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Home News Power Sector News Gas price hike will raise govt’s subsidy burden

Gas price hike will raise govt’s subsidy burden

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KG-D6How is the price of gas fixed?

Before 1987, gas prices were fixed by ONGC and Oil India (OIL). But from January-end 1987, the government took over the role of regulating prices on a cost-plus basis. The last revision under the so-called administered price mechanism was effective July 2005. When the government started to bid out oil and gas blocks under the New Exploration and Licensing Policy (NELP), it decided to opt for market-determined rates for gas. The producer enjoyed marketing freedom but needed to get the pricing formula approved through "arm's length pricing". In 2006, the first controversy began when Reliance Industries invited bids from users and arrived at a price of $4.32 per million metric British thermal units. Subsequently, the matter was referred to an empowered group of ministers headed by Pranab Mukherjee, which agreed on a price of $4.20 a unit after suggesting a few changes to RIL's formula, including elements to do away with volatility.

What is the change that the government has introduced?

Last week, the Cabinet Committee on Economic Affairs (CCEA) approved a new formula, which is based on the recommendations of a committee headed by C Rangarajan, chairman of the Economic Advisory Council to the Prime Minister. The new policy is based on the price of Indian liquefied natural gas (LNG) imports. Then, the weighted average price at major trading hubs in the UK, the United States and Japan is also calculated. Finally, a simple average of the prices of imported LNG and the average international price is calculated. Based on this formula the current price of domestically-produced gas works out to $6.7 a unit, which will go up to $8.4 a unit from April, when the new five-year pricing policy kicks in.

Why is the change being undertaken?

The change is being undertaken because the current pricing policy expires at the end of March 2014. The Rangarajan Committee had suggested the new formula arguing that no market-determined arm's length price is currently available in India and had said that it is unlikely to happen for several more years.

How is this going to impact consumers?

With gas prices at least doubling, there is going to be a significant rise in your monthly bill for piped gas and CNG, which will push up auto and bus fares. In addition, power cost is going to increase. At $6.7 a unit, the cost of gas-based power for 28,000 mega watt will rise by around Rs 1.50 a unit. Critics say high gas price will significantly dampen interest in future gas-fired plants, which is seen as the cleanest source of electricity. Finance minister P Chidambaram has indicated that the government will soften the impact by providing higher subsidy.

What will be the impact on the government?

While the government will earn more through royalties, the Centre's annual subsidy bill will go up by at least Rs 4,000 crore if the price was fixed at $6.7 a unit. At $8.4, the impact will be higher. Add to that the burden on the state governments as a higher subsidy on power has to be borne by them, in case they want to protect consumers.

What is the controversy surrounding the price revision?

Apart from the impact on consumers, many, including some MPs, have alleged corporate influence in policy formulation. Some cabinet ministers also questioned the rationale for price revision although officially, the government has maintained that the guidelines will help incentivize investment and check cartelization.

Source- TOI


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