India’s gas sector dichotomy: Pushing for more use, while subsidies rise and infrastructure remains idle

India’s attraction for natural gas is burning bright again.

The government reiterated its target of raising the share of natural gas in the energy mix to 15%, six years after its initial announcement. Not much has changed on the demand front — gas was 6% of the energy mix in 2016, rising to 6.3% today, despite an expanding gas grid, and city gas distribution (CGD) network. On the other hand, prices have skyrocketed globally. As such, the push for more gas use does not bode well for the economy.

Low price competitiveness

Gas’ poor price competitiveness has led to its static energy mix share.

The gas price surge since October 2021 has worsened the situation. The Japan Korea Marker (JKM), a benchmark for Asian spot liquefied natural gas (LNG) prices, increased by 373% from January 2021 to July 2022, while domestic gas prices soared 240% for regular fields between April 2021 and 2022.

Ongoing supply shortages will further raise prices. Russian company Gazprom’s recent supply cut ahead of the European winter season led to gas supply rationing for India’s industrial use, and fertiliser sector.

The switch to alternative fuels is also affecting demand. Gas consumption fell by 2.5% in the first quarter of 2022-23 on a year-on-year basis, while that of petroleum products increased 16.8%. In April and May, gas consumption by the power, refinery, and petrochemicals sectors declined. The CGD and fertiliser sectors’ consumption increased marginally.

The CGD sector can pass on increases to consumers. The compressed natural gas (CNG) and piped natural gas (PNG) rates, for instance, increased to Rs 80/kg and Rs 48.5/standard cubic meter (scm) in July, respectively, from Rs 66/kg and Rs 39.5/scm in January.

These rates will go up even further as the price of blended domestic and imported gas supplied to the CGD sector increased 18% earlier this month. Gas’ price advantage over other fuels is clearly over.

Low demand, underutilised infrastructure

The vicious cycle of high price/low supply followed by low demand has resulted in heavily underutilised gas infrastructure.

Coal and renewables have already pipped gas-based power production due to limited domestic resources and imported rates going through the roof.

India has more than 14 gigawatts (GW) of stranded gas-based power plants, while the remaining operate below efficiency. LNG terminal utilisation rates topped at 64% in the last three years, indicating vastly underused, expensive infrastructure.

Similarly, despite a ‘no cut’ priority, the CGD sector has received less gas than it needed, resulting in the distribution network’s lower utilisation. Last fiscal, the CGD sector saw a 15% shortfall in domestic gas supply.

Increased subsidy burden

High prices have also led to many direct and indirect subsidies for gas-dependent sectors. High gas prices increased fertiliser subsidies, which crossed Rs1 trillion two years ago. The subsidy could touch Rs2 trillion in the ongoing fiscal as gas prices continue to rise.

Further, the government is reviving liquefied petroleum gas (LPG) subsidies to counter rising prices and falling consumption. A Rs200/cylinder ($2.5/cylinder) LPG subsidy will cost the exchequer Rs 40,000 crore ($5.1bn) in FY2022/23, including under-recoveries for the last fiscal.

This subsidy would further dent PNG’s price competitiveness. PNG is already costlier than LPG. Annual consumption for LPG generally averages at eight cylinders while PNG is 170 scm. The monthly average cost at the ongoing rates of Rs1,052 per cylinder ($13.4/cylinder) for LPG and Rs52.5/scm ($0.66/scm) for PNG works out to be Rs694 for LPG and Rs740 for PNG.

India must make the right bets

Softening of gas prices is not in sight. Global futures indicate that prices will remain upwards of $35/MMBtu till 2023 and could touch $50/MMBtu this winter. This exposes India to energy security and balance of payment risks.

Globally, countries such as Germany and the Netherlands are cutting their gas dependence by shifting to electric heat pumps, gas from biomass for boilers, and exploring hydrogen as an option.

India must learn and evaluate its strategy, especially with the updated Nationally Determined Contribution (NDC) committing the country to meeting 50% of energy requirements from renewables by 2030. Perhaps, the gas contribution can be use-specific until new technologies scale. For instance, gas-based power plants could help balance the grid until large-scale battery storage is viable.

The government must intensify efforts for faster adoption of nascent technologies, such as green hydrogen for the fertiliser sector and biogas for the transport sector. India has an opportunity to invest in renewables to achieve 450GW of renewable energy by 2030 instead of adding more gas infrastructure that could find itself stranded.

This commentary first appeared in Money Control