The Hindu Business Line : Fallout of Iraq war — Power purchase cost of South plants set to soar

POWER purchase costs of the four South Indian utilities are expected to show a hefty escalation on account of increases in fuel costs on account of the ongoing war in Iraq.

All of them have naphtha/gas fired plants. Andhra Pradesh at 1050.2 MW currently has the highest liquid fuelled generation capacity in the Southern region, followed by Tamil Nadu at 741 MW, Kerala at 500 MW and Karnataka at 326.5 MW.

All these stations are currently being fired by naphtha, though Andhra Pradesh has managed to obtain linkage for natural gas supplies from Gas Authority of India Ltd (GAIL). But till such time the gas is available, stations will use naphtha as the operating fuel.

All these projects follow the two-part tariff mechanism comprising fixed and variable charges (which include fuel charges).

The naphtha supplied to them by the oil companies are all at international parity prices. It is this charge that has gone up as a result of the conflict in the Gulf, sources said.

Fuel costs for all these plants are in the region of about $330 per tonne on a CIF (cost insurance and freight) basis. Consequently, any fall in the fixed charge component due to recovery of capital costs, including debt amortisation, has been more than offset by the escalation in fuel costs during the last few months, they said.

During the last three months alone, naphtha prices have gone up by over 30 per cent. Last November, when the beginning of the Iraq war was under discussion, naphtha prices worldwide averaged $250 a tonne.

As a result, power tariffs from the liquid fuelled projects as a result are currently upwards of Rs 7 a unit.

The sources said that in Karnataka and Kerala, poor inflows into the reservoirs and rising demand for power during the summer months have forced the utilities to rely increasingly on the liquid fuel stations both for meeting peaking and base load.

All these liquid fuelled plants together contribute about 42 million units (MU) per day, during the last few days.

According to the sources, almost all the bulk power buyers in the country have the option of passing the fuel escalation charges directly on to the consumers or ask the stations to back down by paying only the fixed charges.

However, neither of these options is feasible currently since most of them have only recently increased tariffs.

Besides, asking the power plants to back down would imply introduction of longer hours of load shedding, which is not feasible. This was because in all these States, the deficit between requirement and availability is more than 25 MU per day, the sources added.

Consequently, the only option is that the cost differential, between the tariff realised and the cost of purchase, would have to be met out of the State Government's subsidy bill. As a result, power subsidies in all these States are expected to escalate during the current fiscal.

In Karnataka, as a result of this increase, the subsidy bill is already close to about Rs 3,000 crore, with liquid-fuelled plants feeding about 6 MU into the grid every day.

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Fallout of Iraq war — Power purchase cost of South plants set to soar