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Wednesday, 29 February 2012 00:00
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Raising gas/coal prices means power costs rise

The Prime Minister’s Office (PMO) getting into overdrive is certainly good news for a government that has been accused of policy paralysis for so long, but increasingly its solutions are looking piecemeal, with not too much thought going into the overall impact of a policy action. In the coal sector, when private sector power producers complained of non-supply of coal by the state-owned Coal India Ltd (CIL), the PMO asked CIL to supply coal to all power producers by, if need be, even importing coal. While that may have helped 50,000 MW of power projects, as the PMO said, the fact is imports of that order of magnitude will likely drive up coal prices by 40%. Given how power sector losses have risen from R26,730 crore in 2006-07 to R63,548 crore in 2009-10, coal hikes of this order will send the tottering sector over the edge and, with it, several banks with large exposures. Nothing in the manner CIL was asked to supply coal suggested the impact on the power sector and the banks had been taken into account while taking the decision.

While the PMO has now asked the petroleum ministry to get a legal opinion on whether Reliance Industries Ltd (RIL) can be allowed to hike prices from the $4.2 per mmbtu that was finalised by the Group of Ministers in October 2007, the real issue is once again about the downstream impact. Each one dollar hike in gas prices results in power costs rising by about 35 paise per unit, or 50 paise by the time it reaches the end consumer. Since what is being talked about is a $3-4 hike, if not more, the impact on the power sector’s finances will be large—the principal argument made by those who argue for a hike is that all contracts today, including by government companies, are taking place at a price that is double or triple that paid to RIL. It is obvious allowing RIL to charge a higher price will send out a good signal to potential investors in the petroleum sector, but this has to be balanced by the impact on the downstream sector. At the end of the day, the issue that the Empowered Group of Ministers (EGoM) has to keep in mind—the legal opinion got by the oil ministry has to be given to the EGoM—is that you cannot have deregulated prices in an input sector (gas) unless prices are deregulated in the output sector (electricity, fertilisers) as well.

 

 

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