Pipe dreams

State governments doling out cheap power is commonplace. During election time, they even promise free power — and we’re used to that, too. Now, here’s a government that’s making promises at the other end of the spectrum — expensive power — and, what is even more surprising is that it is being welcomed with open arms. The Andhra Pradesh Electricity Regulatory Commission (APERC) has recently cleared an initiative that will offer consumers electricity at a steep ₹9-11 a unit, three times higher than the average pooled cost (₹3 a unit). Mind you, this is the same administration that gives free electricity to farmers. So, just what’s going on? 

Out of gas

There’s a background to the decision to generate expensive power. Andhra Pradesh has the largest stock of gas-based power units — eight plants with a combined capacity of over 3,000 MW — that were planned and set up with the idea of using gas from Reliance Industries’ KG-D6 basin. More plants were planned, but they’ve been put on hold for the time being. 

That’s because against the initial plans of producing 86.73 million metric standard cubic meter per day (mmscmd) of gas every day, production at KG-D6 has been declining rapidly since 2011. In October 2012, daily production was just 29.81 mmscmd and is expected to further drop to 24 mmscmd in FY14 and 20 mmscmd the following year. Had the KG basin been producing to its full potential, the total domestic gas production by FY15 would have been 178 mmscmd; currently in FY13, production is expected to be around 104 mmscmd, increasing slightly to 112 mmscmd by FY15. 

With the KG basin producing far less than anticipated, all gas-based plants in the state (and many outside AP as well) are operating at half their capacity. And while assets on the ground are operating at below 50% their plant load factor (PLF), the PLF of newer plants in the state is half of even this diminished production level. Indeed, the 445 MW Konaseema Gas Power, set up in 2010, has already defaulted in payments to lenders and the company is in talks with its bankers for corporate debt restructuring. 

While the plants were planned on the basis of KG basin gas, the same can also run on other forms of fuel including imported liquefied natural gas (LNG). In the current fiscal, LNG imports will rise to 73 mmscmd from around 46 mmscmd in FY12; the figure will jump to 105 mmscmd by FY14, according to oil ministry projections, which will match domestic gas production. LNG imports into India are done on the basic of long, medium and short term contracts as well as on spot purchase basis. But, where the KG basin gas price has been fixed at $4.2/million metric British thermal units (mmbtu) until April 2014, internationally, spot prices of regassified LNG (RLNG) have increased from $7-8/mmbtu to around $17/mmbtu in the past four years. Isaac George, CFO of GVK Power and Infrastructure, points out that at $4.2/mmbtu, power tariff works out to around ₹3 a unit. Obviously, then, using imported gas will mean a three-fold hike in electricity rates.

But with Andhra reeling under a severe power crisis — against an energy requirement of 95,000 million units, the state was able to provide about 82,000 million units, leaving a deficit of over 12,000 million units — last August, distribution companies along with industry floated the idea of using LNG power. And, in January this year, APERC identified four plants of around 1,500 MW — GVK Gautami (464 MW), GVK Extension (220 MW), GMR Vemagiri (370 MW) and Konaseema — that will run their plants on RLNG.  

Paying a premium 

Not surprisingly, the plan has raised quite a few eyebrows. Asks SL Rao, former chairman of the Central Electricity Regulatory Commission (CERC), “Why select these four plants? And who will regulate the price of LNG in the first place?” APERC declined to comment on the issue but the power regulator’s order says these plants have been selected as their station heat rate (the amount of heat energy generated to produce electrical energy) is lower than others and can generate RLNG-based power at lower variable cost. George adds that these are the four biggest gas plants in AP that are currently running on low PLF. “With industry being forced to work only two days a week and power cuts expected to range for six to nine hours in the capital, there was no way out but to use RLNG and increase power generation in the state,” he says.

Certainly, industry is interested in the idea. MV Rajeshwara Rao, secretary general of the Federation of Andhra Pradesh Chambers of Commerce and Industry (FAPCCI), says there is already demand for around 300 MW of LNG-based power, adding that spinning mills, BPOs and some commercial establishments have come forward for this new scheme. “The scheme isn’t meant for cement and steel industries, which need cheaper power,” he points out; rather, it is for those who need continuous power. For such industries, diesel gensets, where power costs nearly ₹15 a unit, are a far more expensive and unreliable option. Indeed, a recent Ficci study points out that 61% of companies using power back-up units “suffer above 10% cost escalation due to power cuts” 

Traditionally, independent power producers secure fuel supplies for their plants. In this case, though, the state government-owned APTransco, along with Gas Authority of India (one of the main importers of RLNG in India), will arrange for procurement of RLNG. “APTransco will arrange for the RLNG and in all likelihood, this will come from the west coast as there are no LNG terminals on the east coast,” says George. 

The state-owned distribution companies will procure electricity from the four plants on a no-profit-no-loss basis. APERC has also put together a separate set of calculations on how RLNG-based power is to be billed. While industry offtake of RLNG will be around 300 MW, there is talk that increased generation can also be used for other purposes, including agriculture supply given that the rabi season is just round the corner. Certainly, there is planned generation of more RLNG power than industry currently needs. Where FAPCCI estimates of demand till mid-January was some 300 MW (that is 2,600 million units), the state discoms have proposed buying 6,000 million units (over 600 MW) of RLNG electricity for FY14. This sale of around ₹6,000 crore, if permitted by the regulator, will bring down Andhra’s power deficit substantially. But that’s only the tip of the iceberg. If it works at all, there is a much larger connotation to the scheme. 

The big picture

If there are takers for RLNG-based power, then the scheme can be extrapolated across the country and other gas-based capacities in the country, too, can run at higher PLF. In FY12, paucity of gas ensured that the 20,000 MW of gas-based power plants in India received less than 70% of the gas required, resulting in a loss of generation of over 10,000 million units. The multi-billion dollar 5 mmtpa LNG terminal at Dabhol has been idle since 2005, when Gail-NTPC took over the project (first shipment of nominal LNG received in January of 2013). One reason (not openly admitted, though) is that LNG prices have shot up in the past few years and LNG-based power would have proved too expensive to sell. Meanwhile, the associated power plant with the Dabhol project had started generation using domestic gas at around $6/mmbtu, resulting in a tariff of ₹3.9/unit. However, with shortage of domestic gas, power generation has dropped at the plant. Still, the perception that there are no takers for expensive power has changed. “If there are customers willing to pay a higher price, then assets such as that at Dabhol, which is running at one-third capacity, can be better used,” points out Vinayak Chatterjee, chairman and managing director of Feedback Infra. He further says, “The Andhra scheme attempts to segregate the consumer market by identifying customers who are willing to pay higher rates for assured supply.”

That’s not all. Andhra’s RLNG initiative is also in line with the Rangarajan committee recommendations on production-sharing contracts and gas pricing. Moving away from the current administered pricing mechanism based pricing, the committee in December 2012 recommended that domestic gas pricing should be benchmarked or aligned with
international prices. 

Meanwhile, discoms themselves are seeking higher retail tariffs from customers. In their recent tariff proposal, Andhra distribution companies have stated that they would have to purchase additional power at a marginal cost of ₹10 a unit. Accordingly, they have sought a hike in tariffs, especially of domestic consumers, by altering the slab rate — their suggestion is that people consuming over 500 units should pay over ₹7 a unit on their total consumption, compared with the earlier scheme of being charged different rate for different slabs. 

Perhaps the most significant implication of the Andhra experiment is for domestic gas prices. If there are takers for power derived from expensive RLNG, is it time to raise domestic gas prices? While the government has moved a Cabinet note on reviewing domestic gas pricing along the lines of the Rangarajan committee recommendations, officials say there will be no change in KG basic gas price until April 2014. On its part, Reliance Industries wants domestic gas prices to be market determined, a provision that exists in the production sharing contract. Ironically, before this new initiative by the Andhra government, the Association of Power Producers had last year opposed a hike in gas prices, stating that every dollar increase in gas prices would hike domestic tariffs by 35 paise a unit. Now, says George, “In principle, fuel prices should be indexed to international prices”, adding that bringing LNG by pipeline from the west coast to the east will hike the cost to about $22/mmbtu. Still, as Chatterjee says, “If the market is prepared to pay a price aligned with international prices, so be it.”