Calling for market-determined pricing of natural gas, a high-level government committee has recommended the use of gas as an industrial fuel and for cooking and transport purposes instead of burning it in power and fertiliser plants.
In its draft report, the high-powered committee headed by former Finance Secretary Ashok Chawla on allocation of natural resources said that subsidised gas should not be provided as an input (feedstock) for power plants since most of the output (electricity) is sold at market price.
The committee felt it was not clear if input subsidies have actually led to lower market prices of power.
"In the short term, gas does not offer any significant cost advantages for base load power generation compared to coal," whose reserves are abundant in India, the report said.
Since the primary goal should be to supply power to the 40% of the country that still does not receive electricity and who are highly cost sensitive, it would be preferable to continue using cheaper coal for base-load power generation to reduce the subsidy impact, it said.
Stating that the intent of the government is to also move fertilisers to a consumer-based subsidy instead of subsidising the input cost, the committee said subsidising gas as an input for urea plants was a weak strategy.
Power and fertiliser currently consume nearly 75% of the total gas available in the country.
With a whopping Rs 2.7 lakh crore being spent on oil imports in 2009-10, the committee felt, "It may be better to use gas to substitute for oil where possible, rather than coal."
While base load power plants will be willing to switch to gas only if it is priced at a maximum of $5.82 per million British thermal units, industry users like refineries and petrochemical plants would be willing to switch to gas up to fairly high gas prices ($17-18 per mmBtu).
"Moreover, gas would be a cheaper option even for transport and cooking fuels if they are unsubsidised," it said.
The committee recommended "moving gas to market pricing".
"The freedom that currently exists in the New Exploration Licensing Policy provisions for contractors to determine the prices of their gas produce should be employed to move toward free pricing of gas from NELP fields," it said.
"The approval of the formula or basis for price discovery should be gradually hived off from government and entrusted to the downstream regulator, the PNGRB. This will ensure a continuing incentive to the contractors to produce and bring more and more gas in the market," it said.