Letter from Mumbai: Gas-fired power plants revived as LNG price fallsArchive
THE sharp drop in the international price of liquefied natural gas has led to the revival of several gas-fired power plants in India. The latest to benefit from this is the jinxed Dabhol Power Project in Maharashtra, promoted originally by the American energy giant Enron, which had to shut down globally following bankruptcy in 2001.
The Dabhol project, located about 160km south of Mumbai, has been facing problems ever since it was launched in the early 1990s by Enron. After the energy major went bankrupt, Indian lenders (including State Bank of India, ICICI Bank, Canara Bank and IDBI Bank) and public sector power firms (including the National Thermal Power Corporation, Gas Authority of India and Maharashtra State Electricity Board) acquired control of the company.
Though the project was revived, it failed to generate power as the Maharashtra State Electricity Distribution Co Ltd, a state government owned utility, terminated the power purchase agreement in 2013, claiming it could not afford to buy electricity at Rs5.5/unit. The plant was also not able to source LNG, resulting in its closure.
But with the sharp plunge in international LNG prices, the various stakeholders finally resolved the differences earlier this month and the project is being revived from November 1. Both the central and state governments have extended concessions and Indian Railways has agreed to buy about 400MW of the total 500MW to be generated.
The Railways will be paying between Rs5-5.50/unit, as against Rs7.5unit it pays to get power from other suppliers. Besides the power generating company, a separate firm has been set up to operate the 5m tonnes per annum LNG facility at the plant.
The power plant will also get funding from the Power System Development Fund (PSDF) set up by the central government to subsidise the high cost of imported LNG.
Last month, the government short-listed 13 gas-based power plants, with an installed capacity of more than 8,200MW, to receive subsidy from the PSDF. The fund will help cash-strapped state power utilities to buy expensive power from these plants. The gas-based plants will supply electricity at or below Rs4.7/unit to the utilities, with the government providing subsidies amounting to Rs16bn to the power plants for importing LNG.
The projects were shortlisted after the power producers participated in a reverse e-bidding process. The National Democratic Alliance government set up the PSDF to rescue the beleaguered gas-fired power sector, which has been sustaining hefty losses over the past few years.
Most state electricity boards in India are virtually bankrupt — their total debt adds up to more than Rs3trn and their combined losses exceed Rs2.5trn. Banks have also sunk in more than Rs3trn into the power sector.
The total installed capacity of gas-fired power plants in India add up to more than 24,000MW; of these, plants with a capacity of more than 14,000MW — and built at a cost exceeding Rs600bn — are considered stranded as they do not get domestic gas, and cannot afford imported LNG.
Unlike coal-fired plants, the gas-based electricity generating plants have low plant load factor (PLF); while the former have a PLF ranging from 60 to 80pc, gas-fired plants operated at 25pc of their rated capacity last month, which though is an improvement over last year’s PLF of a mere 20pc.
THE price of LNG has tumbled by almost 60pc over the past 18 months — from more than $18/mmBtu in April 2014 to $7.7/mmBtu last month. LNG prices are expected to fall further, especially with Iran expected to enter the market following the likely withdrawal of sanctions, and with Japan expected to restart some of its nuclear power plants.
“Asian spot LNG prices, currently at $8/mmBtu, have recovered from their earlier lows,” noted a research report by ICRA, a leading Indian credit rating agency, in which Moody’s is the largest shareholder. “However, the start-up of Japanese nuclear plants could reduce the demand of LNG which could have a dampening effect on the spot prices. Additionally current low crude oil prices at $48-50/barrel would also weigh on spot gas prices.”
India’s largest importer of LNG, state-owned Petronet LNG, had entered into a long-term contract for 25 years with Qatar’s RasGas Co Ltd, more than a decade ago. Petronet pays the Qatari firm $12.5/mmBtu, even though the spot price is around $8, for the purchase of 7.5m tonnes of LNG a year.
But of late, Petronet has been taking only 70pc of the contracted gas from Qatar, buying the remaining from the spot market, and saving substantially. The company might have to pay penalties for failing to lift less than 90pc of the contracted quantity, but may still save money.
ICRA expects India’s dependence on imported gas as a fuel will grow, with the country’s LNG regasification capacity expected to more than double in 10 years. LNG is imported in tankers and re-gasified at four terminals, which have a total capacity of 25m tonnes/annum. India, the world’s fourth-largest importer of LNG, imported 18bn cubic metres (bcm) of LNG last year.
Natural gas consumption in India adds up to 51bcm. But domestic production has fallen by more than a third over the past five years because of disputes relating to the price paid to producers. The government, however, is moving over from a production-sharing contract framework — which takes into account exploration and production costs — to a transparent, revenue-sharing model.
Last month, the government slashed the price of domestic natural gas by 18pc to $3.82/mmBtu. But the government is learnt to be toying with the idea of deregulating the price of natural gas, instead of fixing it every six months. All the leading players, including private sector giant Reliance Industries, and state-owned major Oil and Natural Gas Corporation, have been pushing for an independent pricing regime for natural gas.
Published in Dawn, Business & Finance weekly, October 19th , 2015
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