## Monday, November 07, 2011

### Piped natural gas (PNG) in India: Not priced to displace electricity

In continuation of my previous post on piped natural gas, I found that Mahanagar Gas charges Rs.33/m^3 for natural gas. The energy content is 8500 kcal/m^3 or 35.56 MJ/m^3. This corresponds to 10 kwhr i.e. 10 units. In the units of electricity pricing, then, this gas is priced at Rs.3.3 per unit (i.e. $0.066 per unit). This is slightly cheaper than electricity but not by much. I'd have expected gas to be cheaper than this. This isn't a pricepoint at which one can obtain a big shift from electricity to NG. It is more convenient than shipping bottles around, but that's about it. For a comparison, in Los Angeles, the price of gas works out to$0.036 per kwhr while the price of electricity is $0.132 per kwhr. That is, piped electricity is 3.667 times costlier than piped gas. It makes you wonder about what we're doing wrong with natural gas in India. #### 9 comments: 1. I am not sure how exactly NG is priced in India. But world wide pricing mechanism differs significantly. In US for example, it is market based where in many middle eastern countries prices are pegged to oil prices. Historically there was significant correlation between gas and oil prices. It is not the case now (due perhaps to various innovative techniques to extract NG). That's why you will see significant variations in NG prices. In US, prices currently are say$4/mmBTU where in Middle Eastern countries they are around \$8/mmBTU if they are pegged to oil price. Electricity prices do depend on the gas price. I don't believe the dependency is that strong in India. Electricity prices are mainly dictated by coal prices in India as significant portion is produced by thermal power plants. More on it later. Comment has already become too long.

Vinayak

2. Supply of natural gas increased significantly in US, mostly from shale (so has oil from shale and regular oil fields), despite silly environmentalists obstructions. As Vinayak says, after the existing futures linking gas to oil expire gas will no longer priced based on oil, but based on marginal cost of extraction, again mostly from shale.

Energy story is big in US although not talked about in liberal media wedded to marginal issues like global warming. US is expected to be self-sufficient in energy sources in about a decade because of explosion in shale gas and oil findings and continued extraction. This would especially be true if a pro-drill right winger becomes president. Already import of energy is down significantly from 60% to about 40% in less than a decade.

Lessons of US energy industry bode well for India and for most nations on this planet if they learn and emulate them. Then one can ignore oil politics and pricing mechanism will change significantly. I am surprised - not really - shale option is not explored aggressively and there continued stale debates about nuclear power stations.

3. The US is the Saudi Arabia of natural gas and it's prices in the US are at historic lows.

If the US switches to CNG in cars (so far mainly bus and truck fleets run on CNG), crude oil prices would fall and it would be good for the whole world.

4. I think that the primary objective of PNG should be to replace LPG. Addon applications like geyser based heating would follow - at least here in Mumbai heating will not be a major part of our electricity consumption.

However, the subsidy on LPG and the initial fixed cost of getting a PNG connection are barriers to this switch. Given the monopoly and lack of marketing interest (At least in Mumbai) we have archiac requirements like security deposit (INR 5,000), Application Charges – Rs 500.00 and a Refundable Gas consumption Deposit – Rs 500.00

In sum a combination of transaction costs and misdirected subsidies are disincentives in this regard.

Mukund

5. India must focus on efficient, transarent price discovery mechanism rather than a fixed margin basis as is practicsed by the Government for following reasons.
1. It is driven by demand and supply. Even if it is for priority sector, it must be sold using a price disccovery mechanism liek uniform price e-auctions.
2. It makes sense to develop a transparent deivery based pricing mechanism with real-time MIS on demand and supply factors.
3. It is worthwhile to not develop another sector like petro products wherein Governments 40% of the cost is taxes and duties and lateron billed as subsidy to the Oil marketing companies.

Unless we bring transaprency in the pricing mechanisms, we may end up like MSP route.

4. It woudl help us price our domestcally produced Gas better.

However, considering that the sector is more like an Oligopoly or should we say unique monopolies, it woudl be diffciult to bring them on a common platform. However, it shoudl not be difficult for us to evolve an electronic price discovery mechanism for all of these.

Establsihing a Futures contract is definietly not the solution but a delivry based elctronic trading platform.

6. We do not have ecosystem to support gas based economy the way we have it for elctrcity based products and gadgets. As is rightly pointed out, there is a need to recognise and encourage initiatives that could make a difference in the lives of people. Also gas supply is a big bottle neck and may not get resolved for majority who could beneift from such initiatives. OCnsidering teh fact that even Gas pipleline for industrial use is highly icomplete, we could now start working with it. COnsidering that it would compete with biofuels (e.g.ethanol from sugarcane)more clarity need to emerge vis-a-vis pricing mechanisms.

7. I doubt if the gas pricing is wrong. Its probably the pricing of electricity, considering the losses of SEBs

8. Ajay, there's an error in your assumption. The best combined cycle gas turbine plants have a station heat rate of not less than 1800 KCal/kwh. So, with gas of calorific value 8500, you can expect the Kwh cost to be around Rs 5. This is just the variable cost. The fixed costs and O&M costs need to be added. So, the approx final cost will be around Rs 7/kWh.

1. @ Raj .. Ajay is right .He is comparing the energy obtained from gas with energy obtained from power consumption. The point is not to calculate the price of power generated from gas which you are explaining.

Its a known fact that pricing of gas is not transparent in the Indian Energy Market. There exists an Adjusted pricing mechanism (APM) and there are Production Sharing Contracts(PSC) which price gas mostly through NELP allocated fields. The crux of the problem is that we do not have a functional market for gas in India as of now and the primary reasons for that are :
1. Inadequate gas pipeline infra to foster competition.
2. Preferential treatment (subsidised gas) for power and fertiliser sector.

Its high time to take an integrated approach to pricing of gas.

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