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...