Doing away with subsidies: Plan under study to up gas supply to power plants

Proposal envisions diversion from CNG outlets and captive power plants of industries.

ISLAMABAD:

As power outages worsen sparking protests across the country, a plan is under study to divert gas allocated to compressed natural gas (CNG) stations and captive power plants to power companies in a bid to produce cheap electricity and end swelling subsidy.

An official of the Ministry of Water and Power said the plan was being discussed with relevant ministries in order to ease the energy crisis and end tariff differential claims – the difference between cost of power produced and tariff charged from consumers.

“A strategy is being followed to discourage consumption of CNG to spare gas for power plants. In addition to this, the Ministry of Petroleum and Natural Resources is working on a plan to stop gas supply to the captive power plants of industries within six months,” the official said.

The petroleum ministry has recently proposed enhancing the gas infrastructure development cess on CNG, which will add Rs15 per kg to the price from next financial year 2012-13. CNG dealers are being asked to switch to liquefied petroleum gas (LPG).

According to sources, the government has actually violated the gas allocation policy since 2005 by reducing supplies to power plants and giving preference to other sectors. Though the general industry and CNG outlets were on fourth position in the priority list of the gas allocation policy, gas supply to industries rose by 34% (766 million cubic feet per day) and CNG stations by 363% (310 mmcfd) over the seven-year period.

However, gas allocation to power plants – third in the priority list – dropped from 44% (1,381 mmcfd) in financial year 2005 to 27% (924 mmcfd) in financial year 2011.

“This reduction in gas allocation to power companies has been mainly met by increased reliance on expensive furnace oil for electricity production, which has pushed up determined power tariff by 88% since financial year 2005,” the water and power ministry official said.

As a result, tariff differential claims of power companies rose by an average of 51% per annum to Rs343 billion in financial year 2011 compared to Rs44 billion in 2006. The tariff differential claims stood at Rs60 billion in 2007, Rs134 billion in 2008, Rs112 billion in 2009 and Rs180 billion in 2010.

Captive power plants consume an estimated 1,250 mmcfd of gas, of which 250 mmcfd is used by Karachi plants alone. “The captive power plants have resulted in the formation of a parallel power sector, which benefits only a limited number of industries at the cost of load-shedding for the entire nation,” the official commented.

In the case of CNG outlets, gas consumption has increased by 363% from financial year 2005 to 2011 because of it being 33% cheaper than petrol and high-speed diesel.

“CNG is normally used in cars owned by middle and high-income classes, but the entire nation bears the burden of this subsidised fuel in the form of high electricity prices,” an official of the petroleum ministry said.

“Diverting 310 mmcfd of gas from CNG outlets to power plants will save Rs183 billion ($2 billion) on account of lower furnace oil consumption and increase in power generation by 1,300 megawatts,” the official said.

On the other hand, the supply of 800 mmcfd of gas, consumed by captive power plants, to power companies can save Rs473 billion ($5.2 billion) and increase power output by 3,350 megawatts.

This increase in gas supply to the power plants will leave a positive impact on the overall economy. “It will reduce load-shedding by 80% and increase power generation by 4,600 megawatts,” the official said, adding it would also help eliminate tariff differential claims, leading to a sharp decrease in fiscal deficit to 4.6% of GDP from 6.6% in financial year 2011.

Published in The Express Tribune, May 29^th, 2012.