India turns over a new leaf [NGW Magazine]

India’s gas market is growing fast but not evenly in all sectors. At present, natural gas has about 7% of the country’s overall energy mix (Figure 1), which is one of the lowest among major economies. The Indian government has been promoting the use of gas to fight chronic air pollution. In northern India, this has much to do with the region’s geographical and meteorological conditions, but the source of this pollution is anthropogenic and mainly related to energy demand.

According to the Paris-based International Energy Agency’s (IEA) India Energy Outlook 2021 published early-February, affordability is a sensitive issue for consumers, especially given the complex patchwork of additional charges and tariffs that, on average, last year doubled the wholesale price of energy by the time it reached end‐users in 2019.

“This complexity represents one challenge. It will also not be easy to encourage growth in a market that is likely to be based, in large part, on imported gas, or to find ways of overcoming the persistent competitiveness gap at the end‐use level between gas and cheaper local energy sources such as coal and renewables,” IEA said. “Ultimately, concerted policy efforts, backed by robust implementation, are key to creating the incentives necessary for gas in India to grow.”

India will have to introduce policy support across the value chain if it is to attract the investment needed to expand the use of gas in its energy mix, IEA said. “There are reasons to believe that the gas market can grow rapidly, provided that current policies promoting its use are effectively implemented,” it added.

IEA said that international gas market conditions favour India, with ample supply at generally low prices which is now giving price‐sensitive Indian buyers incentives to contract new volumes. Efforts are also under way to enact market reforms that encourage gas trading, and to rationalise the taxes and tariffs applied to different end users across the states of India.

Modi pitches for tax reforms

One of the most urgent policy reforms is the inclusion of natural gas in the goods and services tax (GST) regime. Some good news came on this front when Indian prime minister Narendra Modi recently said his government was committed to bringing natural gas under the ambit of GST. This suggests the government is seriously looking at simplifying and reducing the tax burden.

“We are trying to eliminate the cascading effect of different taxes on natural gas across different states,” he said on February 17. A uniform tax will lower the cost of natural gas and increase in its use across industries. “We are committed to bringing natural gas under the GST regime,” he said.

In fact, the Indian petroleum and natural gas minister Dharmendra Pradha has been extremely vocal about this issue and has on many occasions said that gas has to be cheaper if India is to achieve its target for consumption. The south Asian country is trying to boost the use of gas in the economy to fight air pollution. It wants to raise its share in the energy mix to 15% by 2030.

At present natural gas is subject to different tax rates in different states. Once it comes under the GST regime, a single tax will apply to the commodity across the country. Gasoline and diesel are likewise not covered by GST.

Including gas in the GST regime will allow consumers to claim taxes back from their state and federal tax payments.

The case for gas in transportation 

IEA said that the main sector where gas is clearly competitive is transport: CNG prices are around 40‐50% lower than petrol and diesel prices, which also have a high tax component. Natural gas is also well placed to compete in smaller‐scale industries that require consistent levels of adjustable process heat but now have to switch to coal, biomass or furnace oil owing to supply problems.

Gas is well suited to the needs of lighter industrial sectors such as textiles, manufacturing, and food and beverages. These tend to be in or near large population centres, where air quality becomes an issue of growing concern. “Policy incentives for such clusters of small and medium enterprises (SME) to switch to gas‐burning equipment are therefore key to unlocking further growth,” it said.

However, in many other parts of the Indian economy – including some key industrial sectors – the case for gas on straight cost grounds is much less compelling, IEA said. With today’s regulatory framework, economics alone do not make the case for gas in India.

Policy Support

Tax reforms would be a major policy support, but overcoming affordability challenges for natural gas requires a range of other supportive policies. The central government, as well as some state governments, have put in place a number of policies promoting gas use, including a wide‐scale roll‐out of CNG and bio‐CNG, and the expansion of gas infrastructure including LNG terminals, long‐distance transmission pipelines and city gas distribution networks.

These policy ambitions translate into rapid growth of gas demand over the next decade, IEA said. On average, gas is expected to grow 7%/year to 2030, more than double the rate of overall energy demand growth. The share of gas in India’s energy mix (both natural gas and biomethane) will likely rise from 6% to 12% by 2040, largely at the expense of coal and traditional solid biomass, it said. 

Draft LNG policy

A draft LNG policy published by the Indian petroleum and natural gas ministry on February 15 attests IEA’s argument that transportation sector could be the most important drivers for gas demand. Greater use of gas as transport fuel also helps reduce CO₂ emissions.

According to the draft policy, every 1mn m³/day of natural gas demand that replaces liquid fuels can reduce around 270,000 metric tons (mt)/yr of CO₂. LNG as import substitute of liquid fuel can also save foreign exchange in the tune of $200/mt/yr.

For India to meet its COP 21 commitments, it has to adopt ever cleaner and more cost-efficient fuels, depending on the sector of industry they are to be used in. “LNG has emerged as one such fuel. Thus, a need has arisen for an integrated policy for the procurement, storage, transportation and use including sale and marketing of LNG,” the draft policy stated. 

The key aims and objectives of the policy are to frame an integrated approach towards procurement, storage, transportation and use of LNG, including its by-products such as boil offs. It also aims to ensure equitable distribution and adequate availability of LNG for all technologically-feasible sectors and help increase use of LNG in various sectors including in transportation and mining.

The policy envisions a regasification capacity of 70mn mt/yr by 2030 and 100mn mt/yr by the year 2040. At present, India has 42.5mn mt/yr of regasification capacity. The policy also aims at developing common carrier capacities in LNG terminals. It supports creation of virtual pipelines of LNG by transporting it by rail and also through LNG truck loading.

“Necessary infrastructure and enabling environment for the same shall be created in consultation with all stakeholders,” it said. “Promotion of manufacturing of LNG ships, FSRUs and other critical infrastructure for the enhancing the use of LNG shall be ensured in co-ordination with automotive and engineering public and private sector players and government regulatory agencies.”

To promote LNG trucking and its use as transport fuel, dedicated highways with extensive LNG infrastructure has been envisioned. The policy says that LNG will be fully available in all major highways, industrial and commercial centres.
“Use of LNG as transport fuel in high-volume closed-circuit loops will enable enhance penetration of LNG as fuel. These circuits will be developed in areas such as mining areas, refineries, etc,” it said.
Mobile dispensing of LNG is an important catalyst for faster penetration and adoption of LNG as fuel across all sectors. The policy aims at establishing 1,000 LNG stations in the coming years for ensuring availability of LNG for long haul, heavy duty trucks and other transport.

It argues for free marketing and sale of LNG as transport fuel. Indian downstream regulator PNGRB has already clarified that any entity can set up an LNG storage and distribution facility. 

“For this purpose, any activity, including sale / marketing thereof, related to boil-off gas from LNG, shall be deemed to be incidental or ancillary to the activity of marketing and sale of LNG, and it shall be treated accordingly,” it said.

The policy draft further advocates encouraging new LNG compatible models and retrofitting vehicles through tax exemptions, permits, and green certifications.
 
Solar and wind

Although natural gas is being aggressively promoted, its use in power sector has in fact slowed down because of cost factors. In fact, according to IEA, the most remarkable story in India’s power sector in recent years has been the growth of solar PV and wind, which have rapidly taken a larger share of the overall energy mix in recent years as coal and hydropower capacity growth has slowed.

Over the past five years, solar PV capacity (Figure 2) has grown at an average growth rate of around 60% and wind capacity of around 10%, outpacing the 7% growth in overall installed capacity. This rapid growth reflects government policy support and falling equipment costs, IEA said.

Together, they now constitute nearly 20% of India’s installed capacity. In 2019, India announced a new target of 450 GW of renewable electricity capacity by 2030.

IEA believes the policy actions that have facilitated the growth of grid‐connected renewables include reverse auctions resulting in progressively falling prices, lower corporate tax rates for developers, renewable purchase obligations mandating utilities to procure a certain minimum purchase of renewable power, investment in transmission infrastructure, and support for solar parks that help reduce project development and land acquisition risks.

The rise of renewables in India’s power sector has been a major success story; wind and solar PV now account for 7% of total generation, twice their share in 2014. In renewable‐rich Indian states, wind and solar contribute as much as 15% of power generation. In some states, they contribute nearly 50% of power generation during those parts of the year when wind speeds are at their strongest, IES said.

“Solar PV and wind have been relatively resilient during the crisis in 2020; even though overall electricity demand was down sharply in the second quarter, coal accounted for most of the reductions in generation,” it said.

However, IEA argues, there are still important structural, regulatory and institutional challenges that could hamper further growth, and progress has been uneven across different renewable technologies. The challenges include the poor financial position of many state distribution companies, difficulties in obtaining access to finance and in acquiring land, grid congestion, and uncertainties over grid infrastructure development.

The expansion of rooftop solar has lagged behind the growth in utility‐scale projects, constrained by higher costs and the lack of attractive financial models for consumers. Rooftop solar had a share of 40 GW in the 100 GW solar target for 2022, but deployment remains at well under 10 GW. This sector is now a focus area for the government as 2022 gets closer. Similarly, despite an identified potential of 10 GW to 20 GW, offshore wind has not yet taken off in India owing to the high cost of capital and to supply chain and infrastructure bottlenecks.