New spot LNG prices too high for power firms

Companies say impact on cost of production makes for unviable economics

A nearly 50 per cent increase over the past seven months in the prices of spot or regasified liquefied natural gas (R-LNG) has turned power generation companies away from the spot LNG market.

GAIL, Petronet LNG and Royal Dutch Shell say the companies have stopped buying gas from them. Gas is instead being sold to refiners, gas retailers, petrochemical producers and steel producers.

Spot LNG prices have gone up from $10 per million British thermal unit (mBtu) at the beginning of this year to $15 mBtu. GAIL, which markets gas for Petronet LNG, has raised spot LNG prices twice since March this year.

Buying LNG at an increased cost would push up the cost of production for power companies. With every dollar of price rise in LNG, the cost of power produced will go up by 35 paise. Thus, at $15 per mBtu cost of LNG, the fuel cost of producing power will work out to around Rs 5 per unit. Adding fixed costs, the total cost will be more than Rs 6 per unit, which, industry players say, is exorbitantly higher.

"If the price of LNG is above $10-12 per mBtu, it becomes unviable to the power sector," said Debashish Mishra, senior director, Deloitte Touche Tomatsu.

“After Japan increased using LNG as a fuel source as they closed down nuclear power plants after the tsunami, spot R-LNG prices have gone up drastically.

A few months before, power producers like NTPC and Torrent Power were buying gas at $10 mBtu but an increase in prices is keeping them away from the market," said an industry player on condition of anonymity.

Torrent has stopped spot LNG purchases for its 1,150 Mw combined cycle Sugen power plant at Surat. The project has a fixed source from Gujarat State Petronet, the Krishna Godavari basin fields of Reliance and the PMT gas fields. However, it also draws LNG on spot from Petronet LNG’s plant at Dahej in Gujarat.

Three power plants of NTPC which are affected are the 645 Mw Kawas unit at Bharuch (the main gas source is the Hazira-Bijaipur-Jagdishpur (HBJ) pipeline), the nearby 648 Mw Jhanor Gandhar unit and the 652 Mw unit at Auraiya in Uttar Pradesh. In an e-mailed response, NTPC said, "Less buying of LNG is due to lack of demand for gas-based power. We are facing a similar situation with coal projects, as availability of power is there but there are no takers in certain areas."

But since these projects have long-term fuel supply arrangements, and only drawing spot LNG to increase their capacity utilisation, they will not be completely affected.