Gas price hike to hit power, fertiliser companies

Electricity to cost more as power cos to pass on fuel price hike to consumers

While Oil and Natural Gas Corp (ONGC) and Reliance Industries Ltd (RIL) will be the biggest gainers from the gas price hike announced by the Indian government today, power and fertiliser companies will see their fuel costs shooting up substantially.

As the power industry, a major consumer of natural gas, operates on the principle of pass-through of fuel costs to consumers, Indian consumers will have to shell out more for electricity, say analysts.

In a report, India Ratings and Research said today the fuel cost per unit for natural gas-based power generation could increase by 56 per cent to Rs 3.41 per kilowatt hour (kwh) if domestic gas prices were to increase to $6.77 per million British thermal unit (mBtu) from the current $4.2 per mBtu. With the Cabinet approving a higher price of $8.4 a unit, this will further hit the power producers which will ultimately pass on the fuel hike to consumers.

This would manifest itself as an increase of 9 paise per kwh on the total Indian power generation of 912 billion kWh, which would lead to an additional burden of Rs 7,800 crore towards gas costs on the gas-based power generation of 65 billion kwh. The additional cost, which is also contributed by the fall in rupee, would ultimately be either recovered from consumers or borne by state power utilities.

The gas price hike of $8.4 per mBtu will jack up the cost of generation for power companies by Rs 42,168 crore annually. The country's largest power generator, NTPC Ltd, said the hike would be passed on to consumers. Meanwhile, fertiliser manufacturers believe the move would add another Rs 13,000 crore to the government subsidy outgo.

Every dollar increase in gas price leads to a 50 paise jump in the cost of generation for NTPC. The company operates 4,900 Mw of stand-alone gas-based capacity and an additional 2,000 Mw capacity in joint ventures. It operates eight gas-based power stations across six states. The company requires 17 million standard cubic metres per day (mscmd) gas to maintain 100 per cent plant load factor (PLF) of its plants. The dwindling KG-D6 output has forced the company to run its plants at a mere 50 per cent PLF as only 9 mscmd remain available.

Analysts say the gas prices are denominated in the US dollar and the recent volatility in the dollar versus Indian rupee exchange rate could further accentuate domestic gas price in rupee terms.

Among the gainers, RIL’s earnings per share (EPS) will go up by seven per cent to eight per cent and the price hike will give incentives to the company to restart investments in its K-G basin off the Andhra coast, say analysts. Similarly, as the production of ONGC and Oil India is higher, its EPS will go up by seven per cent for every one dollar increase in gas prices. According to a Macquarie Equities Research report, $1 per mmBtu hike could add 2 per cent to FY15E profits.

“For the industry, this is a welcome decision. A $4.2 per mBtu hike means that ONGC would add another Rs 8,000-8,500 crore to our profit after tax. But it would not have a major impact on our cash retention due to our subsidy burden and dividend,” said A K Banerjee, director (finance), ONGC.