Deepening the Market: Gas exchanges could be a game changer in CGD sector growth

Deepak Mehta,            Head of Business Development, Indian Gas Exchange

The downstream city gas distribution (CGD) business has gained significant mo­mentum, focused on improving the availability of compressed natural gas (CNG) for the transport sector and piped natural gas (PNG) for the domestic, industrial and commercial sectors. The CGD sector alone utilises about a fifth of the country’s annual consumption of natural gas. It is expected to grow manyfold with significant capex for the development of infrastructure, especially in the geographical areas (GAs) recently awarded by private and state-owned CGD entities. It is thus an important part of the govern­ment’s goal of a gas-based economy, with the share of natural gas in the primary energy mix expected to increase to 15 per cent by 2030. The development of the CGD sector is critical for providing clean energy to the country and achieving the net zero target by 2070.

At present, the CGD sector consumes approximately 35 mmscmd of natural gas, of which approximately 40 per cent is imported regasified liquefied natural gas (RLNG), which is supplied to the commercial and industrial segments. After the completion of the 11th CGD bidding round by the Petroleum and Natural Gas Regulatory Board (PNGRB), 295 GAs will cover about 98 per cent of the population and about 88 per cent of the total area of the country. Further, India is set to expand its natural gas grid to 34,500 km by adding another 17,000 km of gas pipeline, and increase the number of CNG stations threefold by 2025. India’s gas regulator, the PNGRB has granted lic­e­n­ces that will help sustain higher city gas volumes over the next decade.

Role of gas exchanges in the CGD growth trajectory

With CGD gaining prominence in the country, 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 on such a massive scale across the country. This role can be fulfilled by gas exch­anges, which permit their participants to procure gas at optimal prices. Gas exchanges offer the flexibility of delivery-based trade in six different contracts – day ahead, daily, weekday, weekly, fortnightly and monthly – under which the trade can be executed for up to six consecutive months. Weekday contracts are especially important for C&I CGD consumers as their working week is from Mon­day to Friday. Thus, a fixed volume can be so­urced in a weekday contract, while the weekend’s flexible volume requirements can be met through day-ahead and daily contracts. Any additional requirements can be bought through single-day contracts.

It is widely acknowledged that gas exchan­ges facilitate healthy competition by creating a level playing field for all participants. They also ensure transparency through uniformly 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. When discovered on a particular delivery point, this price 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 the volumes that they intend to purchase or sell. At present, the gas ex­change in India trades at multiple delivery points such as Dahej, Hazira, Ankot, Mhas­kal, Bhadhbhut, Dabhol, the KG basin, Gadi­­moga and Suvali. It covers six regional gas hubs – Western Hub, Southern Hub, Eastern Hub, Central Hub, Northern Hub and North Ea­s­tern Hub. When market participants are physically linked to these delivery points through the na­tional gas grid they can benefit from the phy­sical delivery of natural gas as per their re­quirements from these locations.

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

These amendments are aimed at simplifying the implementation of a unified tariff. They have adopted a step-wise process with an entity-level integrated natural gas pipeline tariff. The amendments will act as the foundation for standardising the multiple pipeline tariffs that are currently required to be paid. In order to safeguard the interests of consumers in various regions, the number of unified tariff zones has been increased from two to three.

The unified pipeline tariff will eventually all­ow any natural gas consumer connected to the pipeline to pay a single pipeline tariff re­gar­d­less of the gas source location. This will im­p­rove competitiveness in gas sourcing and facilitate optimal price discovery. Moreover, with a healthy mix of suppliers on exch­anges, supply com­petitiveness is further en­han­ced. The ex­change also provides opportunities for sourcing domestic ceiling price gas such as HPHT gas. These exchanges facilitate trade delivery on a non-transferable 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 provide the flexibility to procure a certain percentage of gas from competitive sources, and gas exch­a­n­ges fall within this category.

Thus, gas exchanges provide a holistic sol­u­tion for the buying and selling of natural gas. Th­ey also manage the responsibilities of risk ma­nagement, clearing, delivery and payment security for their members. Gas exchanges ser­ve as a complement to all trade taking place on the respective platforms, and offer great fl­exi­bility and optimal pricing, which helps establish a benchmark price index for natural gas in India. This makes gas exchanges a catalyst for natural gas procurement through CGD, promoting growth and supporting the government’s goal of increasing the share of this fuel in the country’s overall energy mix to 15 per cent by 2030.

The exchange offers several benefits, such as flexibility, cost optimisation, the ability to ma­nage demand diversity, seasonality and fluctuations, and access to gas from various sour­ces, sellers and delivery points. CGD entities in India actively participate in gas exchanges and benefit from a transparent platform.