Captive power plants’ dilemma - Editorials - Business Recorder

Nov 02, 2024

EDITORIAL: The energy sector is complex with intertwined linkages. Policymaking cannot separate power (electricity) and fuel (petroleum and gas). They are both at loggerheads over the issue of gas (including RLNG) allocation to captive power plants.

If you cut the gas supply, it adversely affects the Sui companies, and if you keep on providing gas to captive power generation plants, the power sector operating the national grid suffers losses because it has to distribute fixed capacity charges on a lower number of units consumed.

Either way, one of them has to take the hit, so to speak. The estimated total allocation of gas to captive and industrial consumers is approximately 350 mmcfd of indigenous gas and 150 mmcfd of RLNG. Industrial connections in South receive around 150 mmcfd of domestic gas from this allocation. The total number of captive power plants (CPPs) is 1,180; the majority of these (797) are in the Sui Southern network.

The government has reached an agreement with the IMF (International Monetary Fund) to integrate CPPs into the national grid and raise the gas tariff to bring it at par with the RLNG price by 1st January 2025. The rationale for this decision is that by integrating CPPs into the grid, the effective power tariffs will decrease for everyone.

The total self-consumption of electricity by the CCPs on indigenous gas and RLNG is estimated at 2,150MW. Reconnecting 70 percent of these to the grid will contribute Rs240 billion to the capacity charges, effectively reducing the tariff by more than Rs2/unit for everyone.

While this can be termed a big saving, and the grid needs more consumers because the demand on the grid is falling due to the economic slowdown and sharp addition of self-solar generation (the majority are non-net-metered industrial and commercial consumers) but the savings in the power sector will further complicate matters for the gas sector, including both Sui companies.

The country’s gas consumption is already on the decline, and the challenge lies in the use of RLNG molecules, as the country must import 11 cargoes per month. Captive power plants (CPPs) are the top-paying consumers as they pay Rs3,000/mmbtu for indigenous gas, while the tariff for processing is Rs2,150/mmbtu. Then RLNG is in the mix—higher for North and lower for South.

These CPPs cross-subsidise the domestic gas consumers. Removing them from the mix would result in higher gas prices for others or an increase in the gas circular debt. Also, there would be an issue of RLNG consumption, and more of it will have to be diverted towards domestic consumers. This could potentially lead to a drastic reduction in the off-take of wellhead gas and a decrease in the crude supply. “We don’t want CPPs to go off-line,” according to a Sui company senior employee.

The players in the power sector say that they may use some of the gas for their generation to supply to the industry moving from captive to the grid—especially K-Electric in South is very committed. The captive industry wants to maintain the status quo.

The grid power is around Rs8/unit higher in equivalent terms than CPPs’. The export industry already bears the burden of higher energy costs compared to the region. They cannot take anymore. However, not all industries rely on captive power. If those on the grid can survive, why can’t the captives be on it too?

One of the major concerns for industry is unreliability and fluctuations in the grid supply. Industry sources reveal that those using CPPs have purchased secondhand machines that do not meet grid standards. That is why there are fluctuations. Therefore, the fault lies with the industries, not with the power utility supplier.

The lack of grid access is one of the industry’s legitimate concerns, and building grid infrastructure could take up to 2-3 years, requiring billions of rupees. However, while this may be true for some, it is not the case for all. According to KE’s calculations, 60 percent of CPPs, who have a sanctioned load but don’t use it, are currently eligible for energization.

Some CPPs require an additional load and can achieve energization within three months, whereas the remaining ones will need more time. Another major industry concern is that the CPPs using combined heat power plants are more efficient than even RLNG-based power plants.

They will incur even higher costs and waste the molecules during conversion. To put it succinctly, the situation is woefully chaotic. The government cannot simply terminate the CPPs overnight. The best course of action is to further increase the price of CPPs and industrial gas so that only combined cycle efficiency can remain on its own.

Copyright Business Recorder, 2024