacity. Their contribution to electricity production is even lower—at 7% for fiscal 2013—and is falling further. Many of these plants are standing idle today because of the lack of gas. The plant load factor, or capacity utilization, at these generation units is only about 30%.
In the last fiscal, gas shortage was responsible for 69% of generation shortfall in India. Gas-fired plants receive only about 27 million metric standard cu. m per day (mmscmd) of fuel, compared with the 72 mmscmd required to operate at 75% capacity utilization levels. It is only expected to get worse in the short run with the output declining from sources such as the Krishna-Godavari D6 basin.
Although there is much talk of how an increase in gas prices will boost investment in gas production, any gains in supply are at least a couple of years away.
Sure, for the existing power plants, tariffs will rise. Most of the gas-fired plants in the country have power purchase agreements that allow them to pass on the fuel hikes.
These pacts are based on plant availability: that means if the producer is able to show that he has the fuel and the capacity to generate, then the customer has to pay fixed charges, irrespective of whether it actually buys power.
According to Crisil’s estimates, this fuel price increase will boost the variable cost of generation by around Rs.2 per unit in 2014-15.
But note that gas tariffs are already high because of low capacity utilization as the fixed cost is spread over a lower number of units. At 30% utilization level, tariffs are as high as Rs.6 per unit.
Thus, the preference for electricity generated from this source is already low among the cash-strapped state distribution companies. Even at 100% plant load factor, under the new pricing scenario, gas-fuelled electricity will be one-and-a-half times the cost of power generated from domestic coal, calculates India Ratings.
Given gas’s low contribution to the overall power supply, the impact on customers may vary from 9-15 paise a unit, according to calculations by various rating agencies.
Still, that may not come to pass as there are indications that the government may subsidize the cost of fuel for utilities, never mind the additional cost to the exchequer and the pressure on the fiscal deficit.