NEW DELHI: The power ministry will allow producers to raise tariffs if fuel costs of new projects rise, and will not oppose a hike in domestic gas prices. The move would hurt consumers but rescue large private investments that are threatened by uncertainty over fuel and tariffs.
Linking tariffs to fuel costs will help new power projects, such as the next set of ultra mega power plants (UMPPs) yet to be awarded, and gas-fired electricity plants with a capacity of over 7,000 mw that have been built but are idling because of fuel scarcity, Power Minister Sushilkumar Shinde told ET.
His remarks will cheer private power producers, which are expected to build 60% of the new capacity in the next five-year plan. The comments would also be music to the ears of gas producers such as Mukesh Ambani’s Reliance Industries.
Reliance Industries wants higher prices to justify investments in proven new gas fields but is facing resistance from the oil ministry.
“We are willing to pay more for gas … if it is available. There is demand for electricity even at higher cost. For developers we can make the fuel cost pass through,” he said. Shinde’s views on gas pricing are significant as the government has justified tight controls over domestic gas prices on the grounds that the power and fertiliser sectors cannot afford to pay more.
Shinde said building new capacity was a priority for his ministry and he was monitoring all new projects, helping the country add a record 20,500 mw of new capacity in 2011-12. He said appropriate policies for fuel supply and tariffs were important to sustain the momentum.
“The sector will otherwise not remain attractive to investors,” the minister said. However, the move to link tariffs to fuel costs would not apply to existing UMPPs of Tata Power and Reliance Power, which are suffering because they can’t bill customers for the sharp rise in cost of imported coal, but Shinde said he would find some solution for these projects too. He did not give details.
New power projects with a capacity of more than 30,000 mw are idling or underutilised because of acute fuel scarcity and high cost of imported coal. Shinde said if fuel costs are passed on to customers, power producers would be able to use existing capacity and build new plants.
Several gas projects have suffered because output from Reliance Industries’ KG-D6 block has fallen. The company recently said it was preparing multi-billion dollar investments in new fields but it needs market-linked pricing.
The government has approved a price of $4.2 per unit for KG-D6 gas up to 2014, but the company wants to raise rates before that to help it invest more in new fields, which would not be viable at the old price. Shinde said the government had sought legal opinion on raising the price of gas from RIL’s KG-D6 basin.
RIL’s KG-D6 block was producing 60 mmscmd of gas two years ago, but output has fallen to about 34 mmscmd now, and is expected to fall by another 18 mmscmd in the next two years.
Developers are finding it difficult to run imported coal-based plants as regulatory changes in mineral-rich countries such as Indonesia and Australia have made imports unviable.
Tata Power has expressed inability to profitably run Mundra UMPP in Gujarat, while Reliance Power has stopped work on Krishnapatnam UMPP in Andhra Pradesh.
Shinde said the government is exploring options to help the companies. He said shortage of coal and gas was his ministry’s primary concern, which had led to the country missing the five-year target of adding 62,000 mw capacity.
“We could have achieved the 62,000 mw target given to us by the Planning Commission after the mid-term assessment if gas and coal were available. Still, we have added 55,000 mw, the highest in any five-year period. In 2011-12, we added 20,502 mw against a target of 17,000 mw. This is more than what we added in the entire 10th Five-Year Plan,” he said.