Can natural gas play the role of a ‘bridge’ fuel in India’s energy transition?

Source: Financial Express, 07 July 2021

A few years ago, the Indian government announced its ambition to almost triple the share of natural gas in its energy mix to 15 percent by 2030. India’s share of gas stands at just over 6 percent, low compared to the global average, and only aggressive growth in gas can bring India closer to its target. Many countries view natural gas as a ‘bridge’ fuel in the gradual transition to a low-carbon economy. However, for India, there are several aspects to consider when it comes to the feasibility of natural gas as a transition fuel, both from an economic and decarbonisation perspective.

At a recent seminar organised by the Centre for Social and Economic Progress on the future of natural gas and coal in India, which was built on IEA’s India Energy Outlook 2021, the general consensus was that while gas has the potential to play an increasingly important role for India’s future, affordability remains a key issue. Another issue is that while gas is superior to coal from an environmental perspective, it still remains a fossil fuel, and not an endpoint for zero emissions.

India currently imports half of its gas. Countries that made the shift from coal power to natural gas relied on inexpensive natural gas supply, which India doesn’t have. While spot prices for gas were until recently low, they have risen after August 2020, and many analysts say future prices won’t be as low as much of 2020, which had a perfect storm of demand falls, favourable weather that muted demand spikes, COVID-19, etc. More importantly, India’s delivered price is much higher due to a combination of infrastructure costs (for regasification and domestic pipelines) and a steep taxation regime. States currently set their own tax rates that are over and above import or federal taxes. The state’s taxes can vary from, for example, 15 percent in Gujarat to 25 percent in Chhattisgarh (as of 2019). Admittedly, oil products may have higher taxes than natural gas has. However, both fall outside the Goods and Services Tax (GST) regime.

If sustainability is the objective, from carbon and other perspectives, is natural gas the best fuel to achieve it? It is true that the clean advantage of gas over coal is real, though modest. From the cleanliness perspective, renewable energy (RE) appears to limit the value-proposition of natural gas, especially for electricity. India’s stated target of reaching 450 GW of renewable capacity by 2030 has spurred investment in renewables. Opportunistic or variable RE, which does not require storage, has already become the lowest cost option for new electricity capacity.

Another disadvantage is that natural gas doesn’t provide high domestic employment, especially if it is imported. However, RE doesn’t provide large-scale jobs domestically either, until manufacturing increases. Most solar cells and even modules are imported today. China dominates the supply of both cells and modules (the latter are sometimes assembled in India). Only coal disproportionately provides domestic jobs, albeit with high environmental costs of mining added to the externalities of coal combustion.

Natural gas does have a non-trivial role in niches or select segments, including industry, which can drive growth in India. But the challenge is one of infrastructure to the end-user. This is planned, but this investment should ideally be used for many decades. Will that be realistic, either because of carbon concerns or because an alternative like green hydrogen catches up?

India’s focus for gas should be where it displaces coal, especially “dirty” (and inefficient) coal, followed by where it offers value against other fossil fuels. It should also plan for a hybrid future, where hydrogen will grow, and India’s gas ecosystem enables a shift to hydrogen, perhaps initially through blending. India must also step up its R&D efforts, last-mile implementation, and manufacturing efforts at unprecedented scales to enable multiple seamless and cost-effective transitions, namely coal to gas, and gas to hydrogen (or, if required, coal to hydrogen). This applies in the industrial sector unlike for power, where renewables plus batteries squeeze natural gas.

India needs a holistic approach to energy, which spans multiple fuels, instead of silo-based targets that often conflict. Policy clarity and certainty are important for industry and end-users, who have to invest in capital stock that lasts decades. This holistic approach must extend to the broader energy transition, which will create winners and losers, as well a heavy localized impacts on regions that are coal heavy today.

Gas may be non-zero carbon but can coexist in a high-RE future, especially until India achieves net-zero emissions, which is likely multiple decades away. However, it appears difficult for the use of natural gas to grow either to the planned 15 percent of portfolio mix announced by the government or to a level where it accounts for a meaningful downward shift in India’s carbon emissions, especially by 2030. On the bright side, carbon emissions are already decreasing because of renewable energy, in addition to other shifts in the economy and increased efficiency.

(The author is a Senior Fellow with CSEP in New Delhi, where his work focuses on technology and policy, especially for sustainable development. He is also a non-resident Senior Fellow at the Brookings Institution, and Adjunct Professor at Carnegie Mellon University, and was the founding Technical Advisor for the Government of India’s Smart Grid Task Force. Views expressed are personal and do not reflect the official position or policy of Financial Express Online.)

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