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What is the price of energy?

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The Hindu Business Line reports on a continuing dispute between Reliance Industries and the government on the pricing of natural gas:

The government had in 2007 fixed $4.20 per mmBtu as the price of gas produced from KG-D6 fields for first five years of production. KG-D6 fields started production in 2009.

But the Oil Ministry’s letter on October 10, 2007, informing RIL of the pricing decision did not stop at this and went on to state that if the company was to realise a price higher than $4.20 per mmBtu, then that rate would be used for determining government’s take from KG-D6 block.

RIL had on January 6 written to the Oil Ministry and the Prime Minister’s Office (PMO) seeking a gas price revision, saying the current $4.2 per million British thermal unit rate for KG-D6 gas was “sub-market” price compared with three times higher price being paid for imported gas (LNG).

Sources said the ministry is not inclined to accept RIL request on the grounds that RIL had accepted to keep price stable at $4.2 per mmBtu for five years. It is also relying on the Supreme Court’s May 7, 2010 judgement in the gas row between RIL and Anil Ambani’s RNRL that stated that government alone has the right to fix the selling price of gas from all fields including KG-D6.

[Reliance argues that] When the nation can pay $12-14 per mmBtu price to overseas producers of liquefied natural gas (LNG), the domestic gas producers too deserve an equivalent price. While high imported LNG price gives no incentive to the government, a higher domestic price would fetch it higher revenues in form of royalty, taxes and profit from petroleum.

Raising energy prices is a big decision because of the strong inflationary impact such a step would have. This happens because, like oil, a significant fraction of natural gas is used directly by the consumer.

Although the cost to generating electricity is less important economically, it is an interesting exercise to compare energy production cost by source. At the reported price, gas from the Krishna-Godavari fields adds to the cost for energy companies about 0.07 paise per KWh. If it is used to generate electricity, then it is a negligible fraction to the actual cost of energy, which, in turn, is comparable to the break-even cost of nuclear power. In terms of GDP output, India does pretty decently with almost Rs 70 of GDP per KWh of energy production. So, if income imbalances were less significant then there would be no harm in a little inflation here.

Written by Arhopala Bazaloides

March 5, 2012 at 4:16 am

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