If I understand correctly, government has scrapped the earlier auction and is re-doing it so bidders can bid negative subsidy (i.e. bidders will pay government money for getting the RLNG). In the auction conducted 3 days earlier, within seconds, all RLNG available for auction got lapped up with zero subsidy asked for it. It prompted government to think in other direction…i.e. getting paid for giving RLNG.
From the provisional winners announced for the above auction, it is clear that Torrent power did not put in zero bid. i.e. Company is expecting to get some subsidy support from government to ensure they supply power at ceiling rate (5.5/Kwh) and cover reasonable cost. On the other hand, power plants in south GVK, Lanco etc put in bid for zero subsidy. Going forward when the auction is re-conducted, if torrent sticks to it’s ground it may not bid for it and will not get any gas from April to October 2016.
Thus, it may not be able to operate UNOSUGEN and DGEN and will also run SUGEN at lower PLF. Apparently, this can may look like negative for Torrent. However, if we dig deeper, as management, the question boils down to following before deciding what subsidy to bid for
- Will TPL be able to procure power from exchnages/market at rate lower than the variable cost of power generation from the RLNG (at USD 7.2-USD 7.5/MMBTU) auctioned without any subsidy support? Apparently, not bidding for zero subsidy means, TPL management is of the view that without subsidy support, it is cheaper to procure power from open market than to do its own generation.
The question that comes to our mind is, if this is so, wouldn’t same logic prevail for other producers as well? In my opinion, it probably will not. It is important to recognize that, unlike GVK,GMR or LANCO, TPL is an integrated generation and distribution company and it supplies all the power generated to its own distribution arm. Thus, for them, it makes lot of sense to go for optimum cost of power across the whole chain (generation, transmission, distribution) considering both generation and distribution. While for others, it is all about, covering some fixed costs to the extent possible as they will eventually end up supplying power to state distribution companies. Thus, at the moment, from TPL’s actions it seems that management view is that it will be much cheaper to procure power from market than to produce its own (in fact, last month on the largest power exchange of the country, IEX, the average power price dropped to all time low of Rs 2.3/Kwh)
It will be interesting to see, how revised auction plays out and how next couple of quarters play out for TPL