Naphtha-based power projects in jeopardy

NEW DELHI, June 6: The government's in-principle decision to charge import-parity prices for naphtha for power projects will hit the naphth...

NEW DELHI, June 6: The government’s in-principle decision to charge import-parity prices for naphtha for power projects will hit the naphtha-based projects which were expected to come up in the Ninth Plan. Based on the plans submitted by producers, about 8,000 MW of naphtha-based projects were expected to come up in the next 5 years — the total fresh power capacity, based on all fuels, is expected to be 34,000 MW.

The government’s decision which is likely to be finalised next week will see naphtha prices (ex-storage point) for power producers go up to Rs 10,500 per tonne — petrochemical units get naphtha at around Rs 7,000 per tonne at present.

The ministry of petroleum’s decision stems from the fact that the oil pool account is already overburdened and hence they cannot afford to add another source of subsidy. Moreover, the entire amount required by the power producers would need to be imported as domestic production of naphtha is woefully inadequate.

Story continues below this ad

The ministry is proposing to take naphtha (for power projects) out of the purview of the administered price mechanism (APM). This is, in fact, in line with earlier decisions by the ministry — in January this year, paraffin wax was decontrolled and import parity prices were charged from all users except for matches and candle manufacturers.

The decision to take naphtha out of the APM as far as the power projects is concerned would mean that the cost of generating power from such plants would go up from Rs 2.4 per KWH to Rs 3.5 per KWH. In which case, the financial viability of such projects would become suspect, as SEBs would be unwilling to pay such high cost for power.

Additionally, all liquid-fuel projects (which includes naphtha) of independent power producers (IPPs) would also be asked to pay an ammortised fee of Rs 15 lakh for each megawatt of generation capacity. The Rs 15-crore deposit for a 100-MW power plant would help meet 50 % of the expenditure required for setting up infrastructure to import and distribute the fuel.The deposit, which is to ensure the seriousness of the IPPs in setting up the projects, would serve as a guarantee. In return, the IPPs would be paid a fixed rate of interest on the deposit and would be provided a rate of return depending on the profitability.

Other features of the fuel supply agreement include:

* Fuel linkage for a period of 15 years with annual adjustment between the oil companies and IPPs on the basis of actual consumption (plant load factor) duly certified by the state;

Story continues below this ad

* Finalisation of the agreement between the oil companies and IPPs within six months from the issue of the linkage;

* Oil companies would intimate the IPP the supply plan every six months, and the allotted would be liable to lift the product as per the agreed plan.