Indian power sector?s continued difficulty in absorbing gas supplied at a market-determined price is reating hurdles for Reliance Industries? plans to ramp up production from its D6 block in K-G basin. A number of power plants using gas from RIL?s D6 block were forced to cut their generation in April in the face of tariff competition from coal-fired power plants. This raises serious doubts about the company?s ability to ramp up production from the prolific block unless the government alters its gas allocation policy.
While the policy gives topmost priority to fertiliser sector, power is second in the pecking order and is capable of providing anchor demand for gas.
What is further complicating the issue is a merit order dispatch system stipulated by the Central Electricity Regulatory Commission (CERC) gives preference to cheaper electricity in supply to bulk buyers. By default, the regulation currently prefers coal-based generation.
In the process, even as gas allocated to the power sector is left unutilised, many other industries that are in dire need of gas, including petrochemicals?where the upstream activity is gas crackers?and city-gas are apparently left high and dry. The refinery sector also needs gas as a fuel. Massive investment plans have been lined up in the petrochemicals industry under the petroleum, petrochemicals and chemicals investment regions.
Though second in priority list, the power sector has got a lion?s share in production from the D6 ? 40 mmscmd gas out of the 60 mmscmd production currently available from the block. Top-up gas allocation was made to 20 power plants from the D6 block so that they could operate at 90% plant load factor.
However, according to statistics available with the Central Electricity Authority (CEA), the plants used only 85% of their overall gas allocation from the D6 block in April. The unutilised gas could fire as much as 2,000 mw capacity.
D6 gas is priced at $4.2 per million British thermal unit (mmbtu) at landfall. On top of that, transportation and marketing margins are also applicable. So the delivered price of D6 gas works out to $6 per mmbtu for customers in the Western region and $7 per mmbtu for those in the Northern region. At this price, generation cost comes out to be around Rs 2.80 per unit (the generation cost at NTPC?s Faridabad gas-based power plant, which runs on D6 gas). In contrast, the average cost of electrcity generated from domestic coal is Rs1.50-1.60 per unit while from imported coal it is Rs 1.70-1.80 per unit.
RIL is currently producing 60 million standard cubic meter per (mmscd) gas from the block, which has the peak production potential of 120 mmscmd. The company is in the process of ramping up production. But given the difficulty of the power sector to utilise entire gas allocation from the block, it might be forced to go slow on its plans.
Significantly, the government has priced gas from Gujarat State Petroleum Corporation?s (GSPC) block in the KG basin at $5.7 per mmbtu. RIL and ONGC have also warned that at $4.2 per mmbtu price, production from new fields might not be viable.
But the question is if the power sector cannot absorb the gas price of $4.2 per mmbtu, how would newer markets be found for the additional gas supply from new fields.