Captive to grid: Tread carefully

Last week cabinet committee on energy (CCoE) decided to put a moratorium on gas supply to self-generation of power for industrial connections, given these have electricity grid connections. The co-generation is exempted from the moratorium. The policy is proposed to be implemented by February for general industry, and March for export-oriented industries.

In principle, it is the right decision. Under 2015 power policy, new capacity is being added to the grid and more capacity will come online in the next few years. There is no way domestic and commercial consumer can use such hefty capacity addition. Without having industry on board, the capacity utilization of grid will keep falling.

The debt capacity payments of plants are frontloaded and higher capacity charge would result in higher tariffs for existing consumers. This will sway the consumers away from the grid or to ration consumption. The only sane way is to move the industry towards the grid. Else, the circular debt growth cannot be curtailed.

But the process must be well thought out. Any abrupt forced conversion can do more damage in the short run. This must be phased out. Best policy is to give right price signal. Government should increase the price of gas and reduce the electricity tariff to make this conversion market based.

The industry, mainly textile, however, is trying to give it a spin. APTMA is historically known for lobbying and extracting rents. There were incidences of misusing government subsidies and central bank’s concessionary finance in the past. Even subsidized gas for textile industry is not purely targeted for exports.

Just as the case, they were against the removal of zero-rating regime – for details (read ’Textile’s crocodile tears’, published on 24th June 2019 by BR Research), they are now lobbying for continuation of blanket subsidy. There must be a mechanism of providing subsidized energy for exports only. Nevertheless, there should be low rates of energy for industries across the board to promote manufacturing in the country.

Numbers support the shift from captive generation to the grid. In FY19, total units sold by NTDC was 93,887 GWh, and out of 24,285 GWh were consumed by the industry. During that year, gas supply to captive power generation was 51,658 BBTU from SNGP. At an estimated 40 percent thermal efficiency, this results in power generation of 5,465 GWh – 22.5 percent of industrial supply by grid and 5.8 percent of grid supply. The conversion will surely help in enhancing grid consumption.

The case of conversion is even stronger for KE grid. In FY19, KE sold 14,318 GWh and out of 4,402 GWh were to industry. SSGC supplied 75,164 BBTU to captive power plants. At 40 percent efficiency, this translates into 7,938 GWh. This implies 55.4 percent industrial power consumption was on captive, and the captive usage of industry was 1.8 times of what was on the grid.

Adding the two, around 14,000 GWh generation in FY19 was relying on captive plants. This is a big number. Without having these on grid, the puzzle of growing capacity payment cannot be solved. Thus, no matter what the industry says, this decision needs to be supported. But the catch is in implementation.

If the KE captive gas connections are closed today, this will break the KE supply system. There could be case of huge load shedding in Karachi. The supply must come from NTDC (where excess supply exists); but there are grid constraints in integration. These must be resolved first before the moratorium is applied. Nonetheless, KE has the reputation of supplying power to industrial units at 132 KV lines without any interruption.

The reliability of grid is an issue in Punjab. Industry players have that complaint. The cost of fluctuation is high. Government needs to fix it. Then, the industry picks up the issue of energy efficiency. That makes sense; but at the same time the higher take or pay capacity must be utilized. That is why co-generation is exempted, as it is more efficient. Then the industry compares its captive plant efficiencies from grid net of transmission and distribution losses. Transmission losses are fine; but non-billing of discos doesn’t fall in energy efficiency matrix.

Government needs to create incentive structure through tariffs to make smoother shift. There are industries that are relying on coal. The number is small but growing. When the objective is to convert to grid, why this discrimination against gas?

The other point is that if the industry is shifted to grid, who will buy the RLNG from new terminals? Why is the government giving third party access? Then there is issue of industry (on local gas) subsidizing domestic consumers. If the industry is shifted, the domestic gas tariffs must be increased.

The bottom line is that the government is moving in the right direction; but it must think through the implications and externalities of such shift; and should do this gradually by giving right incentive structure.

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