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Gas for Power Generation: Availability and Pricing, Shri R V Shahi, Former Secretary, Ministry of Power

While India is planning for a quantum shift in its power profile, from a highly coal centric electricity generation towards a non-fossil fuel based power system, it is important to analyse the issues which may confront this strategy to succeed. Even if we are able to develop entire hydro potential of the country, which is estimated to be of the order of 150 GW, and also succeed in having an accelerated capacity addition programmes through nuclear route, which are estimated to yield about 60 GW by 2032, as per the projection coal continues to occupy the largest space. Getting the targets on hydro fulfilled and similarly the nuclear capacity to the extent projected achieved, are really challenging, if not impossible. In the case of hydroelectric projects, we are going to face serious problems on account of environment, forest and wildlife clearances. Rehabilitation and resettlement issues for large storage based projects always create serious difficulties and, therefore, delays. In spite of best of intentions and efforts both Eleventh and Twelfth Plan are going to see further dilution in the hydroelectric proportion of the total installed capacity. Similarly, on the nuclear front, as it is, the gestation periods are comparatively much larger. Getting about 7% of nuclear capacity with respect to the total installed capacity, up from less than 3% now, in next over 20 years, is not an easy task. The capacity additions through solar and other new technology routes would, no doubt, be accelerated, yet we may not expect a substantial jump from present 10% from the non-conventional energy sources.

Gas based power generation constitutes about 10%. In the past, until the gas production started from KG Basin, even the 10% capacity, based on gas, remained starved of adequate supply of gas, and, as a result, these power plants (about 15,000 MW) were performing at less than 60% Plant Load Factor. Now, with additional gas supply consequent upon KG Gas production, the situation has improved significantly. If our climate change concerns have to be adequately mitigated, apart from dependence on hydro, nuclear and non-conventional sources of power generation, we must think in terms of enhancing power generation through Combined Cycle Power Plants using gas as the fuel. Apart from large Combined Cycle Plants, the other two alternatives which could be considered include heat and power systems based on gas and also Decentralised Distributed Generation using gas the fuel.

It has been established that in clusters like hospitals, hotels, shopping malls, combined heat and power systems, could lead to an efficiency of utilisation of gas to the extent of more than 60%. Even combined cycle large power plants may not yield such results. Bureau of Energy Efficiency, Central Electricity Authority and Ministry of Power could consider a comprehensive examination and evaluation of this approach. Once it is accepted that this type of systems could really deliver a much better and more efficient utilisation of gas, several clusters in large towns and cities could be identified and the development of such power generation facilities could be encouraged and facilitated. One need to answer the question that with the same quantity of gas if we are able to get larger quantity of power and also replace additional quantity of power which could be otherwise used for heating and cooling purposes, why not use these systems in an extensive manner. If this conclusion is validated, there would be a need for a preferential allotment of gas to support development of combined heat and power systems.

It has been seen that with the increase in infrastructural development in an extensive manner in the areas like development of metros and malls across the country in large towns and cities, the requirement of peaking power is experiencing a steep rise. The load profile is changing significantly. Since we have not been able to meet even base load on a nationwide basis, we have been using gas based plants to meet base load requirements. We need to revisit this approach and see whether gas based power plants could primarily be meeting the peak load requirements. This strategy can lead to formulation of Schemes to develop gas based plants in proximity of major load centres and meet their needs during peak hours. One of the disturbing and irritating behaviours of our power supply system has been that invariably, during peak hours it starts being erratic. Therefore, if we could develop peaking support facilities for all the major load centres, to the extent of about 10 to 15% of their peak hour load, we would have addressed this problem almost entirely. Therefore, the twin strategy of having a number of small combined heat and power systems in major clusters in every large towns and cities, together with gas based power plant to meet the peak hour requirement, could go a long way in mitigating the problems we have discussed.

Thus, while on the one hand there is a need to enhance electricity generation through gas based plants, and that can play a significant role, as mentioned earlier, towards climate change mitigation, we are confronted with a situation of shortages. All projections indicate that there would continue to be a significant gap between demand and supply of gas. As a matter of fact, the old fields discovered thirty years ago by ONGC have been declining in their outputs. Similar would be the situation with every gas fields with a time difference. In coming few years, apart from the additional gas from KG Basin, there would be a few other agencies such as Gujarat Petroleum and Cairn Energy etc. who would be adding to the overall availability. These alone, however, would not be sufficient. We need to supplement the domestic gas production and availability by importing gas through pipelines (like Iran Gas) and also Liquefied Natural Gas (LNG), so that the gas based power generation capacity is increased. At present it is 10% of the total. Even to maintain it at 10%, when the country achieves the overall capacity of 800 GW by 2032, gas based capacity would require to be increased from 15 GW to 80 GW. This means in next twenty years the requirement of gas for power generation would be more than five times of what it is today. There is a strong case that the proportion of gas based power capacity is increased beyond 10%, in which case the gas requirement will be even more.

Importing gas is inevitable. One of the problems which the power sector and other gas consuming sectors have been experiencing is the highly volatile behaviour of price of LNG. Somehow in the international market the gas price got correlated with the price of crude. The whole world saw how the price of crude increased from $ 45 a barrel to $ 145 a barrel in a period of about one year. Gas price may not have risen in the same proportion, but gas and LNG prices also shot up. This obviously leads to enormous difficulty in terms of power consumers as also for other consuming sectors. Accessing gas supply through LNG route on the basis of long term contract has also not been a very smooth and satisfying experience. Firstly, long term contracts to correspond to the power plant life of twenty five years or more are difficult to arrive at, and if at all such contract could be possible, they would be tied-up with a number of difficult terms and conditions. In spite of all these difficulties, we need to develop workable alternatives and see that domestic gas production is substantially augmented through imports (Gas and LNG).

Pricing of gas has been under debate for a number of years. At present, we have gas through Administered Price mechanism (APM) whose price is about $ 2 per million btu. There is a different price, which is much higher, for the gas from field of PMT (Panna Mukta Tapti). The gas from KG Basin produced and supplied by Reliance Industries has been priced at $ 4.20 per million btu. Gas available from LNG suppliers like Petronet LNG and Shell LNG Terminal is priced depending on the prices at which they obtain LNG from international market and these are much higher. In this arrangement, those consumers who have been getting gas on APM basis have tremendous benefits, while those who get linked to LNG supplies get into the problem of power price not being viable in certain cases. Therefore, the issue regarding pooling of prices of gas from various sources has been under discussion for sometime. Obviously, in any such new formulation there would be views and counterviews. Also, there would be merits and demerits. One needs to take a balanced view of the matter. Let us briefly examined the issues involved:

i.

The power companies, which have been getting the benefit of Administered Price Mechanism, continue to think that any increase in the price, when gas from different sources is pooled together to arrive at an average price, would increase the cost and, therefore, price of power from these power plants. It is not only the power generating companies which hold this view, but also those Electricity Boards and Distribution Companies which get electricity from these power plants under long term Power Purchase Agreements. Obviously, there is a weight in what they are thinking and stating. However, a counter to this view is also the fact that new power generating facilities, if linked to high cost gas, will be forced to price their power significantly higher. Even the existing companies and plants if they set up new facilities and have to arrange gas at higher rates, the power cost will inevitably be higher.

ii.

Another argument for pooling the prices is with reference to the depreciated value of power plants which were historically linked to the APM Gas. Therefore, even if the pooled price is higher than the APM price, since the fixed cost of the depreciated plants would be less, it should be possible for them and their consumers to absorb the additional burden.

iii.

A large number of new power plants which could have come up but there is some degree of reluctance in view of higher price of gas. They could come up, if the average pooled price works out to be lower than the present higher prices either from PMT or from KG Basin or from LNG or from a mix of them. Therefore, a systematically organised new pricing mechanism, in all likelihood, may be able to provide a more predictable and certain situation under which not only the existing plants could operate in a smooth way, but also the possibility of new plants coming up will get enhanced.

iv.

But the major challenge, even if we generate consensus around the approach of average pooled price, would be the prices of different gas which would be subjected to the process of averaging. What would be these prices to start with? Who fixes these prices? How do we procure LNG from international market - the period of contract, prices etc.? These are the variables which will ultimately determine the pooled price, which could just be based on a mechanical and airthematic process. If the quantity of LNG in the system is also brought under the coverage of pooled price, obviously the task will be even more challenging. The issue of transparency in procurement would become even more relevant.

v.

As regards the authority which will determine these prices, so far the track record of Ministry of Petroleum has been on lines that it is the Ministry which will play the major role and not any independent regulatory institution. In fact, this is the crux of the problem. It is time that Petroleum Ministry thinks and acts in putting in place an independent regulatory set up which will also be entrusted with the responsibility of fixing price of upstream gas. In the interim period this task could be assigned even to the existing Petroleum and Natural Gas Regulatory Board. The belief, if any, that Directorate of Hydrocarbon would be able to take care of this responsibility does not inspire confidence.

In conclusion, we must, keeping in view climate change issues and also other relevant requirements, try to enlarge our power generation base through gas based combined cycle power plants, combined heat and power systems, a chain of gas based peaking stations. For achieving these, not only domestic gas production will need to be enhanced, but the supply will need to be substantially augmented through import of gas as well as LNG. Pooled average price of gas is a good approach and needs to be pursued. However, an independent regulatory mechanism should take care of the prices of gas from different sources and be entrusted with the responsibility of determining average price on year to year basis. This will ensure participation of stakeholders and transparency in decision making.