Lending Support: Key policy and regulatory developments

Key policy and regulatory developments

In the past one year, the government has taken several initiatives aimed at developing the city gas distribution (CGD) network and driving sector growth. The Union Budget 2021-22 has enabled the move towards a gas-based economy, with plans to roll out CGD across 100 additional districts over the next three years. The budget has also proposed an independent gas transport system operator for facilitating and coordinating the booking of common carrier capacity in all-natural gas pipelines on a non-discriminatory, open access basis. In addition, several initiatives have been taken by the government to reduce the impact of Covid-19 on the sector.

Indian Infrastructure provides a snapshot of the key policy and regulatory developments witnessed in the CGD sector over the past one year…

  • In February 2021, the Ministry of Petroleum and Natural Gas prepared a draft liquefied natural gas (LNG) policy, which aims to set up a framework for the promotion of gas and find alternatives for LNG adoption in sectors that are currently not using it as a fuel. The policy aims at creating LNG terminals with a capacity of more than 100 million tonnes per annum along the coastal regions in a bid to increase the share of gas in the country’s overall energy basket to 15 per cent by 2030 from the current level of 6 per cent.
  • In another development, the Ministry of Environment, Forest and Climate Change identified about 1,644 industrial units spread across 50 industrial areas in Delhi to switch over to piped natural gas in December 2020. The decision has been taken on account of high levels of pollution in the city. The Delhi Pollution Control Committee was also directed to inspect and identify industries using unapproved fuel and to take stringent penal action in case of non-compliance.
  • In a bid to making the fuel more affordable for distant users, the Petroleum and Natural Gas Regulatory Board (PNGRB) has simplified the gas pipeline tariff structure. The unified tariff structure will be applicable to the pipelines that form the National Gas Grid, increasing the transportation charges paid by users near the source by 20-30 per cent and reducing the tariff for consumers located in the hinterland. As per the notification, the unified tariff will be determined by the PNGRB in respect of the national gas grid system for each financial year. According to the PNGRB, the charges for the first tariff zone will be 40 per cent of the tariff for the second zone. The new tariff structure is aimed at creating a single gas market in the country.
  • The PNGRB published the Petroleum and Natural Gas Regulatory Board (Access Code for City or Local Natural Gas Distribution Networks) Regulations, 2020, on November 23, 2020. The access code aims at establishing industry-wide transparent and uniform principles for allowing entities to gain or allow access to pipelines systems and CGD networks. The objective of the code is to promote the development of a competitive gas market by establishing uniform principles for owners and users of gas pipelines to allow transparent and non-discriminatory access to the gas pipelines and CGD networks. Following this, on November 27, 2020, the PNGRB released the final regulations for the determination of a transportation rate for the CGD network. The regulations have kept most aspects of the access code unchanged, except for clarifying further on open access.
  • In September 2020, the PNGRB came up with new regulations to regulate the establishment and operation of the gas exchange and clearing corporations. The regulations apply to delivery-based contracts for natural gas or LNG transacted on the gas exchange (day-ahead, intra-day and term-ahead contracts); pipeline capacity contracts; and any contract for trading of natural gas or LNG, including those with a price linkage to other established markets or reported indices, either in India or otherwise. Accordingly, the board may initiate action for market coupling of a gas exchange with another exchange, where a commodity, produced by utilising natural gas as a major input is traded to minimise the risk of production.
  • In another development, the PNGRB issued guidelines for gas supply to industrial and commercial customers connected to a CGD entity through their city or local natural gas distribution networks as well as customers consuming natural gas other than for domestic use and categorised under the non-domestic segment, except transport. As per the guidelines, the customers will ensure compliance with these guidelines for the health, safety and integrity of the IP downstream of meters throughout the operating period.
  • The PNGRB has also issued guidelines with respect to the levy of fees and other charges. Accordingly, the board has mandated an application fee of Rs 300,000 for seeking authorisation or renewal of authorisation for a gas exchange with a clearing corporation; or for a gas exchange without a clearing corporation; or for a clearing corporation. Another annual charge of around Rs 200,000 or 0.02 per cent of the trade value in the exchange (excluding taxes) during the relevant financial year, whichever is higher, will be levied with effect from the date of authorisation granted to it by the PNGRB.
  • Earlier, in June 2020, the PNGRB had issued a clarification, which widens the scope of parties that are eligible to engage in the marketing or distribution of LNG other than certain authorised entities, which already have permission for developing a city or local gas distribution network. The notice reinforces the government’s commitment towards the reduction of fuel emissions by increasing the share of LNG in India’s energy mix and promoting the use of cleaner fuels.

Initiatives in light of Covid-19

The outbreak of the Covid-19 pandemic and the subsequent lockdown posed multiple challenges for the CGD sector. It impacted the earnings of CGD players, besides affecting the pace of project implementation. In a bid to provide relief to CGD players, in September 2020, the PNGRB released a notice on the detailed procedure to be followed for considering force majeure claims for time extension of CGD entities. The guidelines were released after the lockdown was imposed to contain the spread of Covid-19, which delayed/halted city gas projects.

Further, the PNGRB issued an order granting more time to 41 CGD players setting up projects in 185 geographical areas (GAs) to meet their network roll-out commitment on November 5, 2020. A large number of these 185 GAs had received authorisation in bid rounds 9 and 10. The time granted varies from 129 days to 251 days across different GAs, depending on the duration of the Covid-19 lockdown. The PNGRB has considered 69 days as the centrally imposed lockdown period and 60 days as the restoration period. The extensions permitted by the PNGRB are in line with the September 2020 guidelines, which stated that the relative obligation of the entity affected by the force majeure events will be suspended for the period during which such force majeure lasts. While the majority of the 185 entities received a basic extension of 129 days only, 38 entities received extensions for 136-251 days.

In sum

The new regulatory developments offer CGD operators fresh opportunities. However, a number of these initiatives, such as the inclusion of natural gas under the goods and services tax, development of an integrated pipeline network, unbundling of marketing and transmission, and the development of an integrated gas trading hub/exchange still need to be implemented. Going forward, it is imperative that issues such as the slow pace of approvals for CGD projects, road tax on CNG/LNG vehicles, and road-cutting charges are dealt with in order to ensure holistic growth of the sector.