Economics

Jindal Tractabel Company is producing steel. A byproduct of this steel manufacture is a gas called Korex gas which, with its heat energy can heat water in a boiler and produce steam, which in turn can run a turbine to produce electricity. In the absence of electricity production, the gas would, by and large, go waste. Arriving at the cost of generated power involves first arriving at the cost of gas. Gas being a byproduct, one has to do some allocation, using cost accounting principles. Basically, all allocations involve some arbitrariness. The boiler is capable of operating with korex gas as well as coal. In fact, recently, since steel industry was in recession, enough gas was not produced, and the power plant was operating for most of the time with coal. The Central Electricity Authority is supposed to do the techno economic clearance of these projects; i.e. basically check whether the equipment costs and fuel costs are ok and thus ensure that the total costs, which form the basis for price determination, are reasonable. CEA clearly had this problem of arriving at the cost of the byproduct gas. It ruled that its maximum allowable value should not exceed 90% of the equivalent calorific value obtained from coal, taking its delivered cost to the plant. There was a bit of opportunity cost reasoning here; in the absence of korex gas, electricity would have been produced from coal brought to the plant site. The 10% discount was to allow for the fact that korex gas was after all a by product, which, in the absence of production of electricity, had no opportunity value. However, an external economist wondered if the korex gas should be valued at zero since it was a byproduct which did not have any alternative value to the producer other than in the power application. Jindal Tractabel recently offered a Power Purchase Agreement to the Karnataka Electricity Board, (now renamed as Karnataka Power Transmission Corporation) to sell electricity at Rs.2.60 per kwh at 75% plant load factor (PLF) of its 100 MW plant. Beyond 75% PLF the electricity was priced at Rs.2.20. The price was arrived at whereby the fixed costs (capacity costs) and variable costs (energy costs) were clubbed together to get one average total cost. Some reasonable assumptions are that the fixed cost and variable cost would be roughly equal at Rs.1.30 per kwh each even with coal as fuel, and that full capacity cost would have been recovered at 75% PLF, if not at a lower PLF. KPTCL had signed a PPA to buy power at around Rs.3.00 per kwh from private sector Tannir Bhavi barge mounted plant and another PPA with public sector Karnataka Power Corporation (KPC), from its 5th unit at Raichur Coal based power plant at Rs.3.00 per kwh. In view of these PPAs, the Jindal Tractabel power was considered an attractive offer by the Govt of Karnataka. But the regulator was of the opinion that it was an illegal contract, since it was not sent to the Commission for approval, but only for consultation, therefore violating the KERC Act, and that Jindal was having a rip off using a byproduct gas and yet nearly charging the full alternative coal based price, by manipulating the allocations for arriving at the cost of korex gas. Besides it was taking a dim view of the price at which the power in excess of 75% PLF was sold.