Is it time to fire up furnace oil-based power plants?

Published October 17, 2021
Smoke and steam billow from Belchatow Power Station, Europe's largest coal-fired power plant, near Belchatow, Poland. Picture taken November 28, 2018. — Reuters
Smoke and steam billow from Belchatow Power Station, Europe's largest coal-fired power plant, near Belchatow, Poland. Picture taken November 28, 2018. — Reuters

KARACHI: With the onset of winter amid skyrocketing gas and coal prices, energy sector analysts have suggested that the economic merit order should be done away with for three months to optimise the use of imported gas and save foreign exchange.

“The government should suspend the merit order for three months. Not doing so will result in a waste of foreign exchange and also create gas shortages for the export-oriented industries as well as fertiliser and domestic sectors,” said Wajeeha Saajid, energy analyst at Optimus Capital Management, a stock brokerage and financial advisory company.

Power plants are despatched based on their efficiencies, especially in terms of their fuel costs, to ensure the least cost of electricity generation.

According to the National Trans­mission and Despatch Company, gas-fired power plants generated almost one-third of total electricity back in November 2020. Using the same fuel mix in November 2021 will increase the per-unit cost of electricity significantly given the all-time high gas prices.

“Instead of burning expensive gas to produce electricity, the government should fire up furnace oil-based power plants to make the unit price affordable. It should use long-term gas supplies to sustain other sectors of the economy,” she said.

Pakistan receives the bulk of its imported gas on the basis of long-term contracts. The country imports 500 million cubic feet per day (mmcfd) of gas under its 2016 long-term contract with Qatar every month.

It receives 100mmcfd per month from Gunvor and Eni each. It will also start importing 200mmcfd on a monthly basis under the second long-term contract with Qatar from November.

Although spot purchases in the prevailing global energy market cost the nation an arm and a leg, the weighted average price of the total imports, including long-term cargoes, still make gas-based power plants rank high on the economic merit order.

“Using averages makes no sense in this case. The unit cost of electricity produced by furnace oil is cheaper in the present market conditions,” she said.

In other words, the comparison should be between the spot prices of LNG and furnace oil, not the weighted average LNG price (for both long term and spot) and furnace oil.

Unit economics

In the existing energy market, $19 per million British thermal units (mmBtu) is the maximum landed price of imported gas at which it is feasible to burn the fuel for electricity generation, says Ms Saajid. Above that level, using furnace oil to make electricity makes more economic sense.

Assuming the going rate in the international spot market is $33 per mmBtu, the eventual cost of electricity clocks in at Rs38.13 per kWh. However, the cost of electricity comes to Rs20.34 per kWh at the current rate of $490 per tonne of furnace oil, she says.

The last spot delivery of LNG was at $17.84 towards the end of September. There was zero response from global gas suppliers as Pakistan LNG Ltd’s tender for eight cargo deliveries for December and January received no bids.

Published in Dawn, October 17th, 2021

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