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High gas prices in India spur renewables switch

It was set to be the next big gas market but high gas prices in India have put that target beyond reach – and the shortfall in gas supplies will be substituted by renewables, experts said.

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India was set to be the next big market for gas for global fuel producers such as Qatar, Australia and the U.S., after Prime Minister Narendra Modi’s government set an ambitious target to more than double the share of gas in the energy mix to 15% by 2030. But Russia’s invasion of Ukraine, and high gas prices in India and globally, has put that target beyond reach – and the shortfall in gas supplies will be substituted by renewables and green fuels, experts said.

The rate of decline in India’s gas consumption in the April-December period illustrates how record global gas prices have hurt consumers, and trimmed the role of gas in fuelling the country’s economic growth. India’s financial year runs from April to March.

India’s gas demand in December declined by 4.1% from a year earlier for the seventh consecutive month to 5.1 billion cubic meters. Consumption in the first nine months of the 2022-23 fiscal year declined by 6.9% to 45.7 bcm from a year earlier after prices of LNG and domestic gas soared to records, according to oil ministry data. This is the first such annual decline in gas use since 2014-15, after excluding a one-time drop in gas demand in pandemic-led 2020-21.

“While the government has invested significantly to promote natural gas consumption in the domestic market, the current conditions do not make achievement of the targets feasible by fiscal 2030,’’ said Hetal Gandhi, director of research at Crisil Market Intelligence and Analytics, a Mumbai-based ratings company owned by U.S. agency S&P.

“Due to uncertain geopolitical circumstances affecting the energy markets around the globe, gas demand is expected to decline by 1-3% to average between 170-175 MMcmd,” she told Gas Outlook. Crisil had expected demand for the fuel to increase by as much as 6% in a forecast made at the start of the year.

India’s reliance on imported LNG has dropped to 45% in April-November FY23 from 54% in FY21, said Bhanu Patni, associate director at India Ratings & Research. Power, industries and petrochemicals are more price sensitive and therefore there has been a reduction in consumption in these segments after LNG rates surged.

India paid an average of $20/MMbtu for imported LNG, which typically meets nearly half of its demand, last April-December, compared with $11/MMbtu for the whole of 2021-22. Prices of domestic gas, which account for the rest of the demand and are pegged to global gas benchmarks like Henry Hub, TTF and NBK, jumped more than threefold this fiscal year from the previous to average $7.3/MMbtu.

Declining fortunes in gas

The war in Ukraine is a key factor behind India’s declining fortunes in gas, and a corresponding growth in renewables. Europe was forced to turn to imported LNG to compensate for a drastic drop in Russian pipeline gas supplies, sending LNG prices over $50/MMbtu last year. India’s LNG imports has dropped for three consecutive years, including this fiscal, because of Covid19 in 2020, and high fuel prices thereafter. Overseas purchases of the fuel declined by 15.1% to 20.4 bcm in April-December this fiscal year from a year earlier. Anything over $20/MMbtu becomes unaffordable for Indian consumers, according to Petronet LNG, India’s biggest LNG importer.

The target of 15% share of gas in the primary energy mix of India by 2030 would translate into consumption of around 600 MMcm/d, said Sudhir Kumar, director at CareEdge Ratings, an Indian credit rating agency. Given current consumption levels of 168 MMcm/d, gas use in India will have to grow at a compounded annual growth rate of 17% for achieving this target. However, the annual growth rate achieved during the last 5 years has been slightly above 1% only, he said.

Renewables and green fuels

Renewables and green fuels are expected to make up for the loss of gas. For instance, high LNG prices have pushed up the variable cost of gas-fired generation to more than Rs 12 per kWh as against Rs 5-6 per kWh for coal-based plants, and hence the average plant load factor (PLF) is expected to remain low at below 16%. Lower PLF will lead to muted demand from the power segment and support a shift towards renewables, Gandhi said.

The government announced this month a policy for green ammonia and green hydrogen to substitute fossil fuels in industries and fertiliser plants. Fertilisers account for 36% of gas consumed, followed by city gas at 20%. The high cost of gas, which is used to make ammonia and CO2 to manufacture urea, has sent the government’s fertiliser subsidy bill to a record this fiscal year at around $30 billion.

Green hydrogen production involves adding another 125 GW of renewables capacity to produce as much as 5 million t/yr of green hydrogen by 2030, and enabling 70% of fertiliser production to run on green hydrogen/ammonia by 2035. The Modi government expects to add 500 GW of renewables capacity by 2030 from 121 GW now. India will need to add around 380 GW of solar, wind and hydro by 2030, averaging 47 GW annually, to meet the targets.

Meanwhile spot LNG prices to northeast Asia have softened to around $18.6/MMbtu for the second-half of February, according to commodity pricing service Argus. Even if gas prices soften, the pace of adoption of renewables, EVs and green hydrogen would continue, CareEdge’s Kumar said.

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