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How India's EV dream might be scuttling its natural-gas game plan

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The average wait time for compressed natural gas (CNG) refill at a station near the Integrated Freight Complex on Delhi-Ghaziabad border used to be 15 minutes until recently. With more cars switching to CNG in and around Delhi every month, this wait time is gradually inching towards 20 minutes.

 

Delhi has a dense network of 391 CNG refill stations (Mumbai has only 135), but the number drops sharply as you cross the border and enter Uttar Pradesh. The next you find is good five kilometres away and the distance is unlikely to be clipped. Noida, Greater Noida and Ghaziabad have only 91 CNG stations among them, even as the region is geographically way larger than Delhi. The density of refill stations is unlikely to increase anytime soon, as the government’s push for electric vehicles has got bidders for CNG projects reworking their maths.

 

Earlier this year, Petroleum and Natural Gas Regulatory Board (PNGRB) bid out 228 geographical areas to companies for setting up CNG stations along with a network of piped natural gas for supply to homes. The bids for city gas distribution networks covered 406 of India’s 725 districts across 27 states and Union Territories. Several companies, including state-run Indian Oil, Bharat Petroleum and Hindustan Petroleum and private players Adani Gas, besides the Philippines’ AG&P, have bid aggressively for these rights.

 

But they are now wondering if the electric vehicle (EV) policy would snuff out the viability of their natural gas-based projects. No company wants to speak on record but each is worried enough to discuss this in detail off the record. They are not worried by the phasing out of two-wheelers with petrol engines and move to EVs, as those are not CNG customers. They are concerned about the scale of copycat reaction of commercial four-wheelers to the electric vehicle policy. As there are no analyst estimates for this switchover, the future predictions have got clouded.

 

The government, however, is sanguine that both can coexist. The CNG business is expected to run for a decade or more, until electric cars become affordable for the masses. The problem is the timeline for setting up of the CNG network — about eight years from now. This means by the time the stations are up, the electric vehicle ecosystem will possibly begin to build up scale. Compared with a petrol-diesel pump, which costs about Rs 22 lakh to set up, the cost for setting a CNG station is more than double at Rs 50 lakh. Given that the government plans to add 8,181 stations (Lok Sabha data) to the current network of 1,742 CNG stations, the additional investment needed will be Rs 40,000 crore. Adding the cost of PNG network the total investment at stake will be upward of Rs 1 trillion. 

 

There were two components to the auction for city gas networks, in March 2019. The companies bid more aggressively for the rights to supply fuel to homes via piped natural gas (PNG), hoping to make up for those costs through profits they shall earn from CNG pumps. According to analysts, in the PNG business, the quoted number of households made by the winning bidders as a proportion of total estimated households translates to 12-14 per cent. So far, operational entities in this sector, such as Indraprastha Gas and Mahanagar Gas, have achieved a penetration level of only15 to 20 per cent in the household segment. This is despite the support offered by the government through low-cost financing. Yet, all the companies in the city gas business saw their profit margins contracting through 2018-19.

 

Prasad Koparkar, senior director, CRISIL Research, wrote in a note that he expected natural gas to “remain competitive with non-subsidised LPG” with its current price structure, even as household PNG could become more expensive than subsidised LPG. He added that this matrix would only improve if natural gas prices remained soft while consumption of both PNG and CNG took off.

 

Another analyst said: “Achievement of penetration in this consumer category will be contingent on density of households in different geographical areas, price trajectory and potential change in subsidy policy of LPG.”

 

Essentially, the business needs CNG pumps to be the cash cow for making profits. There are some promising signs. For instance, a CARE Ratings figure shows that there was an increase of 260,000 in the number of CNG vehicles across India in just one year to March 2019. At the time, there were 3.35 million CNG-fuelled vehicles plying on Indian roads. Competition will come not only from electric vehicles but also the petrol pump network.

 

When Petroleum Minister Dharmendra Pradhan announced the gas distribution bids, he also announced tenders to more than double the network of petrol\diesel pumps from 64,624 outlets by another 86,493 outlets. It will bring the number of petrol pumps in India on a par with a mature market like the US, which has about 150,000. Incidentally that number is also a climb-down from a peak of 202,800 pumps in the US in 1994.

 

City gas distribution (CGD) companies have another constraint to factor in. The pipelines for pumping natural gas across long geographies is not present in most regions. The ministry lists 14 such national pipelines (Lok Sabha data), but they are concentrated in just five states — Gujarat, Madhya Pradesh, Rajasthan, Uttar Pradesh (western) and Maharashtra. The densely populated states of Bihar, West Bengal, Uttar Pradesh (eastern parts) and even South India are poorly served. Another 14 projects for these regions are in various stages of construction. A source said: “Infrastructure is likely to be a challenge in the near term. However, operationalising CGD network through using satellite LNG solutions is being evaluated”. 

 

Another CRISIL Research paper says the pump economics can be viable with a return between 12 and 17 per cent achievable in four years only if they are clubbed with CNG operations too. This means the bids will be successful only when the winning company has its hand in both natural gas and oil marketing. Standalone CNG pumps are not likely to survive in this scenario.

 

Incidentally, in the current session of Parliament, Pradhan has been asked by several members as to when piped gas would become available in their constituencies. The ministry has carefully skipped those details. It has told the members that the national network will be up within eight years. That makes it perilously close to the timelines for electric four-wheelers in this country.

 

PUMP ECONOMICS

 

  • No. of operational CNG stations: 1742
  • No. of planned CNG stations: 8181
  • Total approved gas pipelines countrywide: 14,239 kms (12 pipelines)
  • PNGRB has authorised CNG and PNG network across 406 districts spread over 27 States
  • Expected RoI from sole Fuel Retailing: 12-17%
  • Payback period: 2.5-4.0 years
  • Expected RoI from Fuel Retailing+ CNG+ Lubes: 15-18%
  • Payback period:1.8-2.3 years



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