Encouraging Developments: Cost economics and emerging business models in the CGD sector

Cost economics and emerging business models in the CGD sector

India’s energy demand is estimated to grow at 4.2 per cent each year over the next 25 years. The country is expected to overtake the European Union (EU) as the world’s third largest energy consumer by the year 2030. Currently, India is the fourth largest energy consumer in the world behind China, the US and the EU. The country’s energy demand growth is expected to be driven by its growing population and an increase in its GDP.

In a bid to meet the country’s growing energy demand, the government has set a target of increasing the share of natural gas in the energy basket from the existing level of 6.3 per cent to 15 per cent by 2030. The adoption of natural gas as an energy alternative is being promoted as it is 30-40 per cent cheaper than petrol and diesel and can help reduce the dependence on oil imports.

The eleventh city gas distribution (CGD) bidding round has been planned and 50-100 districts in Chhattisgarh, Madhya Pradesh and the Vidarbha region of Maharashtra are expected to join the city gas network after this round. As far as investments are concerned, around Rs 1.2 trillion will be invested in establishing city gas networks in almost 300 districts by 2030. The licences for these areas were granted in the ninth and tenth bidding rounds. The government is also expected to invest around Rs 4 trillion in laying gas pipeline networks from Kutch to Kohima and from Kashmir to Kochi.

Cost components of CGD projects

The cost of setting up CGD networks and compressed natural gas (CNG) stations consists of three key components – land cost, gas supply cost and cost of setting up infrastructure.

The expenditure incurred for acquiring land for city gate stations and CNG stations is a major cost component for CGD operators given the land availability issues in cities. Another constraint for the Indian CGD industry is the limited availability of natural gas as the decision to allocate natural gas supply lies with the government authorities. The prices of domestic natural gas and liquefied natural gas (LNG) differ, which has an impact on the investment analysis.

Further, there are various costs associated with setting up of the CGD infrastructure, which comprises pressure reducing stations, laying steel pipes, cathodic protection, district regulating stations, and odorising systems. The laying of a medium density polyethylene pipeline network is a major infrastructural cost component. It is allocated around 55 per cent of the total project cost.

Emerging business models

Several new business models have been introduced for the efficient operation of the CGD industry. Given the increasing demand for CNG, the Ministry of Petroleum and Natural Gas has launched the dealer-owned, dealer-operated model for setting up CNG stations. Under the general guidelines for the scheme, the entire earmarked dealer plot will be developed exclusively for setting up CNG stations and undertaking allied commercial activities.

Another model that has been introduced in the CGD sector is the transportation of LNG from import terminals or small-scale terminals through tankers to locations that are not connected to the pipeline network. Since the volume of LNG is 1/600th of the volume of gaseous natural gas, it is economical to transport it in liquid state through road or rail over short to medium distances. Hence, this model can prove to be cost effective for city gas grids as well as liquid-to-compressed natural gas filling stations.

Various other alternatives of natural gas are also being introduced such as bio-CNG, hydrogen CNG and simulated natural gas. Bio-CNG has a calorific value of about 52,000 kJ per kg, which is 167 per cent higher than that of biogas. The potential for compressed biogas production in India from various sources is estimated at about 62 million tonnes per annum. It can help in reducing the dependence on crude oil imports. Hydrogen-enriched CNG is also viable for use in heavy vehicles which are powered by CNG. It consists of 18 per cent hydrogen while the remaining gas constitutes CNG. Hydrogen-enriched CNG is still under research and is not being used extensively.

The way forward 

The central government has been extensively promoting the adoption of natural gas. It announced a policy on Sustainable Alternative Towards Affordable Transportation in 2018. It has also proposed to set up 5,000 new bio-CNG units by 2025 and generate 15 million tonnes of bio-CNG, thereby reducing the dependence on imports. Going forward, the supply of LNG to CGD operators is expected to expedite the development of remote geographical areas allocated to them. It will also help them commence operations in these areas without depending on trunk pipeline development.

Based on a presentation by  Shireesh S. Swami, Technology Principal, Tata Consulting Engineers, at a recent India Infrastructure conference