Meeting peak power demand through gas-based plants requires dynamic domestic resource allocation

With the summer sun blazing in all glory, the annual concern of meeting India’s peak power demand has emerged again. Rapid urbanisation, increasing industrial activity and erratic weather patterns are raising the peak power demand each year. This year, it is expected to touch 260 gigawatts (GW), 7% more than the 243GW recorded in the summer of 2023. By 2030, peak power demand could touch 350GW.

For ensuring uninterrupted supply, the central government is taking all measures possible. This year, the government has asked all gas-based power plants to remain fully operational during the crunch period of 1 May to 30 June 2024 by invoking Section 11 of the Electricity Act, 2023. Although resorting to natural gas is not ideal, our analysis finds that allocating more domestic gas to the power sector during the summer can make the plan economically advantageous for the country.

Meeting peak power demand

The Institute for Energy Economics and Financial Analysis (IEEFA) firmly believes that increasing renewable energy capacity, enhancing energy efficiency and developing energy storage are key to meeting the peak power demand using sustainable means. While policymakers continue to take steps on all three fronts, they are also resorting to imported fossil fuels to tackle immediate demand spikes.

Highlighting the government’s early action to prevent a supply crisis was its October 2023 decision to direct coal-fired plants to undertake a 6% blending of imported coal to meet the domestic coal shortage. The government also asked all imported coal-based power plants to remain operational and make full capacity available for generation till June 2024, later extended to October 2024.

Learnings from past procurement of gas-based power

This year is not the first time the government has depended on gas-based power to meet peak demand. Last year, the government floated minimum offtake guarantee tenders for procuring 4GW of gas-based power for the 21-day crunch period from April to May 2023 and the 20-day crunch period from October to November 2023. This was apart from the 5GW power supply sought from NTPC’s gas-based power plants.

For the April 2023 tender, the lowest bid was by Torrent Power to supply electricity at Rs13.7 per unit for 920 megawatts (MW) with a minimum guaranteed offtake of 278 million units (MUs). However, Torrent ended up supplying 1,038MUs from its plants in Dahej and Surat, potentially costing Rs14.22 billion.

Before invoking Section 11 for gas-based power plants in April 2024, the government had floated a similar tender for 16 March to 30 October 2024. Torrent was again the lowest bidder, committing 770 megawatts (MW) with a minimum guaranteed offtake of 388MUs until June 2024. Torrent’s expected minimum revenue of Rs4.4 billion translates to a per unit electricity cost of Rs11.34.

While the discovered prices from these tenders were high, gas-based electricity tariffs can come down with tweaks to the current policy on domestic gas allocation. Our calculations finds that tariffs can come down to Rs5.83 per unit by increasing the allocation of domestic gas (currently costing US$6.5 per million metric British thermal units (mmBTu)) to the power sector, such as to allow 50% blending with LNG (ongoing spot price of US$10.225 per mmBtu).

Diminishing role of gas

To facilitate the uptake of expensive imported coal and gas-based power, the government initiated the high-price day ahead market (HP-DAM) in March 2023, which allowed for a high tariff of Rs20 per unit. An analysis of the HP-DAM activity during the April-May 2023 crunch period shows that the market clearing price (MCP) was lower than the tendered gas-based power price on which minimum offtake was provided on almost all days, apart from 17 April 2023 (MCP touched Rs20 per unit) and 13 May 2023 (MCP was Rs13.77 per unit). Similarly for the October to November period, trade only occurred for a ten day period from 10 October 2024 with total volume at 15.8MUs and an average price of Rs16.95 per unit.

Gas is also fast losing competitiveness to renewable energy. Firm and dispatchable renewable energy (FDRE) tenders, to ensure 24x7 supply, are helping overcome the variable nature of solar and wind power.

The latest discovered tariff for FDRE is already down to Rs4.64 per unit, as quoted by ABC Cleantech in the most recent tender floated by NTPC. Commendably, policymakers are accelerating the issuance of such tenders. As a result, gas-based power plants seem to have a limited role in meeting peak demand, even in the short term.

For the short-term, providing gas-based power plants with more domestic gas and reducing their dependence on costly LNG can not only bring down power tariffs but also be financially beneficial to all stakeholders. Going forward, even if gas-based power is required for short periods as peaking power, it would be better to allocate higher domestic gas for them during such times to ensure not just continuous power supply but also affordability. 

This article was first published on economictimes.com.