By Rajesh Kumar Mediratta
India’s economic growth aspirations rely heavily on the availability of adequate energy at affordable rates and through sustainable means. Although India’s per capita consumption of energy is about a third of the global average, this is set to change. As per the International Energy Agency’s (IEA) India 2020 Energy Policy Review, India’ energy demand is expected to double by 2040. The estimate is based on factors such as industrial and economic growth, thrust on manufacturing and self-reliance, electric mobility, urbanisation among others, aptly supported by enabling policy and regulators drivers.
In India, the share of gas in the overall energy mix has been growing steadily to reach 6% as of today. Despite strong latent demand for Natural gas in India, challenges in infrastructure and lack of a regulatory framework have constrained the country’s gas consumption over the past decade, at about 150 mmscmd.
India’s gas development calls for a market-based mechanism for gas pricing and allocation that can provide competitive price signals to the market. A market-based mechanism is possible through a transparent and neutral natural gas trading platform like the Indian Gas Exchange.
Improved Market Efficiency: Creation of a national grid has been supported by commercial contracts wherein huge volumes of electricity are transferred across the country. The exchanges have aided in better utilisation of national resources, reduced unmet energy and consequent economic losses and improved energy security of the nation. Short term exchange-based markets have been instrumental in incentivising mobilisation of resources – which India needs desperately to bridge its demand-supply gap. The exchanges are not only providing a reliable platform for trading but are also bringing in time and costs efficiencies in the market through their implicit auction mechanism.
Signals for Capacity Expansion: Exchanges drive competition across the value chain giving price signals to demand and supply sides. While transparent prices are lower, it incentivises buyers and when they are high, they lead to more production (or import) capacities. A competitive gas market will enhance overall efficiencies. It will bring in greater transparency in pricing and be more reflective of the true equilibrium between the demand and supply. Exchanges also help augment investments in upstream and downstream infrastructure, in the locations suitable for the end customers, thus supporting the overall ambition of increasing the share of gas in the energy mix. All of these lead to optimal infrastructure for supply of gas to customers keeping overall marginal cost uniform across network.
Cost reduction for Buyers: Exchanges also provide flexibility to buyers to go to market when they need it. Long term take-or-pay contracts and bundled contracts are rigid and do not offer buyers adequate flexibility. Current volatility across energy chain due to renewables, electric mobility and potential of hydrogen to be next big source of energy, all demand aggregators (like CGDs) find difficult to tie up GSAs.
Payment Security for Seller: In addition, exchanges also offer a high level of payment security since the exchange acts as a counter party. Sellers are able to reduce their costs because of timely payments and increases supply and lowering the prices for customers.
Signals for Infrastructure Capacity Additions: Competition works wonders for any sector and reduces the need for regulation. We are witness to many such transformations – be it transport, e-commerce, airline industry or telecommunication or electricity. Power Exchanges have brought huge benefits in terms of – private sector capacity addition. Over last 10 years, private sector generation capacity has gone up from significantly. The transmission capacity additions helped to lower congestion from 15% to 0.4% in last 7 years in power sector, thanks to clear price signals from IEX. Each sector has proven that markets and competition not only leads to industry, economic and consumer benefit but also greater wellbeing of the ecosystem.
India is making energy security, sustainability and access a priority and a liquid and well-functioning domestic gas market, as also suggested by International Energy Agency, would be a strong pillar for building gas economy in India. Well-functioning market requires the enabling regulatory framework to reducing entry/exit barriers to transactions, achieve balance between safeguarding the interests of best customers pricing, delivery expectations and sellers returns expectations. Few measures such as open access to infrastructure, an independent system operator, mechanisms to decouple transport from the marketing of gas and conducive taxation policies can help to a large extent.
The gas trading platform along with regulatory enablement will help bolster the path towards optimising the energy mix through increased adoption of natural gas on a pan India basis.
There are a few potential regulatory enablers that are required in order for India to build the market-based gas economy.
- Open Access Policy: As more industries sign up and make use of this cleaner fuel, an open access policy will help drive greater adoption.
- Independent System Operator: Given that gas trade by nature offers the scope to flout agreed upon contracts due to overdrawing or under-drawing, an overall controlling entity can help ensure that the interests of all participants are protected.
- Decoupling Transport from Marketing of Gas: It is imperative that the marketing or selling of gas should be kept independent of the transport function to help deter the formation of monopolies.
- Taxation: Given that entities such as petrol and alcohol do not fall under the ambit of GST, the Government could consider waiving GST for Gas too. Introducing GST is also likely to raise questions on whether it would fall under central or state government.
As India prepares to position itself towards building a sustainable energy economy, increase in share of natural gas is more critical than ever. Therefore, we expedite all necessary measures including the regulatory enablers as above, towards building competitive and vibrant gas markets with participation from all the buyers, sellers, traders, infrastructure, and pipelines. This will ensure that the benefits of gas proliferate – both in terms of affordability and accessibility to industry, economy and consumers at large.
Mr Rajesh Kumar Mediratta is director, strategy, at the Indian Energy Exchange (IEX). He has over 30 years of experience in the energy sector. Prior to this, he was director, business development, at the IEX. He has worked in areas of system operations and energy settlement at the regional level. His areas of expertise include energy markets, energy transition, power markets, power system operation, grid integration of renewables and settlement systems.