LNG-based power plants: Government flouts least cost generation policy

The adverse impact of a ‘seller-favouring’ USD 16b deal with Qatar for import of liquefied natural gas (LNG) has started appearing, as the government has approved a new implementation agreement for three LNG-fired power plants, which violates the least cost generation policy. The implementation agreement has been prepared under compulsion of consistent LNG supply by Qatar. This will make it binding for the three public sector power plants to produce 3,600 megawatts of electricity around the clock, irrespective of being economically viable or not. The downside risk is that the cost of generation will double once crude oil prices start increasing in the international markets.

The Economic Coordination Committee (ECC) of the cabinet approved the implementation agreement on Tuesday for running the LNG-based power plants, two of them being set up by the federal government and the third by the Punjab government. These power plants will be located in Punjab at Bhikki, Balloki and Haveli Bahadur Shah. The ECC approved the draft implementation agreement for imported LNG-based power projects in the public sector, said the Ministry of Finance. The government has already amended the Private Power Infrastructure Board (PPIB) law to make it possible to administer these plants. The ECC also approved amendments to power purchase agreements of three independent power producers (IPPs) to bind them to make payments for LNG supply within 10 days – down from the current period of 55 days.

The implementation agreement of the three LNG power plants will bind the federal government to pick all the risks associated with supply of the imported gas.

According to the approved arrangement, these plants will have to be operated on “must-run basis owing to the peculiarity of the mechanism of importing LNG”, according to a summary of the Ministry of Water and Power. The must-run policy would violate the merit order that was aimed at ensuring that low-cost power generation plants are run first, said Shahid Sattar, former member energy of the Planning Commission.

Pakistan recently approved a 15-year (2016-2031) government-to-government deal with Qatar that requires Islamabad to buy the entire volume of LNG or pay the full price, if it does not lift the whole quantity.

The implementation agreement is also in contrast to such agreements signed with the IPPs. In this arrangement, the government is the producer and buyer of electricity. It has picked all financial obligations associated with LNG supplies.

This was very unusual and eventually the government would pass on the buck to the electricity consumers, officials said. According to the implementation agreement, in the absence of re-gasified LNG, these power plants will be run on high-speed diesel and the price differential on account of high cost of generation and payment for LNG supplies, which was not picked because of any reason, will be the responsibility of the federal government. The ECC also authorised the PPIB to make and approve any project-specific amendments to the implementation agreement required during negotiations. The PPIB board has also been authorised to make amendments, if required, to the agreements to comply with the National Electric Power Regulatory Authority’s tariff determinations. The ECC approved amendments to the agreement between the Central Power Purchasing Agency and three IPPs – Rousch, Fauji Kabirwala and Davis Energen – to bind them to make payments to LNG suppliers within 10 days. The arrangement is also aimed at ensuring that Qatar Gas is paid within 10 days of the delivery of gas.

Source: The Tribune: LG-based power plants: Government flouts least cost generation policy