CGD: A cleaner, sustainable solution for India

Amit Wankhede, General Manager - Upstream Business Affairs

Date: 9 February 2018
In North India, 2017 will be remembered as a watershed year – unfortunately, not for a positive or a happy reason. From mid-October, air - the very element on which all living species survive - was highly polluted. While this happens every winter when the air gets trapped in the lower atmosphere, in 2017 the Air Quality Index (AQI) readings went off the charts in many locations! Did you know that 27 Indian cities figure amongst the top 50 most polluted cities in the world? Consequently, apart from Christmas and Diwali vacations school children have now come to expect ‘Pollution’ vacations! 

There can be no doubt that India’s development is heavily dependent on clean and affordable energy on one hand and the growth of cities on the other. Rapid urbanization demands clean and affordable energy for mobility, heat, lighting and cooking by domestic, commercial and industrial users. The current sources of energy comprising coal, petrol, diesel, kerosene and furnace oil fail either on the count of not being ‘clean’ or ‘affordable’ or both. City Gas Distribution (CGD) not only provides a solution to both problems on a sustainable basis but also complements the cleaner Alternative Energy (AE) sources such as solar, wind, hydro-electric, etc.
Our Prime Minister has mandated that India should transition to a gas-based economy in the next few years. Currently, India produces only 50% of its natural gas consumption. However, it has sufficient proven reserves to double the domestic production which can be bought at market-based price. Fun fact: the CGD consumption of London is 30 mmscmdm, while Mumbai and New Delhi’s consumption stands at 1.5 and 3 mmscmd, respectively.
It is to be noted that CGD despite being sold at market-based rates is still nearly 50% cheaper than comparative liquid fuels. CGD, present in only 41 cities and towns, contributes a meagre 16% of total natural gas consumed in the country. As we embark on building 100 smart cities and eventually 325+ smart cities, one of the key components has to be ‘green energy’ wherein natural gas supply infrastructure is integrated into the blueprint.

The challenges and solutions

Liquid fuel replacement: To address pollution in cities, a multi-pronged approach is needed wherein we incentivize natural gas usage for mobility, heating and lighting requirements in and around city areas. We have to build up a world-class digitally connected public transport system with last mile connectivity running on natural gas. Usage of personal vehicles during peak hours on weekdays should be heavily dis-incentivized to encourage people to use public transport.

CGD infrastructure: Another issue is regarding CGD infrastructure or rather the lack of it. One ready-made solution is to use those petrol stations that are located in and around cities. Retrofitting CNG/LNG in petrol stations is possible in a space efficient modular set up. This would provide additional fuel choices to consumers and a revenue stream to retailers. 

Pipeline infrastructure: While India needs 30000 kms of pipelines, we only have 15000 kms today, and those too are underutilized at less than 40% capacity. There are two solutions: one based on economics and the other on technology. Viability Gap Funding (VGF) on the lines of National Highway Authority of India (NHAI) provides a good solution to de-risk the investors from capacity utilization risks and paves the way for a speedy building-up of infrastructure. The second solution is technology based and is popularly known as ‘LNG at door step or distributed LNG’, which doesn’t need pipelines (regasification terminal is optional). LNG is transported in modular sized cryogenic ships and then directly off-loaded into tank trucks that carry it on road right up to the customers who are provided with third-party owned in-situ LNG storage facilities. This can serve as an intermediate solution and support market development that would complement pipeline utilization as well as extend the reach of natural gas to cities that are not connected by pipelines

 

Bidding process: Bidding parameters should be focused on rewarding quantum and speed of committed CGD infrastructure and less on the economics. The policy initiatives of the Petroleum and Natural Gas Regulatory Board, India such as focusing on Technical & Financial Capability, rationalization of Geographical Area (GA), extension of exclusivity period, access to third party and connectivity are a step in the right direction. The bidding criteria should focus on a work program with incentives to complete on or before time. There should also be a performance bond to act as deterrence for any deliberate delays.

Availability: Any priority allocation or concessions in bidding create distortions in development of gas markets. The CNG, industrial and commercial segments compete with non-subsidized liquid fuels which are market priced and gas availability at market rates will ensure efficiency. *It seems that the incentive for providing low priced domestic gas for the PNG and CNG sectors is not resulting in the intended network expansion. Further, the gas in the PNG and CNG sector competes with non-subsidized diesel and LPG providing CGD operators with “windfall profits” and a perverse incentive to limit the network expansion of low priced domestic gas. Therefore, the incentive of priority domestic gas allocation must be phased out and be replaced by an incentive mechanism which promotes greater network expansion and customer service.  

Affordability: It is vital that there is uniformity of tax structure across all states w.r.t. VAT – input tax credit and early inclusion of natural gas into GST regime as competing fuels like LPG, furnace oil, etc., are already under GST. Further, there needs to be a form of carbon levy on polluting fuels to encourage adoption of clean fuel, especially in urban areas to address local air quality concerns. Fostering supply side competition by providing fair and non-discriminatory access to infrastructure will result in reducing prices.

Conclusion
Policy makers and all the players in the energy sector, NGOs and civil society need to come together and give CGD the right impetus to provide clean energy on an urgent basis. Formulating the vision of a gas-based economy is just the start. The key is to ensure that legislation, policy, regulations and taxation levers are used in a concerted effort to align with the stated vision. It is no longer a matter of options – clean energy has now become an imperative and CGD is a proven, feasible and, most importantly, implementable solution.
*Estimates are based on published data by PPAC, MoPNG, NGS and other sources

Views expressed here are personal.