LNG and Power Sector Opportunities and Concerns B. Pradeep KSEB Officers’ Association

KSEB Officers' Association Background LNG terminal being commissioned in Kochi Initial capacity 2.5 mmtpa; ultimate capacity 5 mmtpa Laying of Gas pipeline network in Kochi in final stages Gas pipeline to Mangalore and Bangalore under execution Gas pipeline to Kayamkulam planned MoU between GAIL and KSIDC for City Gas distribution etc GSA between Petronet and Exxon-Mobil for supply of 1.44 mmtpa from 2015; FOB price 14.5% * JCC KSEB Officers' Association 2

Natural gas in power sector Clean fuel Lower Carbon footprint Seen as “bridge fuel” until transformation to renewable energy is technically and commercially viable Operational flexibility in responding to sudden changes in demand Suitable as peaking station suitable for integration with infirm renewable power Scope for decentralised plants at load centers KSEB Officers' Association

Opportunities in power sector Proposals under various stages include 1200 MW project at Puthuvypeen 1050 MW project at Brahmapuram 1050 MW Kayamkulam expansion 1200 MW project at Cheemeni Conversion of 350 MW Kayamkulam Stage I Conversion of 165 MW BSES plant at Kochi Total natural gas requirement for these projects will be around 25 MMSCMD or 6.25 mmtpa – higher than terminal capacity KSEB Officers' Association

But, Some hard facts Inadequate Long term tie-up for LNG supply to terminal only for a fraction of the capacity (1.44 mmtpa against capacity of 5 mmtpa) Price linked to crude oil price (Japanese Custom Cleared crude price) Will commence only from 2015 LNG supply at spot prices Price is volatile; presently floating between 12 – 17 US$ per mmbtu Thus there is no firmness in quantum or price for the supply at Kochi terminal The situation is entirely different from that at Dahej terminal (price stability ensured through floor & caps in pricing formula) KSEB Officers' Association

Some hard facts Unfavorable commercial conditions “Take or Pay” even when LNG becomes unaffordable due to flaring up of crude oil prices The technical advantage of “operational flexibility” lost due to inflexible commercial conditions Planning Commissions observations By 2016-17 the import dependence of gas is expected to increase to 28.4% from 19% in 2010-11 Unless the pricing issue is resolved, the scope of using LNG in the price sensitive power sector is remote The high prices prevalent in LNG trade in Asia-Pacific region can potentially kill the goose that lays the golden eggs Thus in the 12th plan capacity addition of 2539 MW only is planned for the country as a whole using Natural Gas & LNG, that too as peaking stations alone (instead of base load stations) KSEB Officers' Association

Increase in Power Purchase cost Power procurement cost has abnormally increased in Kerala in the backdrop of abnormal increase in fuel cost (Naphtha, LSHS, Coal etc) de-licensing of generation sector through Electricity Act, 2003 Imperfections in market revision of operation norms by CERC for central sector stations and No major hydro projects being commissioned KSEB Officers' Association

KSEB Officers' Association Increase in Power Purchase cost of KSEB (Source: True up orders, ARR&ERC orders and ARR & ERC filings) KSEB Officers' Association

Power purchase cost VS Revenue Purchase cost is overtaking revenue from tariff KSEB Officers' Association

LNG as replacement fuel One of the reasons for the above situation is increase in cost of Naphtha power Existing capacity of Naphtha stations Kayamkulam – 350 MW, BSES – 165 MW; Total – 515 MW Annual generation from these stations were restricted between Zero and 1200 MU against a potential of 3600 Mus Conversion of fuel Per unit cost will come down - from present Rs 11 to about Rs 7 per unit (considering crude price of 100 US$ per barrel); but is still higher than present average retail tariff – Rs 4.38 per unit Thus, conversion to facilitate generation at current level could be beneficial, but any additional generation may be counter productive KSEB Officers' Association

KSEB Officers' Association LNG for new plants Energy demand in Kerala for 2013-14 is estimated as 22,117 MU, which is to be met by KSEB stations – 6,837 MU; Central Generating stations – 10,236 MU; Small IPPs in Kerala - 196 MU; Traders - 3,628 MU; Kayamkulam + BSES - 1,220 MU Total power purchase cost is estimated as Rs 7,083 Crores The demand is expected to increase to 26,584 MU by 2016-17 and to 32,895 MU by 2020-21 Additional energy required – 10,778 MU Additional power purchase cost will be about Rs 9,200 crores if the additional power is met from new LNG plants (FC Rs 1.5 + VC Rs 7) The revenue of KSEB for 2013-14 is estimated as Rs 8,000 cores only Power purchase cost will increase by 130% (at current prices) to meet increase of 48% in power procurement quantum KSEB Officers' Association 11

Impact of change in crude price Kochi LNG price is directly linked to Crude price Between 2003 and 2012 crude price has increased at 16% annually. Between 2003 -08 the increase was at 27% and between 2009-12 the increase is at 22% LNG Projects considered are Puthuvypeen 1050 MW and Brahmapuram 350 MW alone KSEB Officers' Association

KSEB Officers' Association Risk Mitigation Clearly Kerala cannot absorb such costly power in huge quantum – reducing the quantum is important LNG plants as peaking stations Peak demand is estimated to become 6093 MW by 2011-12 Additional capacity required to meet the peak demand is about 3000 MW; at a plf of 85% LNG plants will deliver about 22,000 MUs Whereas the additional energy requirement is about 11,000 MUs only If capacity to the tune of 1000 – 1500 MW is created or contracted for base load operation the energy demand could be more or less met Such base load stations may be on Coal and balance energy and capacity may be met from LNG plants This could limit the exposure on LNG to the tune of 2000 – 3000 MUs KSEB Officers' Association

KSEB Officers' Association Risk Mitigation Allocation of Domestic Natural Gas Kerala not being endowed with any natural resources like Coal, Natural Gas etc and development of hydro projects is hampered due to environmental concerns has eligibility to get priority allocation of domestic natural gas, once gas pipeline infrastructure is in place Due to price stability to certain extent, Kerala shall seek for domestic natural gas allocation for power projects on Swap basis Gas price pooling Pooling the price of LNG with domestic natural gas could bring down the cost as well as create some stability in price Kerala shall seek gas price pooling to ensure utilisation of LNG facilities KSEB Officers' Association

Gas prices in different markets Domestic natural gas APM gas - 4.2 to 5.25 US$ /mmbtu Pre NELP fields – 3.5 to 5.73 US$ /mmbtu NELP fields - 4.2 US$ /mmbtu LNG imported in India Qatar Gas (Dahej) - 9 US$/mmbtu Other term contracts - 6.97 to 9.06 US$ /mmbtu Spot LNG - 12 to 17 US$ /mmbtu Gorgon gas (Kochi) - 16 US$ /mmbtu at current crude price International prices Henry Hub (US) - 3 to 4 US$ /mmbtu NBP (UK and Europe) - 6 to 7 US$ /mmbtu JCC based (Japan) - 14 to 15 US$ /mmbtu Canada - 3 to 4 US$/ mmbtu KSEB Officers' Association

Kochi Terminal landed in a disadvantageous position The suppliers of Gas to be sensitised on the price factor Globally the link between Crude price and Gas price is being broken (Dr C. Rengarajan Committee report 2012) Our proposed power projects shall not be tied down with commercially unviable contracts for gas supply But the highly urbanised Kerala context provides a great market for LNG as a substitute fuel through city gas distribution (domestic & commercial sectors) network, automotive fuel etc – piped gas KSEB Officers' Association

KSEB Officers' Association Looking forward Gas based projects has a major role to play in our power supply landscape LNG terminal is a game changer – connecting Kerala to the Natural gas market; ship route as well as pipe route In view of the present commercially unfavorable contracts for supply of Gas, Kerala shall cautiously tap the market The strategies may include Seeking domestic natural gas allocation on swap basis Seeking pooled prices for gas Limiting exposure to LNG by going for peaking stations initially Work along with GAIL/Petronet etc to tap North American market and other potential markets Gradually move away from the crude price linkage KSEB Officers' Association

KSEB Officers' Association THANKS KSEB Officers' Association