 "Efforts to revive power plants may bring limited relief")
Power plants that came up over the past decade in the hope of ample supply of domestic natural gas soon found their investments stuck as the production of gas fell way short of the demand. It was not feasible to switch to imported gas because the power distribution companies were not ready to pay more.
For relief, these companies had sought measures like pooling of imported gas from the government. After almost three years, the government last week finally came out with a package to pull the stranded gas-based power capacity out of the woods.
Contrary to their expectations, the Cabinet Committee on Economic Affairs, or CCEA, did not decide on gas pooling - power plants will continue to pay for domestic gas, the price of which has come down marginally from April 1. Instead, the government announced a subsidy scheme which would function through a reverse bidding process. Power plants would quote a tariff, with Rs 5.5 a unit as the feed-in rate or the assured tariff. The lowest bidder would be able to sell power to distribution companies, and would be supplied natural gas, while the distribution companies would be subsidised by the government.
While gas for such power plants will be imported as liquefied natural gas, or LNG, and supplied by state-owned GAIL (India), the subsidy will be released through the Power System Development Fund. Though the purpose of this fund is to maintain grid stability and security, the government justified its use for reviving gas-based power plants on the grounds that such plants are best suited to meet the peak load demand.
According to the Union minister of state for power and coal, Piyush Goyal, the reverse auction will help revive some 31 projects with a combined capacity of 14305 Mw.
Besides the condition of lower PLF, power plants will also have to forego their return on equity while calculating the tariff. This means that the power plant's revenue will essentially meet the operating cost and service debt. According to a Moody's report, IDBI Bank has an especially high exposure to gas-based power plants and would be the key beneficiary of these measures. State Bank of India and ICICI Bank have exposure to Ratnagiri Gas & Power, which is the largest gas-based power plant in India, and would benefit as well, it said.
The total exposure of the banking system to the power sector at the end of January 2015 was around $88 billion, or 9 per cent of the outstanding bank credit, Moody's said. Banks had a major exposure to gas-based power plants that had a high risk of turning into non-performing loans.
What it holds for the owners of these gas-based plants like Lanco Infratech, Essar Power, Reliance Power, GVK Group and GMR Energy is not very clear. Repayment of debt would enable them to get some of the liabilities out of their balance sheets. "Even though the power plant operators may not get any return, a beginning has been made which will be in the overall interest of the power sector. Within the constraints, the government has reduced the difference between imported and domestic gas price," says Khurana.
No pain, no gain
While approving the mechanism, CCEA decided all others too should take a haircut. "The mechanism envisages sacrifices by all stakeholders, including the central and state governments by way of exemptions from certain applicable taxes and levies on the incremental regasified LNG, or R-LNG, being imported for the purpose. Besides, gas transporters and re-gasification terminals have agreed to reduce their transportation tariff, marketing margin and re-gasification charges on the incremental R-LNG," said an official statement.
According to a government official, GAIL and Gujarat State Petronet would have to forego 50 per cent of their transmission tariff and 75 per cent of marketing margin in supplying imported R-LNG. The government estimates that with this arrangement, electricity generation in the country would be enhanced significantly by around 79 billion units, valued at about Rs 42,000 crore.
Out of the 24150-Mw gas-based and grid-connected power capacity in the country, 14305 Mw has currently no supply of domestic gas. This represents an investment of over Rs 60,000 crore which is at the threshold of becoming non-performing assets for banks. The balance capacity of 9845 Mw, involving an investment of over Rs 40,000 crore, is also working at a suboptimal level because of the limited supply of domestic gas.
With the discovery of natural gas in the Krishna-Godavari basin, it was expected that there would be a considerable increase in the availability of domestic gas. Therefore, a large number of gas-based plants were set up, some with firm allocations and others with expected allocation. However, the supply of domestic gas from the KG basin started declining after 2012 and completely stopped in March 2013. Since then, these plants have either not been operating at all or are being under-utilised.
A day after the CCEA decision, Reliance Industries, which operates the KG-D6 block, denied that the declining output is the reason why these plants are in a quandary. Almost 30 mscmd gas was tied up from this block with 25 power plants. The KG-D6 field, which began gas production in April 2009, hit a peak of 69.43 mmscmd in March 2010 before water and sand ingress led to shutting down of its wells.
The current spot rate of imported gas is $10 with the cost of generation working out to be Rs 5 a unit (kw/hour), while domestic gas-based power is Rs 4 (in comparison to Rs 4 for imported coal and Rs 3.25 for domestic coal). The success of the new mechanism is yet to be gauged. But a lot would depend on the concurrence of distribution companies and their ability to buy such power at Rs 5.5 a unit. As things stand today, sometimes they are reluctant to buy power even at Rs 4 a unit.
For relief, these companies had sought measures like pooling of imported gas from the government. After almost three years, the government last week finally came out with a package to pull the stranded gas-based power capacity out of the woods.
Contrary to their expectations, the Cabinet Committee on Economic Affairs, or CCEA, did not decide on gas pooling - power plants will continue to pay for domestic gas, the price of which has come down marginally from April 1. Instead, the government announced a subsidy scheme which would function through a reverse bidding process. Power plants would quote a tariff, with Rs 5.5 a unit as the feed-in rate or the assured tariff. The lowest bidder would be able to sell power to distribution companies, and would be supplied natural gas, while the distribution companies would be subsidised by the government.
While gas for such power plants will be imported as liquefied natural gas, or LNG, and supplied by state-owned GAIL (India), the subsidy will be released through the Power System Development Fund. Though the purpose of this fund is to maintain grid stability and security, the government justified its use for reviving gas-based power plants on the grounds that such plants are best suited to meet the peak load demand.
According to the Union minister of state for power and coal, Piyush Goyal, the reverse auction will help revive some 31 projects with a combined capacity of 14305 Mw.
Besides the condition of lower PLF, power plants will also have to forego their return on equity while calculating the tariff. This means that the power plant's revenue will essentially meet the operating cost and service debt. According to a Moody's report, IDBI Bank has an especially high exposure to gas-based power plants and would be the key beneficiary of these measures. State Bank of India and ICICI Bank have exposure to Ratnagiri Gas & Power, which is the largest gas-based power plant in India, and would benefit as well, it said.
The total exposure of the banking system to the power sector at the end of January 2015 was around $88 billion, or 9 per cent of the outstanding bank credit, Moody's said. Banks had a major exposure to gas-based power plants that had a high risk of turning into non-performing loans.
What it holds for the owners of these gas-based plants like Lanco Infratech, Essar Power, Reliance Power, GVK Group and GMR Energy is not very clear. Repayment of debt would enable them to get some of the liabilities out of their balance sheets. "Even though the power plant operators may not get any return, a beginning has been made which will be in the overall interest of the power sector. Within the constraints, the government has reduced the difference between imported and domestic gas price," says Khurana.
No pain, no gain
While approving the mechanism, CCEA decided all others too should take a haircut. "The mechanism envisages sacrifices by all stakeholders, including the central and state governments by way of exemptions from certain applicable taxes and levies on the incremental regasified LNG, or R-LNG, being imported for the purpose. Besides, gas transporters and re-gasification terminals have agreed to reduce their transportation tariff, marketing margin and re-gasification charges on the incremental R-LNG," said an official statement.
According to a government official, GAIL and Gujarat State Petronet would have to forego 50 per cent of their transmission tariff and 75 per cent of marketing margin in supplying imported R-LNG. The government estimates that with this arrangement, electricity generation in the country would be enhanced significantly by around 79 billion units, valued at about Rs 42,000 crore.
Out of the 24150-Mw gas-based and grid-connected power capacity in the country, 14305 Mw has currently no supply of domestic gas. This represents an investment of over Rs 60,000 crore which is at the threshold of becoming non-performing assets for banks. The balance capacity of 9845 Mw, involving an investment of over Rs 40,000 crore, is also working at a suboptimal level because of the limited supply of domestic gas.
With the discovery of natural gas in the Krishna-Godavari basin, it was expected that there would be a considerable increase in the availability of domestic gas. Therefore, a large number of gas-based plants were set up, some with firm allocations and others with expected allocation. However, the supply of domestic gas from the KG basin started declining after 2012 and completely stopped in March 2013. Since then, these plants have either not been operating at all or are being under-utilised.
A day after the CCEA decision, Reliance Industries, which operates the KG-D6 block, denied that the declining output is the reason why these plants are in a quandary. Almost 30 mscmd gas was tied up from this block with 25 power plants. The KG-D6 field, which began gas production in April 2009, hit a peak of 69.43 mmscmd in March 2010 before water and sand ingress led to shutting down of its wells.
The current spot rate of imported gas is $10 with the cost of generation working out to be Rs 5 a unit (kw/hour), while domestic gas-based power is Rs 4 (in comparison to Rs 4 for imported coal and Rs 3.25 for domestic coal). The success of the new mechanism is yet to be gauged. But a lot would depend on the concurrence of distribution companies and their ability to buy such power at Rs 5.5 a unit. As things stand today, sometimes they are reluctant to buy power even at Rs 4 a unit.