Over the next 10 years, the city gas distribution (CGD) segment is set to become one of the upcoming areas where huge investments and activity are expected. Since this will be a huge task, a distribution network needs to be laid all over the country, keeping in mind safety standards and the profitability of companies investing in this segment. A lot has been done in the past for this segment 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 on the growth of the CGD segment in India, the progress in infrastructure development, and various opportunities and challenges in the CGD segment. Excerpts…
Performance review
Drawing inference from the world average, India seems to be underperforming in terms of natural gas consumption. With ambitious plans of natural gas infrastructure expansion in place, natural gas consumption in the country must also 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 liquefied petroleum gas (LPG) or cooking requirements in the country, there are 300 million LPG connections. A lot needs to be done to reach more households as piped natural gas (PNG) connections in India stand at merely 8.3 million to 8.4 million. Despite many efforts put in by CGD companies, it is believed that this segment is not profitable enough. Further, administered price mechanism (APM) gas is only available for CNG and the domestic market. Nonetheless, numerous opportunities are there for making more discoveries in the country with resources available.
Roadblocks in the CGD segment
Pricing mechanism
A major setback that the CGD segment faces is in terms of pricing. With India still relying on imports for more than 50 per cent of its natural gas requirements, even amidst continuous hikes in international prices of natural gas, it is essential that the price to customers is regulated for attracting business in the segment. 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. It is suggested that gas is made available in the country at a stable price so as to attract more and more customers. This can happen only if there are long-term international contracts to ensure continuous gas supply at a stable price. Meanwhile, more investments are needed to enhance domestic production in the segment so that prices can be maintained in the future as well.
Meanwhile, APM is in place across the country and some gas is available under the same, wherein prices are determined based on a formula. Under APM gas allocation, the CGD segment is a priority, followed by fertilisers and power as the main consumer segments. In the coming years, the entire gas allocation is expected to shift to CGD. As the CGD segment expands, power sector allocation will keep reducing. Along with a lot of accounting issues facing the segment, another challenge is to get most of the domestic gas into the CGD segment.
Safety standards
With multiple agencies involved, there is also a debate around the supervision of safety standards. The government has made efforts for making cheap gas available to CGD companies, but it has not fixed any formula or mechanism to control the price at which CGD companies can sell. Therefore, CGD companies are free to charge anything for PNG and CNG. To address such issues, CGD companies should have some margins to make the huge investments required in the segment. Further, with regard to regulation, there is an exclusivity issue. Marketing exclusivity is available to CGD companies for a fixed period, while infrastructure exclusivity is for 25 years.
Network expansion
The Petroleum and Natural Gas Regulatory Board (PNGRB) plays a key role in the overall growth of the CGD segment. It undertakes bidding rounds and allocates areas, formulates regulations, monitors, sets safety standards and is involved in dispute settlement. The 11th bidding round has been successful and most of the country has been covered, with an allocation in rural areas as well, where the population is sparse and also 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.
The PNGRB must focus on achieving more than the set targets and plans. Constant monitoring at the state government level is another area that needs attention. Besides, 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. To solve this, there should be a nodal department in every state. In most states, the civil supplies department is the nodal department and several states do hold meetings to sort out various ground-level issues. Constant engagement with stakeholders is crucial to gain knowledge about the dominant fuel market, customers, or coverage on key players in the segment.
What lies ahead?
Going forward, it is essential that the segment focuses on real coverage and the actual availability that CGD networks are offering across states. Even in cities such as Delhi the number of households covered is not enough, indicating that a lot of work needs to be done still, especially in the PNG segment.
The CNG segment also needs a lot of effort and growth, along with some upfront investment. City gas entities must ensure that CNG is made available across their areas, keeping in mind routes for long distance travel as well, so that vehicle owners have the confidence to travel in case they own CNG vehicles. The CNG business is more profitable because of larger consumption volumes. With PNG supply issues in defence areas resolved, the urban affairs ministry has issued a lot of advisories. For the overall growth of the CGD segment, the issue of obtaining permissions, land, bidding criteria as well as NOC requirements should be dealt with. When it comes to PNG, laying pipelines across various households also poses a challenge.
In the near future, price volatility is another aspect that needs to be taken care of. A mechanism is needed so that 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. Finally, APM gas pricing should be taken care of, taking into consideration international price mechanisms and profitability for companies, and linkages in terms of production costs are needed to avoid companies incurring losses. Much more focus is required when it comes to benchmarks of safety and continuous monitoring, along with deploying skilled manpower for development in the segment. Uniformity in charges across municipal corporations in various states is also needed to curb shocks to companies entering new areas. Further, appropriate mechanisms and awareness programmes should be put in place to further convince people to shift from LPG to natural gas, as it is a better source of fuel.