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Cover Story | November 2015

GAS or Reality

After two decades of chequered legacy, gas-based power plants are yet to make a mark on the power supply scenario in the country. Identifying feedstock supply as the major problem for this state, the government has recently chalked out a mechanism to subsidise import of RLNG to put the idle plants back into operation. Experts say that it is only a short term remedy and call for a long term solutions.

The recent positive developments have raised the hopes of revival of natural gas-based power sector in the country, where many plants were either closed or operating at lower than optimal levels.

Power plants seldom use high-priced imported LNG as power produced from this fuel would cost much more than the power produced from a domestic gas-fired or coal-fuelled plant and there would be no takers for such expensive power.

However, falling price of LNG in the global markets has enabled the government to launch a subsidy scheme to revive gas-based power plants. Recent spot LNG contracts were struck at prices as low as $10.5 per mmbtu, nearly 45% down from year ago period and 25% down from those struck in October 2014. These contracts are for delivery after two months and hence deliveries will be effective from January 2015. There are indications the trend will continue well in future. However, LNG imports will subject these companies to the vagaries of foreign exchange markets, besides natural gas ones.

India imported a total 13 million tonne (MT) of LNG in FY14 for $8.5 billion, according to the export-import data published by the Ministry of Commerce.

Under the government´s revival plan, LNG will be imported and cash-strapped state power distribution companies will be financially supported to buy electricity from them.

The Reserve Bank of India´s (RBI) scheme launched in December 2014, to restructure existing long-term loans for infrastructure projects, including for power projects, called ´5/25 scheme´ also comes in handy to the cash-strapped gas-based power plants. The scheme envisages stretching repayments to 20-25 years to match the cash flow of the projects, with refinancing done every five years. But the gap between the demand and supply is still wide and there are other issues that have to be addressed.

Supply Shortage
India´s share of proved global natural gas reserves stood at 0.6 per cent or 42.4 trillion cubic feet (tcf) at the end of 2011.
Proved reserves which increased from 25 tcf to 29 tcf between 1991 and 2001 grew by 50 per cent between 2002 and 2011 due to massive gas discoveries in 2002 in the D6 field in the Krishna Godavari basin (KG basin). Estimated originally at recoverable reserves of over 6 tcf, KG-D6 equated to 40 times the size of India´s largest producing gas field, the off-shore Bombay High. However, the high expectations from KG-D6 took a nose dive after production peaked in 2010.

Domestic production of natural gas has been falling since fiscal 2012, mainly because of a precipitous decline in output from the D6 block-from 55 mmscmd in fiscal 2011-14 mmscmd in 2014 and 11 mmscmd by now, even after BP PLC., joining RIL as a co-developer. ´Several gas-based plants that were set up to bank on gas produced at KG-D6 went without gas supply and were rendered partially or fully inoperable. Nearly 14,000 MW of gas-based capacities were completely stranded (zero PLF), while 10,000 MW capacities were receiving limited supply and operating at a sub-optimal PLF,´ said rating agency CRISIL in a report-Power Sector Compendium-recently.

The total installed capacity of gas-based power plants in the country as on September 30, 2015 was at 24,088.15 MW - consisting of 6,974.42 MW in the state sector, 9,594 MW in the private sector and 7,519.73 MW in the central sector. Total power sector´s installed capacity was at 278,733.62 MW (or 278.73 GW) as on that day, according to the Central Electricity Authority (CEA) data.

The Ministry of Power (MoP) subsidy scheme for imported LNG provided for a per-unit tariff subsidy from the Power System Development Fund (PSDF). This will be disbursed-based on a reverse auction mechanism-to stranded gas-based power plants first and then to plants already receiving domestic gas. Between June and September 2015, PSDF support equivalent to Rs.844 crore was allotted for this mechanism.

In May 2015 auction for imported LNG, plants with 7,000 MW of capacity successfully bid for subsidy. The average subsidy is around `1.43 per unit and the tariff to be charged to discoms is Rs.4.7 per unit. Thus, revenue of around `6.13 per unit will be available to these power plants.

CRISIL said, the scheme will enable power plants stranded capacity to operate at around 27% PLF-which is good enough to service their interest payment obligations. So, the success of the scheme will depend on the availability of a principal moratorium period from lenders and the ability of power plants to find buyers for electricity at `4.7 per unit.

The PLF of those operating at sub-optimal capacities will improve to 32% from last fiscal´s 24%. Since this is not very significant improvement and most of these players already have a favourable availability-based tariff structure that facilitates cost-recovery, the scheme is unlikely to materially benefit them, CRISIL added.

The Working Group on Power (WGP) for Twelfth Plan (2012-17), in fact, emphasises the need to make gas available to these units. ´Gas power projects of about 13,000 MW capacity are under various stages of construction and this capacity may materialise during 11th Plan/12th Plan, if gas is made available. Otherwise, they may become stranded assets. Hence some concrete policy decision towards increasing the gas availability to power plants either by increasing the production of domestic gas or increasing the share of RLNG by pooling with domestic gas is required to be taken,´ opines WGP.

The launching of the New Exploration Licensing Policy (NELP) in April 1997 improved the investment conditions for foreign and domestic investors in exploration and production. Several public and private companies were allotted exploration blocks under NELP where exploration and production were in full swing.

´NTPC has been allotted exploration block under NELP-VIII as operator with 100 per cent participating interest. The drilling of one explanatory well has been completed and drilling of second well is in progress. Presently NTPC has one block with ONGC as operator, NTPC has 10 per cent stake in the block where exploration work is in progress,´ informs a senior official from NTPC who did not wish to be identified. NTPC has 4,017 MW gas based capacity at present in their plants at Anta, Rajasthan, Auraiya, Dadri, Uttar Pradesh, Kawas, Gujarat, Jhanor Gandhar, Gujarat, Kayamkulam, Kerala and Faridabad, Haryana.

According to the Central Government´s own projections, the shortage of gas supplies is likely to continue during FY13ûFY22.

Post the decline from 97 mmscmd in 2013-14 to 92 mmscmd in 2014-15, the domestic natural gas production from existing or already discovered fields is projected to increase to around 130 mmscmd by 2020-21, on the back of likely commencement of GSPC´s Deen Dayal block and ONGC´s KG basin blocks along with marginal increase in RIL´s KG production, leading rating agency ICRA said in a report titled - Indian Gas Utilities.

ICRA also projects the domestic production level to increase further to around ~140 mmscmd by 2024-25.

On the demand side, while the demand potential for natural gas is high, the actual offtake could critically depend upon the price competitiveness of gas/RLNG against alternative fuels (especially in current low crude oil price scenario). ICRA believes the gas demand will rise to ~275 mmscmd by 2019-20 and ~330 mmscmd by 2024-25, from the current demand potential of more than 225 mmscmd.

Pricing Policy
Another major constraint is the distorted retail pricing structure in the power sector that currently limits the competitiveness of gas-fired generation. As per the Central Government´s Gas Utilisation Policy, NELP producers cannot sell gas on purely commercial basis. The gas is allocated by the government, limiting upstream investments as the high cost of off-shore exploration cannot be recovered from the priority sectors that are highly price sensitive. Power producing companies cannot raise tariffs without the consent of the state electricity boards. If the latter do not agree to an increase, the power company has to either reduce the quantity of power generation or bear the losses.

In addition, under subsidy mechanisms, power tariffs are kept artificially low, which fails to send proper pricing signals to those who can adjust consumption to price changes. Similarly, it undermines the cost-recovery prospect of the investors. Hence there has been a demand from the industry for rationalisation of the pricing mechanism to attract investors into this sector.

´The softening of international gas prices is a good opportunity for the stranded gas projects. If the gas-based projects can be effectively put to use for the much needed peaking power, with adequate pricing mechanism for power supplied for peaking, the problem of shortage of power as well as stranded gas-based assets can be effectively resolved,´ said John Fernandes, Director Operations, GVK Power & Infrastructure Ltd. GVK group has three gas- based power projects in the KG basin area of Andhra Pradesh - Jegurupadu CCPP (235 MW), Jegurupadu Extension Project (220 MW) and Gautami CCPP (464 MW). While the Jegurupadu Phase-I continues to operate with partial gas supplies from Oil and Natural Gas Corporation (ONGC) and GAIL India, the Jegurupadu II and Gautami projects were shutdown in 2013, since Reliance Infrastructure stopped gas supply to them.

NTPC, on the other hand, had to rely on spot supply, reveals its spokesperson: ´NTPC has Administered Price Mechanism (APM) for its gas stations and makes arrangements for tie-up and supply of spot RLNG or fall back RLNG from domestic suppliers on reasonable endeavour basis based on requirement and availability from time to time´

Infrastructure Issues
India is miles away from having an integrated national gas grid, which would facilitate availability of gas-fired power, throughout the country. Infrastructure, including physical facilities of transmission and distribution networks, remains inadequate. Further, there is a severe regional imbalance within the country as far as accessing natural gas due to lack of pipeline infrastructure in many states. As a result Gujarat, Maharashtra and UP together consume over 65 per cent of the available gas with other states having no access to gas.

Other Options
Internationally, the natural gas supply is being expanded through production from unconventional sources, such as shale gas. India reportedly has shale gas resources in the order of 250 tcf, but has made limited efforts to explore this potential. While the government is considering shale gas exploration, questions are also being raised about its viability for India with its water scarcity condition, as the technology used for shale gas extraction consumes considerable water. Moreover, the wells to be drilled and land area required for shale gas are also high.

The Ministry of Petroleum and Natural Gas has identified six potential shale gas basins in Cambay, Assam-Arakan, Gondwana, Krishna-Godavari, Kaveri and the Indo-Gangetic plain. A draft policy for the exploration of shale gas prepared in 2012 suggests that there should be a mandatory rainwater harvesting provision in the exploration area and as far as possible, river, rain or non-potable ground water only should be utilised. ONGC and OIL India are implementing pilot projects to assess the shale gas potential in the country.

Reforms Required
Natural gas power has the potential to play an important role in meeting India´s energy demand, but some reforms have to be in place if the country has to realise this potential. Several suggestions have been put forward like having an attractive gas pricing to attract investments, development of fully-integrated national gas grid that assures effective third party access etc.

´There is scope for further reduction of gas prices if the gas procurer takes advantage of the current depressed market for the LNG available worldwide. The initiative taken by the Central Government to offer sops to the stranded gas-based assets under the ´scheme for utilisation of stranded gas based generation assets´ is a step in the right direction. The stage-II of the scheme is now under implementation, and we expect it will further evolve to meet the needs of the sector and also mitigate the power shortages´ says Fernandes.

RWG, while emphasising the need for increasing gas-based power generation, had set a target of 20,000-MW new capacity in the 12th Plan. RWG has also suggested several regulatory changes to promote gas based capacity addition. They include policy initiatives to incentivise gas-based plants, including combined heating & cooling plants having high efficiency; priority gas allocation to CCHP plants; constitution of a task force under CERC to address issues related to setting up of peaking and reserve plants; duration of PPA (Power Purchase Agreement) to be brought down to 15-18 years etc.

´Current domestic and international market environment for natural gas suggests that there are far too many uncertainties with regard to availability and/or price of natural gas. Developers are not ideally placed to take those risks. Therefore, fuel availability and price risks need to be borne by the procurers. Gas supply contracts are characterised by high level of take or pay obligations on fuel buyer. PPA needs to be suitably amended to alter current level (relatively low) of minimum off-take guarantees to suitably higher levels. It also needs to be ensured that gas-based plants do not face dispatch risks during their intended hours of operation (peak/intermediate load). Bidding would, therefore, be primarily on competitively discovering capacity charges and conversion (net heat rate) efficiencies. Gas-based peaking power if integrated into the total electricity generation system can lead to carbon reduction efficiencies even higher than renewables like wind or solar power. Hence it is suggested to extend the fiscal benefits to gas based peaking power projects at par with the renewable energy projects or Ultra Mega Projects-specifically, zero customs duties and taxes and interest rate subsidy´ says the report.

Evidently, a host of measures are required to be taken before India can look forward to a hassle-free gas-fired power generation.

The Boosters
The sharp drop in the international price of liquefied natural gas (LNG) has led to the revival of some gas-fired power plants in India.
In two auctions held by the government in September 2015, 18 natural gas based power plants including that of NTPC, Gujarat Industries Power, CLP India and Torrent Power emerged as successful bidders to receive subsidy from the government to purchase imported gas, which will result in generation of additional 12.47 billion units of electricity between October 2015 and March 2016.
In September, the government announced that the Dabhol power plant which was shut down two years back for want of fuel, will be split into two separate companies (power and LNG) in an effort to revive the plant.
In June 2015, two gas-based power plants of GMR Energy in Andhra Pradesh received letter of intent for gas allocation for four months beginning June, after they emerged as successful bidders in the reverse auction.

Higher RLNG imports to meet domestic gas shortfalls
Import of re-gasified natural gas (RLNG) in Q1 FY16 at 3.63 million metric tonnes (MMT) was about 21.4% higher on a year-on-year (yoy) basis from 2.99 MMT in Q1 FY15 due to low international spot gas prices during Q1 FY16. RLNG demand is expected to remain high in the near term because of the low natural gas production from the KG-D6 fields and limited upside in production expected from other fields. Over the medium to long term, even though domestic natural gas supply is expected to increase due to commercialisation of new gas discoveries, the demand for RLNG will continue to derive support from,
i)sectors which have demonstrated the capacity to absorb higher priced gas like the industrial segment,
ii)improvement in affordability of the fertilizer sector due to policy changes,
iii)the narrowing of differential between domestic gas and spot gas prices,
iv)increase in global RLNG supplies, and
v)setting up of several new R-LNG terminals thereby increasing the capacity to import gas.

India´s LNG re-gasification capacity to rise significantly
The total re-gasification capacity in India is currently around 25 million metric tonnes per annum (MMTPA); however, the operational capacity is about 17 MMTPA as the 5 MMTPA Kochi terminal of Petronet LNG Ltd (PLL) lacks full pipeline connectivity and 5 MMTPA Dabhol terminal is being operated at low capacity utilisations in the absence of breakwater required for protecting LNG ships during the monsoon season. Going forward, additional RLNG capacity of 10-15 MMTPA would be available with expansions at Dahej and Hazira along with possible improvement in capacity utilisation of Kochi terminal upon pipeline connectivity coming in place, leading rating agency ICRA said in a report - Indian Gas Utilities. The major greenfield projects, finalised by the sponsors and expected to be executed in the next 4-5 years are:

1)Floating Storage & Regasification Unit (FSRU)/RLNG terminal at Kakinada port, Andhra Pradesh (by GAIL, AP Gas Distribution Company, GDF, Shell and Kakinada port);
2)FSRU / RLNG terminal Pipavav, Gujarat (by Swan Energy Ltd);
3)Terminal at Mundra, Gujarat (by GSPC-Adani JV); and
4)Terminal at Ennore, Tamil Nadu (by Indian Oil Corporation Ltd).
Apart from above, many other terminals are proposed and are still in the preliminary stage. Based on relatively ´firm´ regasification terminals plans in India, ICRA projects the regasification capacity to significantly increase to around 47 MMTPA (~165 MMSMCD) by FY 20 and around 55 MMTPA (~190 MMSMCD) by FY 25.

Ambitious target to double gas pipeline infrastructure
With KG-D6 production coming on-stream during 2009-10 in Andhra Pradesh, the emphasis on enlarging the pipeline reach to other parts of India increased and various players had announced projects to connect some of the high-demand areas in south, east and central India. Post its election in mid-2014, the Central Government has set an ambitious target of doubling the gas pipeline capacity to ~30,000 km under the National Gas Grid Mission. Various options being placed on the drawing board are a partnership between GAIL (India) and Gujarat-based GSPC, taking up certain strategic pipeline projects based on budgetary support, public-private partnership (PPP) and bidding on viability gap funding (VGF). The proposed pipelines are expected to significantly improve the connectivity all over India.

Gas availability: Major hurdle
In line with the marginal improvement in domestic gas supply and the significant addition in the regasification capacities planned in the next 3-4 years, ICRA expects the capacity utilisation of pipeline network to improve in the long-term. However, capacity utilisation levels of some pipelines would continue to remain at sub-optimal levels in the medium term, ICRA said in a report titled - Indian Gas Utilities. Besides, despite the ambitious plan of the Central Government to double the pipeline capacity, the constrained gas availability may be a key hurdle for the viability of new pipeline projects, which require large investments. Though the Central Government is willing to provide VGF for the new projects, the interest of private players may be limited in absence of much clarity on the availability of gas supplies and anchor customers who can consume high-price RLNG.

Dabhol Power Plant - The Jinxed
The Dabhol plant, situated in Ratnagiri district of Maharashtra was a combined effort of Enron, GE, and Bechtel. GE provided the generating turbines to Dabhol, Bechtel constructed the physical plant, and Enron was charged with managing the project, through Enron International. The plant was to be constructed in two phases, construction of phase-I of the project was started in 1992. In May 1995, hundreds of villagers swarmed the site to protest the displacement of people that would take place, and a riot broke out. In 1996, the Indian government assessed the project as being excessively expensive and refused to pay for the plant and the construction had ground to a halt.

The Maharashtra State Electricity Board (MSEB), the local state run utility, was required by contract to continue to pay Enron plant maintenance charges, even if no power was purchased from the plant. MSEB decided that it could not afford to purchase the power (at `8 per unit/kWh) charged by Enron. From 1996 until Enron´s bankruptcy in 2001, the company tried to revive the project and spark interest in India´s need for the power plant, but without success.

The Dabhol power project has been dogged by controversies since its inception. There were allegations of favouritism, corruption, lack of transparency and overlooking of environmental concerns. The project was also vehemently criticised for human rights violations and suppression of local protests by Human Rights Watch and Amnesty International. The project was also widely criticised for excess costs and deemed a ´white elephant.´

In February 1996, the then government of Maharashtra and Enron announced a new agreement.

Enron had cut the price of the power by over 20 per cent, cut total capital costs from $2.8 billion to $2.5 billion, and increased Dabhol´s output from 2,015 megawatts (MW) to 2,184 MW. Both parties committed formally to develop the second phase. The first phase went on stream in May 1999, almost two years behind schedule, and construction was started on phase-II. Costs ultimately climbed to $3 billion. Again everything came to a halt. MSEB refused to pay for all the power, and it became clear that getting the government to honour the guarantees would not be an easy task. Meanwhile Enron, went bankrupt after an accounting scandal in 2001.

The power plant which was renamed as Ratnagiri Gas and Power Pvt Ltd (RGPPL) started operation in May 2006, after a gap of over 5 years. RGPPL´s key share holders comprise the state-owned National Thermal Power Corporation (NTPC, 32.47%), Gas Authority of India Limited (GAIL, 32.47%), MSEB (16.94%) and financial institutions including IDBI Bank, State Bank of India, ICICI Bank and Canara Bank (18.12%).

The Dabhol plant ran into further problems, with RGPPL shutting down the plant in July 2006 due to a lack of naphtha supply. The Qatar-based company, RasGas Company Ltd, started supplying LNG to the plant in April 2007. Power generation from the plant had plunged to less than 450 MW towards the end of 2012. Later it was shut down for want of fuel.

Recently, the government announced that the Dabhol power plant will be split into two separate companies (power and LNG) in an effort to revive the plant.

Pros and Cons of Natural Gas

Advantages

  • Clean fuel with less greenhouse emissions.
  • Much shorter construction time for power plant than coal
  • Low PLF of 25% as compared to coal-fired plants with 60-80%
  • Easy storage and transportation
  • Lighter than air and tends to dissipate when there is a leakage.

Disadvantages

  • Toxic and flammable, and leakages can be dangerous causing explosions and/or fire
  • Non-renewable, hence not a long term solution to energy problems
  • Although cleaner than other fossil fuels as far as by-products are concerned, natural gas leaks can become more hazardous since methane is 21 times more dangerous than carbon dioxide
  • Pipeline installation for transfer may be expensive

-BS Srinivasalu Reddy

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