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Pooling of Gas Prices - An Optimistic approach to Keep Gas Based Power Plants under Optimal PLF

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Power sector is facing acute shortage of gas and many plants are either stranded or operating at very low PLF, whereas Fertilizer sector is getting almost its complete requirement of gas. Therefore, Ministry of Power had proposed the Empowered Group of Ministers (EGoM) on pricing & commercial utilization on NELP gas for allocation/ supply of gas to Power sector on equal priority with Fertilizer sector or if not equal priority, then it was proposed to cap allocation/ supply to Fertilizer at 31.5 MMSCMD and allocate entire additional domestic gas coming into the system to (after meeting shrinkage requirements) power sector till its full requirements are met.

EGoM have decided that the total domestic gas supply to fertilizer sector be capped at their present level of 31.5 MMSCMD as their full demand is being met. The EGoM further decided that all additional domestic gas from the year 2013-14, 2014-15 and 2015-16 will be allotted to power sector to help improve generation. EGoM will review the gas production scenario thereafter for deciding supply of additional domestic gas that would be available from 2016-17 onwards to Fertilizer and Power sectors.

Additional Domestic Gas that can be made available to Power Sector for the years 2013-14, 2014-15 and 2015-16, if Allocation/ Supply to Fertilizer capped at 31.5 MMSCMD is 1.125, 3.980 and 6.895 mmscmd respectively. This entails a net shortfall of 70.515, 66.54, 59.64 mmscmd during the same same period respectively and this is calculated based on the PLF of 70/75.

Analysis on Pooling of Domestic gas with RLNG for Power sector
Even after considering capping of allocation/ supply to Fertilizer at 31.5 MMSCMD and allocating the entire additional domestic gas to Power sector, there will be a net shortfall for Power sector. This shortfall can only be met by importing RLNG and pooling this with the price of the domestic gas and providing subsidy to Power sector to make gas based generation viable at operating the plants at technically sustainable PLF. At present, 12,561 MW of APM based plants (i.e. plants that have been getting domestic gas other than KG D6 gas) are getting 17.26 MMSCMD domestic gas and are operating at average PLF of 27.7 percent (29 percent if Spot RLNG is included). 4,842.5 MW predominantly dependent on KG D6 (2,478 MW fully dependent) but are badly affected due to nil supply of gas from KG-D6. Further, 1334 MW newly commissioned gas based capacities are lying idle without any gas allocation. The present price level of Domestic gas is around US$ 4.2 / MMBtu, which shall almost double in April, 2014 as per the recent CCEA approval of the new gas price formula.

Analysis for the balance period 2013-14
For the balance period of 2013-14, it is proposed to allocate the additionally available 1.125 MMSCMD gas (as indicated by MoP&NG) to the 4,842.5 MW predominantly dependent on KG D6 (2,478 MW fully dependent/ substantially dependent) & 1334 MW newly commissioned gas based capacities which are without any gas allocation. Further, by adding 6 MMSCMD of RLNG to these plants, the weighted average price of gas would be US$ 11.43/ MMBtu and the average PLF of around 25.54 percent can be achieved. However, the indicative total cost of Generation would increase to INR 10.47/ unit, which would be extremely high. Considering a viable level of maximum Total tariff of INR 5.50/ unit that may be despatchable, the indicative Subsidy to be borne by Government would be INR 3788 Crore for the balance 6 months period of 2013-14.

Analysis for the period 2014-15
From April, 2014, the domestic gas prices will be revised as per the CCEA approved new gas price formula. The new gas price will be computed every quarter and will be dependent on international LNG prices and the trading hubs like Henery Hub and NBP, thus will be quite high and volatile. For analysis purpose, an indicative price of US$ 8.0/ MMBtu has been considered.

For 2014-15 and 2015-16, it is proposed not to change the allocation/ supply of domestic gas to APM based plants. However, additional RLNG may be added into the pool to increase their average PLF. It is proposed to allocate the additionally available domestic gas to the plants which are fully & substantially dependent on KG D6 gas, newly commissioned plants without gas allocation and some plants which can be commissioned. For 2014-15, it is proposed to allocate the additionally available domestic gas 5.11 MMSCMD (1.125 + 3.98, as indicated by MoP&NG) to 4,842.5 MW predominantly dependent on KG D6 (2,478 MW fully dependent/ substantially dependent) & 1334 MW newly commissioned gas based capacities that are without any gas allocation and 3000 MW of new power plants that are ready for commissioning. Further, by pooling with around 7 MMSCMD RLNG to these plants, the pooled price of gas would be US$ 10.32/ MMBtu and the average PLF can be achieved around 25.82 percent. However, the indicative total cost of Generation would increase to INR 10.32/ unit, which would be extremely high. Considering a Total tariff of INR 7.0/ unit, the indicative Subsidy to be borne by Government would be INR 7379 Crore.

For the APM based plants, the present supplies under their existing agreements will continue. Along with the supplies of existing Long term RLNG quantities of 1.98 MMSCMD, additional 8 MMSCMD of RLNG may be pooled in this group. Thus, the Pooled price becomes US$ 10.14/ MMBtu and the PLF levels can be improved to 40.03 percent. However, the Total cost of generation would increase to INR 8.46/ unit, which is quite high. Considering a Total tariff of INR 7.0/ unit, the indicative Subsidy to be borne by Government would be INR 6435 Crore. Thus, the Total subsidy in the Year 2014-15 to be borne by Government would be INR 11098 Crore.

Analysis for the period 2015-16
For 2015-16, it is proposed to allocate the additional available domestic gas of 12 MMSCMD (1.125 + 3.98 + 6.895, as indicated by MoP&NG) to 4,842.5 MW predominantly dependent on KG D6 (2,478 MW fully dependent/ substantially dependent) and 1,334 MW newly commissioned gas based capacities that are without any gas allocation and all 7,815 MW of new power plants that will get commissioned. Further, by pooling it with around 12 MMSCMD of RLNG for these plants, the Pooled price of gas would be US$ 10.96/ MMBtu and the average PLF of around 31.79 percent can be achieved. However, the indicative Total cost of Generation would increase to INR 9.53/ unit, which would be extremely high. Considering a Total tariff of INR 7.50/ unit, the indicative Subsidy to be borne by Government would be INR 8265 Crore.

For the APM based plants, the present supplies under their existing agreements will continue. Along with the supplies of existing Long term RLNG quantities of 1.98 MMCSMD, additional 8 MMSCMD of RLNG may be pooled in this group. Thus, the Pooled price becomes US$ 10.24/ MMBtu and the PLF levels can be improved to 48.3 percent. However, the Total cost of generation would increase to INR 8.52/ unit, which is quite high. Considering a Total tariff of INR 7.5/ unit, the indicative Subsidy to be borne by Government would be INR 2658 Crore. Thus, the Total subsidy in the Year 2015-16 to be borne by Government would be INR 10924 Crore.

Justification for the Proposal
In view of the severe gas shortages and resulting techno-commercially unviable PLF, EGoM has approved allocation of additional domestic gas to Power sector for the years 2013-14, 2014-15 and 2015-16 by capping supplies to Fertilizer sector. However, even with this additional gas, there will be significant shortfall in power sector. This shortfall can only be met by importing RLNG and pooling this with the price of the domestic gas and providing subsidy to Power sector to make gas based generation viable and achieve technically sustainable level PLF. However, the Total cost of generation will increase significantly because of the Pooling of domestic gas with RLNG. This will make Gas based generation totally unviable in the merit order dispatch. In Power sector, there are hardly any takers of electricity at more than INR 4.50- 5.00/ Kwh in recent times. To bail out the financially sick Discoms, Government of India has recently approved financial restructuring plan. Hence, the gas based power stations would need to be supported by Government through appropriate Subsidy mechanism in the gas pool.

This will prevent the stranded Gas based capacities and the new Gas based projects to become NPAs. The investment sentiments in the Power sector and the confidence of the bankers will be restored. The PLF of 12,561 MW of APM based plants would increase from present avg. PLF of 27.7 percent to 42.53 percent in the year 2014-15 and beyond. This will help increase power generation from present level of 27 BUs to ...BUs. It will also enable RGPPL to be functional so that the assets restructured in 2009 under the aegis of Gol may avoid being classified as NPA. The power requirement of the country can be immediately met by utilizing the already created 24,189 MW gas based assets. Moreover, the demand of Southern region, which is yet to be connected to the National grid, can be met immediately. Gas based power generation is a preferred mode worldwide because of various benefits mainly its environmental friendliness.

Pool Operation Mechanism:
Regarding the pool operation mechanism, it is proposed to appoint GAIL as 'Pool Operator' in view of the following reasons:
  • GAIL is a public sector company and is well established in global market as a LNG Buyer and has already finalised LNG Contracts of about 7-8 MMTPA based on JCC / Brent and Henry Hub indexation.
  • Being a Central PSU, Government guidelines can be implemented.
  • Government nominee from MoPNG/ MoP can also be made a part of the Empowered Committee that approves procurement of LNG from international sources.
GAIL can act as the aggregator wherein, monthly pooled price for the proposed pools during the years 2014-15 and 2015-16 shall be declared by GAIL (as per guidelines of MoPNG/ MoP) in its capacity as the pool operator. The existing domestic gas suppliers may continue to sell gas to the contracted power plants. However, the payment to all such sellers shall be made as per contracted price by GAIL as the pool operator and the existing contracts of power plants will need to be modified only to this extent. The subsidy of the Government will also be channelised through the Pool operator. In turn, GAIL shall make the RLNG available to the power plants at competitive prices so as to limit the Total cost of power generation within the proposed reference limits. All gas based power plants shall make payments to the pool operator to enable it to make payment to individual gas suppliers. However, the legal implications of appointing GAIL as 'Pool Operator' in view of the existing Gas/ RLNG Sale & Purchase Agreement (GSPAs) and Gas Transportation Agreement (GTAs) amongst various entities will need to be examined and settled.

Financial Implication
In case Pooling of gas/ RLNG is implemented, there will be an out go of Government subsidy. If we consider limiting the Total tariff of power to INR 5.50/ unit in 2013-14, INR 7.0/ unit in 2014-15 and INR 7.50/ unit in 2015-16, the amount of Subsidy to be borne by the Government shall be INR 3788 Crore (for balance 6 month period of 2013-14), INR 11045 Crore and INR 10924 Crore, respectively during these years. These Subsidy calculations are estimates only based on projections and the actual Subsidy in a year will depend upon the actual supply of gas/ RLNG at prevailing level of prices during that year. The actual Subsidy may be even less depending upon the consumption of costlier RLNG. However, Government, if so desires, may limit the subsidy in the respective years to the proposed subsidy levels in this proposal.

During the years of 2013-14, 2014-15 and 2015-16, by pooling with the additionally available domestic gas with RLNG, gradually all the power plants can be run, thus avoiding their present stranded situation. However, the average PLF levels are still not technically viable for individual power plants. Hence, it will be important to optimize the operation of the power plants by clubbing/diversion of gas and rostering the gas, as is being done till the time the domestic gas availability is sufficient enough.

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Salient features of Pooling of prices of Domestic and Imported coal

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Salient Features of Pooling of Prices of Domestic and Imported Coal

It has been proposed for pooling for the identified capacity of 60,000 MW which has been committed coal supply during the XII Plan period (option -I) with sector wise break up as Central Sector- 17,500 MW, State Setor- 12,675 MW and Private Sector- 29,825 MW for the plants commissioned/ to be commissioned during the period 01.04.2009 to 31.03.2015 and having PPAs with DISCOMs/ State Designated Agencies.
  • The proposed scheme would facilitate capacity utilization of new units, reduce logistic constraints along with rationalization of movement of imported coal and thereby reduce the cost of generation of power, recovery of cost of imported coal by charging its price in line with price of CIL's domestic coal of equivalent quality, utilization of power from new plants under merit order dispatch through across the board increase in the price of domestic coal supply of CIL among all the linked consumers.
  • In the competitively bid projects, the Developers conclude the PPAs based on the domestic coal LOA granted by CIL. The fuel charge escalation is permitted based on CERC notified escalation rates. The fuel charge based on imported coal may not be a pass through unless the coal supply is through CIL.
  • Imported coal to be supplied @ INR 4500 per tonne which is the price of domestic coal of equivalent quality instead of the prevailing price of INR 6000 per tonne. The coal quantity required to be imported for meeting the FSA commitments would be 15 million tonnes and 20 million tonnes in 2013-14 and 2014-15 respectively. In case option I is adopted, it will result to an increase of INR 58 and INR 71 per tonne in 2013-14 and 2014-15 respectively, with the percentage increase of 5 & 6 in the domestic coal prices.
  • Imported coal would basically be supplied to the plants which are nearer to coasts, irrespective of whether these have come up before 31.03.2009 or after that. There will be an increase of domestic coal to the new units coming up between 01.04.2009 and 31.03.2015 which are nearer to mines, corresponding to the decrease in coal supply to be made to the pre- 31.03.2009 coastal plants. Keeping in view the decisions conveyed by MoC on 17.02.2012 , supplies would be made in the following manner:-
    • New plants nearer to mines- domestic 80%
    • New plants nearer to coasts- domestic 65 % + imported 10% (eqvt. to 15% domestic coal)
    • Pre-31.03.2009 plants nearer to coasts- domestic 80%+ imported 6.67% (eqvt. to 10% domestic coal). Excess presently delivered to be diverted to (a) above.
    • Remaining pre-31.03.2009 plants- domestic 90%
  • Impact of price pooling on individual utilities will vary, depending upon proportion of existing and the new plants and their relative distance from associated ports and mines. If the mechanism is applied across the table, new utilities coming up after 31.03.2009 would benefit more.
  • The proposed mechanism would be price neutral to CIL as the higher cost of imported coal would be evenly distributed amongst all the old and new power plants using domestic as well as imported coal. It would however lead to savings of INR 1015 Crore and INR 1189 Crore by way of savings on rail freight in 2013-14 and 2014-15 respectively, as the proposed supply matrix would minimize movement of imported coal as well as domestic coal - thereby reducing the overall transportation costs.
  • The proposed mechanism would result to additional generation of power to the tune of 30 BU and 40 BU in 2013-14 and 2014-15 respectively.
  • The technological limitations of the plants for blending domestic coal with imported coal have to be kept in view while deciding the mechanism. To take care of this problem, it has also been proposed that lower GCV coal may be imported to match the characteristics of domestic coal.
  • Pooling of prices of domestic coal and imported coal would be an interim measure for 2013-14 and 2014-15 only. Depending upon its success, it can be extended further.
  • For meeting the remaining requirements, power utilities would continue to make their own imports which they are doing now.
  • Out of the 60,000 MW capacity for which option-1 has been proposed, where long-term PPAs with DISCOMs is a pre condition for coal supply, private sector is yet to tie up PPAs to the tune of 12,000 MW. As FSA commitments for this quantity are not to be met till the PPAs are in place, either the remaining 48,000 MW capacity may be supplied additional coal beyond FSA capacity or new units of 12,000 MW capacity may be adjusted for signing FSA.
  • Pooling of prices may benefit the private sector developers more, but the exact quantum of such benefits cannot be worked out because the power generated by the private sector will ultimately go to the DISCOMs for further supply to the consumers at regulated tariff. The proposed matrix of movement of imported and domestic coal in the proposed scheme would however, result to savings on rail freight, bringing down the overall transportation costs.
Source: Cerebral Business Research Pvt. Ltd.

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Coal Pool Pricing – How and what it aims to work for?

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Coal Pool Pricing – How and what it aims to work for?

In regard to the commitment of 80% supply, it has been estimated that CIL would be able to meet roughly 65% of the committed quantity through indigenous sources during the first three years of the current Plan and shortfall from 80% would require to be met by imported coal.
  • In respect of the plants commissioned up to March 31, 2009, domestic coal will continue to be supplied as hitherto at Coal India Limited (CIL) notified prices.
  • In respect of the plants (with aggregate capacity of about 60,000 MW) commissioned/ to be commissioned during the period from 1.4.2009 to 31.3.2015 and also other plants (with aggregate capacity of about 7,000 MW) that are likely to be commissioned by 31.3.2015 after achieving milestones, CIL will provide imported coal on cost plus basis to all producers willing to take such coal, in addition to domestic coal producers who have already signed. Fuel Supply Agreements (FSAs) with the provision of imported coal to be supplied by CIL on cost plus basis will also be given an opportunity to exercise their option afresh for imported coal on cost plus basis. Such plants as are unwilling to take imported coal on cost plus basis will be supplied imported coal at a pooled price. The pooled price will be worked out by CIL as per the methodology and modalities mentioned in the note.
  • The guidelines in paragraph above will also be applicable in respect of the plants (with aggregate capacity of about 11,000 MW) which have been given tapering linkage.
  • The case of the plants (with aggregate capacity of about 16,000 MW) which would be commissioned by 31.3.2015 but which have not been given linkage, any be examined by an inter-ministerial committee headed by Secretary, Ministry of Coal to see it the guidelines in paragraph 2 above can also be applicable in respect of these plants with a appropriate lower trigger for penalty; and
  • The higher cost of imported coal will be allowed as a pass through as proposed in the note.
    The Committee directed that based on the above guidelines, the Ministry of Coal and the Ministry of State (Independent Charge) of the Ministry of Power will work out specific capacities / quantities in consultation with the Ministry of Finance and thereafter, the Ministry of Coal will place an appropriate proposal before the CCEA within five weeks.
Existing provision of import of coal
Under the New Coal Distribution Policy (NCDP) of October 2007, "normative requirement" of coal is required to be supplied under Fuel Supply Agreements (FSAs) at 100% level in respect of regulated sectors of Power Utilities, Fertilizer, Defence & Railways and at the level of 75% for remaining coal consuming sectors. Clause 5.2 of the NCDP provides that "In order to meet the domestic requirement of coal, CIL may have to import coal as may be required from time to time, if feasible. CIL may adjust its overall price accordingly".
Need for Import of Coal through CIL
As per the existing import policy, any entity can import coal. Every year, CEA/MOP sets targets for import of coal by different power utilities and imports are being made accordingly. The basic reason stated by Ministry of Power/CEA and the power industry for supply of imported coal by CIL is the assumption that the fuel charge based on imported coal may not be a pass through in the cases of the competitively bid projects unless the coal supply is through CIL. According to them, failure in supply of full linkage quantity by CIL as per FSA/MoU is likely to have the following consequences:
  • Developers are likely to default in supply of power as per PPA.
  • Developers may not be able to recover full capacity (fixed) charge as the availability will be much below 85%.
  • Default in payment by Developers (IPPs) to the Banks/FIs on account of non-recovery of capacity charge and ROE due to poor availability of plant.
  • The cost incurred by DISCOMs in arranging electricity from other sources through short term/medium term would be much higher.
Status of import of coal by power utilities during 2011-12 and target for 2012-13
  • The requirement of coal for Power Utilities for 2011-12 projected by CEA was 442 MT. Against estimated requirement, the indigenous availability was estimated at 388 MT (335 MT from CIL, 31 MT from SCCL and 22 MT from captive mines).
  • The gap of 54 MT between projected requirement and indigenous availability was proposed to be met through import of 35 Million Tonnes (which is considered equivalent to about 54 MT of indigenous coal) by Power Plants, during 2011-12.
  • Against the target of 366 MT for CIL and SCCL together, they supplied about 348.50 million tonnes, which is about 95% materialization, to the power utilities.
  • The power utilities imported 27 million tonnes against the target of 35 million tonnes (about 80% of the target) during 2011-12.
  • MOP has fixed a target of 46 MT for import by power utilities during 2012-13 to meet the gap between estimated indigenous availability and coal requirement. Till 31.10.2012, as against the pro-rata target of 26.8 MT, the power utilities have imported only 16.3 MT of coal. 
Source: Cerebral Business Research Pvt. Ltd.
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