INR8bn Fuel Cost Decline Likely for Gas-based Power Plants - India Ratings

New Delhi, March 23, 2015: India Ratings & Research (Ind-Ra) expects the fuel costs for gas-based power stations to decline by INR8.2bn in FY16. Domestic gas prices are due for a possible downward revision for the period 1 April 2015 to 30 September 2015 as the bench mark indexes of Henry Hub (HH) in the US, National Balancing Point (NBP) in the UK, Canada’s Alberta Hub as well as Russia’s gas prices have declined over the reference period January 2014-December 2014.

A 7.5% decline in domestic gas price will reduce fuel costs for gas-based power stations by INR8.2bn in FY15-16. However, the same is likely to be passed on to the end consumers as most of the power purchase agreements are cost plus in nature which allow for fuel cost pass-through. The fuel cost per unit is likely to decline by INR0.2/kwh which will improve the merit-order despatch ranking of gas-based power plants. However, given the overall gas shortage, the plant load factors (PLFs) of gas-based power stations will remain low at 20%-25% in FY16. During 11MFY15, gas-based power plants recorded a PLF of 20.96% with a generation of 37.8bnkwh.

Additionally, the prices of spot liquefied natural gas have declined from the peak of USD15-16/mmbtu to USD7-8/mmbtu in 3QFY15. The price of long-term LNG has declined and is likely to decline further as the transmission of fall in crude prices to LNG prices is slow. This is because the pricing of the latter is linked to a five-year rolling average of Japanese Crude Cocktail. A decline in spot LNG prices to USD7-8/mmbtu is likely to result in the possibility of higher usage of spot LNG to fire gas-based power stations though the fuel cost of spot LNG-based electricity will remain high at INR4/kwh (domestic gas: INR3/kwh). Thus, the ability of state power utilities to buy expensive power will determine the PLFs of these plants.

(Source: Senior Manager - Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company, Mumbai.)