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Cover Story | September 2016

Reviving Gas Based Plants

LNG imports may come to the rescue of stranded gas-based power plants.

Much water has flowed under the bridge since the first natural gas find in the west coast of India in eighties and subsequently laying of Hajira-Vijaypur-Jagdishpur (HVJ) gas pipeline. In the three decades since then gas-based power plants with a capacity of 24,508 MW have been set up in line with the expectations created by various gas finds and the encouragement to use the cleanest and reasonably priced fuel for various industrial purposes, including power plants. These plants are in doldrums over the last six years due to dwindling domestic gas production and the cost of gas shooting up in the global markets. However, moderation in global gas prices in the recent months is raising hopes of revival of these gas-based power plants.

Currently, the country´s natural gas demand stands at 120 million standard cubic meters per day (mscmd), while the volume of domestic supply is 80 mscmd, necessitating import dependency. Out of around 24,508 MW of grid connected gas-based power generation capacity in the country, which includes about 6,000 MW of captive gas capacity, about 14,305 MW of capacity has no supply of domestic gas. Reflecting the drop in production of domestic natural gas over the years, plant load factor (PLF) of gas-based plants of about 54.5% in 2012 of gas-based plants has come down to around 23 per cent.

On this front, an investment of about Rs.60,000 crore is at the threshold of becoming a non-performing asset. The remaining capacity (9,845 Mw), involving an investment of about Rs.40,000 crore, is working at a sub-optimal level, based on the limited quantity of domestic gas.

´Gas-based power projects are second only to renewables and hydro power in generating clean energy. So, ensuring fuel supplies for such projects will help the Independent Power Producers (IPPs) to avail CDM (clean development mechanism) benefits/ credits and will go a long way in meeting India´s obligations under the climate change commitments and reduce green-house emissions substantially´ said Gaurav Sharma, Senior Analyst, Independent Power Producers Association of India (IPPAI).

Gas-based power is vital not only to meet peaking demand, but also to balance output from renewable energy sources, which are intermittent sources of power. The power sector is the leading end user of natural gas in India, along with the fertilizer sector, and consumes nearly one third of the total natural gas produced in the country. Moreover, the Central government is increasing its focus on gas-based power projects due to their high efficiency, low gestation period, environmental factors, and requirement of less water and land compared to other fuel based power plants.

Production & supply
As per the BP Statistical Review 2015, India is the fourth largest energy consumer in the world with oil and gas constituting about 37.47 per cent of primary energy consumption, of which 28.33 per cent comes from crude oil and 7.14 per cent comes from natural gas. Coal constitutes around 56.47 per cent of total energy consumption in the country.

The total daily average domestic gas production during the first half of 2015-16 (April 2015 to September 2015) was around 86.59 million metric standard cubic meter per day (MMSCMD) and supply was 70.52 MMSCMD. The total consumption of natural gas in the country in the same period last year was around 123.25 MMSCMD which consist of 69.98 MMSCMD of conventional domestic natural gas (56.78% of total onsumption), 0.55 MMSMCD of Coal Bed Methane (0.44% of total consumption) and 52.72 MMSCMD of imported R-LNG (42.78% of total consumption). Even going by the global average, or even Asian average, gas production and supply in India is very low. That raises hope that the share of natural gas in India´s primary energy basket is going to increase in the future.

The growth rate (CAGR) for 2004-14 period for natural gas in the world has been 2.33%, while in Asia Pacific it was at 6.03% and India at 4.74%. Natural gas constitutes only 7.14% of total primary energy consumed in India during 2014, compared to 23.71% in the world, 11.45% in Asia Pacific, 30.25% in USA. The domestic natural gas production from existing or already discovered fields is projected to increase to around 130 MMSCMD (Million Metric Standard Cubic Meter Per Day) 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. Rating agency, ICRA, 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/R-LNG 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.

Import option
After weighing the options - domestic production or import - the government has tilted towards the latter given over 18,600 MW of gas-based power capacity was lying idle and ramping up natural gas production is not the available option in the short term. In May 2016, Piyush Goyal, Minister of Power has announced that the government was ready to import at least 70 to 80 million metric standard cubic metres (mmscm) of natural gas to bring idle gas-based power plants into operation, if it can secure long-term ´affordable´ rates.

However, shifting from domestic production of LNG to import dependence will call for recasting of the existing processes, particularly development of LNG regasification processes. The total regasification 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.

Based on relatively ´firm´ regasification terminals plans in India, ICRA projects the regasification capacity to significantly increase to around 47 MMTPA (165 MMSMCD) by 2019-20 and around 55 MMTPA (190 MMSMCD) by 2024-25. A key challenge for the new terminals is their ability to tie up LNG supplies through long-term contracts at competitive prices and the competition faced by RLNG from liquid fuels.

Several gas-based power plants, mostly private ones, which were relying totally on imported gas had to shut down their operations three years back in the wake of gas prices shooting up to almost at USD 12-14 per a million British Thermal Units (mmbtu).

Recently, the public sector NTPC Ltd., India´s biggest power producer, had sought to terminate a long-term supply contract for imported natural gas as it says the fuel is too expensive to be used in power generation.

NTPC said that it has become impossible to execute the contract as the company is unable to sell the power it generates from the fuel. NTPC signed a 20-year contract with GAIL in 2009 to buy 2 million metric standard cubic meters a day of gas, the people said.

The cost of power generated from GAIL´s gas is about Rs.7 per kilowatt hour (kWh), which is more than double Rs.3.18 average price at which NTPC sold power in 2015-16, and more than three times the current national average spot price. Indian regulations require electricity retailers to buy power from the cheapest sources available, which makes it difficult for a generator to sell more expensive electricity.

NTPC´s combined 4 giga watts (GW) of gas-fired generation accounts for about 9 per cent of its total capacity. Its seven gas plants ran at 25 per cent of their capacity in 2015-16, compared with 33 per cent in the previous year.

However, the private sector Essar Power is planning to test the waters considering the drastic fall in global LNG prices. It is planning to start operations at its 500 mw natural gas-based power plant at Hazira in Gujarat soon.

´The prices have gone down to almost USD 4.5-5 per mmbtu. Though we expect it to further come down to a comfortable level, at this rate also we can at least start instead of keeping the plant idle,´ Sushil Maroo, Executive Vice Chairman, Essar Power said recently. Since then there was a slight uptick in global LNG prices.

Maroo further said that the company has also kept the 515 mw Essar Power-Hazira power plant on ready mode, though it will be put into operation only if gas prices go down further. The Essar Power-Hazira is a multi-fuel (naphtha, high-speed diesel, natural gasoline liquid and/or natural gas) combined-cycle power plant.

´We do not have adequate regasification facility in the country. So even if I get gas, I am stuck with the LNG regasification. We are trying to find out a solution for that and we think the regasification capacity should go up as gas is another good source of energy,´ Maroo added.

Recently, a couple of gas-based power plants located in south India and were lying idle for a few years due to lack of fuel, have started operations with imported fuel. Regasified LNG is still not cost-competitive with coal, after local transportation costs and taxes are taken into account. India needs to improve its gas-pipeline infrastructure substantially to boost the popularity of gas in the power sector, an expert said.

Pipeline Network
India´s 16,300 kilometer (10,130 mile) gas-pipeline network transmitted 148.39 million cubic meters of natural gas in 2015-16, using only about 38 per cent of the system´s capacity, according to the Ministry of Petroleum and Natural Gas.

Pipelines are the lifelines of the oil and gas industry. Government has focused to develop an ecosystem of national gas grid across the country. In order to complete the grid, another 15,000 km of additional gas pipeline has been planned. Out of the proposed 15,000 km gas pipeline, about 13,000 km has already been authorised and these projects are at various stages of implementation. The sponsoring authority i.e. GAIL (India) Limited has completed survey work for the project.

In order to provide thrust for gas grid development, government support to fund pipeline projects are also under consideration. A pipeline of about 312 Km connecting Coal Bed Methane (CBM) block at Shadhol, Madyha Pradesh to existing natural gas corridor i.e. Hazira-Vijyapur-Jagdishpur pipeline at Phulpur, Uttar Pradesh is expected to be operational by now. In the eastern part of the country, GAIL expedited its efforts to implement Jagdishpur-Haldia Pipeline (JHPL) project. Construction of JHPL Phase -I was inaugurated in July 2015.

Phase-I includes 341 km mainline from Phulpur (UP) to Dobhi (Bihar) and 414 km spur lines to various demand centers like FCI-Gorakhpur, IOCL - Barauni, City Gate Stations of Varanasi and Patna. Project is under execution and is being synchronised with anchor load customers including revival of fertilizer plants.

Recent initiatives
Recently, India and Australia decided to form a sub-group, to prepare a roadmap on streamlining issues that would help in providing cheap LNG for power plants in the country.

´If the government gets gas at $5 per mmbtu, gives custom duty waiver, reduces marketing margins and gas transportation charges by half and reduces inter-state transmission charges to zero, the industry will be able to absorb the price´ said Maroo of Essar Power.

In a bid to give thrust to import of LNG, the government has set up Power System Development Fund (PSDF) to provide subsidy to the power plants importing LNG. It has evolved a reverse bidding mechanism to assess interest among the gas-based power plants in imports. Gas-based power producers have put near-zero bids to procure subsidised regasified liquefied natural gas (RLNG) from the government. The eligible bidders indicate the total incremental electricity they would generate using the e-bid RLNG. The companies also quote the subsidy they require to ensure the net purchase price for the distribution companies to buy that power, without exceeding the target plant load factor.

Under the gas supply mechanism announced last year, every stakeholder in the supply chain would have to forgo a part of their returns on operations. While the central government would give up the service tax levied on gas sourcing, the power plant operators would forgo return on equity. GAIL would source the imported gas and with Gujarat State Petronet would forgo 50 per cent of their transmission rate and 75 per cent of the marketing margin in supplying imported RLNG.

The natural gas finds in the eighties and nineties have created an euphoria leading to several industrial groups setting gas-based power plants in several pockets of the country. For several reasons, the gas production in the country has slipped from 52.22 billion cubic meters (BCM) in 2010-11 to 33.66 BCM in 2014-15 leaving a lot of these power plants, with an investment value of over `one lakh crore, in the lurch. Though the domestic natural gas production level is expected to increase further to around 140 MMSCMD by 2024-25, it is too late for the existing gas-based power plants to wait. If not rescued within the next couple of years about 10,000 MW of existing gas-based plants will get mothballed. That is the exigency that has spurred the government and the industry to seek urgent alternatives, of which importing LNG seems to be the best option at the existing prices. However, it is not advisable to depend totally on the vagaries of the global LNG markets, which again move based on the price movements of naphtha and crude oil. So, the other alternative is to bolster domestic capacities and expediting prospecting of already identified fields. Tweaking pipeline plans according to the new scenario and executing projects expeditiously is the need of the hour. Increased level of imports call for more port connectivity to the user industries.

Though the investors will not be pleased to invest at a time when the prospects are looking bleak, the government has recently provided marketing and pricing freedom (subject to a price ceiling) to players operating in deepwater, ultra- deepwater and high pressure-high temperature areas that were yet to commence commercial production as on January 1, 2016. This will help improve the situation. The other major challenge for expediting the projects, particularly in the pipeline space, where making land acquisition and creating the right of the way easier is critical. If necessary the government should intervene to sort out matters.

-BS Srinivasalu Reddy

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