Regulation to play a key role in India’s gas ambitions
The US experience suggests building pipelines is not enough. An effective regulatory regime is also required
India’s government has in recent months reaffirmed its commitment to the development of an expanded domestic gas grid and cross-border interconnections such as the long-mooted Turkmenistan-Afghanistan-Pakistan-India pipeline. But the experience of the US gas market suggests that smart and considered government gas transport regulation could play as crucial a role in boosting Indian gas demand as simply increasing pipeline capacity.
To curb its greenhouse gas emissions and reduce air pollution, India plans to increase the proportion of gas in its energy mix from 6.2pc in 2018 to 15pc by 2030. To achieve its target, India has committed to invest $60bn to expand its gas grid and LNG import terminals by 2024, when prime minister Narendra Modi’s current term ends.
$60bn – Spend on gas grid and LNG by 2024
Insufficient connections have led to low utilisation of gas in India’s towns and industry. But current pipeline investments aim to build infrastructure connecting all of India’s 28 states.
India has experienced declining domestic gas production, while LNG has increased from 31pc of gas supply in 2012 to more than 50pc in 2019, making the country the fourth-largest LNG importer globally. However, given that most of India’s LNG terminals are in the west of the country, eastern states have historically struggled to gain access to imported gas.
Getting the rules right
Clearly, if demand growth is to continue, more pipeline infrastructure is needed to connect the coasts to inland demand centres. Yet India must not neglect the importance of policy and regulation in promoting or stifling the use of gas by any given sector.
Lessons from more developed gas markets such as the US point to the potential need to loosen gas pipeline regulation to try to ensure that mutually beneficial gas transport exchanges take place. For instance, evidence indicates US government regulations capping the price of pipeline transport depressed the use of gas in the country’s power generation sector prior to the caps being lifted in 2008.
Rolling back these price caps led to a c.18pc increase in the capacity factor—i.e. the percentage of actual power generation relative to maximum generating capacity—of gas plants near congested pipelines. In other words, allowing the market to determine a price for gas transport based on supply and demand led to more efficient use of pipeline space.
State-controlled Gail is currently listed as the authorised entity for over half of India’s gas pipeline network, affording it considerable market power. In the US, government regulator Ferc ensures such market power does not lead to inefficient and unfair long-term pricing, limiting access to gas transport. But allowing gas-fired power plants to purchase pipeline space at market rates—as opposed to Ferc-regulated rates—for short-dated contracts appears to have contributed quite significantly to the historic high in gas-fired generation the US is experiencing today.
Additionally, flexibility in the energy system will be crucial if India is to succeed with a goal of reaching 175MW of renewable energy capacity by 2022—the most ambitious renewable energy expansion plan in the world.
Dethroning King Coal
Coal is currently responsible for 72pc of India’s power generation. Better aligning electricity and gas transport balancing regimes could allow for gas to be dispatched more efficiently to provide support and stability in the face of growing variable renewable energy production—and counteract the ease-of-storage advantage held by coal.
India must not neglect the importance of policy and regulation in promoting or stifling the use of gas by any given sector
Electricity markets often balance at hourly, or even five-minute, intervals, while gas transport markets work at daily granularity. Moreover, a majority of gas-fired power plants do not have easy and cheap options to store gas beyond using the linepack—the flexibility to vary pressure—in the pipelines that supply them. Thus, an overly strict gas balancing regime that does not knit well with power market balancing largely negates the technical advantages of gas-fired plants in terms of quicker startup and easier modulation of output compared with coal-fired stations.
India’s low utilisation of gas pipeline infrastructure and idle gas-fired power plants suggest it is far from heeding lessons on setting the ideal regulatory system that will help it achieve its ambitions for both gas expansion and an electricity mix that can integrate significant renewable energy and efficiently reduce its carbon footprint.
Greer Gosnell is a senior research associate at the Payne Institute for Public Policy at the Colorado School of Mines and Ian Lange is an associate professor of Economics at the Colorado School of Mines.