Natural Gas Pricing for Power Plants

The production and supply of natural gas in Iran is monopolized in the hands of the Ministry of Petroleum and prices are set by administrative decisions. However, given that gas based   power plants  use it as an input to meet the needs of end users of electricity, optimal price of natural gas is related to the final price of electricity.  We use time series data for the period 1989 to 2016 to estimate the price elasticity of gas demand.   We first estimate the price elasticity of gas demand. We then calculate the efficiency of natural gas production at scale and calculate the final cost of the natural gas produced. We then calculate the coded price of gas delivered to power plants. The actual cost of supplying one cubic meter of natural gas to power plants in 2015 was 800 Rials. The natural gas prices based on estimated Ramsey price for the years 2015 and 2016 for the gas delivered to the power plants are 8589.71 and 9377.91 Rials per cubic meter respectively. We can thus conclude that current administrative prices for natural gas in the power plants sector are not optimal.