Expensive purchase of RLNG: Power Division suggests recovery of losses from consumers

ISLAMABAD: The Petroleum Division is said to have recommended recovery of financial losses of billions of rupees from power consumers due to purchase of expensive RLNG or its non-availability for the power plants, well informed sources told Business Recorder.

"Volume and pricing of RLNG is ring-fenced whereby RLNG consumers have to bear the full cost of supply. Any tariff differential and/or any other liquidity damages due to downward deviation from the indicated power demand should be borne by power purchaser/ IPPs or passed on to the electricity sector consumers," said the Petroleum Division, in its comments on a summary to Power Division to be considered in the forthcoming meeting of Cabinet Committee on Energy (CCoE).

According to Nepra, power sector consumers have to pay an extra Rs 9.6 billion due to non availability of RLNG. Energy sector experts argue that an extra amount of about Rs 500 billion will be passed on to the consumers due to procurement of expensive LNG.

In recent days, PLL or PSO, two key arms of Petroleum Division, purchased spot cargoes of RLNG at very expensive rates, the cost of which will be recovered from power consumers.

Since National Accountability Bureau (NAB) is investigating the LNG deal with Qatar, inked during the Pakistan Muslim League-Nawaz (PML-N) government, the Petroleum Division has secured partial exemption of 16 spot cargoes of LNG from Public Procurement Rules 2004 procured or to be procured on spot price by PSO and Pakistan LNG Limited (PLL) till December 2021.

PD says ‘multiple challenges’ led them to buy costlier LNG

Power Division, in its summary, has said that power sector is a major stakeholder of the RLNG supply chain and any disturbances in RLNG supply/demand affects the economic dispatch of power and high line pack issues in gas transmission system.

In cases where RLNG supply is below the firm demand for RLNG, the basket price of electricity becomes higher than it would be if the supply was in accordance with demand.

On the other hand, the basket price is also affected when these plants have to be dispatched out of merit order to accommodate the RLNG over-supply issues of gas supply companies.

Lower supply of RLNG also induces operational constraints and system stability issues for the system operator.

The summary states that existing Take-or-Pay contractual arrangements of three RLNG- based power plants specify the minimum fuel off take requirement of 66% on annual basis as established under Annual Production Plan (APP).

RLNG off take lesser than the firm requirement of 66% invokes financial liability on power sector, in the form of NPD (Net Proceed Differential) on account of diversion of RLNG to other sectors.

Similarly, non-compliance of firm RLNG orders by SNGPL triggers the Liquidated Damages (CDs) to be charged to SNGPL for non- supply of committed RLNG to power sector and leads to commercial disputes between government-owned entities in power and petroleum divisions.

The CCoE, on September 18, 2020 approved the waiver of minimum take-or-pay commitment of 66% under PPA(s) and GSA(s) with effect from January 2022 with corresponding direction to respective parties to initiate amendments in respective agreements.

The Power Division argues that despite best efforts, any later variations in the assumed variables/constraints do and would cause lower RLNG off take by the power sector obligating payment of NPD.

At the same time, lower RLNG off take would continue to result in increase of line pack in SNGPL gas pipeline transmission system, putting the gas transmission system into higher risk for rupture. In this situation SNGPL insists both NPCC and power plants follow hourly flow-rate limit to regulate its line pressure and mitigate its risk. Consequently, such constraints result in non-economic operation of RLNG plants while reducing generation from other cheaper power plants.

The Power Division has prepared the following proposals for consideration and approval of CCoE of the Cabinet: (i) flexibility to NPCC be allowed in RLNG flow rate on daily, weekly & monthly basis to adjust the unutilized RLNG on account of power system dynamics. Accordingly, SNGPL shall ensure the incorporation of flexible RLNG flow rate requirements in its allocation of RLNG to power sector, on best effort basis.

This will enable optimal utilization of resources on least cost basis and assist in reduction of NPD on the power sector; and (ii) to safeguard SNGPL pipeline network from damage, the violation of merit order shall be allowed on account of operational system constraints leading to mandatory consumption of allocated RLNG.

Power Division maintains that such deviations may be dealt under one of the following options: (i) cost of deviation from merit order be passed on to the other gas sector consumers (excluding power sector). Accordingly, Power Division shall claim the cost of such non-compliance on monthly basis to SNGPL, which shall be adjusted within 30 days of such claim. OGRA may be advised to recognize flow rate regulation requirement as an operational system constraint of the energy value chain and such cost maybe incorporated accordingly; or (ii) cost of deviation from merit order be passed on to the electricity sector consumers.

Accordingly, NEPRA may be advised to recognise flow rate regulation requirement as an operational system constraint of the energy value chain and correspondingly the cost of such constraint shall be allowed in the monthly Fuel Charge Adjustment (FCA); or (iii) cost of deviation from merit order be passed on to other gas and electricity sector consumers in equal proportion. NEPRA and OGRA may be advised to recognize flow rate regulation requirement as an operational system constraint of the energy value chain and correspondingly the cost of such constraint shall be allowed. Further, power division shall claim the proportional cost for such non-compliance on monthly basis to SNGPL, which shall be adjusted within 30 days of such claim.

Petroleum Division maintains that power sector is a major consumer in RLNG supply chain and effective management of RLNG supplies is reliant on Power Division's consumption. Timelines and dynamics of RLNG ordering are very crucial. SNGPL requires ordering RLNG at least 90-120 days ahead of its requirement which become firm and on Take or Pay, once confirmed to the LNG importer.

Power Division argues that consumption of power sector varies significantly on daily basis for variety of reasons which include economic merit order, demand of Discos, availability of plants & network, weather conditions and final generation schedule. etc.

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SNGPL's system pack and line pressures are directly affected by power plants' daily consumption pattern since the RLNG/ gas off-takes of other sectors are almost static on daily basis. Therefore, any variation in daily off take as against power plants' given demand impacts system supplies.

Petroleum Division further says that for stability of system, consistent daily RLNG off-take by power sector is very critical to avoid undue pressure on the operations of the LNG supply chain, adding that the issue can be resolved through developing LNG storage, and till then, it is imperative that power plants' must off take allocated volumes on daily basis with permissible variation of 2-3% in demand.

According to the Petroleum Division, it is evident that most of the time, SNGPL's line pack increase to a maximum level due to power sector's reduced off take against the demand; therefore, the proposal for passing on the cost of merit order deviation on gas consumers is not supported.

Petroleum Division maintains that since volume and pricing of RLNG is ring-fenced whereby RLNG consumers have to bear the full cost of supply therefore, it would not be possible for gas companies to divert RLNG to other consumers and recover the diversion/ differential cost. Therefore, Petroleum Division has recommended that any tariff differential and/or any other liquidity damages due to downward deviation from the indicated power demand should be borne by power purchaser/ IPPs or passed on to the electricity sector consumers'.

Petroleum Division further says that it is of the considered view that the proposal with respect to cost of non-economic dispatch to RLNG plants be allowed to be adjusted into monthly Fuel Charge Adjustment (FCA) in power tariff by NEPRA and that it should be time bound i.e. 3 years during which the LNG storage infrastructure can be operationalized to avoid recurring of such events moving forward.

Copyright Business Recorder, 2021