BackModi’s gas push faces risk from coddled consumer
The first rise in natural gas prices since 2010 leaves a key weakness unresolved: consumers who don't pay enough for power
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New Delhi: India’s first increase in natural gas prices since 2010 to reverse sliding production leaves a key weakness unresolved: consumers who don’t pay enough for power.
Prime Minister Narendra Modi raised the gas tariff by about one-third on 18 October, part of his biggest energy policy changes since taking office in May. Indebted utilities face the higher charge even as they’re required to sell electricity below cost, raising the risk they’ll favour less expensive sources of power.
“In the end, you need to charge users for their consumption—that’s the bottom line," said Rajiv Biswas, chief Asia economist at IHS Global Insight in Singapore. Still, the gas revision is a “good" start to boost output, he said.
Modi on 18 October showed some willingness to make consumers pay market rates for energy by ending diesel-price controls that had shielded Indians from the fuel’s full cost. A similar step for electricity retailers such as BSES Rajdhani Power Ltd and Tata Power Co. Ltd would provide more funds for energy production as Modi seeks an end to blackouts.
The new gas tariff is $5.61 per million British thermal units from 1 November, up from $4.2, and it will be reviewed half-yearly. The previous government under Manmohan Singh had approved a different formula that would have doubled gas prices, a decision Modi put under review.
The cost of gas-fired power generation is set to rise about 25%, Icra Ltd, the local unit of Moody’s Investors Service, estimated in a note on Monday.
‘Cheaper options’
While explorers such as Oil and Natural Gas Corp. Ltd (ONGC) have welcomed the higher tariff, some power generation companies are concerned that electricity distributors will curb demand for gas-fired supplies.
“Because our cost of generation goes up, we may see some reduced purchases by retailers, who’d seek cheaper options," said A. Issac George, the chief financial officer at Secunderabad, India-based GVK Power and Infrastructure Ltd.
The company has idled three gas-based plants with a combined capacity of 1,131 megawatts because of a lack of fuel, and a plan to add 1,600 megawatts remains deferred, George said.
India cushions the retail electricity price as more than 700 million people live on less than $2 per day, according to World Bank data. Distributors also face about $17 billion of lost revenue annually from stolen power, inefficient transmission and patchy metering.
ONGC outlook
Despite these obstacles, any gas price increase boosts the revenue outlook at explorers such as ONGC, Oil India Ltd and Reliance Industries Ltd, according to IDFC Securities Ltd.
“ONGC will stand to gain the most because of the sheer volumes they produce," said Prakash Joshi, Mumbai-based analyst at IDFC Securities.
Each $1 increase in the price of gas boosts ONGC’s annual profit by ₹ 2,350 crore, according to D. K. Sarraf, the chairman of New Delhi-based ONGC.
“The increase in gas prices and decontrol of diesel are just the beginning of energy-sector reforms in India," Sarraf said, adding the steps will spur investment.
The picture for billionaire Mukesh Ambani’s Reliance Industries Ltd, locked in a dispute with the administration over output levels from some gas fields, is more hazy. The company won’t get the proceeds of the higher tariff until the spat is resolved, the government said.
India’s gas output has declined to about 91 million cubic meters a day in the five months through August 2014 from more than 140 million cubic meters daily in the year ended March 2011, oil ministry data show.
That led to imports of costlier liquefied natural gas (LNG). India uses the fuel mainly to make fertilizer and electricity. Coal accounts for more than 60% of electricity generation capacity, compared with about 9% for gas, according to Central Electricity Authority (CEA) data.
“New exploration and production is going to take some years at least," said IHS’s Biswas. “You need to see some further increases in the price of gas. Even if it takes another year or 18 months, it’s moving in the right direction." Reuters
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