Over the next 10 years or more, city gas distribution (CGD) is set to become one of the upcoming areas where huge investments and activity is expected. Since this will be a huge task, distribution network needs to be laid all over the country, keeping in mind safety standards and profitability of the companies investing in the sector. A lot has been done in the past for this sector and a lot still needs to be done…
At the recent CGD in India 2022 conference, Tarun Kapoor, Chairman, Energy Transition Advisory Committee shared his views about the growth of CGD sector in India, the progress of infrastructure development, various opportunities as well as challenges facing the CGD sector. Excerpts…
Sectoral performance review
Upon drawing inference from the world average, India is underperforming in terms of natural gas consumption. With ambitious plans of natural gas infrastructure expansion in place, the natural gas consumption in the country must go up. The government has already made announcements of transitioning to a gas-based economy by increasing the share of natural gas in the energy mix from 6 per cent in 2019 to 15 per cent by 2030. Compared to liquified petroleum gas (LPG) or the cooking requirements in the country, there are 300 million LPG connections, but a lot needs to be done to reach more households that have been left out. Moreover, the piped natural gas (PNG) connections are merely 8.3 – 8.4 million. Despite the many efforts put in by CGD companies it is believed that this segment is not profitable enough, and the domestic sector has seen little progress in this sector. Further, administered price mechanism (APM) gas is only available for CNG and domestic market. Nonetheless, numerous opportunities are there for making more discoveries in the country with resources available.
Roadblocks facing the CGD sector
a) Pricing mechanism
One major setback that the sector faces is in terms of pricing. Even amid continuous hike in international price of natural gas, India still relies on imports for more than 50 per cent of its natural gas requirements. Another key issue faced by the country is in terms of gas supply. It is imperative to note that maintaining gas supply at a reasonable price is crucial, given the fact that the Indian market is price sensitive. For a country that imports 50 per cent of its gas supplies, price to the customer is important. The APM is in place across the country and some gas is available under the same, wherein the prices are determined based on a formula. Under APM gas allocation, CGD segment is a priority, followed by fertiliser and power as the main consumers. In the coming years, the entire gas allocation is expected l shift to CGD. The production is also limited and is not increasing. As the CGD sector expands, power sectors allocation will keep reducing. Along with a lot of accounting issues facing the sector, another challenge is to get most of the domestic gas into the CGD sector. Most of the domestic gas being produced currently has a cap and is much cheaper. Further, when it comes to the power sector, it has multiple sources of supplying power and distribution, making companies choose the cheapest source of energy. In such a scenario, the end customers have a fixed tariff. Therefore, if the gas price goes up, the price for the customer cannot be increased, making it important for gas to be available at a stable price. This can happen only if we have long-term international contracts to ensure continuous gas supply at a stable price. Secondly, more investments are needed to enhance domestic production in the sector.
b) Safety standards
With multiple agencies involved, there is also a debate around supervision of safety standards. The government has made efforts for making cheap gas available to CGD companies, but the government has not fixed any formula or any mechanism to control the price at which the CGD companies can sell. Therefore, the CGD companies are free to charge anything for PNG and CNG. To address such issues, CGD companies should have some margins to make huge investments required in the sector. Further, with regards to regulation, there is an exclusivity issue. Marketing exclusivity is available to the CGD companies for a fixed period while infrastructure exclusivity is there for 25 years. The marketing exclusivity for the older areas is already over, but new players are not coming because there is another regulation which is required. Thus, infrastructure exclusivity remains for a much longer time.
c) Network expansion
Petroleum and Natural Gas Regulatory Board (PNGRB) plays a key role for overall growth of CGD sector by bidding rounds and allocating areas, formulating regulations, monitoring, dispute settlements as well as setting safety standards. The 11th bidding round has been successful and most of the country has been covered, with allocation in rural areas as well, where the population is sparse and wherein network provision and expansion may not be very economical. The idea is to cover most areas, wherever some sale is possible so as to gradually increase the number of CGD companies. There will be a need to start off with anchor customers, finally reaching out to areas where there is concentration of population, without leaving domestic customers out of loop. PNGRB must also focus on achieving more than the set targets and plans. Constant monitoring at the state government level is another segment that needs attention. Also, right of use is probably the single largest issue involved when it comes to implementation. At some places, land is acquired for some facilities but when land is needed in a particular location, too much shifting is not viable. In every state, a nodal department should be there. In most states, the civil supplies department is the nodal department, and several states do hold meetings to sort out various ground level issues. To impress knowledge about dominant fuel market, customers, or coverage upon key players in the sector, constant engagement with relevant people is crucial.
In future, the sector needs to focus on real coverage and actual availability that CGD networks are ensuring across states. Even in cities like Delhi, the number of households covered is not enough, indicating that a lot of work needs to be done, especially for the PNG segment.
CNG segment also needs a lot of efforts and growth, with some investment upfront. City gas entities must ensure that CNG is made available across their areas, selecting routes for long distance travel as well so that the vehicle owners have confidence to travel in case, they own CNG vehicles. With PNG supply issues in defence areas resolved, the Urban Affairs Ministry has also issued lot of advisories, but some states have not been able to come up with up-to-the-mark policy guidelines. The issue of obtaining permissions, land, bidding criteria as well as NOC requirements persist when it comes to municipal bodies.
Moreover, many operators fear losing money in domestic connections. For instance, an expense Rs 15,000 on an average per connection coupled with charging Rs 5,000 per connection instils such fear among operators. Low PNG price and consumption is another such factor. Thus, CNG business is more profitable because due to the presence of volumes. When it comes to PNG, it is also difficult to lay pipelines across various households. Operators will have to realise that the seriousness in the whole society or the area will come only if every household has a PNG connection. Price volatility is another aspect that needs to be taken care of and a mechanism is needed so international volatility can be absorbed through an aggregation model. In some states, taxation issues are prevalent due to the presence of high value-added tax. Environmental laws need to be enforced very strongly in cities, so that the industry shifts to natural gas, wherein coal is being used. Lastly, APM gas pricing should be taken care of, taking into consideration international price mechanisms and profitability for the companies, and linkages in terms of costs of production are needed to avoid companies from incurring losses.
When it comes to effective implementation in terms of bidding, the companies have set targets, although they need to be revised and worked upon. When it comes to benchmarks of safety and continuous monitoring, a lot needs to be done, along with a focus on skilled manpower for development in the sector. Uniformity in the charges across municipal corporations in various states is also needed to curb shocks to companies entering newer areas. Also, appropriate mechanisms should be in place to further convince people in shifting from LPG to better sources of fuel. In some areas, the number of CNG vehicles is not adequate and there is a need to have enough CNG vehicles popularised and available in the market.
Mr Tarun Kapoor is the Chairman of Energy Transition Advisory Committee and Former Secretary to the Government of India in the MoPNG. He is a member of the Indian Administrative service with over 33 years’ experience at the state and national level. Before taking over as Secretary, MoPNG, Mr Tarun Kapoor was posted as Vice Chairman, DDA. He has worked as Additional Chief Secretary in Government of Himachal Pradesh looking after various departments from time to time like Power, Environment and Forests, Food and Civil Supplies, Excise, PWD etc. He has also worked as Joint Secretary in the Ministry of New and Renewable Energy looking after National Solar Mission for five years. He also worked in Satluj Jal Vidyut Nigam Ltd, a CPSE in the area of hydro power.