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EDITORIAL: There is a debate brewing on gas becoming dearer during winters and violation of the Economic Merit Order (EMO) in power generation. These are legitimate concerns that should be analyzed in their proper context and addressed. The criteria of the EMO needs to be evaluated especially in times of escalating fuels, particularly imported LNG, costs. As pointed out aptly in the latest State of Industry Report by electric power regulator, Nepra (National Electric Power Regulatory Authority), the EMO is prepared based on fuel cost and variable O&M (Operation and Maintenance) while other factors like plant efficiency, degradation factor, plant location relative to load centre, grid constraints and others are not considered in it. This essentially makes, in some case, the EMO cost inefficient in a true economic sense. The merit order is based on the average cost of imported fuel (such as LNG) which can be misleading when prices are ballooning or erratic.

The biggest issue for merit violation is the grid constraints, i.e., it might not be technically possible to transmit load from the plant high in merit order to load centres. The problem is again and again faced in three RLNG-based government-owned plants. These IPPs (Independent Power Producers) were installed in Punjab near the load centres. However, in its haste to commission these plants, the then Punjab government connected some of these to 500KVA mainline instead of having smaller connecting lines to the load centre. These plants are high on merit order. However, on 500KVA lines, the current moves from north to south usually; and lower merit order inefficient (FO-based) plants must run to supply load centres in centre and north. That is one-way how merit is violated. Who is to blame for this? Well, at the time of installation, the fault lay with the PML-N government where optics of having early operational plants led to suboptimal decision on saving time and cost on grid connections. But given three years in power, if these grid constraints are still there, PTI must share the blame. The important element is to focus on the grid constraints and nudge the government to remove those.

There is another problem in the merit order. It is based on the fuel cost charged when it should be on the opportunity cost of that fuel if it is priced too low. Locally-produced gas price is significantly lower than imported RLNG. Sindh has the first right to use the gas produced within the province with the proviso that allocations at the time of passage of the 18th Constitutional Amendment ‘shall’ remain intact. The old inefficient power plants on gas in Sindh are at higher merit order than a few other thermally better efficiency plants as their fuel price is low. And when the domestic gas is not available, these are run only on LNG or not run at all. The merit is violated in the process. Here revisiting merit order determination might be better.

There’s another issue: in the case of gas (including LNG) merit order is computed based on the need of the power sector. There is a gas merit order first and that determines the fuel allocation. To the remaining power plants LNG is being supplied and the need of these plants may be higher than what is available even if the LNG terminals are operating at full capacity. The merit orders should not be made in isolation, and gas should be prioritized based on efficient users. Lately, in days of multi-year high fuel prices, another problem is emerging. The merit order is computed based on the average cost of the fuel, not the marginal cost and the cost is determined on the past period price while the existing price could be much higher. This renders the merit order cost inefficient in retrospect. Currently, LNG prices are relatively higher than those of other fuels. For instance, at $250/ton coal and $450/ton furnace oil, the fuel costs of power generation from coal and FO are at 40 and 45 percent efficiency, respectively, which is less than producing at 60 percent LNG plants if the cost of LNG is at $20/mmbtu. The government should not decide the merit order in such circumstances based on term pricing and trailing prices. Supply of adequate quantity of gas in winters for domestic use is not possible as the production of local gas is not sufficient. The pipeline supply is accessible to a one-third of households. These should not be supplied imported gas at a fraction of the cost. And the new connections should not be allowed as it takes decades to recover the cost of laying gas pipelines. It is about time the government implemented Weighted Average Cost of gas and re-imposed a moratorium on new gas connections till such time as sizeable gas reserves are found again.

Copyright Business Recorder, 2021

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