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Naphtha-based power

Prakash Saran, New Delhi

While the country faces a bleak power situation, the Government continues with its outdated policies. After almost a decade after power sector reforms, not much has changed, and the power deficit that the Government was planning to bridge, has widened, thanks to its intriguing policies. The case of the naphtha-based power producers amply demonstrates the confusing power sector measures.

In the initial stages of power sector reforms, when the Government announced that 12,000 MW of liquid fuel-based power projects would be allowed to come up in the private sector, naphtha, a 11 per cent byproduct of crude oil was chosen as a major fuel fo r these projects.

At that time, it was planned that naphtha would have to be imported to meet the demand from independent power producers (IPPs). Thus, fuel supply agreements were signed between IPPs and Oil PSUs, based on import parity prices for the naphtha that was to be supplied domestically. Import parity pricing includes FOB price, C and F cost, insurance, landing charge, LC charge, basic and countervailing duties, import handling charges, infrastructure and service charges and guarantee charges.

Naphtha was decontrolled in April 1998. With huge addition in refining capacity, India is now a naphtha-surplus country, so much so that oil PSUs are exporting naphtha at prevailing international prices, which are less than the price at which the same fu el is supplied to IPPs.

That means the oil PSUs are selling naphtha from their domestic refineries to IPPs on import parity pricing basis, which includes national costs. The extremely high input cost has severely affected the viability of naphtha-based power projects, making th e per unit output cost of power extremely high.

According to a study, the extra cost being borne by IPPs is around Rs. 3,000 per metric tonne of naphtha, which is around 35 per cent of the product's original cost in the international market. According to the same study, a Rs. 1,000 decrease in the pri ces of naphtha, will bring down the unit cost of power by 18-20 paise. This means, the cost of the power supplied by the naphtha-based IPPs can be reduced by as much as 50-60 paise per unit, as fuel is a pass-through cost for state electricity boards.

Ultimately, this inflated cost is passed onto the consumers. So, one tends to conclude the consumers and the power producers suffer, while the oil PSUs are allowed to earn super normal profits. Ideally, the power producers should be supplied naphtha at t he domestic price, plus reasonable profit basis or at prices at which oil PSUs are exporting their surplus naphtha.

It is time the Government addressed such anomalies in the system.