Why the gas price increase is good for India

Why the gas price increase is good for India

Recently the Cabinet Committee on Economic Affairs (CCEA) approved an increase in the price of natural gas. It will almost be doubled to USD 8.4/MMBtu from USD 4.5/MMBtu. This move was long awaited by gas producers. It will incentivize investments in the sector, make gas a more important part of the power mix and help reduce the cost of energy imports. For solar that is also good news: gas is an ideal balancing power and the resulting increase in grid power prices will make solar comparatively more attractive.

  • The gas price increased around 90%, effective 1st April 2014. Prices will now be revised every quarter
  • India’s gas production has decreased by more than 20% between 2010-11 and 2012-13, primarily due to unfavorable economics
  • India currently imports liquefied natural gas (LNG) at three times the cost of domestic gas.

This move of increasing the price of gas is part of a larger trend of liberalizing the Indian energy market. A few months back, the price of diesel was already partially deregulated. In addition, power prices have also been increasing in many parts of the country in the past couple of years. Delhi, for instance, witnessed a steep rise of 22% in power tariffs in 2011, followed by another 5% in 2012. Power tariffs in Kerala, similarly, have risen by about 30% in the last couple of years. These steps are important, as they help to make the pricing of energy in India more economically sustainable, which will incentivize investment into the new energy sources, which India badly needs.

In the past years, many players in the gas market have reduced production or have minimized spending on R&D to reduce losses. India’s overall gas production has fallen by more than 20% between 2010-11 and 2012-13 and currently stands at 3.9 mn MMBtu/day. While the domestic production is falling, the dependence on imports is rising. India’s LNG imports are expected to grow five-fold to 8.2 mn MMBtu/day in 2016-17. The current cost at which India buys LNG (USD 13.7/MMBtu) is significantly higher than even the revised price of gas (USD 8.4/MMBtu). India would need to almost triple its production to avoid expensive imports. With the revised prices, this seems to be a possibility.

The revision in gas price will not only encourage the upstream companies to invest in exploration to increase gas production, but a good amount of this additional revenue will also flow back to the government in the form of direct and indirect taxes and also in profits from leading public sector undertakings such as Oil India and ONGC. For Oil India, this move is expected to increase profits by INR 10bn. While for ONGC, profits are expected to increase by INR 80bn.

Fertilizer manufacturers and power producers, the major consumers of gas, have predictably opposed the price increase. They now want the government rather than their customers to absorb it. The average rise in power tariff due to higher gas prices would be close to INR 0.15/kWh. It currently looks like the increase in cost will be absorbed by both, the government/taxpayer and the power/fertilizer consumers. In any case, the increase in gas costs may well be a short term concern, as in the longer term the share of expensive imports will decrease as more affordable gas production in India rises.

Apart from the economic aspects, an increase in Indian gas exploration will increase the supply security and reduce CO 2 emissions wherever gas replaces coal (India’s dominant power source). For the expansion of solar and other renewables this is also good news. Gas plants are an ideal balancing source for renewables and will reduce the cost of storage or grid up gradation, thus making any large-scale, grid-interacting renewable power generation both less costly and more manageable.

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