Overview of India’s CGD Sector

There has been tremendous amount of momentum in the downstream city gas distribution (CGD) business, with most of it aimed at improving the availability of natural gas to the transport sector (as compressed natural gas (CNG)) and domestic, industrial and commercial sectors (as piped natural gas (PNG)). The CGD sector alone utilises about a fifth of the country’s annual consumption of natural gas which is expected to grow many folds with tremendous amount of capex being carried out in the CGD sector for development of infrastructure in the recently awarded geographical areas (GAs) by both private and state-owned CGD entities. It is thus an important part of the government’s envisioned goal of a gas-based economy with share of natural gas in the primary energy mix increasing to 15 per cent by 2030. CGD sector’s development is pivotal in providing clean energy to the nation and moving towards target of achieving net zero by 2070.

At present, CGD sector consumes approximately 35 mmscmd of natural gas, with approximately 40 per cent of this gas consisting of imported regasified liquefied natural gas (RLNG) which is consumed by the commercial and industrial segments. After completion of 11A CGD bidding round by Petroleum and Natural Gas Regulatory Board (PNGRB), 295 GAs will cover about 98 per cent of the population and about 88 per cent of total geographical area of the country spread over nearly 630 districts in 28 states/ UTs. Further, India is set to expand India’s natural gas grid to 34,500 km by adding another 17,000 km gas pipeline and CNG stations are going to increase three times by 2025. India’s gas regulator PNGRB has granted licenses which will help sustain higher city gas volumes over the next decade.

Role of Gas Exchanges in the CGD growth trajectory

With CGD gaining such prominence, it is imperative to design a plan for sourcing gas at competitive prices in order to improve the economic viability of the infrastructure being developed at such massive scale across the country. This role can be fulfilled by Gas Exchanges which permit their participants to procure gas at optimal prices, along with endowing them the flexibility of delivery-based trade in six different contracts such as day-ahead, daily, weekday, weekly, fortnightly and monthly, under which the trade can be executed for up to six consecutive months. The weekday contracts are especially important for the commercial and industrial CGD consumers as their working week is between Monday and Friday. Thus, the fixed volume can be sourced in weekday contract, while the weekend flexible volume requirements can be met through day-ahead and daily contracts. Any additional requirements can be bought through the single day contracts as well.

It is widely acknowledged that Gas Exchanges stimulate healthy competition by creating a level playing field for all participants. They also ensure transparency through uniform priced, double-sided open auction processes which make buy and sell bids, prices, and quantities visible to all participants. This is done without divulging the identity of the bidders. The outcome of this auction is the discovery of a uniform clearing price for each type of contract, that when discovered on a particular delivery point, is applicable to all participants uniformly. By virtue of this system, a successful trade allows the buyer to procure gas at a price equivalent to – or lower than – their bid price. The main objective of such trading mechanisms is to ensure improved competitiveness.

On Gas Exchanges, natural gas is traded through delivery points where members put forward their best price bids and volumes that they intend to purchase or sell. At present, Gas Exchange in India trades at multiple delivery points, such as – Dahej, Hazira, Ankot, Mhaskal, Bhadhbhut, Dabhol, KG Basin, Gadimoga, Suvali. It covers six regional gas hubs, namely, Western Hub, Southern Hub, Eastern Hub, Central Hub, Northern Hub, and North Eastern Hub across India. When market participants are physically linked to these delivery points through the national gas grid, they can benefit with the physical delivery of their natural gas as per their requirements from these locations.

PNGRB recently brought out amendments in Natural Gas Tariff, Authorisation and Capacity Regulations. These amendments will pave the pathway for implementation of unified tariff regulations which will be effective from April 1, 2023. To address the settlement issues for implementation of unified tariff, industry committee has been constituted with an objective of providing access of natural gas to far flung areas at competitive and affordable rates.

These amendments are aimed at simplifying the implementation of unified tariff, by adopting a step-wise process where an entity level Integrated natural gas pipeline tariff have been introduced which will act as building block towards normalization of multiple pipeline tariffs, required to be paid currently. To protect the overall interest of consumers in different regions number of unified tariff zones have been increased from two to three.

Unified pipeline tariff will eventually enable any consumer of natural gas on pipeline to pay single pipeline tariff irrespective of location of gas source. This further improves the competitiveness in gas sourcing along with optimal price discovery. Furthermore, with a healthy mix of suppliers on these exchanges, competitiveness on supply is further enhanced. Exchange also provides opportunities to source domestic ceiling price gas (HPHT gas).

These Exchanges facilitate the trade delivery – on a non-transferrable basis – for volumes as low as 50 MMBtu, with no cap on the upper limit. On these platforms, gas flows through the existing pipelines which utilise the standard metering systems. As these exchanges accept bids in Rs per mmBtu instead of $ per mmBtu, the risk of currency fluctuations that exist in the conventional bilateral pricing contracts is completely alleviated.

The observation made with the pricing on the Gas Exchanges is that they are often significantly lower than spot prices in the country. The prevailing Gas Supply Agreements (“GSA”) permit a flexibility to procure a certain percentage of gas from competitive sources, and gas exchanges fit within this description.

Thus, Gas Exchanges provide a holistic solution for the buying and selling of natural gas, and manage the responsibilities of risk management, clearing, delivery and ensuring payment security for their members. Gas Exchanges also act as a counterpart to all trades occurring on the respective platforms and provide immense flexibility and optimal pricing to their members so as to form a benchmark price index for natural gas in India. By doing so, Gas Exchanges will act as a catalyst for natural gas procurement through CGD, in turn, boosting its growth and aiding realisation of the Government’s vision of increasing the share of this fuel in the country’s overall energy mix to 15 per cent by 2030.

Due to the numerous benefits offered by Exchange in terms of flexibility, cost optimisation, ability to manage demand diversity/ seasonality/ fluctuations, availability of gas from various sources/ sellers/ delivery points. CGD entities in India are active participants on Gas Exchanges reaping benefits of a transparent platform which in turn is getting passed to the masses in terms of CGD customers of India.

By Deepak Mehta, Head of Business Development, IGX