Unified Tariff for Natural Gas Pipeline in India

Natural Gas is the cleanest fossil fuel available on earth. The share of natural gas in Indian energy mix is only 6.5% as compared to the world average of nearly 24%. The government of India is keen to increase the share of this clean fuel from 6.5% to 15% so as to develop a gas-based economy in the country. A well-developed Gas transmission infrastructure is a bare minimum requirement to do so but somehow since many years we have not seen such aggressiveness and enthusiasm from the investors when it comes to investing in building new pipeline infrastructure in the country.

Low capacity utilization of pipelines has hindered investors to secure a 12% post-tax return on capital employed to build pipeline. Same was the case in building Jagdishpur – Haldia pipeline where GAIL was reluctant in investing huge money to lay the pipeline and the issue was resolved when government agreed to provide a capital grant of 40% of investment i.e. Rs 5176 Crore of the total estimated cost of Rs. 12,940 crore required to lay pipeline. But this cannot be a long term solution. It is essential to attract adequate investments in the gas transmission sector by assuring reasonable return on investments to the investing authority. PNGRB the oil and gas regulator in India has recently proposed consultation on the implementation of unified/pooled tariff for the cross country gas pipeline network in the country. So the question is can this implementation of unified tariff will help country to move towards a gas-based economy or will it be just another attempt in vain?

Currently, in India, tariff for gas transmission are fixed separately for each pipeline. For example, tariff for HVJ pipeline going from Hazira to Jagdishpur in north is INR 19.83 per SCM for zone-1 while the tariff DUPL pipeline which goes from Dahej to Uran in south is INR 24.41 per SCM for zone-1. Hence a customer located on a DUPL pipeline 100 km away from source i.e. Dahej as compared to a customer located on HVJ pipeline 100 km away from Dahej has to pay INR 4.58 (24%) more for the same quantity of gas transported for the same distance covered. This creates the discrimination. Thus any new customer getting connected to the newer pipeline when starts using gas will have to pay higher tariff as compared to older customers on older pipeline. Same is the case with Kochi – Kottanad – Mangalore – Bengaluru pipeline whose zone-1 tariff is INR 42.78 per SCM of gas. This again results into lower capacity utilization for newer pipelines and hence the investing entity is not able to gain its required return on the investments.

Unified tariff for gas transmission network is determined by adding up the total expenditure (both Capital and Operating expenditure) of all the pipelines in the network and distributing it over weighted average volume flow of the connected pipelines in the network. This creates a single tariff for gas transmission across the network as compared to a different tariff for a specific pipeline in the network. Further, this pooled tariff can be charged on the basis of distance.

Thus the unified tariff for gas transmission will eliminate the possibility of discrimination between older and newer customers. This incentivizes newer customers to connect with the pipeline infrastructure which in turn will increase the consumption of gas in the country. Also, the unified tariff is designed in such a way that it ensures 12% post-tax return to the investors and hence making this business profitable.

So in all implementation of unified tariff can eliminate multiple tariff for gas transmission, expedite the development national gas pipeline grid, enable the reach of natural gas in far flange areas, improvise the share of natural gas in country’s energy mix, increase the utilization of the pipeline, creates a profitable business environment for pipeline sector but the only demerit is that tariff for some existing customer on some pipeline may increase.

Thus the implementation of unified tariff for cross-country pipeline network of India may not be the only solution to all the problems of pipeline infrastructure for the Gas market in the country but it is the step worth taking to push India further toward a gas based economy.

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Article by

Viral Shah (PGP16)

Energy & Infrastructure Management

SPM, PDPU 

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