India has taken steps to reduce the price of feedstock for its stricken gas-fired power plants, 59% of which are stranded without fuel. A measure approved last week introduced a series of concessions aimed at easing the cost of LNG imports for the power sector, India’s primary source of gas demand.

It exempts companies from certain taxes and levies if the LNG is imported for power production, reduces the transport and regasification tariffs importers and distributors can charge – which will cut their marketing margins – and forces power developers to completely forgo their return on equity.

"Reviving these gas-based power plants will go a long way in making peak load shortages in the summer months a thing of the past," the Ministry of Power said.

"It is felt the revival of stranded gas-based capacity would ameliorate stress on the banking sector. This will kickstart growth and have a multiplier effect on the economy. It will also restore investors’ confidence in the power sector," it added.

Analysts at the Japanese investment bank Nomura agreed, calling it an "innovative scheme" and a positive development – after years of failed discussions over proposed gas-pooling measures.

"As part of the haircut being taken by all stakeholders, the scheme calls for lower tariffs (both regasification and transportation) and marketing margins. But, importantly, the proposal clearly says that these haircuts will be only incremental for regasified LNG. And thus, will not impact current earnings," the analysts said.

While the government has not said how much tariffs and margins will be reduced by, the fact that much of India’s gas infrastructure is underused means operators will benefit from any additional use, the analysts added.

"Also, with the power sector likely to emerge as a key user of imported LNG, we believe the current concerns of weak LNG demand will dissipate, both in the short and long term," the analysts said, pointing to investor concern about whether there will be enough demand for state-run Gail’s LNG import portfolio – which will grow to 8.5 mtpa with supplies from the United States, Australia and Gazprom Marketing & Trading in the next few years.

Nomura estimates the measure could provide 25-30 million cubic metres per day (MMcm/d) of new gas for power plants, although the rise will be gradual because of import capacity constraints.

State-run Petronet LNG’s Dahej terminal in the northwestern state of Gujarat has only 10-15% of flexible capacity out of 5 mtpa, the analysts said. Shell and Total’s Hazira facility in Gujarat has more flexibility, with only 60-70% of its 5 mtpa capacity in use, but the government may not be able to force private owners to reduce their tariffs.

Petronet’s Kochi terminal, in the southwestern state of Kerala, and Gail’s Dabhol, in the northwestern state of Maharashtra, will operate well below their 5 mtpa capacities until their infrastructure is completed.

India is the fifth-largest power producer in the world but ranks 110th in per capita consumption, meaning a huge swathe of its population still lacks electricity.

The country’s gas-fired capacity has suffered over the past five years as the promising deepwater Krishna Godavari D6 (KG-D6) Block’s output has fallen below expectations and older fields are running out of gas.

As a result, 14.3 GW of the country’s 24.1 GW of gas-fired generation capacity is now idle, according to the Ministry of Power. This has forced India’s power sector to rely more heavily on cheaper and more readily available coal, despite the environmental effects. However, the government is looking to reduce this dependence.

The KG-D6 Block’s disappointing performance since 2010 has forced the government and industry to suspend plans for new gas-fired power generation. Output from Reliance Industry’s eastern block – in which BP has a share – peaked at around 66 MMcm/d in 2010 and has steadily declined, hitting 11.8 MMcm/d in Q4 2014.

Some companies had started building new power plants in the eastern states in the expectation that KG-D6’s output would level off at a high of 80 MMcm/d, while others took their LNG terminals to the west coast when its fields started to decline. But as KG-D6’s shortfall became clear, New Delhi placed a moratorium on new gas-fired generation in 2012.

Gas-fired power accounted for 9% of India’s total installed generation capacity of 248.5 GW as of May 2014, according to the United States Energy Information Administration. Coal provided 59%, hydro 16%, other renewables 13%, nuclear 2% and diesel 1%.

Source:interfaxenergy.com