The increase in natural gas prices after deregulation is likely to diminish its competitiveness vis-a-vis coal for power generation, according to a recent study on the natural gas market conducted by credit rating agency Icra.
The study, however, points out that natural gas will remain the most competitive fuel for fertiliser manufacturers despite the increase in its price.
The study says that the primary consumers for natural gas would continue to be the fertiliser and the power sectors, with demand growth increasingly becoming a function of the attractiveness of natural gas relative to alternative fuels and also of the price absorption capacity of the primary user segments.
According to Icra, natural gas had emerged as a fuel of choice for power generation in the past because of its superior physical characteristics relative to coal, and also its subsidised and stable pricing, which resulted in the economies of usage being similar as in the case of coal.
In the deregulated scenario, however, an increase in the price of natural gas and also higher volatility therein, will result in the loss of competitiveness relative to coal.
Natural gas will, however, retain its price competitiveness relative to alternative liquid hydrocarbon feedstock, such as naptha and low sulphur heavy stock (LSHS).
Natural gas will still remain the most cost-efficient feedstock for fertiliser manufacturers even after the substantial increase in its price, says the study.
Moreover, despite the loss in competitiveness relative to coal, natural gas will continue to remain suitable for power generation if priced at less than $3 mmbtu since such a price will ensure a competitive position on the merit order of most State Electricity Boards (SEBs).
The study also says liquefied natural gas (LNG) is unlikely to be a competitive fuel for power generation, given its higher cost, although it would be an attractive fuel for fertiliser manufacturers relative to liquid hydrocarbon fuels, which it could displace.
Icra says it expects Petronet LNG, the sponsors of the Dahej LNG project, to focus on the fertiliser and the industrial segments, as the power sector may not be able to absorb the relatively higher cost of LNG.
The growth of a vibrant natural gas business in India will be critically dependent on the development of a suitable transmission and distribution infrastructure.
At the moment, however, there is uncertainty on the nature of regulation that will govern the operation of gas transmission and distribution business.
