LNG-based plants: NEPRA opposes violation of merit order

Notes LNG-based power is more expensive than electricity produced through furnace oil

ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) has opposed a plan to allow liquefied natural gas (LNG) based power plants to operate outside of the merit order in terms of production cost and termed it a violation that can put an additional burden of billions of rupees on power consumers.

During discussions on approval of an implementation agreement for imported LNG-based power plants of the government in a meeting of the Economic Coordination Committee (ECC) on June 28, Nepra - the regulator of the power sector - said the must-run condition for these plants could lead to violation of the merit order.

Therefore, it directed that the operation of power plants should be in accordance with the merit order.



Nepra’s concern

During the last few months, the power regulator had been expressing serious concern over violation of the merit order for LNG-based plants while hearing petitions regarding fuel price adjustment.

It noted that LNG-based power was more expensive than electricity produced through furnace oil and sought a detailed report from the Central Power Purchasing Agency (CPPA).

However, the government had itself made the violation of merit order legal through the ECC and required the regulator to follow the decision, especially in the case of LNG-based power plants in the public sector, which were being installed in Punjab with a capacity of 3,600 megawatts.

During the ECC meeting, the Ministry of Water and Power responded that take-or-pay liability was an established concept in the gas sales agreement with LNG supplier Qatar.

A long-term supply contract between Qatar and Pakistan State Oil (PSO) also contained the take-or-pay provision, hence, all entities within the supply chain including PSO, Sui gas companies, independent power producers and the CPPA had to bear their part of risk for delay in utilisation of gas that had been ordered but not consumed.

Explaining the gas-ordering mechanism, the power ministry said for every calendar year, a firm order had to be placed months in advance and it was essential to ensure that the entire quantity was consumed, otherwise losses would have to be paid.



“This by implication means that the power purchaser will not like to make capacity payments to the power producer with the utilisation of gas. Although the plants on LNG are amongst the most efficient, still there is a remote possibility that they do not fall higher in the merit order,” the ministry added.

Ministry’s request

The power ministry said due to the unique nature of power projects and the peculiar supply chain risks associated with the import and delivery of LNG at project sites and the binding terms of gas sales agreement, a new package of security documents was required.

In this regard, a standard power purchase agreement for such public-sector projects was developed with the condition that in the event of non-supply of LNG at the complex, the power producers would make the complex available for dispatches of alternative fuel (high-speed diesel).

The ministry proposed that the difference in net proceeds accumulating on account of fuel supply risk to the complex, which showed the difference between the notified price of LNG at the complex and the notified price for utilisation, be provided as a standard term for the public sector in the power purchase agreement.

After discussions, the ECC approved the proposal with observations that instead of the must-run provision, these plants may be operated outside of the merit economic order if required by back-to-back, take-or-pay obligation under specific fuel supply arrangements.

Published in The Express Tribune, July 22^nd, 2016.

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