Grim Outlook for Gas

Government strikes down proposal for fresh allocations

The past few years have been tough for the gas-based power generation segment and the stress seems far from over. Already struggling with low plant load factors (PLFs) and shortage of natural gas feedstock, power producers will now also need to deal with bidding for gas to secure supplies, as reportedly conveyed by the government recently.

To recap, the government had, in 2015, introduced an e-auction scheme for supplying regasified liquefied natural gas (R-LNG) to stranded and underutilised projects, which have been provided with subsidy support. The scheme, which was operational for two years, was rolled back in 2016-17.

The government reportedly does not plan to resume the scheme and the sector will now not receive any priority in terms of fresh allocations from gas fields. The issue has come up in the backdrop of gas availability from the Krishna-Godavari (KG) basin on the east coast by state-run explorer Oil and Natural Gas Corporation (ONGC). One of ONGC’s deepwater gas fields in the basin is now ready for commercial production and it has invited bids for it from prospective buyers. Power producers had sought allocations from the government from the ONGC fields given that a number of the power plants, especially those in Andhra Pradesh, were originally conceived based on KG basin discoveries back in 2009-10, from which gas supply has now completely stopped.

The Reserve Bank of India’s (RBI) new guidelines Resolution of Stressed Assets — Revised Framework, which mandate banks to classify even a day’s delay in debt servicing as default, are adding to the sector’s stress. According to the Central Electricity Authority’s estimates, over 14 GW of gas-grid-connected power generation capacity in the country is stranded for want of gas. With these new guidelines in force, owners of these power projects are expected to be considered as defaulters for reasons beyond their control.

Power Line takes a look at the key trends in the gas-based power generation segment and its future outlook…

The supply story

Currently, gas-based power projects, aggregating nearly 24,897 MW of capacity, account for 7 per cent of the country’s total installed capacity and about 4 per cent of the total generation (from conventional sources).

PLFs have been declining continuously. From 67 per cent in 2009-10, the average PLF has come down to around 23 per cent for 2017-18 (till January 2018).

According to Kaushlendra Tripathi, director, power and utilities practice, PricewaterhouseCoopers, “The low PLF levels of gas-based projects are stemming from low despatch on the supply side, resulting from the high cost of domestic gas owing to its low availability in the country.”

In the past two to three years, the segment received domestic gas supply of only 21-23 million metric standard cubic metres per day (mmscmd) as against a domestic gas allocation of around 87 mmscmd.

As a result of the low gas supplies, around 14,305 MW of projects have been stranded. This comprises 5,194 MW of gas-based plants with allocations predominantly from the KG-D6 fields, 3,762 MW of gas-based capacity commissioned without any gas allocation and 5,349 MW of new gas-based capacity that is ready for commissioning (if gas is made available).

Since 2010, gas production from onshore as well as offshore fields has declined significantly, leading to much lower than expected domestic supply. The sharpest declines in production have been in the offshore fields. The offshore fields account for about 70 per cent of the total domestic production, while the onshore fields account for the balance production.

A major decline in production has been from Reliance Industries Limited’s KG-D6 block, which was supposed to produce 80-100 mmscmd. Supply of KG-D6 gas started in 2009-10 with 39.67 mmscmd and reached a peak of 55.35 mmscmd in 2010-11. However, production started declining gradually from 42.33 mmscmd in 2011-12 to 25.74 mmscmd in 2012-13 and to only 16 mmscmd in March 2013.

The gradual reduction in production from KG-D6, contrary to projections, disrupted the country’s gas-based capacity addition programme. In March 2013, when production from the KG-D6 fields fell to 16 mmscmd, supplies to the power sector were reduced to zero. As production fell, cuts were made in allocations based on merit order, wherein the fertiliser sector and liquefied petroleum gas (LPG) extraction units were accorded higher priority than the power sector.

With ONGC commencing operations at the Vashishta (VA) and S1 deepwater gas fields in the KG offshore basin in January 2017, India’s overall gas supply was anticipated to increase. The Vashishta field is estimated to yield 9.56 billion cubic metres (bcm) over a period of nine years, with peak production reaching 3.55 mmscmd during the first five years. Meanwhile, the S1 field is expected to deliver 6.22 bcm over a period of eight years, with a peak production of 2.2 mmscmd for the first five years.

Based on this, ONGC has floated an e-tender for the sale of 2.5 mmscmd of gas from the S1 and VA deepwater fields. Gas supplies are expected to commence on April 1, 2018. Moreover, Vashishta and S1 will be the first fields in India to get a premium price for gas under the government’s policy to incentivise production from deepwater, ultra deepwater, high temperature and high pressure fields.

On the outlook for PLFs, Rajesh Mokashi, MD and CEO, CARE Ratings, “We expect in the near to medium term, the gas based power generation will continue to report low PLFs given the continued lower availability of domestic gas, discontinuation of subsidy scheme and the relative attractiveness of alternative sources of power generation vis a vis RLNG based power generation.”

Did the e-bid scheme work?

A short-term breather for the segment was the two-year subsidy scheme for the utilisation of stranded and underutilised gas-based power generation capacity. This involved the supply of R-LNG to stranded and underutilised power plants through an auction process. Four rounds of auctions were held in 2015-16 and 2016-17 for 23,000 MW of capacity.

The ceiling tariff at which the discoms were to purchase power was fixed at Rs 4.70 per unit; however, negative or zero bids were made at these auctions, implying that bidders were willing to forego their subsidy or supply power at even lower than the ceiling tariff.

According to industry observers, the scheme at best provided interim relief to the industry and improved generation only to some extent. As per ICRA’s estimates, overall gas-based power generation increased by only 6 billion units (BUs), from 41 BUs during 2014-15 to 47 BUs in 2015-16, against an incremental generation of 18.2 BUs estimated using imported R-LNG. Further, in 2016-17, generation was higher by only 9 BUs as compared to 2015-16, while the incremental generation estimated under the scheme was 15.6 BUs.

ICRA further adds that given the relatively high cost of procuring power generated from gas-based projects under the scheme (at Rs 4.70 per unit), discoms have been reluctant to participate in the scheme.

The low tariffs available for power procurement from the open market have further exacerbated the situation for gas-based projects. Short-term prices on the power exchanges have reduced significantly and renewable energy prices too have seen a declining trend in recent auctions.

Industry developments

After the roll-back of the e-bid scheme, plants have again been left idle and are either undergoing strategic debt restructuring (SDR) or are on the verge of being declared non-performing assets.

Recently, in January 2018, lenders began the SDR process for Lanco Kondapalli Power Limited, which owns the 1,466 MW Kondapalli gas-based project. The project has been unable to operate around 1,108 MW of capacity and has been incurring losses for the past three years, resulting in mounting dues to the lenders. Meanwhile, the lenders to GMR’s Rajahmundry Energy Limited, which owns the 768 MW gas-based combined cycle power project in Andhra Pradesh that has been under SDR since 2016, are finding it difficult to find buyers. GMR Rajahmundry Energy is saddled with a debt of Rs 23.66 billion.

Another key gas-based power producer, GVK Power and Infrastructure Limited, has been looking for buyers for its assets too. After the 2016 divestment of the 217 MW Unit 1 of the Jegurupadu gas-fired power plant, GVK Power and Infrastructure Limited has now reportedly decided to divest the 228 MW Unit 2, which has a debt of Rs 4.8 billion on its books.

Meanwhile, India’s largest gas-based power project, owned by Ratnagiri Gas and Power Private Limited (RGPPL), got a breather last year in the form of an agreement to supply 500 MW power to Indian Railways at a fixed price of Rs 5.50 per unit for a period of five years beginning April 1, 2017. The agreement is expected to help the company sustain its operations as well as service its debt.

While no new plants are being planned in the country, there has been an interest in overseas markets. Reliance Power is setting up a 750 MW gas-fired power plant at Meghnaghat in Bangladesh and an LNG import terminal. The company has signed an agreement with the Bangladesh Power Development Board, which will be providing land for the power plant. Reliance Power has in-principle approval from a consortium of lenders led by the Asian Development Bank for funding the project, which will be the largest foreign direct investment in Bangladesh. Moreover, the company has been mulling over the idea of  shifting its 2,400 MW plant from Samalkot in Andhra Pradesh to Bangladesh.

Apart from this, there has also been interest in the captive gas-based power generation market. “Although on the independent power producer side, there has been some ambiguity regarding the future of gas-based power projects, on the captive power generation side, there are in fact fresh additions being made in the country. With the increased thermal efficiency of new gas turbines (up to 60 per cent), we may in the medium term see the possibility of new gas-based power plants coming up, especially in areas with high coal transportation costs,” says Tripathi.

Outlook

Can gas play an important role in India’s renewable future? The Ministry of Power (MoP) does seem to be keen on utilising gas-based power generation for load balancing to support the integration of 175 GW of renewables by 2022.

According to a new report, “Optimal Energy Mix in Power Generation on Medium And Long Term Basis”, brought out by the ministry recently, combined-cycle  gas  stations  can  provide peaking  and  balancing  capacity to  some  extent if  gas  supply  contracts  are  modified  to  include clauses like allowing non-uniform consumption of gas.

The report states that plants  under  the  jurisdiction  of  the regional  load  despatch  centres,  aggregating about 3,300 MW (excluding the RGPPL project)  which have  about  4.8  mmscmd of  domestic  gas  allocation, could produce around  1,000  MW  of power round the  clock. These plants, through quick starts/stops and operation at a minimum load of 55 per cent, could provide 500 MW to 1,500 MW of flexible generation, which is required for peaking as well as balancing. The states can  also  likewise provide  500-1,000  MW  of power by  using their  combined  gas  grid-connected  power plants   for   peaking   and   balancing.

The report also recommends a review of gas contracts. The inclusion of clauses like non-uniform consumption  of  gas  and  weekly  gas  allocation  instead  of  daily allocation  with  flexibility  for  less withdrawal  during  weekends/holidays/ festivals  and  more  on  other  days  could improve gas generation for peaking and balancing requirements, it notes. A separate committee has also been constituted by the MoP to look  into  this  aspect  and  suggest  the changes  required  in  gas  contracts  to  improve  peak generation.

The way forward

According to industry experts, an improvement in the sector outlook depends largely on an improvement in domestic gas supply. ONGC gas could have helped in the revival of projects. Also, from a price point of view, it would have been more prudent for generators to use domestic gas. More so as gas now faces significant competition from other cheaper sources of generation. However, the government seems to have shelved the proposal for allocating ONGC gas for now.

In this context, is R-LNG a viable option? In specific cases, yes. “In the current scenario of hardening of exchange rates in short-term contracts, R-LNG may be a viable option in specific cases such as meeting peak power demand, particularly during the summer. Captive power generation based on R-LNG is also a viable option. At present, the landed cost of R-LNG for power projects in India is in the range of $6.50-$7 per mmBtu. This leads to a tariff of around Rs 5 per kWh for most combined cycle power plants, which again appears reasonable for meeting power demand,” says Tripathi.

What are the policy interventions needed? Apart from allocations from gas fields, power producers have been asking for relief measures such as providing exemption from value added tax by state governments or bringing natural gas under the new goods and services tax (GST) regime. The Association of Power Producers has also made a case for a GST waiver on regasification and gas transportation charges, reduction of pipeline rates and regasification charges by half, and a 75 per cent reduction in the marketing margin. In addition, it wants power transmission charges and losses to be exempted for interstate transmission.

A bundling mechanism could also be put into place. “Given the government’s focus on renewable energy, including solar and wind power which exhibit an erratic generation pattern, the need for some kind of mechanism to stabilise the grid cannot be over-emphasised. To this effect, in the future auctions, the government can bundle solar and wind capacities with gas-based power plants thus effectively achieving the objective of grid stability while reviving the stranded gas-based power plants,” says Mokashi.

The segment could also improve through interventions such as the government’s plans of creating a national gas grid by doubling the gas pipeline length (from the current 15,000 km) and introducing a peaking power policy, which would allow discoms to step up purchases from these plants.

Meanwhile, the Independent Gas-based Power Producers Association has requested the Central Electricity Regulatory Commission to keep gas-based plants outside the purview of the new transmission regulatory framework, the General Network Access (GNA) Regulations. In the new GNA regime, which would link transmission access to long-term power purchase agreements (PPAs), the association contends that the generator will have to bear the transmission charges whether it utilises the network or not. It has also stated that since gas-based power plants do not have fuel tie-ups, they are unable to execute any PPAs.

Power producers have also sought a special dispensation from RBI with regard to the new stressed assets guidelines. The power minister, in fact, recently held a high-level meeting with industry leaders to discuss the issues faced by the sector, including the new RBI guidelines.

Clearly, the decisions and actions taken by the ministry, RBI and other stakeholders in the medium term will determine if gas-based power generation will maintain the status quo or arrest the downslide.

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