The Cabinet Committee on Energy (CCOE) is set to adopt a plan to exempt LNG-based power plants from the economic merit rule in order to alleviate strain on a gas utility’s pipeline network, but the move will impose higher costs on gas consumers.
The CCOE has previously exempted LNG-based power stations from the 66 percent guaranteed LNG offtake, putting the gas utility Sui Northern Gas Pipelines Limited (SNGPL) and the power plants in financial difficulty.
Due to the unwillingness of the power sector to accept LNG supplies, public gas utilities are similarly hesitant to allow the private sector to begin LNG imports in order to mitigate financial risk for energy companies.
SNGPL has been threatened multiple times in the past, and the business was forced to persuade Pakistan State Oil (PSO) to restrict LNG deliveries in order to protect its pipeline network from excessive gas pressure.
The fundamental responsibility of the system operator – National Power Construction Corporation (NPCC) – under the “economic dispatch” mechanism is to achieve the “lowest cost” while maintaining system integrity, security, reliability, and quality of supply.
The merit order of thermal power plants is based on the specific cost (fuel cost plus variable operation and maintenance cost) per unit of the power plants/units in increasing order. The merit ranking is one of the variables that affect the economic dispatch process.
Additional elements that the system operator must evaluate throughout the economic dispatch process include plant availability, fuel availability, system restrictions, take-or-pay fuel contracts, startup/shutdowns, ramping rates, and stability reserves.
The Grid Code requires that electricity producing facilities operate in the merit order under “normal system conditions.” However, where necessary, and subject to the discussed circumstances, a variation from the merit order is permitted.
The power sector is a significant stakeholder in the supply chain for re-gasified LNG. Disruptions in the supply/demand of RLNG have a detrimental effect on the economic dispatch of power and produce line pack concerns in the gas transmission system.
When RLNG supply falls short of the firm order, the basket price of electricity increases in comparison to when supply meets demand. Additionally, the decreased supply of RLNG generates operating limits and poses system stability concerns for the system operator.
On the other side, the basket price is impacted when facilities are compelled by gas companies to accommodate RLNG oversupply. The take-or-pay contractual terms for the three RLNG-based power plants set a minimum annual fuel offtake demand of 66% as defined in the Annual Production Plan.
RLNG offtake that is less than 66 percent of the company demand causes financial obligations for the power industry in the form of net profits differentials resulting from the diversion of the firm RLNG requirement to other industries.
Similarly, SNGPL’s non-compliance with firm RLNG orders results in liquidated damages against the gas utility for failing to supply the pledged RLNG to the power sector, as well as commercial conflicts between government-owned enterprises within the Power and Petroleum Divisions.
To avoid causing damage to the SNGPL pipeline network, the Power Division has requested permission from the CCOE to deviate from the economic merit order due to operational system constraints, resulting in mandatory consumption of RLNG.
Additionally, it proposed that the cost of changing the merit order be passed on to other gas sector users (excluding the power sector). As a result, the Power Division will submit monthly claims to SNGPL for the cost of such deviations, which will be adjusted within 30 days of submission.