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GMR Energy forgoes guarantees for gas supply, has rivals fuming

GMR Energy forgoes guarantees for gas supply, has rivals fuming
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First Published: Mon, Jan 21 2008. 12 01 AM IST
Updated: Mon, Jan 21 2008. 12 01 AM IST
New Delhi/ Hyderabad: The fight for gas has intensified in Andhra Pradesh where the power plants of several private sector power companies were lying idle, with one of the companies, GMR Energy Ltd, changing its previous agreement with the state government in favour of the latter, in return for an assured, albeit temporary supply of the fuel.
GMR’s rival GVK Power and Infrastructure Ltd (GVKPIL), which runs one of the power plants currently idle, has accused the local Congress government in Andhra Pradesh headed by Y. Rajsekhara Reddy of playing favourites. The gas is supplied by GAIL India Ltd, a Union government-run firm and decisions on gas supplies are effectively taken by the Centre. The Congress is the dominant party in the ruling United Progressive Alliance government at the Centre.
Starting January, GMR’s 388.50MW Vemagiri Gas Power Project, or VGPP, has begun receiving 1.12-1.15 million standard cubic metre per day (mscmd) of gas from GAIL. Private sector firms that run power plants (or independent power producers, or IPPs as they are termed) enter into power purchase agreements with the state government concerned that say the government will pay the fixed cost component of their idle capacities and pay for the power generated by these companies by using alternative fuels such as naphtha. The last is an expensive proposition because naphtha is currently priced at almost six times the price of domestic natural gas which is available at $4.20 (Rs165) per million British thermal units.
The government may have decided to push GMR’s case because the company has deleted the clause on alternative fuels from its agreement with the state and also promised not to claim any fixed charges, according to an official in Andhra Pradesh’s energy ministry, who did not wish to be identified because of the sensitivity of the issue. He said VGPP was the only project that agreed to do this.
Mint could not ascertain the amount the state would save because of this, but the official added that if all four IPPs currently lying idle in the state agree to similar terms, Andhra Pradesh would save around Rs2,500 crore a year.
However, GVKPIL wants the Centre to revise its decision on gas supplies to GMR especially since its own 220MW Jegurupadu Extension Project, or JEP, was commissioned before VGPP.
In a letter written to the petroleum and natural gas secretary M.S. Srinivasan, GVKPIL said: “It would be arbitrary, unfair, unjust and discriminatory to supply the gas to VGPP, leaving our project already commissioned. We request you to kindly arrange to supply the gas to JEP first.”
The other projects in the region that are awaiting supplies include GVK’s 464MW Gautami project and the 445MW Konaseema project promoted by the VBC Group.
Arguing his company’s position, GVK Group chief financial officer Issac A. George said: “As against producing one kilowatt of power from 2,000 kilocalories of gas in Jegurupadu phase-I, we can produce one kilowatt of power using only 1,850 kilocalories of gas in Jegurupadu phase-II.”
Other IPPs, too, are protesting the decision.
“It is not fair on the part of government authorities to ensure gas to Vemagiri alone... and to discriminate projects of other IPPs that were lying idle for want of gas for more than a year” said M.S.P. Rama Rao, managing director of Konaseema Power Ltd.
GMR officials, however, defended the decision.
“We believe the government must have taken an appropriate decision in gas supplies after recognizing that our project was commissioned first. The government would have also taken into consideration the fact that we have agreed to alter the dual fuel clause in the power purchase agreement,” Raaj Kumar, chief operating officer, GMR Energy, said.
The supply of gas to GMR, however, is only till April although it is likely that the same considerations that influenced the government’s gas-supply decision now could do so again in April.
“It is a smart move on the part of the Andhra government as in the event of the project not getting any gas after April, they would not have the provision of burning naphtha for generation. This would also mean saving for the state as naphtha-based generation costs around Rs7 per unit,” said Shubhranshu Patnaik, an executive director at audit and consulting firm PricewaterhouseCoopers.
Analysts believe the disputes will get more contentious.
“The demand for gas will increase with supplies being limited. The political factor will come into picture...” said Prayesh Jain, an analyst at stock market research firm India Infoline Ltd.
Gas shortage is a problem faced by power generation firms across the country. The ministry of petroleum and natural gas estimates the country will need around 180mscmd of gas in 2007-08.
It expects supply to be around 81mscmd and projects that the fuel shortage will persist till 2012.
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First Published: Mon, Jan 21 2008. 12 01 AM IST