Natural gas prices hit record high : Centre's relief plan for consumers in the works but it has tough choices

Natural gas prices have been hiked 40 per cent to reach a new record high to reflect global firming of energy prices.

Natural gas is a key input to produce fertilizers, electricity, Compressed Natural Gas (CNG) for vehicles and Piped Natural Gas (PNG) that is delivered to homes for cooking purposes. The prices of CNG and PNG particularly could be set to rise following the hike in rates paid to domestic gas producers.

An order from the oil ministry’s Petroleum Planning and Analysis Cell (PPAC) said that the rate paid for gas produced from old fields was hiked to USD 8.57 per million British thermal units (Btu) from the current USD 6.1.

The order also said that the price of gas from difficult and newer fields was hiked to USD 12.6 per mmBtu from USD 9.92.

The government reviews the price of natural gas on April 1 and October 1. The pricing mechanism evolved from a 2014 concept by which the government used prices in gas surplus countries like US and Russia to set domestic gas prices. However, with the Ukraine war sending gas prices surging skywards, the pressure to hike rates were felt in India too.

What will be the impact on consumers?

Various media reports quoting source-based information say that the cost of CNG and PNG in metro cities like Delhi and Mumbai could rise.

Currently, natural gas plays only a minor role in energy generation so the cost of electricity should not be affected. Also, the government heavily subsidises fertilizers - the important soil nutrient – so that too is unlikely to feel an impact.

Though CNG and PNG rates for urban consumers can be raised, it is unlikely that operators will pass on the entire burden to citizens.

For producers, the rise in prices would be welcome. Domestic gas producers have additionally been lobbying for a price control-free regime that incentivises exploration so that India can augment its domestic supplies.

Oil and gas exploration involves risk-taking and the marginal cost of bringing additional supplies to the market is higher than the average cost. So, producers want India to move away from the price cap to address the shortages in local production.

Tough choices for Centre

Already the inflation in India is expected to hover around 6.7 per cent for the current fiscal. Retail inflation came in higher in August at 7 per cent. The RBI’s continuous rate hikes are part of the measures to control the biting prices.

The Centre has already set up a panel that is deliberating on a new pricing model that is “market-oriented, transparent and reliable” according to the oil ministry order.

Since natural gas is a cleaner alternative fuel, the government has been aiming to increase its share in the energy mix in India. For a future ‘gas based economy’, the centre aims to double the share of natural gas in the primary energy basket to 15 per cent by 2030 from the current 6.7 per cent.

The panel was supposed to hand in its recommendations by September end but it is likely to take longer, reports say.

Gas-dependent sectors have traditionally received heavy subsidies from the government creating a distortion in the market. This does not bode well for an economy that wants to transition to gas because of its environmental benefits and cost.

Analysts have pointed out that under the current regime of price control, business and political interests collide. Manufacturers fail to compete against each other to amplify production at the lowest possible price because they are busy seeking a preferential treatment from the government.

However, fuel subsidies have been one of the major policy initiatives that are credited with bringing the Narednra Modi-led administration to power for a second term in 2019. The Centre’s Ujjwala yojana gives more than 9 crore beneficiaries a subsidy of RS 200 per gas cylinder (for up to 12 cylinders). This scheme that brought access to clean cooking fuel to women in low income households was touted to be the most popular intervention that not only eased lives but also protected the health of millions of households who earlier depended on firewood to cook meals.

But the government is already footing a huge subsidy bill and more allotted for natural gas consumers could entail energy security and balance of payments risks.

The government has to weigh its options carefully and take a decision that protects Indian consumers in difficult years going ahead (since the price of gas is not expected to soften as the war stretches on). It also has to formulate an acceptable policy for all stakeholders that will help India shift gears toward a gas ecosystem in the near future.