A software for reforms in India’s natural gas sector

The government has a target to increase the share of natural gas in India’s energy basket from the current 6 percent to 15 percent by the year 2030. The rationale behind aspiring for such an ambitious target is very obvious — for one, natural gas is the most environment-friendly among fossil fuels. Recently, newspaper reports quoting from the 6th World Air Quality Report of IQ Air said that India is the third-most polluted country, only next to Pakistan and Bangladesh. Further, they said that Delhi is the most polluted capital city globally and third among major cities. Replacing some of the other fuels with natural gas can partly address this issue.

Secondly, gas is cheaper as compared to other fuels, considering the calorific value, barring periodic aberrations in global fuel prices.

The government, Petroleum and Natural Gas Regulatory Board (PNGRB) and the industry have taken numerous steps to increase gas consumption in India.  

Gas infrastructure: In the area of City Gas Distribution (CGD), with the conclusion of the 12th CGD Bidding Round, PNGRB has already covered almost the entire population of India for the development of CGD network, which 10 years back was just 15 percent. Today, the country has a total annual capacity for the import of LNG at about 50 MMT — almost doubling during the last 10 years. In the last six years, several new gas pipelines have been authorised by PNGRB, significant among them are Urja Ganga pipeline (Jagdishpur-Haldia-Bokaro-Dhamra-Paradeep-Barauni-Guwahati), North-east pipeline grid, Mumbai-Nagpur-Jharsuguda, Ennore-Tuticorin. Many of the pipelines have been completed and PNGRB has initiated many others.

Authorisation of Gas Exchange: PNGRB authorised India’s first gas trading exchange in December 2020 with a view to provide a transparent, flexible and online platform to sellers and buyers. During the three years of its existence, the exchange has achieved reasonable volumes of trade through its potential to a large extent.   

Tax arbitrage for gas: To boost gasification, the government has kept tax incidence on natural gas far lower as compared with that on liquid fuels. The government has also provided cheaper APM (Administered Pricing Mechanism) gas for domestic use and for the transport sector.  

Despite the above significant steps and incentives, we are far away from the target of pushing natural gas’ share to 15 percent in the energy mix. In fact, this percentage has reduced from 6.84 percent in 2020 to 5.75 percent in 2022. To achieve the targeted share of 15 percent by the year 2030, we would need to multiply the consumption of natural gas by 3.5 times the current level. Though obviously, it may not be feasible, but at the same time it shows the direction and speed at which the government wants gas to replace other fuels.

Increasing gas consumption

In one line, we would need to make the gas markets more vibrant, transparent and efficient so as to boost the confidence of buyers and sellers in natural gas as a viable replacement for the existing fuels. To use an analogy, gas infrastructure is akin to hardware and gas markets are like the software. Like we require both hardware as well as software to run the computer, we need to have a well-laid infrastructure duly supported by an efficient market through various regulations to encourage an increase in gas consumption. 

Market reforms in gas sector

Put an independent TSO in place: Firstly, the need is to set up an independent natural gas Transport System Operator (TSO) for facilitation and coordination of capacity booking in all common carrier natural gas pipelines on a non-discriminatory, open access basis. The government and/or PNGRB should finalise the establishment of the TSO as an independent apex body to ensure integrated operation of the gas grid, manage entire capacity booking and have supervision and control over the gas grid. One can draw a parallel from India’s power sector TSO, Grid Controller of India Limited (earlier named Power System Operator Company, or POSOCO) — a structure worth emulating in the gas sector. Incidentally, Finance Minister Nirmala Sitharaman in her Budget speech of 2021 announced to set up such a TSO.   

Gas market regulations: Further, the regulator should finalise the implementation of market-friendly regulations on uniform access code, real-time gas bulletin boards, simplified gas pipeline tariffs, standardised gas transportation agreements and gas sale-purchase agreements, unbundling gas transportation from gas marketing, amongst others.

Bring Natural Gas under GST: Another much-awaited reform is the coverage of natural gas under GST (Goods and Services Tax). Prime Minister Narendra Modi declared this as a commitment of his government in February 2021. The existing VAT regime on gas has a dual problem — firstly, the rate is very high in some of the states (thankfully, Andhra Pradesh recently reduced it from 24.5 percent to 5 percent).

Secondly, and more importantly, the rates differ significantly from state-to-state — this makes the markets inefficient, hampering the free movement of gas across India and defying the basic principle of ‘one nation-one market.’ Therefore, a buyer of natural gas needs to plan from which state he needs to buy gas not only based on the demand-supply-price considerations but also the VAT structure. With the implementation of GST, such market inefficiency would be taken care of. Even if the government implements GST rates which are revenue-neutral to it, the major issue of market inefficiency and free movement of gas would be resolved.

Terminating exclusivity period in CGD areas: As the authorisation for CGD business is granted to an entity by the ‘State’ with the exclusion of other entities in the same area, CGD is a state-created monopoly. The rationale for the creation of a monopoly in this business is that CGD is a capital-intensive business involving the creation of infrastructure. Hence the creation of duplicate infrastructure by more than one entity in the same area would not be in the interest of society.

However, it is the duty of the ‘State’ to protect the interest of consumers vis-à-vis the monopoly entity authorised by it. Consumer interest can be protected either by: (i) Control on prices of monopoly, or (ii) Ending the monopoly status after a reasonable period. The PNGRB Act adopts the model (ii) above and it does not empower PNGRB to control the prices charged by the CGD entity, but provides for ending the monopoly privilege of the CGD entity after the expiry of the marketing exclusivity period.

PNGRB has notified regulations for making a process for declaring a CGD network as a common carrier twice, and on both the occasions, the regulations were challenged in courts. While PNGRB needs to finalise the regulations detailing the process of terminating the exclusivity of the CGD entities, the government also needs to intervene as it makes available subsidised gas to CGD companies for CNG and PNG domestic connections.

Encouraging the gas exchange: The gas exchange provides the buyers and sellers easy access to a competitive gas market with visible gas price benchmarks, flexible procurement terms with a secure and transparent payment system. An electronic trading platform of the gas exchange discovers natural gas prices for both R-LNG and domestically produced gas via trading under standard contracts.

Though trading volumes on the exchange have started to increase, there still exist significant barriers that require a sustained policy and regulatory support to create a vibrant gas trading market to develop a natural gas price index based on local market buy and sell conditions. 

Gas-fuelled power plants: The government’s emphasis on solar and wind power has created imbalances in the availability of power across different time-zones during the day. To balance the power demand and maintain power supply throughout the day, gas-fuelled power plants can be a good solution, as their start-up time is minimal. However, there remain various regulatory and commercial issues impeding the production of balancing power from gas-fired power plants. The power and gas industries need to resolve the issues along with regulators.

Support to Bio-gas: Another area which requires more government support is the development of the Bio-gas sector. Bio-gas is produced from waste, hence there is no cost of raw material. These plants are typically labour-intensive, hence, they create a large number of unskilled/semi-skilled jobs in villages. Since they require low capital, they can be initiated by small entrepreneurs, leading to opportunities for new entrepreneurs. Since the feed is agro/forest/municipal waste, it avoids the burning of waste, thereby combating pollution, and it generates energy indigenously, saving forex.

Another similar government initiative for the production of ethanol from sugarcane and other crops for blending with petrol and diesel has done remarkably well. The bio-gas industry is still struggling despite the government’s support. The government would do well in contractually ensuring the purchase of bio-bas from such plants at a reasonable price by OMCs and CGD companies.

The author is a former Chairman of PNGRB and a former Chairman & Managing Director (CMD) of Oil & Natural Gas Corporation (ONGC).

Disclaimer: This is an Op-ed article. The opinions expressed in this article are the author's own. PSU Watch does not endorse nor support views, opinions or conclusions drawn in this post.

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