Natural gas will no longer be allocated: Govt to private power producers

No fresh allocation of gas to be made

Leaving gas-based power plants stranded, the government has conveyed to private power producers that natural gas would no longer be allocated but they will have to bid for buying the fuel. This is a policy reversal from the United Progressive Alliance (UPA) regime when gas-based power generation along with fertiliser, liquefied petroleum gas production, and city gas distribution were identified as priority sectors for allocation of gas.

The decision to let private power plants bid for gas rather than get an allocation was conveyed at a meeting of power producers and the government earlier this month. Around 7.5 gigawatt (Gw) of gas-based generation capacity is stranded, of which plants with a capacity of 3.5 Gw are facing gas shortage.

The private power producers had asked the government to reserve the expected gas production from Oil and Natural Gas Corporation’s (ONGC’s) block in the Krishna Godavari (KG) basin for power generation. ONGC had in January come out with a tender inviting bids for sale of natural gas from S1-VA fields in the KG basin. “The government conveyed that if power producers wanted gas for their plants, they should bid for it,” said a person in the know. ONGC is expected to open the bids next month.

ONGC had sought bids for sale of 2.5 million metric standard cubic metre per day (MMSCMD) of gas with a floor price of $5.05 per million British thermal unit (mmBtu) and a cap of $6.30 for five years. The gas supplies are expected to commence from April 1, 2018.

The government also allowed a gas procurement scheme designed to help the stranded plants to lapse. The Ministry of Power had in March 2015 introduced a scheme for utilisation of stranded gas-based power generating capacity for a period of two years up to March 2017. Under the scheme, the Union government had envisaged Rs 75-billion support from the Power System Development Fund for a period of two years for operationalising gas-based power plants. However, only Rs 15 billion was utilised. 

“Gas-based power generation is no more a viable option without government support in the form of gas allocation or tax concession,” said an industry expert. He said gas-based generation was required for balancing power requirement. Since renewable power is unpredictable, there is a need for power plants that can ramp-up to meet the balancing power requirement.

He, however, pointed out that the government’s indifference towards gas-based generation stems from the fact that growth in power demand was muted and no addition to generation capacity was required. “There is no paucity of power supply. So much power is idling, with plants working at 50-60 per cent plant load factor. Any additional power can only be a substitute of power not being generated elsewhere,” said the person quoted earlier.

A senior executive in one of the power companies said a capital of more than Rs 500 billion is already invested in gas-based power plants. “This investment is non-performing in nature and adversely affects the balance sheet of financial institutions along with the power sector, which makes revival of these gas-based power plants critical for both the power and the banking sectors.”

India has 25,510 megawatt of installed gas-based capacity, of which the private sector owns about half. Most of this capacity came up when Reliance Industries’ KG-D6 was expected to produce 80 MMSCMD by 2009. The RIL gas production did not match up to the company’s estimates. The KG-D6 supplied only 32.37 MMSCMD of natural gas in 2016-17.

An empowered group of ministers in the UPA government made an allocation of 63.17 MMSCMD of KG-D6 gas to the power sector in May 2008 and October 2009, while deciding that the entire additional gas produced under the New Exploration and Licensing Policy would go to the power sector after meeting the requirements of the fertiliser sector.