Soaring crude may hit power generation

Soaring crude may hit power generation

The cost of generating power for companies using liquefied natural gas (LNG) as a fuel could increase in the wake of soaring crude prices, and if this increase cannot be passed on to customers, India’s efforts to generate more power to feed an expanding economy could slow.

Firms such as NTPC Ltd, India’s largest power generation firm, are already bracing for a 50% increase in the international spot price of LNG, from around $8 (Rs315) per million British thermal units (mBtu).

Crude prices serve as a benchmark against which LNG is priced.

“As long as the (gas) prices are below those of furnace oil ($15 per mBtu), companies will prefer to buy gas at this rate," said an official of Petronet LNG Ltd, India’s leading LNG receiving and regasification company, who did not wish to be identified.

A senior executive at NTPC said the increase in the price of LNG would inflate the company’s generation cost. The increase on account of higher fuel prices could be passed on to customers (state electricity boards that buy power), but only if they agree to it, added this executive, who also did not wish to be identified. If customers do not agree to an increase in price of power, companies such as NTPC have to either reduce the amount of power they generate or bear the losses themselves.

Indian companies in the power and fertilizer sectors that use LNG as fuel have been unable to tie up long-term supply contracts for all the fuel they need and buy gas in the spot market to make up the difference. The country imports around 3 million tonnes per annum (mtpa) of LNG or 12 million standard cubic metres per day (mscmd) of gas in the spot markets. The balance comes from local production and long-term supply contracts with overseas sellers.

The ministry of petroleum and natural gas estimates that the country will need around 180mscmd of LNG in 2007-08. It expects supply to be around 81mscmd and projects that the shortage will persist till 2012.

NTPC has seven power plants fuelled by gas or liquid fuel with a total capacity of 3,955MW; it also runs a 740MW gas-based plant through a joint venture. It sells power at an average cost of around Rs1.67 per unit, the lowest in India. The state-owned firm cannot raise tariffs without approval from the state governments to which it sells power.

A court battle with Reliance Industries Ltd over the supply of gas from the firm’s find off India’s east coast to an NTPC plant in Gujarat has already delayed the company’s plans to increase its power generation capacity by 1,450MW in the five years to 2007.

Situations such as this show that “the country should sign as many long-term contracts as possible", said Ravi Mahajan, a partner at audit and consulting firm Ernst & Young. “We need to secure energy supplies," he added.

India has a power generation capacity of 135,000MW. Of this 13,400MW is gas-based, and operates at 60% efficiency due to a shortage of the fuel. Currently, gas supply to these power plants is 47mscmd against their requirement of 64mscmd. “The spot prices will also be guided by how severe the winters are in other geographies, such as the US," Mahajan added.

The country expects to add power generation capacity of 78,577MW by 2012, of which around 4,289MW will come from gas-based projects.