The gas price hike by the Cabinet Committee on Economic Affairs (CCEA) could adversely affect the economics of the key user industries including power and fertiliser amid continued supply constraints, opines India Ratings & Research (Ind-Ra). Higher gas prices could increase input costs for both the sectors though gas supplies are unlikely to improve in the short-to-medium term. Gas-based power plants (GBPPs) have been suffering from low plant load factor (PLF) due to the non-availability of domestic fuel and unviable operations on imported LNG. Similarly, fertiliser plants have also seen gas supply constraints from domestic sources.
Gas Price Hike Basis Modified: CCEA's approval on raising natural gas prices to USD 5.61/mmbtu from USD 4.2/mmbtu effective Nov. 1, 2014 is lower than the price proposed on the basis of the formula outlined by the Rangarajan Committee. CCEA has modified the formula proposed by the Committee by removal of Japanese and Indian LNG import components in the formula which have led to the reduction in gas prices. On an adjusted gross calorific value basis, the gas prices have been increased 47% to USD 6.17/mmbtu. However, they still remain lower than the USD 8.4/mmbtu mark earlier sought by the government.
Electricity Generation Cost to Increase: The fuel cost for GBPPs is likely to increase 43% yoy as the gas price hike will lead to a rise in per unit fuel cost by around Rs 0.85/kwh. This could lower the competitiveness of GBPPs in relation to coal-based power plants. However, as GBPPs contributed a mere 4.4% to the overall generation in FY14 (FY13: 7.1%), its impact on the pan-India cost of generation is likely to be only around 4 paisa/kwh.
If the domestic prices, according to the revised formula, were to trend upwards due to the semi-annual revisions allowed, the operations of GBPPs could suffer as they would rank lower in the merit order dispatch schedule compared with coal-based power plants. In that case, the government could look at subsidising the cost of gas being paid by GBPPs. GBPPs with merchant capacities or selling power under fixed short-term arrangements are likely to be more impacted in terms of profitability as gas costs are not a pass through in tariff. However, given that the power sector ranks high in the gas priority allocation, increased domestic gas output over the long term could improve the PLF of stressed GBPPs.
Offshore Gas Could Cost Higher: Post the CCEA's decision, for discoveries in ultra-deep water areas, deep water areas and high pressure-high temperature areas, a premium would be paid on the gas price which will be determined according to the prescribed procedure. This could further increase input costs for power and fertiliser plants.
Fertiliser Sector Profitability to Decline: Higher domestic gas prices would have a three-fold impact on fertiliser manufacturers. First, the per unit subsidy on urea will increase leading to higher working capital requirements as subsidy dues are usually paid with a lag. The interest costs on higher working capital requirement will have to be borne by fertiliser manufacturers. Secondly, the profitability of urea manufacturers selling above 110% of the re-assessed capacity will be lower as the sale price is linked to import parity price but the costs are not pass through. Finally, non-urea manufacturers will also have to either bear the higher gas prices or pass them on to the consumers.
