Government to Supply Local Gas to RLNG Power Plants at Rs2,000/MMBtu: Positive for Hubco

What the new gas price changed for RLNG power plants

The government has decided to supply local natural gas to power plants that typically run on Re-gasified Liquefied Natural Gas (RLNG) at a rate of Rs2,000 per Million British Thermal Units (MMBtu). This move comes amidst a shortage of imported LNG, primarily due to the US-Iran conflict, which has led to Qatar suspending its LNG supplies to Pakistan. Previously, these RLNG-based power plants were paying Rs3,500 per MMBtu for imported gas. While the new rate is higher than the standard domestic gas price of Rs1,245 per MMBtu, it represents a substantial reduction from the imported RLNG cost. A formal summary for this decision is currently awaiting approval.

Industry representatives have expressed some frustration, as they had hoped for an even lower price, closer to the domestic gas rate, which would have significantly reduced electricity tariffs. However, the government's stance is that charging the full imported LNG price of Rs3,500 per MMBtu for local gas would be too burdensome, and the Rs2,000 per MMBtu rate strikes a balance to ensure energy supply at a more reasonable cost during the ongoing shortage.

Here is a comparison of the gas prices:

Why the gas price cut matters for power generation stocks

The decision to supply local gas at a reduced rate directly impacts the fuel costs for power generation companies that operate RLNG-based plants. Fuel is a major operating expense for thermal power producers, and a significant reduction in this cost can improve their profit margins. While the measure is temporary, intended to address the current LNG shortage, it offers a period of relief for these plants by lowering their input costs. For companies with substantial RLNG-fired capacity, this could translate into better earnings during the period of cheaper gas supply.

Which power stocks, and why

Among the listed power generation companies, Hub Power Company (HUBC) is notably impacted. Hubco operates an RLNG-based power plant (Nara Power Plant), which previously relied on imported RLNG. With the shift to local gas at Rs2,000 per MMBtu, down from Rs3,500 per MMBtu, Hubco's fuel costs for this specific plant are expected to decrease significantly. This reduction in input costs is a positive development for the company's operational profitability, even if it is a short-term measure to mitigate the impact of the LNG supply disruption.

What to watch for gas supply and power tariffs

Investors should monitor the formal approval process for this gas supply decision, as well as any further updates on the global LNG market and the US-Iran conflict, which could affect the duration of the current LNG shortage. Additionally, watch for announcements from the National Electric Power Regulatory Authority (NEPRA) regarding how this change in fuel cost will be reflected in the overall power tariff determinations. While lower fuel costs generally benefit power producers, the ultimate impact on their earnings will also depend on how these savings are treated in the regulatory framework and whether they lead to lower consumer tariffs or improved margins for the plants.