India’s target of increasing the share of natural gas in the energy mix to 15 per cent by 2030 from 6 per cent in 2021 faces challenges from high prices of the key resource, impacting its demand as well as infrastructural constraints in importing and distributing the commodity.

Price volatility and infrastructure constraints challenge India’s target to increase natural gas’ (NG) share of energy, despite resilient demand from city gas distribution (CGD) companies and rising domestic production, Fitch Ratings Director Mohit Soni said.

“We believe that NG demand from price-sensitive industrial and power sectors may be limited in times of rising NG prices, as they switch to cheaper alternate fuels in the absence of robust emission norms. Gas adoption for mobility and household fuel may also slow when its price benefit against alternate fuels decreases,” the ratings agency said.

Fitch believes that India’s inadequate gas pipeline network and the agency’s expectation of execution delays in some under construction projects may limit NG demand growth to lower than its intrinsic levels, even in times of low prices.

Underutilised existing liquefied natural gas (LNG) import infrastructure may slow new capex in the near to medium term, creating temporary bottlenecks in case demand picks up sharply. Sustained high NG prices and customers switching to alternate fuels may squeeze developers’ returns and fresh capex plans, it added.

Production and demand

“We believe that the operationalisation of new CGD geographical areas (GAs), the price advantage of NG against other fuels and increased adoption of NG to comply with pollution norms would support long-term NG demand from CGD companies. We also expect increasing domestic NG production, on the ramp-up in operations at India’s complex deep-water NG fields, to support consumption in the near to medium term,” Fitch said.

India’s NG share of the energy mix has stayed at 6 per cent over the past seven years, well below the global average of 24 per cent, and dominated by coal (57 per cent of total) because of large domestic coal reserves, it added.

“Fitch believes that energy growth, aided by India’s GDP growth estimate of 7 per cent a year over the financial years ending March 2023 (FY23)-FY27 — and the government’s efforts to increase NG and renewables’ share in the energy mix on its path of decarbonisation and net-zero emissions by 2070 — would support mid-single-digit NG demand growth over the medium term,” it said.

However, this may not be sufficient to meet India’s target of increasing the share of NG in its energy mix from 6 per cent currently to 15 per cent by 2030. The target implies a CAGR of 16 per cent in NG consumption from now until 2030, assuming total energy growth of 5 per cent a year. However, Fitch believes the demand impact from price volatility and infrastructure constraints may limit NG growth.