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Tuesday, 09 September 2014 00:00
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It is so attractive, it needs to be pushed further

Given how strapped the country’s power plants are for coal and natural gas, it has never quite been clear why no viable solution to this has been found so far. The natural solution, earlier governments have accepted, has been to pool prices of the locally available fuel with the more expensive imported one. This has, however, been opposed by existing power plants, often in politically important states, on the grounds this will make power production more expensive for them. While anyone losing an advantage has a right to protest, it has to be recognised that cheaper fuel from a PSU, or based on a government diktat in the case of natural gas, is not a natural right. To that extent, given the alternatives, the government is well within its rights to charge them higher prices. Indeed, given the shortage of power in the country, it makes the most economic sense.

While the exact numbers differ depending upon the amount of power capacity being talked about, estimates are that if local and imported coal prices are pooled, this will make a difference of 18-20 paise per unit of generating costs if spread across even the older coal/lignite based power plants; if, however, this is spread across power plants built in the last 5 years, it works out to a higher 60-70 paise. And as time goes by, and more capacity comes on line based on imported fuel—since there isn’t enough domestic coal capacity—the number will fall even further. A power ministry estimate last week—a proposal based on this is to be taken to Cabinet—is that if pooling is done across all power plants, the increase in generation costs will be 23 paise for FY15, 17 paise for FY16 and a mere 2 paise for FY17. If the price pooling is done for the post-2009 plants, the price hike would be 74 paise for FY15, 44 paise for FY16 and a mere 5 paise for FY17.

Juxtapose these costs of pooling—either for all power plants or just the post-2009 ones—with the costs of not doing this. If the plants are shut down due to lack of fuel, the buyers end up paying the capacity charges of around R1-1.2 anyway. So, it is more economical for them to pay the higher fuel charge and sell the electricity at rates of around R2.5-3 per unit. Indeed, for the economy as a whole, the efficiency gains from price-pooling are so high, it is not clear why governments so far have not pushed for this. The same principle, needless to say, applies to other fuels like natural gas where an equally large power capacity is lying unused due to lack of local fuel and the government’s inability to enforce price pooling. In general, while taking into account, and often rejecting, the increased costs from any action, it is important to keep in mind the cost of not taking any action—in terms of power plants either functioning at lower capacities or not functioning at all.


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