The government has approved the pooling of imported gas and domestic gas for gas based power plants. The formula incorporates support from pipeline companies such as GAIL which have agreed for a cut in pipeline tariff and marketing margins.
Gas transporters and re-gasification terminals have agreed to reduce their transportation tariff, marketing margin and re-gasification charges on the incremental RLNG - which is an acronym for Re-Gasified Liquefied Natural Gas.
State governments have agreed on a cut in duties on gas. In addition, the government will provide a subsidy up to the power tariff of Rs 5.5 per unit for purchasing gas based power.
The biggest winners would be stranded power asset owners such as Torrent Power, GMR and GVK. Overall, this will help the gas based power producers, banks which funded the assets, pipeline companies and distribution companies.
Gas based power producers have agreed to forgo return on equity as the government would help them by arranging for buyers of the power. The government will also provide subsidy directly to the distribution companies for purchasing gas based power. This will help the gas based power plants operate at a capacity utilisation of about 30% and generate cash on their idle assets. This is critical because it will help them service their debt, thereby helping both power companies and banking sector.
Morningstar's equity analyst Piyush Jain was pleased to hear that the government has chosen the reverse bidding process for the decision on subsidy. Power producers will have to bid for the lowest subsidy requirement through an e-auction process. He believes that power generated would be suitable for meeting peak demand as gas based plants can turn on in couple of minutes. Thereby, during peak load, power prices will be balanced by increased supply from the gas based power and therefore, in a way it is beneficial for the distribution companies also.
However, since distribution companies are not in a financial condition to buy expensive power, we cannot expect gas based power plants to operate at higher capacity utilisation of 70-80% in the absence of adequate domestic gas supply.
In terms of viability of the plan, prices of imported LNG in Asia have fallen by about 60% versus a year ago to about $7.5 per MMBTU. According to our estimates, if delivered gas prices remain at or below $9 per MMBTU, cost of power will remain within government’s target of Rs 5.5 per unit. Till India does not have a long term cheap LNG supply contracts and its LNG requirements rely only on spot LNG prices, it is not possible to expect these plants to operate at optimum capacity utilization.
We believe pipeline companies like GAIL would still derive incremental revenue from this policy owing to increase in the pipeline capacity utilisation. Over the medium term, as re-gasification terminal projects fructify in different stages over the next couple of years, we would see a steady increase in supply of imported LNG and gas based power.
