Home / This Week / Cover Stories / Ban on use of gas by captive power plants

Ban on use of gas by captive power plants

In an attempt to address circular debt issue, the Government of Pakistan (GoP) has increased electricity tariff by Rs1.95/Kwh or 15%. This is likely to translate into additional recoveries of Rs200 billion. Potential agreements with IPPs is also likely to result in savings of Rs800 billion over the next 20 years (annual savings of Rs40 billion), according to government calculations. Negotiations and termination with/of government generation companies (GENCOs) are expected to generate savings of Rs6 trillion over the next 30 years (annual savings of Rs200 billion), as per news reports and Ministers’ press conference. Analysts believe most of the savings (Rs140 billion per annum) are likely to come from change of ‘Take or Pay’ agreements to ‘Take and Pay’ for RLNG plants.

Combined together, the above mentioned savings are Rs440 billion per annum. However, half of this chunk is not immediate as Take and Pay agreements, as per the Minister, will start from January 2022. It may also take some more time or may not necessarily happen, as it can hamper GoP’s privatization plan. Capacity payments over next three years are likely to increase by CPPsRs600 billion, resulting into additional burden of Rs200 billion a year.

All these measures can reduce circular debt by 20% in 2021 and 50% in 2022, assuming no more tariff hikes and no further cost increase. However, if GoP increases tariff by additional Rs1.5/Kwh (as planned) in next couple of months, the savings/recoveries will be go up to 50% in 2021 and 80% in 2022.

According to an analysis by Topline Securities, based on numbers provided by ministers during press conference and key risk to their back of the envelope calculation are: 1) delay in materialization of IPPs new agreements, 2) change in the GoP numbers and 3) delay in reform measures.

In order to dilute the impact of rising future capacity payments, which are expected to cross Rs1.4 trillion in FY23, from Rs842 billion in FY20, the GoP is trying to explore various options to generate more demand of electricity in near future.

One of the proposals, which the Cabinet Committee on Energy (CCoE), has approved is to place moratorium on use of natural gas in captives power plants (CPPs) established by different manufacturing units. As per our understanding, textiles and industries for whom gas is a necessity (feed and for steam usage) would be exempted.

According to the minister, those companies which already have an electricity connection will have to stop their natural gas based CPPs by 1st February 2021, while companies with no electricity connections will get one-year exemption. As per Minister’s press conference, power distribution companies (DISCOs) already have 3,000 MW connections pending for approval.

Analysts believe, rather than shifting to national grid, the corporates will prefer other fuel mix for their CPPs (like FO, RLNG, Coal etc) as cost of grid is expected to be around Rs20/kwh. However, the high cost of Rs20/Kwh, will be lower by 25% (Rs15/kwh) in the first year, as their units from grid will be counted as incremental on which government has announced a discount of 25% for next three years. In the next two years, discounted units will be lower, and hence the cost of electricity for industries may average around Rs18/Kwh.

Currently, a unit of electricity (Kwh) on FO based CPPs costs around Rs13/Kwh, while on coal it costs Rs9/Kwh, lower than grid normal and discounted rates of Rs20 and Rs15/Kwh respectively.

Amongst listed companies EPCL, LOTCHEM, CEPB, LUCK, DGKC, CHCC, and STCL are using natural gas in their production process. In these, gas connection for companies like EPCL and STCL is a necessity as they use it for steam/feed purpose and are likely to get exemptions for most of their gas usage. As per our checks, companies can also approach government for getting extension on this or they can also move to courts for getting a stay. Other companies like Gul Ahmed (GATM) and Feroze Mills (FML) are likely to get exemptions as they are classified under export oriented sector.

Due to the rise in power tariff, sectors like steel (rebar) will be negatively impacted as around 700 units of electricity are required to manufacture one ton of rebar. This can increase rebar prices by Rs1,500/ton. Some cement companies are also using grid for 10-20% of their production. It is believed that cement companies will continue to invest (or have already invested and will commence later) in alternative captive fuels generators to dilute grid impact.

The gas crisis in Pakistan has intensified and added to the hardships of citizens amid the cold winter season. The gas shortage in Karachi has domestic and industrial consumers, as well as tandoors, tea houses, and hotels worried. The severe cold weather has further aggravated the citizens’ plight as it has led to a reduction in pressure and the suspension of gas supply in residential areas. In Gujranwala, residents cannot light their stoves due to gas shortage and are forced to buy expensive cylinders. CNG stations in Multan have been shut down due to gas shortage, which has further added to the citizens’ woes. Low gas pressure persists in different areas of Quetta — in Nawan Kali, Sariab Road, Brewery, Bypass, and other areas — due to which domestic and business consumers are facing difficulties. Apart from this, a reduction in gas pressure in Ziarat and Kalat has also increased the hardships of the citizens who are forced to burn expensive wood.

Check Also

Etimad Online facilitating access to finance for SMEs

Etimad Online facilitating access to finance for SMEs

Etimad Online is an initiative to reduce inflation and alleviate poverty from Pakistan by promoting …

Leave a Reply