True to its commitment to filling the cleavages in system left over by a decade of policy paralysis and mis-governance under erstwhile UPA dispensation, Modi – government has sewed up a package for resurrecting 24,000 megawatt (mw) of power generation capacity based on gas.
For starters, 14,000 mw of capacity with an investment of Rs 60,000 crores is lying dormant (no generation at all) due to absence of fuel linkage. Another 10,000 mw with Rs 40,000 crores blocked is operating at sub-optimal level i.e. below 30% due grossly inadequate supply of domestic gas.
The relevant plants were commissioned in anticipation of abundant supplies from prolific KG-D6 field off Andhra coast [this discovery was made in 2002 and initial development plan (IDP) submitted in 2004 followed by an addendum to IDP in 2006] and others such as GSPC, Deendayal, Cairns, ONGC etc.
Alas! supplies from KG-D6 have been a big disaster. The operator promised supply of 80 mmscmd (million standard cubic metre per day) [initial projection made in 2004 was 40 mmscmd which was doubled to 80 mmscmd in 2006] whereas, the actual delivery has dipped to just about 10 mmscmd in 2014-15.
The huge shortfall has left a devastating effect on the economy. User industries have either suffered production loss due to non/woefully low availability or their costs increased steeply due to import of LNG at much higher price to replace domestic gas. In fertilizers, this has boosted subsidy to unsustainable levels.
In the power sector, projects with 24,000 mw of generation capacity are literally on the ventilator. Until June, 2014 when imported LNG was coming @ US$ 15 per mBtu (million British thermal unit) plus, fuel cost alone was Rs 7.5 per unit of power. There being no takers of electricity at such prohibitive rate (ignoring even other cost), plants were kept idle.
Since then, international price of crude oil has fallen to 40% of its high around US$ 110 per barrel prevailing in June 2014. Prices of other fuels too have fallen in tandem. The price of LNG has also declined; yet @ US$ 10 per mBtu, current rate is still high and almost double the price of domestic gas @ US$ 5.05 per mBtu [on gross calorific value (GCV) basis].
Even at US$ 10 per mBtu, fuel cost will be Rs 5 per unit. Together with other costs around Rs 2 per unit (including amortization of capital expenses), operators won’t still find takers @ Rs 7 per unit. The government can’t let this situation to linger on especially when a total investment of Rs 100,000 crores is at stake.
Bulk of funding for these projects has come from public sector banks (PSBs) and this entire amount runs the risk of bleeding their balance sheets. This is because from April 1, 2015 when forbearance comes to an end, even for restructured asset, they will have to make provision at same rate 15% as for NPAs (non-performing asset).
Given the dire need to save banks from bleeding on one hand and deliver more power to meet increasing deficit on the other, the government has intervened at the right time to salvage the situation. The package approved by CCEA (cabinet committee on economic affairs) is aimed at lowering the cost of power to project promoters.
The money available in the Power Systems Development Fund (PSDF) will be used to extend subsidy to enable corresponding reduction in cost. Through a transparent process of competitive bidding, promoters will quote subsidy support and quantum of LNG they need for power tariff they offer. Tariff will be benchmarked to a base rate of Rs 5.5 per unit. In other words, while a lower rate is welcome, anything in excess is unacceptable.
Promoters who offer the best quote will qualify for the special dispensation. Apart from subvention from PSDF, this will include arrangements by GAIL to import LNG for running plant at 50% load, exemption from customs duty, 80% reduction in re-gasification charges, 50% concession in transport tariff, 75% cut in marketing margin and exemption/lowering VAT by states.
The promoters will also need to forego return on investment. This is perfectly logical as in a scenario where all stakeholders viz., centre, state governments, PSUs such as GAIL, Petronet LNG, banks etc are being made to make sacrifice with an over-arching objective of reviving the dud capacity, making profit from operations can’t even be contemplated at this stage!
A ‘management committee’ consisting of representatives from all stakeholders will oversee entire operations. While, the CERC (central electricity regulatory commission) will look in to technical parameters, banks will ensure compliance with all financial aspects. To secure banks paramount interest, payments received from distribution companies will be deposited in ‘escrow account’ from where all obligations to former will be discharged first and only thereafter, balance money will go to promoters.
However, all this will only give a temporary life line to the concerned 31 projects. The patient may come out of the ICU (intensive care unit) but will remain potentially vulnerable. Even so, the funds available in the PSDF around Rs 9500 crores (these are meant for ensuring grid stability and safety but being diverted to deal with this emergency situation) can at best provide support for 2 years!
The government must endeavor to find a permanent solution to the problem. It should work for a scenario whereby enough of domestic gas is available at a reasonable price. The current price of US$ 5.05 per mBtu in vogue since November 1, 2014 – based on modified Rangarajan formula – is a good price. But, the real problem is supply. Indeed, the big question is how to fill the void created by steep drop in supplies from KG-D6?
Here, the big challenge is fixing responsibility on the operator viz., RIL/BP/Niko combine for reneging on its commitment? Even as government has levied a penalty of around US$ 2.5 billion, that does not help in getting extra gas. Even this recovery has got stuck in arbitration and only time will tell whether the money will at all come to its coffers and when?
So, how to get extra gas? On this front, the government needs to win a war of perception. For over 2 years, a marathon propaganda machine unleashed by RIL jointly with its multinational partners and supported by equally powerful media is at work to sell an idea that ‘unless gas price is hiked (they dismiss extant US$ 5.05 per mBtu as too low), production will not increase!
If, one goes by facts on the ground and sound logic, such a link is preposterous. If at all such link were to hold water then, how come RIL who at one point in 2004 was quite happy with a price of US$ 2.37 per mBtu (for supplies to NTPC from KG-D6) and got this doubled to US$ 4.2 per mBtu in 2007 (making it even more comfortable), is now delivering only a fraction – 1/8th to be precise – of what it had promised to deliver?
It is good that Modi – government while deciding on new pricing guidelines in October, 2014, did not buckle under pressure and refrained from implementing flawed Rangarajan formula that would have doubled price of domestic gas to US$ 8.4 per mBtu. But, the pressure continues to mount despite price declining at all global hubs, which should have made advocates of higher prices see reason.
While, continuing to argue with them on facts and sound logic, Modi will need to move a step forward and actually demonstrate – by making ONGC and OIL to deliver more and enticing MNCs (other than BP/Niko) in exploration and production segment – that more investment and production will come in even with reasonable gas price under extant pricing guidelines which are based on sound rationale. That will also make the likes of RIL/BP/Niko more practical and reasonable in their approach.
Adequate supplies of domestic gas at reasonable price will undoubtedly help in bringing down power generation cost and in turn, tariff. But, that alone will not ensure the viability of generators. It is equally necessary that health of power distribution companies (PDCs)/state electricity boards (SEBs) is restored so that they make timely payments to power plants for electricity they buy.
This in turn, will require that political intervention in fixing price of electricity sold to consumers/farmers is stopped forth with. And still, if chief ministers like Kejriwal or any other state head want to give subsidy that must come directly from the state budget instead of states riding piggy back on PDCs/SEBs which unfortunately is the order of the day and single most important factor responsible for their precarious financial health.
The aforementioned 2 areas pose a daunting challenge to Modi – dispensation which it must address on a war footing as any other alternative, like subvention from PSDF or ‘gas pooling’ (this was mooted for quite some time, but withdrawn at last minute) are at best short term palliatives and far from providing lasting solution to the problems ailing the power sector.