India: Why Gas Power Plants Are In Total Disarray

Last Updated: 25 September 2018
Article by Piyush Joshi
  • Several gas-based power plants were built on government coaxing, but have since been stranded due to the arbitrary flip-flops in the allocation of gas for the sector by the government.
  • The Andhra Pradesh High Court had directed the government to re-examine the gas allocation policy and undertake consultations with the affected stakeholders, but the government is still to act.
  • Instead of seeing how the stranded infrastructure can be efficiently utilised and maximum benefit be extracted, there is increasing clamour to send the stranded gas based capacity through the shredder process of the Insolvency and Bankruptcy Code.

In the iconic Hindi movie satire Jane Bhi Do Yaaro, Naseeruddin Shah's character famously stated "Hamere desh mai aise khate hai - thoda khao thoda pheko, bahot maaza aata hai..tum bhi try karo" ("In our country we eat by eating some and wasting some which makes it fun. You also try it").

Unfortunately, this has now come to best describe the outlook of Indian policy on infrastructure development, which is to allow a bit of infrastructure to be built sporadically and then waste most of what is built. This policy of building some and then wasting some of what is built is evident across infrastructure sectors.

Running Out of Gas

But perhaps the most stark example of this outlook is the complete government apathy to the 27,123 MW of gas-based power generation capacity, of which 14,305 MW capacity were identified as "Stranded Gas Based Plants" since they never received any supply of domestic gas. These are stated to represent Rs 48,000 crore in debt that have been declared as NPAs or are undergoing SDR restructuring.

These stranded investments were not built on individual whims, but are a result of the government's conscious policy to attract and promote investments to develop gas-based generation on the basis of stated and declared availability of domestic natural gas, particularly on the basis of the declared availability of domestic natural gas from the KG D-6 Basin.

In fact, the government continued this policy of inviting investments to establish gas- based generation well into 2011-12, when there appears to have been realisation in some quarters of the government itself that domestic gas production had started falling. The continued investments in gas-based generation capacity is unlike most other failed investments because in this case the decision to invest was driven by explicitly stated government policy and publicly made representations on availability and allocation of domestic gas for power generation and active support by various government agencies and instrumentalities.

This push by the government for developing gas-based power plants resulted in 27,123 MW of gas based generation capacity being developed with the aim of replacing and substituting higher polluting coal fired capacity, was an attractive proposition for many investors. Added to this, the environmentally friendly gas-based power plants would require lesser quantity of water and area of land, have minimal waste production and no ash. Arbitrary changes in policy, however, have essentially driven such infrastructure developed into no-man's land of policy limbo.

Interestingly, the High Court of Andhra Pradesh passed a judgement in 2015, based on a review of the history of the development of gas-based power capacity and the arbitrary flip-flops in the allocation of gas for the power sector by the government, that the government should re-examine the gas allocation policy to provide parity to gas-based power plants across India and undertake wide-ranging consultations with the affected stakeholders in determining gas allocation policy. The court had also stated that certain aspects of the gas allocation could be held to be arbitrary and in violation of Article 14. The government is yet to implement this direction.

The situation is still not beyond redemption. Practical resolution is possible by enacting policy measures, such as by directing preference in despatch and offtake to gas-based power plants based on their ability to substitute more polluting coal fired plants, with only such coal fired plants that have installed pollution control devices such as Flue Gas Desulpharisation (FGDs) being also given priority in despatch.

How About a Common Bulk Competitive Process?

This can be supported with other policy initiatives, including providing for pooling of spot based RLNG and long-term LNG and domestic gas through a common bulk competitive process for gas procurement for gas-based power projects from gas suppliers and support in transmission tariff. Strangely, however, while such a measure has been undertaken for the fertiliser sector, which is not solely dependent on gas as a fuel, it has not been envisaged for other sectors, especially those which may be completely dependent on gas as a fuel.

Sustained policy interventions such as these are crucial for enabling the rationalisation of the per unit price of gas-based generation and revive the stranded infrastructure that was developed based on representations by the government of availability of domestic gas.

Instead of seeing how the stranded infrastructure that was developed in the first place based on the government's own policies and representations can be efficiently utilised and maximum benefit be extracted from such infrastructure, there is increasing clamour to send the stranded gas based capacity through the shredder process of the Insolvency and Bankruptcy Code (IBC). This will only waste investments and ensure the liquidation of these assets at almost scrap value since there is presently no viability in the sector.

It will only be a policy in line with Naseeruddin Shah's line of "Thoda Khao Todha Pheko" in Jaane Bhi Do Yaaro.

One can only hope that this will not be the case, and sensible policy interventions will be taken which will enable better recovery of the debt financing by the lenders, than what the IBC shredder can ever generate.

Originally published by CNBC TV18, April 2018


Piyush Joshi, partner, Clarus Law Associates, specialises in Infrastructure Project and Project Finance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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