NTPC said to seek end to imported-gas supply deal

New Delhi: State-run NTPC Ltd., India’s biggest power producer, is seeking to terminate a long-term supply contract for imported natural gas as it says the fuel is too expensive to be used in power generation, according to people with knowledge of the situation.

The New Delhi-based electricity generator has written to state-run GAIL India Ltd., which supplies the fuel sourced overseas by its affiliate Petronet LNG Ltd., saying it’s become impossible to execute the contract as the company is unable to sell the power it generates from the fuel, officials from all three companies said who asked not to be identified, citing policy. NTPC signed a 20-year contract with GAIL in 2009 to buy 2 million metric standard cubic meters a day of gas, the people said.

The contract dispute highlights the country’s difficulty switching from coal to natural gas for power generation, undermining Prime Minister Narendra Modi’s efforts to cut carbon emissions and promote clean energy. The country’s gas-fired plants, with nearly 25 gigawatts of generation capacity, are running at less than a quarter of their potential. Transportation costs and taxes have countered the 27% decline in spot LNG prices in the past year.

“In India’s power sector, gas will find it difficult to weaken the dominance of coal in the next few years,” said Abhishek Kumar, an analyst at Interfax Energy’s Global Gas Analytics in London. “Regasified LNG is still not cost-competitive with coal, after local transportation costs and taxes are taken into account. India needs to improve its gas-pipeline infrastructure substantially to boost the popularity of gas in the power sector.”

NTPC has been taking less than 10% of the contracted volume, forcing GAIL to levy so-called take-or-pay penalty charges, the officials said. NTPC and GAIL declined to comment. Petronet didn’t respond to requests for comment.

The cost of power generated from GAIL’s gas is about Rs7 per kilowatt hour, according to an NTPC official. That’s more than double Rs3.18 average price at which NTPC sold power in the year to 31 March, and more than three times the current national average spot price. Indian regulations require electricity retailers to buy power from the cheapest sources available, which makes it difficult for a generator to sell more-expensive electricity.

NTPC’s combined 4 gigawatts of gas-fired generation account for about 9% of its total capacity. Its seven gas plants ran at 25% of their capacity in the year ended 31 March, compared with 33% in the prior year, the company said in May.