As per the proposal, domestic natural gas, which is available at one-third the price of imported LNG, will only be supplied to companies that sell all power produced from this gas at regulated tariffs, a ministry official said.
Merchant power plants are units that do not enter into any long-term power purchase contract for the sale of power and instead sell their output in the spot market. Tariffs in the spot market depend on the supply and demand situation and have on many occasions been several times that of regulated tariffs.
The official said a scarce natural resource cannot be used for profiteering.
"It is felt that domestically available scarce gas (which is substantially cheaper than the imported LNG) should be made available only to those power plants that are willing to sell power to the grid so that power is available to people at large at regulated rates," he said.
Against the demand of 230 million cubic metres per day, India produces about 166 mmscmd, including close to 45 mmscmd from Reliance Industries' eastern offshore KG-D6 fields.
KG-D6 gas and other domestically produced gas is priced at USD 4.20 per million British thermal units, while imported gas in its liquid form (called liquefied natural gas, or LNG) costs upward of USD 13-14 per mmBtu.
Of the 21.87 mmscmd of KG-D6 gas that has been allocated to 27 power plants in the country, at least two of them (the Lanco Kondapalli expansion and Tanir Bavi in Andhra Pradesh) are merchant power plants that sell power during peak seasons to private entities at an average price premium of about Rs 2 per unit compared to the regulated rates.
The official said a view on the 1.46 mmscmd allocated to Lanco and 0.88 mmscmd supplied to Tanir Bavi will have to be taken by the Empowered Group of Ministers (EGoM).
"In view of the scarcity of domestic gas, the current and future allocations of domestic gas will be subject to the condition that the entire electricity produced from this gas shall be sold under long-term Power Purchase Agreements to the grid/distribution companies at regulated tariffs approved by the regulator(s)," the policy under formulation reads.
The official said the Gas Utilisation Policy has prioritised allocation from KG-D6 fields to urea-manufacturing fertiliser plants, LPG extraction units, power plants and city gas distribution projects and thereafter to steel, petrochemical, refinery and captive power plants.
The policy has placed captive and merchant power/feed stock for fuel purposes at the bottom of the list of priority-based gas allocation.
The Power Ministry, too, is of the view that for private sector projects, a PPA for at least 85 per cent of the allotted gas should be a precondition for drawal of domestic gas.