That natural gas supply in the country is going to vault in the near future does little to ease the jostling between private power companies for gas. The reason is simple. Having invested large sums of money in capital-intensive power plants, they are unable to run them for want of fuel. The latest controversy is in Andhra Pradesh, where GVK Energy has protested against the selective allocation of scarcely available gas to its rival GMR Power.
The Andhra government recently managed to convince the Centre to direct the public sector GAIL to switch gas supplies to GMR’s Vemagiri project from Lanco’s at Kondapalli, which will now run on the costlier naphtha—GMR’s plant does not operate on naphtha. Andhra’s justification is its need to meet higher electricity demand from farmers over the next few months. But rival GVK is naturally fuming. Its Gautami and Jegurupadu-II plants are sitting idle only for lack of fuel.
On the face of it, the state’s decision seems to have been influenced by GMR agreeing to drop some of its contractual claims. This includes compensation (of fixed costs of the plant) in the event that the plant is not generating power due to lack of fuel supply. The deal is for three months, but it is a moot issue whether or not it would be renewed later.
Andhra has been trying to get these claims dropped by several players, including GVK, whose projects are ready to begin operations. Only GMR has agreed so far.
Importantly, Lanco may not object to the switch, since the fuel cost gets recovered from the power purchaser—the state utility. But it is worth asking if the state has exhausted all options of importing power from other states that could be cheaper than the naphtha-based power from Lanco. Is its strained supply situation leading it to make ad hoc moves to raise additional power at any cost?
Unfortunately, given the legacy of loose policymaking and weak regulation, there are no easy solutions. The underbelly of the story is that of a state government using its political affiliations with the Centre to deliver a highly politically sensitive good—electricity to its farmers at the peak time of the rabi crop harvest. And of persisting shortages—both in the supply of electricity and in the gas to fuel its generation.
Fundamental to the fight for gas is the fact that GAIL had signed contracts with several power producers in Andhra to supply them gas several years ago—evidently contracting far more than it had, or could have, on hand. As a result, the state has today a bunch of stranded assets, that is, idling gas-fired power plants. Since the contracts signed with GAIL seem to be loosely structured and don’t let them claim damages, private promoters are running into worrying losses. And in question are leading players in the infrastructure business in the country, whose appetite for risk is well acknowledged.
Evidently, GMR decided to stick its neck out more than GVK. For, although fresh gas supplies are round the corner —around a year away—the outlook in the interim period is grim and fraught with risks that are not remedied in the fuel contracts with GAIL. Hence, forgoing its right to claim fixed costs in the event of non-availability of gas is a courageous move. This, since fixed costs cover the crucial debt repayment obligations posed by lenders who fund as much as 70% of these projects.
It is a big question why GVK refused to drop the claim. After all, it is one of the pioneers in the power sector, having set up projects in the early 1990s, when private companies were unwilling to invest.
The larger point remains of government control on the fuel business—not only gas, even coal and hydel, as far as fuel for power generation is concerned. Just as policy and regulation in the power sector is slowly, but surely, improving, the market for fuel needs to be simultaneously unshackled. Else, discontent in the investor community will persist.
(Who benefits from selective allocation of gas? Write to us at firstname.lastname@example.org)