Time to think of gas-based UMPPs

The government’s ultra mega power project (UMPP) scheme has proved a big hit among investors. However, this effort alone would not go far enough in meeting the country’s growing power shortage. With natural gas availability from domestic sources improving significantly in recent years, the government needs to think of a gas-based UMPP scheme if it is to effectively deal with the country’s power problems. In any case, cost economics of gas-fired power projects near load centres compares well with imported coal-fired power plants set up at coastal locations.

India has faced huge shortfalls in its envisaged power generation targets for every Five Year Plan. In view of that, the government has launched the ultra mega power project (UMPP) policy to accelerate the country’s coal-based capacity addition pace. The government has successfully bid out four UMPPs so far and more are in the pipeline.

The government has also envisaged tapping renewable energy sources like solar, wind, bio-mass as well as nuclear to overcome the country’s electricity shortage. However, the cost of generating electricity from these sources works out much higher compared to fossil fuel-generated power because of high capital cost. So the government will have to make huge subsidy payouts to support renewable power generation capacity addition. In any case, these are not appropriate sources for meeting peak power requirement.

Cost economics apart, these efforts might not be enough in bridging India’s power demand-supply gap. India’s power requirement is rising at a much faster pace than the official projection. Global consultancy firm McKinsey has said that if India continues to grow at an average rate of 8%, the country’s demand for power will soar to 315-335 gigawatt (gw) by 2017, a projection that is 100 gw higher than the estimates put out by the Planning Commission. To meet the country’s projected electricity demand, McKinsey has suggested that India focus on setting up peaking power sources like hydro and gas-based power plants.

Although India has the potential to develop 1,48,700 mw of hydro-based power generation capacity, there are serious geological and technological constraints in harnessing country’s hydro resources. Most of the hydropower projects face delays because of hydrological and geological uncertainties involved in their execution. India has so far harnessed only 20% of its hydrogenation potential.

Natural gas availability from domestic sources has significantly improved in recent years. Additional 80 million standard cubic meter per day (mmscmd) of gas became available from Reliance Industries Ltd’s (RIL) D6 block in the Krishna-Godavari basin. Gujarat State Petroleum Corporation (GSPC) also plans to begin production from its Deendayal gas field in 2012. GSPC expects production of 200-300 million metric cubic feet a day (mmscfd) from the block. Meanwhile, exploration work is on in the KG basin and more discoveries are likely to be made in days ahead.

At current market prices, cost economics of gas-fired power projects near load centres compares well with those in coastal areas based on imported coal. For example, electricity tariff for a power plant at coastal location based on imported coal works out to Rs. 3.5 per unit. A gas-based power plant near load centre will be able to compete with an imported coal-fired power project if it can procure gas at a price in the rage of $7 million British thermal unit (mBtu). Significantly, delivered market price of domestic gas available from RIL’s D6 works out to $6-7 per mmBtu.

Not only in terms of generation cost economics, gas-based UMPPs also compare favourably with imported coal-fired UMPPs in respect of transmission losses. Gas-fired UMPPs’ transmission losses would work out much lower compared to coal-based UMPPs set up at coastal locations because of their proximity to load centres. By a rough estimate, transmission losses for these coastal plants would be in the range of 18-20%. In comparison, transmission losses for gas-based UMPPs should be about 80% lower.

Capacity addition and cost considerations aside, increasing share of natural gas in power generation can also help the country in checking its fast-expanding carbon footprint. India has volunteered to make a significant reduction in its carbon emissions. Gas-based UMPPs will come in handy for India in meeting the emission cut promise.

While the government can award captive coal mines for coal-fired UMPPs, there is no such assurance for gas-based projects. That means tying up fuel linkage for a gas-based power project will take more time. So while the government can replicate other provisions of the current UMPP policy in formulation of a gas-based policy, it will have to allow a longer timeframe for completing bidding for allocation of these projects.

Carbon footprint of the Indian power sector is growing fast. Given the growing global concern against global warming, it might not be feasible for India to maintain the current share of coal-based power generation capacity in the long term. So, it is high time the government started thinking about gas-based UMPP scheme.

Source: Financial Express

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