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Wednesday, 22 February 2012 16:04
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RIL’s KG output poses big challenge for power sector

If Coal India’s poor levels of production aren’t enough of a source of worry, the power sector’s woes are all set to increase as Reliance Industries’ output from the KG Basin looks likely to fall further, FE reported Monday. Around 12% of India’s power production today is based on natural gas, around a third of which comes from RIL, and any shortfall here will impact power production immediately—in terms of the capacity under construction, the impact will be far greater. Theoretically, the firms can import regasified LNG (R-LNG) but capacity needs to be ramped up for that and, more important, it costs 2-3 times what RIL’s gas costs. In the case of the coal sector, similarly, while the PMO has come up with a solution that allows for pooling of imported and local coal prices—Coal India has been told it needs to import coal if need be, but it has to supply the coal needs of power plants—this will increase coal prices by around 30-40%. The figure can rise as more power plants come up. Naturally, Coal India is not going to absorb this cost, but will pass it on. Since no state has any automatic method of linking tariffs to costs, this means the already tottering power sector will go over the brink. Having to import R-LNG to make up for the fall in RIL’s production will only add to this. The situation is not much better for other sectors like fertilisers and city gas.

In other words, India probably needs to go back to the drawing board and rework its demand-supply scenario for energy for the next few decades. This is not just due to the fall in RIL’s production (this could once again get back on track now that BP is part of a JV with RIL for the fields) but includes the problems faced in coal supply which continues to be the mainstay of the energy scenario. Whether we like it or not, future supply responses are unlikely to grow as desired unless prices reach international levels, and that applies as much to coal as it does to natural gas. But you can’t have international prices for raw materials if you don’t have international prices for the final product, whether power or fertilisers—if the government wishes to subsidise, this has to be explicit, through the budget. That is the new reality and any planning in the absence of this is likely to be a waste of time.

 

 

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