Light Dims for Millions as Gas-Price Rise Looms: Corporate India

The light bulb in Komal’s room flickers and dies, preventing the 17 year-old from studying for high-school exams as she strives for an education that can help her escape the squalor of a slum in New Delhi.

Komal, who goes by one name, is one of the hundreds of millions in India suffering outages that can last hours a day even in parts of the national capital. The cuts may yet deepen, as a government plan to double the price of natural gas on April 1 to boost production risks making a fuel that accounts for about a 10th of power-generation capacity too costly.

“Gas power is extremely sensitive to gas prices,” N.N. Misra, operations director at state-run NTPC Ltd., the nation’s biggest power generator, said in a Feb. 14 interview. “We’re currently running our plants at 35 percent capacity. It is anyone’s guess what will happen if the price doubles.”

India’s aim is to spur more output from Reliance Industries Ltd., operator of the country’s biggest natural gas field, and lure explorers such as Exxon Mobil Corp. by raising prices closer to global rates. The risk is that indebted electricity distributors will demand more coal-fired power instead, even as the country struggles to mine enough of the fuel and nations from China to the U.S. seek cleaner gas-based power.

India in June approved a new formula for calculating the price of gas, which will take it to about $8.4 per million British thermal units from $4.2. The tariff would remain lower than the benchmark import price in the spot market of more than $16. That import rate was at about $8 in 2009.

‘No Buyers’

Even as the government pushes ahead with raising the price, it requires power distributors to sell electricity below cost, forcing them to increase debt to pay for supplies.

“There’s a view gas prices above $6 aren’t viable for power plants,” said Ashok Khurana, director general at the Association of Power Producers, which counts non-state generators Tata Power Co., Adani Power Ltd. and Reliance Power Ltd. as its members. “If prices double, the plants will have no buyers and will have to shut.”

The weighted average electricity tariff for gas-fired power in India was 3,840 rupees ($62) per megawatt hour in the year ended March 2012, Bloomberg New Energy Finance wrote in a Jan. 6 report. The average capacity use that year was about 57 percent, which required a tariff of more than 4,500 rupees per unit to take a profit, according to the report. Once gas prices double to $8.4, and at 40 percent capacity use, rates need to be 6,000 rupees per unit.

Lights On

Keeping the lights on remains a key challenge for Prime Minister Manmohan Singh, ahead of the general election due by May, as he struggles to revive economic growth from about a decade low in the nation of 1.2 billion people. In 2012, two power-grid collapses in 36 hours left 600 million people sweating.

India had the third-largest energy demand in the world after China and the U.S. in 2009, according to a report by the International Energy Agency in 2012.

Coal accounts for more than 70 percent of generated electricity, followed by hydro power at 15 percent and natural gas at 10 percent, it said. The power sector’s share of domestic natural gas consumption is 53 percent, followed by the fertilizer industry with 26 percent, the IEA said in the analysis.

India produced 558 million tons of coal in the year ended March 31, trailing a demand of 696 million tons. The gap between local output and demand for the fuel is expected to widen through the year ending March 2017, according to a presentation on the website of Coal India Ltd., the world’s biggest producer of the fossil fuel.

Energy Imports

Energy imports are contributing to the country’s current-account deficit, estimated by the government at $45 billion in the fiscal year ending March. That shortfall has weighed on the rupee, which is down about 13 percent versus the dollar in the past 12 months.

In the gas industry, the planned price rise isn’t prompting companies to revive stalled investments as supplies from India’s key deep sea wells dwindle.

New Delhi-based NTPC has halted a project to expand its gas-fired plant near New Delhi by 750 megawatts. About 11 percent of the company’s 36,990 megawatt capacity is gas-based.

Pipeline Projects

GAIL India Ltd., the nation’s biggest natural gas distributor, has put pipeline projects worth $3 billion on hold. Capital spending for the fiscal year starting April 1 will be reduced 25 percent and new projects will be started only when production improves, GAIL’s Chairman B.C. Tripathi said in an interview in New Delhi, the company’s base.

“New projects will take time, we can’t execute them now,” he said, adding some of GAIL’s pipelines are operating at just 5 percent capacity.

GAIL shares fell 2 percent to 356.70 rupees in Mumbai, the most in three weeks. The stock was the biggest loser in the S&P BSE Oil & Gas Index. The benchmark S&P BSE Sensex rose 0.2 percent.

India’s Oil Minister Veerappa Moily has taken a different view, saying higher gas prices will help spur investment in exploration and production. His ministry announced the auction of at least 56 exploration blocks last month.

Higher prices will make smaller gas discoveries more viable, Sudhir Vasudeva, chairman of state-run explorer Oil & Natural Gas Corp., said in January.

Reliance Industries Executive Director P.M.S. Prasad has said that gas at $8 per million British thermal units may make smaller finds at its KG-D6 wells in the Bay of Bengal viable, though not ultra-deep ones.

Technical Difficulties

Reliance, based in Mumbai, has said production was slumping because of technical difficulties. Output from the KG-D6 block dropped to about 10 million cubic meters a day from more than 60 million cubic meters in 2010.

The IEA said one of the conditions India must fulfill for gas to play an important role in meeting energy demand in Asia’s No. 3 economy is attractive pricing that encourages “timely and sufficient” investment in domestic exploration and production.

Ultimately, that means allowing higher tariffs for power consumers -- a daunting prospect with the national poll looming.

“In an election year, power prices are very unlikely to be raised in spite of the increase in gas prices,” said R.K. Gupta, managing director of New Delhi-based Taurus Asset Management Co., which manages about $726 million. “Without higher power prices, local gas will become almost unaffordable. After the elections, rates may rise because the need is so compelling.”

Political Sensitivity

In an indication of the political sensitivity of higher power costs, former Delhi leader Arvind Kejriwal this month attacked the ruling Congress party, main opposition Bharatiya Janata Party and Mukesh Ambani, who runs Reliance Industries and is India’s richest man, over gas pricing.

Kejriwal, campaigning on an anti-graft agenda for the national poll, is seeking to tap into anger over energy-sector corruption scandals and rising costs. Consumer-price inflation has averaged about 10 percent in the past year.

Tushar Pania, a spokesman for Reliance Industries, didn’t reply to an e-mail seeking comments on the gas pricing policy.

India’s gas plants used a quarter of their capacity in the 10 months ended Jan. 31, according to the Central Electricity Authority.

For Komal, the struggling student in New Delhi, the power deficit presents one of the key obstacles to a better future, according to her mother Poonam Sood.

“Our children can’t study because the electricity just can’t be trusted,” she said. “Our dream that they should be educated will come to nothing.”

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