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 fertilizer 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 per cent 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 fertilizers 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 per cent 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 USD 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 (USD 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.

“The subsidies, wherever required, should be transferred directly to the end consumer; or, otherwise met transparently through a budgetary mechanism,” the committee said in the report.

The Union Cabinet Secretariat on February 8 set up a high-power committee headed by Chawla to suggest a roadmap for efficient and transparent distribution of scarce natural resources, such as telecom spectrum and natural gas.

“There is need to revisit the current end uses of NELP gas,” it said. “The allocation of gas can continue to be decided by the current mechanism of an Empowered Group of Ministers (EGOM). However, in the medium and long term, administratively guided gas allocation should be replaced by a market-driven mechanism for allocation of gas as a natural resource.”

The committee felt the government and regulatory agencies should gradually withdraw from their roles in deciding price and allocation as gas markets become increasingly competitive and supply improves.

“Instead, they should ensure that markets remain competitive and consumer interests are protected,” it said.

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