LNG plants to be free of merit order
The Cabinet Committee on Energy (CCOE) is likely to approve a plan to free liquefied natural gas (LNG)-based power plants from the economic merit order in a bid to ease pressure on a gas utility’s pipeline network, but the move will put an additional burden on gas consumers.
The CCOE has already exempted the LNG-based power plants from 66% guaranteed off take of LNG, triggering financial trouble for gas utility Sui Northern Gas Pipelines Limited (SNGPL) and the power plants.
As the power sector is not willing to take LNG supplies, the public gas utilities are also reluctant to allow the private sector start LNG imports to reduce the financial risk for energy companies.
In the past, SNGPL was put at risk several times and the company was compelled to request Pakistan State Oil (PSO) to curtail LNG supplies to safeguard its pipeline network from excessive gas pressure.
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Under the “economic dispatch” mechanism, the primary responsibility of system operator – National Power Construction Corporation (NPCC) - is to achieve the “lowest cost” while ensuring system integrity, security, reliability and quality of supply.
Merit order is a ranking of thermal power plants based on ascending order of specific cost (fuel cost plus variable operation and maintenance cost) per unit of the power plants/units. The merit order is one variable in the economic dispatch process.
Other factors required to be considered by the system operator in the economic dispatch include plant availability, fuel availability, system constraints, take-or-pay fuel contracts, startups/shutdowns, ramping rates, stability reserves, etc.
According to the Grid Code, the operation of power generation facilities according to the merit order is strictly desired under “normal system conditions.” However, when required, subject to the factors discussed, the deviation from the merit order is allowed.
The power sector is a major stakeholder in the re-gasified LNG supply chain. Any disturbances in RLNG supply/demand affect the economic dispatch of power and create high line pack issues in the gas transmission system.
In cases where RLNG supply is below the firm order, the basket price of electricity becomes higher compared to the situation when supply follows demand. The lower supply of RLNG also causes operational constraints and creates system stability issues for the system operator.
On the other hand, the basket price is also affected when the plants are forced to accommodate RLNG oversupply by the gas companies. The take-or-pay contractual arrangements for the three RLNG based power plants specify the minimum fuel offtake requirement of 66% annually as established under the Annual Production Plan.
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RLNG offtake lesser than the firm requirement of 66% creates financial liabilities for the power sector, in the form of net proceeds differential on account of diversion of firm RLNG requirement to other industries.
Similarly, non-compliance by SNGPL with the firm RLNG orders leads to liquidated damages, to be collected from the gas utility, for failure to supply the committed RLNG to the power sector, and commercial disputes between government-owned entities under the Power and Petroleum Divisions.
To protect the SNGPL pipeline network from damage, the Power Division has asked the CCOE to allow deviation from the economic merit order on account of operational system constraints, leading to mandatory consumption of RLNG.
It also suggested that the cost of variation in the merit order should be passed on to other gas sector consumers (excluding the power sector). Accordingly, the Power Division will claim the cost of such deviation every month from SNGPL, which will be adjusted within 30 days of such claim.