Gas tender guidelines could prevent pipeline exodus

Proposed changes to gas-fired power plant tender rules could head off concerns that thermal power plants will flee from natural gas pipelines systems in Brazil.

A number of thermal power plants in Brazil are considering disconnecting from pipeline gas supplies and connecting directly to gas production wells and LNG terminals, citing problems with how they are charged for gas pipeline capacity. The expiration of subsidized gas contracts under the government's priority thermal program (PPT), which will unwind from 2019 through 2028, may also be driving those discussions.

While some pipeline operators said it is unlikely gas-fired power plants will leave the pipeline network, companies are using the threat to negotiate better terms for new contracts. Thermal plant operators say it is unfair to have to pay pipeline transportation and distribution tariffs when some of them are only drawing gas intermittently since they are dispatched at times of peak electricity demand.

Some gas market participants are suggesting more flexibility in how power plant customers are charged for pipeline capacity in an effort to avoid losing customers that account for as much as 40pc of pipeline gas demand. This flexibility could include allowing these plants to pay lower rates when not dispatched and paying more when they are called to generate. Any such changes would need to apply to all plants in the same category and cannot be determined bilaterally between power plant companies and pipeline operators.

It would be important for thermal power tenders to stipulate rules on the type of gas supply allowed, a gas pipeline sector market participant said. Brazilian energy research bureau (Epe) could decide that only domestically produced natural gas delivered via pipelines could be used in certain tenders, the source added.

The power plant operators' threats to get gas through other means sounds unrealistic to some in the market. Such moves would also be illegal, according to Brazilian gas distribution association's (Abegas) strategy and market director Marcelo Mendonca, and hamper development of a natural gas-reliant industry.

But companies disengaging from the pipeline system will drive up costs for remaining customers. In a study shared with oil and gas regulator ANP, pipeline operator TAG said transportation tariffs could rise by as much as 39pc when the legacy power plant gas contracts signed in previous years come to an end in the next few years.

By Rebecca Gompertz