New comparative advantage in power

For years, Indian businessmen have complained that they cannot compete internationally because of costly electricity. However, electricity prices globally are shooting up, mainly because natural gas prices are going through the roof. In consequence, Indian companies with captive coal mines and power plants now enjoy a comparative advantage in power.

This is a mind-boggling transformation. A few years, the Tatas decided to set up a ferro-alloys plant in South Africa, not India, because of cheaper electricity there. South Africa remains a cheap-power country. But India too is emerging with pockets of cheap power.

This augurs well for continuous process industries such as aluminium, which can run captive thermal plants at a plant load factor of over 90%. Companies with captive coal mines can mine coal at just $ 5-10/tonne, whereas Coal India Ltd is auctioning coal at three to four times that rate. Such companies should be able to generate power at just 2-3 cents (Rs 1.00-1.50) per unit.

By contrast, industries using grid power pay up to 9 cents (Rs 4) per unit in many states. This is partly of a cross-subsidy for free rural power, partly because State Electricity Boards suffer high transmission and distribution losses (including outright theft). But even manufacturers using grid power will find that their historical disadvantage reduced by rising global electricity rates.

In the USA, the spot price of wholesale power (firm on-peak) has in recent days been 6.5 cents/unit from the Paolo Verde and Mid-Columbia grids. The same grids charged more than 9 cents/unit in September when two hurricanes wrecked gas platforms and pipelines in the Gulf of Mexico. They used to charge just 4 cents/unit some years ago.

The price of natural gas in the USA averaged $ 2/mmbtu in the 1990s, peaking in winter (when demand for home heating surged) and falling in summer. But this year, the price crossed $ 9 in mid-summer, and skyrocketed further to $ 14/mmbtu in September when the two hurricanes devastated gas production. Subsequently the price has fallen to $ 10/mmbtu, but will shoot up when winter sets in. Gas futures reflect fears of tight supply for some years to come.

In Europe too, the price of natural gas has almost tripled from its low point in the last twelve months. It appears that the world is experiencing a shortage of natural gas no less than oil, and the shortage will not disappear any time soon.

The cost of coal-based power in the US is still perhaps 2-3 cents/unit, despite a sharp rise in coal prices. But for environmental reasons, rich countries the world over have been closing down old coal-based plants, and replacing them with new plants based mainly on natural gas or LNG (liquefied natural gas). This seemed logical when gas was cheap. In fact, low-cost coal-based power is being substituted by high-cost gas-based power. No reversal in this trend is feasible for years, because the vast majority of new plants under construction are designed to use gas. And any attempt to set up a new generation of coal-based plants will face formidable opposition in the US and Europe.

The sharp rise in electricity prices have plunged aluminium plants in many parts of the world into trouble. This may seem puzzling, given that world aluminium prices are at an all-time high. Aluminium plants using cheap hydel or geothermal power are doing splendidly. Yet, according to a recent survey in the Financial Times, London, global aluminium MNCs like Alcoa, Alcan and Norsk Hydro have all issued downbeat statements in recent months.

At the end of September, Alcan told investors that it had postponed from 2006 to 2008 its goal of achieving profitability higher than the cost of capital. It is planning to close its 66-year old smelter in Lannemezan France.

Alcoa has warned that it might shut down a plant in Maryland, USA, because of high electricity prices. Norsk Hydro says its European operations have been hit by high power costs arising from high gas prices. It plans to shut down one of its two aluminium plants in Germany. Also to be closed by the end of the year is the Hamburg-based HAW plant, owned jointly by Norsk Hydro, Alcoa and Austria Metall.

By contrast, aluminium companies in India are booming as never before. Hindalco chalked up a whopping profit of Rs 1,329 crore in 2004-05 and now plans a massive expansion costing Rs 12,000, including captive power plants. NALCO made a record profit of Rs 1,235 crore last year, is implementing an expansion plan of over Rs 4,000 crore, and is planning a new investment of Rs 9,000 crore in Vishakapatnam.

India has excellent bauxite, which can be converted cheaply to alumina. But converting alumina to aluminium is power-intensive, and so MNCs like Alcan want to stop at the alumina stage in India, and export this to another country with cheap hydel power. But the world is running out of cheap hydel sites, and India suddenly looks a reasonable bet for thermal power.

Alas, our coal policy prevents us from maximizing this advantage. Coal remains a government monopoly by law, and the Left front will not permit any amendment. The small mercy is that the law permits captive coal production.

In theory, companies can use captive mines to generate electricity for sale to private customers. In practice State Electricity Regulators levy surcharges that make private sales uneconomic. Other hurdles are common. Orissa, for instance, wants companies with captive coal mines to provide free power to the State Electricity Board. Further, it does not want such companies to sell excess power directly to Powergrid or other states: it wants a monopoly in selling surplus power. Thus the Electricity Act, supposed to liberalise the industry, is in practice toothless.

While India may have a comparative advantage in coal-based power, laws and state governments are sabotaging this very advantage. It is an ugly sight.


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