Captive power units: MoC opposed to increase in gas rates

ISLAMABAD: The commerce ministry has reportedly opposed increase in gas rates for captive power units, saying that the hike in gas tariff and plan for closure of captive units by January 2025 could impact the country’s exports, well-informed sources told Business Recorder.

These views were expressed by the commerce ministry during discussion at the ECC on Sunday on Petroleum Division’s summary for an increase in gas prices for captive power units as prior action with the IMF in recent talks.

“The Commerce Division was of the view that gas connection data of captive power plants had been analyzed by that Division with the assistance of PRAL which had revealed that about 349 units out of 523 gas connections had exports of $ 13 billion in year 2022.

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The commerce ministry raised concern that since gas is used in captive power units, therefore, increase in gas tariff and plan for closure of captive units by January 2025 could impact the exports of the country,“ the sources added.

The Petroleum Division briefed the forum that the Sui Southern Gas Company Ltd (SSGCL) and Sui Northern Gas Pipelines Ltd (SNGPL) are public sector gas utility companies licensed by Oil & Gas Regulatory Authority (OGRA) for purchase, transmission, distribution and sale of gas to consumers in the country.

The OGRA determines annual revenue requirements of both Sui companies in accordance with the respective licence conditions, Natural Gas Tariff Rules 2002 and Section 8 of the OGRA Ordinance 2002. Pursuant to Section 8(1) of the OGRA Ordinance, 2002, the Authority vide its decision dated 20-5-2024 had issued determination of Estimated Revenue Requirements (ERR) for FY 2024-25 for both SNGPL and SSGCL respectively.

According to the said determinations, SNGPL required a revenue of Rs.607 billion and SSGCL required a revenue of Rs.289 billion in FY 2024-25, respectively. The cumulative revenue requirements of both the Sui companies are Rs. 897 billion for the FY 2024-25.

Pursuant to Section 8(3) of the OGRA Ordinance 2002, Federal Government is required to advise OGRA revision in the category-wise consumer gas prices within 40 days of the determination, ie, by or before 30-6-2024 so that revised tariff becomes effective from July 01, 2024. Further, the amended Section 8(3) of OGRA Ordinance, 2002 (amended through enactment in March 2022) mandates Federal Government to ensure that the consumer gas sale prices so advised are not less than the revenue requirement(s) determined by the Authority.

At the current notified consumer gas sale prices effective February 01, 2024 the estimated revenues of both Sui Companies during 2024-25 would be Rs. 1,025 billion (SSGCL: Rs. 364 billion and SNGPL: Rs.661 billion) leading to surplus of Rs.133 billion (SSGC: Rs.75 billion, SNGPL: Rs.58 billion) assuming no change in the current consumer gas prices.

Petroleum Division further briefed that in the recent meetings held with IMF mission for the review of Stand By Agreement (SBA), notification of the consumer gas prices on July 1, 2024 has been taken as ‘Prior Action’ whereas phasing out of the captive power plants out of the gas grid by January 2025 has been a taken as ‘Structural Benchmark’. It was highlighted that captive power industry contributes significant portion of gas and RLNG consumption at higher rates and thus not only provides additional revenues for the cross subsidy in domestic sector in the absence of budgeted subsidy but also consumes LNG which often becomes surplus due to erratic off-take of power plants.

Meanwhile, Commerce Division was provided the list of captive power units to seek details of export implications who have now confirmed that based on data from PRAL, 349 units (with 523 gas connections) had exports of $ 13.31 billion on their title during FY 2022. It had been advised by the IMF mission under review and already part of Memorandum of Economic and Financial Policies (MEFP) that besides phasing out of the captive power plants, their indigenous gas tariff would be increased to equate with RLNG tariff.

Currently, captive power plants are being provided different blend proportions of indigenous gas and RLNG on the network of SSGCL and SNGPL, ie, proportion of 70:30 on SSGCL and 25:75 on SNGPL which in tariff terms translates into Rs. 3,000/mmbtu for units on SSGCL and Rs. 3,300/mmbtu for units on SNGPL network versus the notified RLNG tariff in rupee terms as Rs. 3,550/mmbtu. However, in line with commitment with IMF, the gas tariff for the captive power plants is proposed to be revised.

Petroleum Division noted that on annual basis, at current tariff of Rs. 2,750/mmbtu, the estimated surplus revenue from captive power units was Rs.76 billion and at proposed revised tariff of Rs. 3,000/ mmbtu, the surplus would be Rs.92 billion on annualized basis, however, pursuant to the commitment made with the IMF at closure of captive power units by January, 2025 there would be shortfall in revenue requirements for January to June 2025 which amounts to Rs. 47billion. This shortfall needs to be recouped through price revisions from January 01, 2025 after receipt of OGRA’s Review of Estimated Revenue Requirements (RERRS) of both the Sui companies in November-December 2024.

Petroleum Division submitted following proposals for consideration and approval of the ECC: (i) except for general industry (captive power), there is no change proposed in the existing consumer gas prices from July 1, 2024; (ii) the present indigenous gas tariff for industry (captive power), ie, Rs. 2,750/mmbtu is proposed to be revised to Rs. 3,000/mmbtu. Sui companies may continue to offer blend of indigenous and RLNG to captive power units; and (iii) OGRA to consider revision of category-wise prescribed prices of both the companies to account for any anticipated surplus revenues enabling Sui companies to meet their prior year shortfalls/stock of gas circular debt.

During the ensuing discussion, Secretary, Petroleum Division made a brief presentation to the ECC members wherein he stated that OGRA, pursuant to Section 8(1) of the OGRA Ordinance, 2002 had determined the estimated revenue requirements of both the Sui companies and had submitted the same for seeking advice of Federal Government under Section 8(3) of the OGRA Ordinance, 2002. He further stated that total revenue requirements of both the Sui companies for the next financial year was Rs.897 billion; and that Petroleum Division was proposing no change in the current consumer gas sale prices as revised in February, 2024. Only change proposed was for tariff of captive power units which might be revised from Rs. 2750/mmbtu to Rs. 3000/mmbtu from July 1, 2024.

On unwelcome expansion of price difference between industry and captive tariff which will expand incentive to run open cycle captive plants on industry tariff, Minister of State for Finance & Revenue and Power observed that SNGPL and SSGCL may remain vigilant and ensure that open cycle plants are only operative on captive tariff in line with government transition plan.

Minister for Power inquired about the rationale of charging separate tariff on indigenous gas-based plants and RLNG based power plants. Secretary Petroleum responded that the arrangements are in line with OGRA Ordinance 2002. Minister for Power informed that Power Division is actively engaged in reforms which include reduction in cross subsidy on industry, allowing wheeling of electricity and reduction in power tariff.

He argued that increase in gas tariff for captive power will enable their transition to power grid. He also emphasized that due to difference in tariff for captive power plants and industry (process), there should be proper enforcement mechanism in place to eliminate any misuse of gas along with penalty for the defaulters.

Industries and Production Division maintained that reforms being pursued by Power Division should provide a relief to industry especially through reduction in cross-subsidy and wheeling policy. Commerce Division argued that gas connection data of captive power plants had been analyzed by that Division with the assistance of PRAL which had revealed that about 349 units with 523 gas connections had exports of $ 13 billion in year 2022. He raised the concern that since gas is used in captive power units, therefore, proposed increase in gas tariff and plan for closure of captive units by January 2025 could impact the exports of the country.

Secretary, Finance Division agreed that the proposal submitted by the Petroleum Division in the summary was in order. Chairman OGRA highlighted the relevant provisions of the OGRA ordinance seeking approval of the Federal Government for notification of category-wise gas tariff. It was observed that a holistic transition plan for captive power units to power grid may need to be finalized.

The ECC unanimously approved the summary. Ministry of Commerce and Ministry of Industries and Production noted that their respective Ministers supported the summary and Minister for Power also expressed his approval to it; Ministry of Petroleum also expressed similar approval of Minister for Petroleum.

The ECC also recommended that decision on the summary should be ratified by the Cabinet through circulation due to urgency of the matter and all formalities stipulated by Rules of Business 1973 may be fulfilled in this regard.

Copyright Business Recorder, 2024