India's bid to raise natural gas share in energy basket faces hurdle

With power demand being muted and more renewables being used, the PLF of coal-based plants would be lower.
A pitch for change in the taxation regime for natural gas by British Petroleum’s (BP’s) Bernard Looney comes at a time when the country has not been able to transition into a gas-based economy despite prevalence of low global prices.

India has set a target of raising the share of natural gas in the ene­rgy basket to 15 per cent by 2030 from the current 6.72 per cent. However, a high and varying taxation rate with no input credit pass through are coming in the way. 

While the reason for pushing for natural gas is environmental because coal-based power creates more pollution, the country’s move to integrate intermittent renewable power necessitates inclusion of more gas and hydro-power generation.

According to the Association of Power Producers, out of the 24 Gw of installed gas-based power plant capacity in the country, around 8.5 Gw of plants are completely stranded without any domestic gas supplies. Most of the remaining capacity is stressed due to operations being at sub-optimal plant load factor (PLF).

Moreover, with power demand being muted and more renewables being used, the PLF of coal-based plants would be lower. 

“Sin­ce the fixed component of tariff com­prising capital cost of coal units is higher than gas, distribution companies have to pay power producers even if the power is not being bought,” said an industry player. 

Investment in gas-based generation stopped since power generated from it was costly. 

However, industry leaders say it is not the cost of gas but taxation that has made use of natural gas expensive, whether it is domestically produced or imported as liquefied natural gas.

Natural gas is currently taxed under the value-added tax (VAT) regime with rates ranging from 3 per cent to as high as 25 per cent across different states (see table). The competing fuel attracts goods and services tax (GST) of 5 per cent. The current landed price of LNG — at $3.25 a million British thermal unit — rises to $4.94 when VAT is 14.5 per cent and $5.27 when it is 24.5 per cent. 

“In terms of the financial impact of bringing natural gas under GST (and excluding VAT), for a power plant located in Andhra Pradesh using RIL’s deepwater gas, the price of gas would reduce by 16 per cent and the power tariff would fall by 10-12 per cent,” said Ashok Khurana, director-general, Association of Power Producers, in a recent letter to the Union government.

Despite global prices being low for a year now, utilisation levels of LNG terminals are also low. According to IDFC Securities, LNG re-gasification projects — including Dabhol in Maharashtra and Kochi in Kerala — are struggling for optimum capacity utilisation despite being up and running for more than five years now. 

Even the new Mundra LNG terminal in Gujarat is operating at 45 per cent capacity. 

The application of VAT regime means there is no uniformity in rates. Besides, as natural gas is not under the ambit of GST, there is no input tax credit available. 

“Generators are unable to claim the benefit of tax credit on VAT paid on purchase of natural gas. If natural gas is brought under GST, it would help companies in setting off tax that they paid on input. It would thus remove the cascading impact of taxes,” said Khurana.

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