CNG vehicles gear up for a long ride with regulated prices, strong demand

With regulated prices and its designation as a 'clean fuel', this segment of the transport industry could accelerate

India’s city gas distribution (CGD) infrastructure has seen an investment of Rs. 1.5 trillion in the last five years. Apart from the supply of piped natural gas (PNG) for domestic and industrial purposes, compressed natural gas (CNG) for transportation forms a significant element of the CGD network. CNG, which is considered as one of the cleanest modes of transportation, has been seeing a topsy-turvy ride over the last few years.

The pandemic, price rise triggered by geopolitical tensions such as the Russia-Ukraine War, the subsequent demand dip and the European Union sourcing largely from India’s traditional Gulf suppliers are among the key reasons for instability. Though many view CNG as an intermediate fuel ahead of the electric vehicle boom, CNG suppliers, original equipment manufacturers (OEMs) and consumers believe that this is a fuel for the longer run.

On April 6, the industry seemed to have been given a fresh lease of life. The Cabinet Committee on Economic Affairs (CCEA) cleared a new domestic natural gas pricing plan, setting domestic gas price at 10 per cent of the average price of the India basket crude for the previous month. However, the gas price must stay within a Cabinet-determined band of $4-6.5 for gas produced by the fields operated by Oil and Natural Gas Corporation and Oil India. The new policy helped in bringing down the CNG prices by up to 10 per cent across cities.

To those who are betting big on this fuel, there are reasons to cheer. According to a report by CARE Ratings, CNG car sales volume revved up 41 per cent in FY23, despite a 49 per cent rise in prices, indicating that long-distance commuters and taxi drivers still depend on the fuel. According to data in the Vahan portal, CNG-only vehicle registrations saw an average of 31,050 units per month from January to May 2023, compared to 22,615 units per month during the same period in 2022, representing a 37 per cent increase.

“CNG vehicle sales are directly proportional to the pricing of CNG in the market. What is good about this segment is that everybody is now aware of the benefits of CNG, especially taxi operators. Also talks about diesel vehicles being banned are encouraging buyers to go for any alternative fuel,” said Manish Raj Singhania, president, Federation of Automobile Dealers’ Associations.

Significantly, the rise in CNG vehicle sales has occurred despite the fact that prices increased by 70 per cent in Delhi based on Petroleum Planning and Analysis Cell data, from Rs. 43.40 per kg in April 2021 to Rs. 73.59 per kg in April 2023. At the same time, prices in Mumbai expanded 60 per cent from Rs. 49.4 per kg to Rs. 79, touching an all-time high of Rs. 89.5 per kg in November 2022.

Despite the upbeat outlook, OEMs are still in a defensive mode in terms of creating or expanding CNG offerings. That’s because despite the January-May 2023 uptick, FY23 was not a good year for CNG. “The differential between diesel and CNG became too narrow for CNG to be really attractive. So, customers did not come forward to buy CNG vehicles. Recently, there were some policy announcements, which have made CNG a little bit more attractive again. Still the gap is not enough to get back to the levels that we have seen before,” said Shenu Agarwal, the new managing director and chief executive officer of Ashok Leyland, addressing its Q4 earnings call.

“Because of the recent changes, some uptick in the CNG demand will happen, but it will not reach the same level at the current prices. Now, CNG prices are going to be announced every month. We have to see how it performs over the next few months. We are ready with its product portfolio,” Agarwal added.

Certainly, the second half of the calendar year 2022 was not that attractive for manufacturers. Take the case of Maruti Suzuki India (MSIL). The contribution of CNG powertrains in the order backlog for MSIL declined from 43 per cent in June 2022 to 32 per cent in December 2022. In the passenger car segment, MSIL has 74 per cent market share in the CNG segment with 12 models, followed by Hyundai at 15 per cent and Tata at 11 per cent. According to ICRA analysts, despite a higher upfront cost, lower running costs, aided by a superior mileage significantly lower the total cost of ownership for CNG-powered vehicles.

“Rising gas prices slowed down the adoption of CNG powertrains in H2 CY2022, led by a decline in the running cost differential between petrol and CNG powertrains and a consequent increase in the payback period for the latter. A decline in CNG prices has led to a reduction in the total cost of ownership (10-15 per cent lower than petrol) for the powertrain and is likely to aid adoption for the same going forward,” predicted Shamsher Dewan, senior vice-president and group head, corporate ratings, ICRA, about the government decision in April.

According to ICRA, while the initial purchase cost of CNG is 10 per cent higher than petrol, it provides 50-55 per cent savings on fuel cost after the new pricing policy and 15-20 per cent savings in the total cost of ownership.

ICRA estimates CNG powertrain penetration to increase to around 18 per cent by CY2027, from 11 per cent in CY2022. During the same period, electric vehicles and hybrids are expected to see a rise in share from 2 per cent to 9 per cent. On the other hand, petrol share is expected to decline from 68 per cent now to 58 per cent and diesel from 19 per cent to 9 per cent. This may well be the reason industry veterans like former ONGC Chairman and Managing Director R S Sharma believe that CNG will sustain as a major fuel even in 2050. “It is a long-haul fuel and no intermediate. Since the base load of green energy fuels is low, that may hardly be able to meet the incremental demand,” Sharma said.

The government has set a target of 17,700 CNG outlets by 2030, against 5,665 now. Going by the massive investments in the last few years and the expansion plans lined up, it seems the government is also considering it as a long-haul fuel.