Utilities: Government gets gas IPPs under S/11

15 Apr 2024 , 10:22 AM

Ministry of Power (MoP) has directed gas IPPs to operate under S/11 (mandatory working, when needed), until June 30th from May 1st 2024. This should de-risk the grid’s reliance on coal units to meet peak demand, and generate incremental power (~25GW capacity operates at 14% PLF) at reasonable rates if gas prices remain weak; PLFs can rise, thereby, benefiting Torrent (1.5GW merchant capacity), GAIL, PLNG, GSPL etc. (gas import / trading).

Gas IPPs under S/11:

The MoP has issued directives to get gas IPPs under S/11 of the Electricity Act; the objective seems to be -1) tap stranded units to meet demand; 2) de-risk grid from reliance on coal/lignite IPPs, during non-solar period. India has 25GW of gas IPPs, of which 14GW is owned by PSUs (have LT PPAs), but for commercial reasons operates at low PLF; 3GW of 11GW capacity privately owned is open. As per directives, central/state IPPs can sell surplus power (if any) at regulated rates on the exchanges; private IPPs with open capacity, during exchange/bi-lateral sales will realise 120% of energy charge (determined by CEA on a periodic basis).

Positive step for sector:

Analysts of IIFL Securities think this is a positive step; it will gradually improve PLFs of gas IPPs, de-risk grid from coal generation during nonsolar hours, etc, and will improve commercials of stranded IPPs (Torrent1.5GW). For example, if S/11 is extended for FY25, then Torrent’s 1.5GW capacity, at 35% PLF, current gas prices, can add 12-13% to FY25 PBT; analysts of IIFL Securities note, until 15th July 2024, only ~800MW capacity will be under S/11, as 770MW capacity is tied up with NVVN. However the street may have been anticipating it to earn higher merchant profits; and to that extent, weakness in stock may be a good entry point.

GAIL, PLNG other beneficiaries:

The scheme if extended for FY25, apart from gas IPPs, can also benefit gas importing / trading companies; assuming PLFs to increase to 30% (vs 14% in FY24), India would need to import additional ~5m MT LNG (25% more); GAIL (transmission + trading), PLNG (imports/trade) can materially gain from such imports; for every 1m MT incremental LNG imported, GAIL/PLNG may see 5-10% EPS upgrade; IEX may also gain from higher exchange volumes.

Key highlights:

1. Govt. imposes Section 11 of the Electricity Act on Gas based power plants (with + without PPAs) from 01st May 2024 to 30th June 2024
2. Grid India to intimate generators for power requirements 14 days in advance and guarantee 50% offtake
3. Power would be made available to existing PPA holders before supplying the same on exchanges/ Grid India
4. Tariff for plants with PPAs shall be determined by the appropriate commission
5. Tariff for plants without PPAs shall be determined by a committee on a mutually agreed basis and shall be reviewed every 15 days.
6. Tariff for power supplied to Grid India/ exchanges shall be capped at 120% of ECR plus ISTS charges
7. LPS rules shall be applicable to the arrangements and payments shall be made to generators on a weekly basis.