The prospects for city gas distribution (CGD) in India look promising, following recent policy interventions by the centre. Gas allocation to the piped natural gas (PNG) and compressed natural gas (CNG) segments has been prioritised. The Petroleum and Natural Gas Regulatory Board (PNGRB) has also expedited the process of granting authorisation, and has identified 20 geographical areas (GAs) for Round 5 of bidding.
A look at the viewpoints of key CGD operators regarding the current state of the sector, recent policy changes, and the impact on business practices, new opportunities and key challenges…
CGD is a fast growing industry in India. The share of natural gas consumption is 24 per cent of the primary global energy consumption. In India, the share is around 8 per cent. Natural gas is the fuel of choice, given that it is safe, clean and easy to handle.
At present, there are over 20 CGD operating entities serving around 70 cities covering 45 GAs in India. The domestic PNG conversion stands at about 2.75 million across the country (as of December 2014), and is expected to cross 2.85 million in the next three months. Indraprastha Gas Limited (IGL) alone is poised to add 100,000 customers in Delhi.
CNG has several benefits, including the fact that it produces less carbon monoxide (by 84 per cent), NOX (by 58 per cent) and particulate matter (by 98 per cent). Around 2.2 million vehicles running on CNG in India, of which close to 900,000 operate in the National Capital Region (NCR). There are around 900 CNG stations across the country, of which 325 operate in the NCR. The Delhi Transport Corporation also operates the largest fleet of CNG-run buses. In terms of the number of vehicles operating on CNG, India stands fourth, after Iran, Pakistan and Argentina.
In February 2014, a decision was made to allocate 100 per cent domestic gas to the CNG and PNG segments. Provision for an additional 10 per cent was also made to meet demand fluctuations. Consequently, the price has reduced due to priority allocations. Plans to issue 10 million connections over the next five years are on the anvil. The government is also promoting the laying of 15,000 km of natural gas pipeline infrastructure through public-private partnerships to increase connectivity. The early bidding of the remaining GAs in the fourth round of bidding is yet to be completed. However, Round 5 bidding has been announced for 20 GAs, which has expanded the market for the CGD industry.
Going forward, the focus on online metering of domestic, commercial and industrial customers will have to be increased. Investments will be required in automated meter reading and smart metering. Another area of focus will be the setting up of a new cylinder testing facility. This will provide opportunities for kit manufacturers, dispenser manufacturers, etc.
The challenges for the sector include the lack of a uniform tax structure across states (varies between 0 and 15 per cent) and the non-availability of a dedicated corridor to lay pipelines, particularly in large metropolitan cities. Third-party damage is also a major cause of concern.
On an average, 10-15 years are required to roll out CGD infrastructure in a city. It takes a couple of years (in some cases, three to five years) to secure different permissions. This is after the CGD utility has secured authorisation for a particular town. For instance, for Mumbai, permission is required from 17 agencies to run a CGD business. If the targets for CGD network roll-out are to be met, the permissions need to be granted within a shorter time frame.
There is also a dearth of the necessary infrastructure, which the government is trying to counter by considering viability gap funding to encourage its creation. There are substantial costs involved in creating and extending network infrastructure. The government may have to pitch in with zero-cost incentives or else it will take a longer time.
Besides normal CGD operations, new applications are coming up. For instance, the railways are trying to use gas in engines and metal cutting in railway workshops and in ports (ports in Europe cannot use engines run on diesel or other traditional fuels). In addition, the Agharkar Research Institute, Pune, has developed a CNG direct inject engine with diesel. This is more efficient and can be used in any proportion vis-à-vis other fuels. It can, therefore, help CNG-fitted vehicles to run on one particular fuel and switch to another, depending on availability. These engines will be helpful, both in the short term as well as in the long term, and will encourage vehicle manufacturers to design appropriate models.
In large cities like Mumbai and Delhi, stringent Bharat Stage (BS) IV emission standards are in effect. However, most commercial vehicle fleets and buses are not registered in these cities; instead, they are registered in adjacent towns where BS II or BS III standards are in effect. These vehicles ply at night with little concern for the environment.
Every city has its own set of challenges. Mumbai is already developed, unlike a new city where there is an option of developing and laying infrastructure and access to public roads. The first challenge is the scarcity of land in large metropolitan cities, which inhibits the setting up of CNG stations at appropriate places. Further, the availability of right of way to lay infrastructure is a major cause of concern. Land availability in Mumbai is an even bigger issue than in Delhi. To address this issue, Mahanagar Gas Limited (MGL) is using the land available at the retail outlets of oil marketing companies. MGL requires space to set up compressors and to provide other facilities. While some land has been allocated by the government, this usually takes a long time and impedes the provision of infrastructure. For a city like Mumbai, these are serious issues, as is the high cost of last mile connectivity.
Energy is the primary driver for a country’s GDP. India, however, is dependent on imported energy sources (more than 80 per cent of the basket). Unless there are concerted efforts to increase domestic supply, there may be an issue from the energy security perspective. There is a lot of uncertainty in the exploration and production sector regarding whether a molecule will be discovered and brought out at a commercially advan-tageous price.
On the transmission side, pipeline projects have been awarded to companies. However, the implementation of these is yet to commence. Transmission companies are also struggling to gauge the right pace of development of pipelines. This issue is hampering the growth of transmission pipelines. In the past few years, the pace of development of transmission companies has slowed down.
Over the past two years, there have been positive developments in the CGD sector. The onus is now on utilities to expand their CGD operations. The government has announced its support to ensure the availability of gas for CNG and PNG. Moreover, during the past fiscal year, the number of cylinders made available to each customer has been reduced from nine to six, and then increased back to 12. Even with gas costing $5.6, prices are slightly above those of subsidised liquefied petroleum gas (LPG). The Petroleum and Natural Gas Regulatory Board has been aggressive with respect to bidding rounds and the granting of authorisation. However, competition with LPG is holding back the expansion plans of companies, primarily because the city gas operator is responsible for ensuring that there is pipeline connectivity to homes. Commercials play a big part in deciding whether customers decide to convert to PNG.
Most CGD utilities are dependent on the retail and industrial sectors, or on the small and medium enterprise sector for the bulk of their revenues (with the exception of IGL, which receives around 60 per cent of its revenue from CNG consumers). The industrial sector is mostly dependent on regasified liquefied natural gas (R-LNG) because there is no committed gas supply from the administered pricing mechanism, or from the Panna-Mukta and Tapti fields. In the past year or so, the price of R-LNG has nosedived. Industrial consumers, in addition to looking for a cheaper fuel, consider the security of supply to be a priority.
Overall, there is enormous potential and operating space in the CGD sector, not only for the existing players but also for new players. What is important is to ensure that the pace of growth in the sector is maintained.
Excerpts from remarks made at the City Gas Distribution in India conference organised by Indian Infrastructure