Gas pooling is fine, but where is the import facility

Commissioning gas-based units would mean importing gas as the country does not produce enough gas

In order to restart gas based power plants, government has announced a gas pooling policy which is expected to revive Rs 60,000 crore of stuck investment.

But in order to get the ball rolling, almost all stake holders in these projects will have to take a hit, except the banks. As per Piyush Jain of Morningstar Investment Adviser, the formula incorporates support from pipeline companies like Gail which have agreed for cut in pipeline tariff and marketing margins, regasification terminal owners who will bear cut in regasification charges and state governments have agreed on cut in duties on gas. In addition, government will provide subsidy up to a power tariff of Rs 5.50 per unit for purchasing gas based power.

The gas-based power producers have agreed to forgo ‘return on equity’ clause, provided the government helps them by arranging for buyers of the power. Government will provide subsidy directly to distribution companies for purchasing gas-based power. This will help the gas-based power plants to operate at a capacity utilisation of about 30% and generate cash on their idle assets. Around 14,000 MW of plants will be generating 75 billion units worth Rs 40,000 crore.

The impact on the economy will be much higher on account of the multiplier effect. As per a CLSA note the LNG policy would increase LNG imports by 18 mmscmd. Power plants will compete in a reverse auction which will make the power affordable. Morningstar says that power generated from these units would be suitable for meeting peak demand as gas based plants can turn on in couple of minutes. Thereby, during peak load, power prices will be balanced by increased supply from the gas based power and therefore, in a way it is beneficial for the distribution companies also.

Overall availability of cheap power to the economy will rise thus benefiting all the stake holders in the process. The biggest beneficiaries will be the banks who do not have to take any hit for the funds they have allocated. Loans to gas power producers have already turned into a non-performing asset.

There is however, one drawback in the entire policy. India lacks import and regasification facility of gas. Commissioning these gas-based units would mean importing gas as the country does not produce enough gas.

According to CLSA this 18mmscmd (5 mtpa) LNG import plan exceeds existing spare regasification capacity in India and could eat into short term/ spot volumes. Of the three operations terminals, Gail's Dabhol terminal has found it difficult to operate beyond 30-40 per cent of its 5mtpa capacity as it lacks breakwater facility which makes it non-operational during monsoons.

Thus the annual supply of 10mmscmd (2.8mtpa) will need to come from the two operational terminals i.e. Petronet's 11mtpa Dahej and the 5mtpa Hazira terminal operated by Shell- Total JV. Petronet has been operating its terminal at full capacity. Data of Hazira terminal is not publicly available says CLSA but says that the current utilisation needs to be sub-40 per cent to ensure spare capacity for this extra volume. This lack of spare capacity points to possibility that some spot volumes will have to be replaced, says CLSA.

This means that in order to start the ‘stuck’ gas based power plant, existing imports and uses of gas will have to be diverted. That does not seem to be clever thinking on the part of the government.