Gas-based power companies agree to revenue cut to enable price pooling

NEW DELHI: In a move aimed at preventing their investments from turning bad, developers of about 24,000 MW of stranded gas-fired power plants have agreed to take a cut in their revenues to help take off a power ministry proposal on price pooling of gas.
The ministry has proposed to supply domestic and imported gas at an average 'pool' price to gasbased power plants. To keep electricity tariffs from these plants low, the government has proposed to waive customs duty on natural gas imports.

It is also likely to ask states to abolish taxes on gas and state-run Gas Authority of India to reduce transportation charges. "The move aims at reducing the Centre’s subsidy burden from the proposal. The Centre plans to utilise the National Clean Energy Fund to meet the subsidy burden," a senior government official said.

As per the proposal, imported and domestic gas will be supplied to the projects at an average price and the government will subsidise the state distribution companies to keep electricity tariff at Rs 5 per unit in this financial year and Rs 5.5 per unit in 2015-16.

The power ministry had earlier proposed a subsidy burden of Rs 5,677 crore, which will decrease substantially if the taxes and transportation charges are lowered. "Most of the stranded private power developers have agreed to forego up to 20% of their fixed cost if the government supplies them fuel at pooled prices," the official said.

"The government also plans to abolish duty on gas imports and ask the state governments to waive value-added tax on gas and central sales tax. The petroleum and natural gas regulatory board needs to be approached for reduction in pipeline tariff." Ashok Khurana, director-general at Association of Power Producers, lauded the move.

"All stakeholders coming together and sacrificing a bit will help the 24,000 MW of gas-based stranded capacity to operation. This will mean additional power availability and contain damage to banking sector," he said.

Now, there is a 5% customs duty, 0.2% education cess and landing charges on imports. Value-added tax varies 0-26% from state to state. The central sales tax is levied by the Union government but collected by states.

The pooling proposal, if implemented, will benefit power plants of NTPC, Lanco Infratech, Essar Power, Reliance Power, GVK Group and GMR Energy, among others. The power and petroleum ministries are drafting the pool mechanism in consultation with the Prime Minister’s Office.

Once finalised by the ministries, the pooling mechanism will be sent for Cabinet approval. The proposed package aims at salvaging Rs 1 lakh crore capital investment in the power plants by supplying them fuel to operate at about 50% of their capacity.

In August, the plants operated at 21% of their capacity, making it difficult for companies to recover fixed costs. Debasish Mishra, senior director-consulting, Deloitte Touche Tohmatsu India, however, said higher natural prices in the international markets might render the proposal unviable.

Gas prices are hovering around $9-12 per mmbtu in international markets.