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India embraces gas and renewables

With prime minister Narendra Modi now less than a year away from a general election, his energy successes and failures will be in the spotlight

India has just passed a milestone in its natural gas development. In fiscal year 2018, which ended on 31 March, liquefied natural gas provided more than half of all the gas the nation consumed, for the first time.

It is a success in that prime minister Narendra Modi and his petroleum and natural gas minister, Dharmendra Pradhan, have been promoting the concept of India becoming a gas-based economy. Imports will play a crucial role if that is to happen. India has struggled to develop pipeline imports and so is becoming increasingly dependent on LNG. There is a long way to go: the share of gas in primary energy supply is just 6.5%.

It is a failure in that India's own gas production has been on the decline since 2011 (see chart)—though there has been a levelling off in recent years and even an uptick from 2017 to 2018.

HELP — we need more investors

The New Exploration Licensing Policy (NELP) introduced by the government in the late 1990s was not a resounding success, failing to attract a significant volume of foreign interest. NELP has therefore been replaced by a new upstream regime called the Hydrocarbon Exploration Licensing Policy, or, appropriately, HELP.

It is a single licence for exploration and production of all forms of hydrocarbons, under an open acreage licensing model with a revenue-sharing rather than a cost-recovery mechanism, and marketing and pricing freedom for the oil and gas produced.

According to the head of the Directorate General of Hydrocarbons (DGH), Atanu Chakraborty, the early signs are promising. Bidding under the first round of the Open Acreage Licensing Programme (OALP) began in January and by the start of May 110 bids had been received for 55 blocks. The award of blocks was due as Petroleum Economist went to press.

Awaiting policy

India's government faces many challenges in providing affordable, secure and clean energy to its people.

A quarter of the population, around 300 million people, still lacks access to electricity. Coal is the dominant energy source, accounting for 55% of primary energy supply in FY 2016. Many gas-fired power stations lie idle or run at very low load factors.

Until the 2014 general election—which resulted in a landslide victory for Modi and his Bharatiya Janata Party (BJP), which leads the National Democratic Alliance (NDA)—India had endured more than a decade of weak coalition governments that proved unable to achieve the breakthroughs needed to remedy the nation's energy failings. 

Even the stranded gas-based capacity may find a market for its power

In the run-up to the 2014 election, the BJP's election manifesto acknowledged "the need to focus on generation and distribution of power as a national security issue, so that growth is not negatively impacted due to supply issues in the energy sector". A key commitment was to publish "a responsible and comprehensive national energy policy". 

However, it was not until June 2017 that the National Institution for Transforming India (NITI Aayog) published a draft of the National Energy Policy (NEP). A few weeks later, a NITI Aayog spokesman told Petroleum Economist he was hopeful that the draft would go to the Cabinet for final approval before the end of the year. It has yet to be approved.

The draft NEP is an ambitious document. It sets out energy ambitions to 2040 but also proposes actions to achieve energy targets set by Modi for 2022—which include universal electrification, 175 gigawatts of renewable generation capacity, and cutting oil imports by 10% from FY 2015 levels.

It addresses the 2030 climate pledges in India's Nationally Determined Contribution (NDC) under the 2015 Paris Agreement. Among these are: to reduce emissions intensity of GDP by 33-35% from 2005 levels; and for non-fossil fuelled energy sources to provide 40% of electricity generation capacity.

There is emphasis on finalising reforms begun but never completed; competitive markets; third-party access to LNG regasification terminals; empowered and independent regulators; incentives for the creation of infrastructure; and appropriate pricing and subsidies. Crucially, the NEP recognises the role of gas in supporting India's renewable energy ambitions, given the intermittency of wind and solar power.

175 GW of renewables by 2022?

One of Modi's flagship energy policies is the 2022 target for 175 GW of renewable energy, with 100 GW of this being solar and 60 GW wind. To put that into context, last year coal-based power generation capacity was 192 GW.

In November the minister for power and new and renewable energy, Raj Kumar Singh, set out the government's roadmap for meeting this target, stressing that he was comfortable that it would be met or exceeded.

Progress to date has been impressive. Renewables capacity has risen from 35.5 GW in FY 2014 to 70.0 GW in FY 2018. Another 15 GW is under construction and a further 25 GW has been tendered. The lowest per-unit prices in auctions have gone from Rs. 6.17 to Rs. 2.44 for solar and from Rs. 4.2 to Rs. 2.43 for wind.

Solar has grown especially quickly, from 2.6 GW in 2014 to 22.0 GW in 2018. India recently launched the world's largest solar park, a 2,000 MW installation at Pavagada, Karnataka.

India has struggled to develop pipeline imports and so is becoming increasingly dependent on LNG. There is a long way to go: the share of gas in primary energy supply is just 6.5%

 

To drive the growth of renewables, the government has introduced a Renewable Purchase Obligation (RPO), a Renewable Generation Obligation (RGO), and a policy of waiving inter-state transmission charges for solar and wind power. To encourage local manufacturing, it is guaranteeing the purchase of 20 GW of solar PV equipment from new domestic producers.

As India's renewable generation capacity soars, the intermittency of wind and solar power will become an ever more pressing issue, as the draft NEP acknowledges. It states that: "Meeting the 175 GW … target by 2022 will not be so much a financial challenge as a technical one."

It will mean upgrading grid capacity and technology, introducing new grid protocols, and flexible operation of thermal power plants. "Even the stranded gas-based capacity may find a market for its power," says the NEP.

A growing need for LNG

The draft NEP accepts that "availability of domestic gas supplies is likely to grow only over the medium term" and so calls for various measures to encourage the import of gas via pipeline and in the form of LNG.

So far, efforts to import gas by pipeline have been in vain. A pipeline from Iran via Pakistan has been proposed for decades but has yet to become a reality. Indeed, the intention now is to take the pipeline only as far as Pakistan. The proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline is still confronting a variety of political and financial obstacles, despite construction having begun.

So, India is becoming increasingly dependent on LNG for its gas supply and imports have been growing briskly. According to the Petroleum Planning & Analysis Cell (PPAC) of the Ministry of Petroleum and Natural Gas, imports in FY 2018 reached 19.9 million tonnes, up from 13.0 mt in FY 2014, a compound annual growth rate of 11.2%.

Not surprisingly, there has been a surge in interest among potential investors in new regasification terminals.

Currently, the main importers are Petronet LNG, which sells on some of that gas to its four shareholder companies, and Gas Authority of India Limited. But the number of importers is growing as LNG consumption rises and more import infrastructure is built.

Four import terminals are currently in operation. They have a total regasification capacity of 30 mtpa, though not all of this capacity is useable, because Ratnagiri lacks a breakwater and Kochi does not have enough evacuation pipeline capacity. 

Source: Petroleum Planning and Analysis Cell

Another three terminals are due to begin operations this year, adding 14 mtpa to capacity, taking the total to 44 mtpa. Beyond that, another ten proposals are at various stages of development, but the probability of some of these proceeding is quite low. For now it seems that India will not lack import capacity.

Further import growth will depend on how prices evolve. One of the factors in the growth of LNG imports since 2014 was the oil price collapse that began towards the end of that year, taking LNG prices down with it.

The two largest gas-consuming sectors in India are fertiliser production, which accounted for 30.4% of the market in FY 2017, and power generation, which accounted for 22.9%. Both sectors are sensitive to price. City gas distribution is less sensitive to price but accounted for only 14.5%, though its share is growing.

The price of domestic gas is regulated by the government but LNG prices are set by the companies that buy and sell LNG and that market regasified LNG (RLNG). Prices in long-term contracts have been on the rise because of the rise in oil price, while spot prices are rising mainly because demand for LNG has been growing unexpectedly quickly, especially in China.

Indian importers have had some success in re-negotiating the terms of their long-term contracts with suppliers, while others have had to resort to re-selling volumes they contracted but could not find markets for.

For example, Petronet succeeded in renegotiating its 7.5 mtpa contract with Qatar in late 2015, which led to a much lower price and an extra 1 mtpa of offtake. However, the re-negotiation did not change the basic price formula; it removed the floor price. So rising oil prices will erode the advantage over time.

Meanwhile, GAIL has contracted for 5.8 mtpa of US LNG from Sabine Pass and Cove Point and has been trying to offload some of the volumes for some while.

Feed-in tariffs for gas?

LNG growth could receive a boost from one of the more controversial proposals in the draft NEP. Concerned about the large amount of gas-fired power generation capacity that lies stranded because the power sector cannot pass on the variable costs of LNG, it suggests that the government "may extend purchase support to gas-based power on the lines of what was done to develop the wind and solar sectors". In short, feed-in tariffs for stranded gas power stations.

The fact that four years have passed since Modi came to power and India still does not have a definitive National Energy Policy is a disappointment. However, there have been some notable achievements over the past four years—in both electricity and gas.

And if recent opinion polls are any guide, Modi will probably get a second term in which to continue what he has begun.

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