The oil ministry's plan to make users of domestic natural gas pay more so that costlier imported LNG finds buyers has been opposed by a high-level committee, headed by former finance secretary Ashok Chawla, saying prices should be market-determined.
The high-level committee on allocation of natural resources said in its draft report said, "In the ideal scenario, a gas pooling arrangement, with a view to mitigate price volatility is not recommended".
The oil ministry is pushing for pooling or averaging out the price of domestic natural gas and imported LNG so that the high cost imported fuel contracted by Petronet LNG finds users.
"Prices should be determined by a market-driven mechanism, with gas being eventually allocated to its most optimal use, based on the specific circumstance of each sector," it said.
The panel called for market-determined pricing of natural gas and recommended the use of gas as an industrial fuel and for cooking and transport purposes instead of burning it in power and fertiliser plants.
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.
"It may be better to discourage new gas-fired power plants, other than those already committed," 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 fertilizer 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."
