Falling LNG prices to revive prospects of power units

Falling spot prices of liquefied natural gas (LNG) makes this an opportune time for the revival of stressed gas-based power assets in the country, the report said.

LNG prices are currently at USD 5 per million metric British thermal units (MMBtu), down from a peak of USD 10 per MMBtu as recently as November 2018.

"The decline has been due to increasing supply in global markets from newly commissioned projects in Australia and the US. Moreover, a few of the liquefaction capacities in the US and Australia became operational in the last quarter of fiscal 2019, putting downward pressure on spot LNG prices," the rating agency Crisil said.

The rating agency expects spot LNG prices to trend lower in 2019, averaging USD 5-6 per MMBtu. Beyond this year, prices could increase slightly to USD 6-7 per MMBtu, as the demand in winter season improves.

Additionally, the government plans to waive off customs duty of 2.57 per cent as well as bring natural gas under the GST regime (the lower rate at 5 per cent as compared to 15-20 per cent VAT at present).

"This will reduce the delivered cost of LNG further, reducing the cost of generation for power plants," Crisil said.

Over the next 4-5 years, the US and Australia are expected to commission 60 MTPA of LNG terminals. This is expected to shore up LNG supply, keeping prices under pressure at USD 5-7 per MMBtu over the medium term.

"The key reason India has not used LNG extensively for power generation so far is the high cost involved. Higher prices of LNG made the power generated through this route far more expensive compared with conventional sources, deterring offtake by power distribution companies (discoms)," it said.

As per the report of Parliamentary Committee on Energy, nearly 14 GW of gas-based capacity is stranded due to lack of domestic gas, of which 11 GW is operational and generating on an intermittent basis, resulting in low average plant load factor (PLF) of 24 per cent as of fiscal 2019.

Of this 11 GW operational capacity, 2 GW is owned by the central sector and 2.7 GW by Gujarat (1.9 GW) and Delhi (750 MW), which can be supported by the Central government or the respective state governments.

The remaining 6.6 GW capacity, which is in private hands, is in dire need of support and can be revived using imported spot LNG.

Crisil further said that to make matters worse, the cost of power generation through renewable sources has dropped significantly in the last 3-4 years, posing stiff competition to gas-based power.

It further said the phase II of aggregated thermal power procurement from coal-based power plants, concluded recently, saw discovered tariffs of Rs 4.41 per kWh, which can be matched by gas-based power plants using spot LNG even without subsidy on a variable cost basis.

However, the plants were unable to utilise the allocated quantity of gas due to issues such as the discovered tariffs being lower than the cost of generation, non- cooperation of some states in providing exemptions in taxes and duties, and the reluctance of states to buy high-priced gas-based power.