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Gas price increase puts at risk under-construction plants

Gas-fired power plants to be rendered unviable without new subsidy

Malini Bhupta Mumbai
Last Updated : Jan 13 2014 | 11:09 PM IST
The government has finally notified an increase in gas prices. While this is good news for gas producers, the collateral damage on the power and fertiliser sectors will be substantial. The new formula will push up gas prices from the current $4.2 a million British thermal units (mBtu) to $8.4 an mBtu.

The new price regime will kick in from April 1 and be applicable for five years. Every quarter, prices will be reviewed and adjusted, depending on how global prices move. The obvious gainers of this are the gas producers.

Analysts believe Oil and Natural Gas Corporation (ONGC), Oil India and Reliance will benefit from this move and will be earnings-accretive for these. The market expects earnings to increase anywhere between 15 and 30 per cent for these, depending on how the subsidy burden is shared.

Motilal Oswal Securities has been conservative in its estimates and has modelled a gas price of $6.3 an mBtu, assuming 50 per cent subsidy to the power and fertiliser sectors. However, if ONGC and Oil India do not have to bear the subsidy, the earnings estimates for these two companies will increase another 15 per cent. Reliance has to await a Supreme Court verdict, scheduled for hearing in March, before its path for higher gas prices is paved.

However, the downside of this move will render gas-fired power plants unviable. India has a total capacity of 20 gigawatts (GW) gas-fired power plants and another 9.5 GW of capacity is under construction. The overall plant load factor (PLF) of these capacities is down to 25 per cent on lower gas availability. With the increase in gas prices, the disputes between state electricity boards (SEBs) and generators will increase, as these power producers will want to pass on the higher costs.

For starters, while the existing capacities will become unviable if no new subsidy is announced, the under-construction capacity might never see commissioning. Barclays believes the increase in cost per unit after both these changes will make gas power plant tariff unviable, ensuring 9 GW of power plants under construction without power purchase agreements will be stranded, reducing the appetite of these companies to invest in new power plants. If no new subsidy is announced, it will put further financial pressures on SEBs, impacting their ability to spend. Analysts expect a lot of order cancellations, which will wreak further damage on capital goods producers such as Bharat Heavy Electricals Ltd, Siemens and other vendors.

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First Published: Jan 13 2014 | 9:36 PM IST

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