What’s relevance of independent system operators, rational transportation tariffs in building gas markets

As India aspires to be a sustainable energy economy, the government has set into motion several changes that are resulting in a churn in India’s energy basket. The push could be seen at both the industrial and residential consumer level in the gas sector with many new reforms already introduced and several in the pipeline. The introduction of gas markets last year was one significant step towards this direction. In fact, gas markets would be key in the all-around development of India’s gas industry by facilitating greater market access to buyers and sellers along with ensuring competitive and transparent pricing and flexibility in procurement. However, in order to unlock the true potential of the gas markets, India must provide the right policy support.

Independent system operator and transmission tariff rationalisation

The introduction of overall supervision and transmission oversight body called System Operator will bring transparency and neutrality in transmission capacity booking and access. In many geographies, this responsibility lies with a major pipeline operator, called a Transmission System Operator (TSO) which manages the grid. However, in some markets where many pipeline operators exist, system operation is generally carried out by an Independent System Operator (ISO). In fact, we can draw parallels with Indian power markets when it comes to the ISO model which has POSOCO that handles the grid management functions relating to the national grid.

A similar ISO is required in gas markets in India to promote efficiency and aid in managing the gas grid in a collaborative manner, ease capacity access and create more competition leading to the expansion of gas markets. The pipeline infrastructure necessary for the transportation of natural gas will be operated by the pipeline operators as per directions from such System Operator. In the recent Union Budget speech, FM announced the introduction of a transport (or transmission) system operator to regulate common carrier capacity in the gas pipeline. As we await the implementation, it is important to note that an independent system operator for natural gas pipelines would help ensure transparent and neutral allocation of pipeline usage.

Further, rationalization of gas pipeline tariffs is another key area of focus. With a view to promoting a conducive business environment for competitive gas markets, rationalising gas pipeline tariffs will improve the affordability of gas across the country. We have already made some progress in this direction and further rationalization by adopting a single-zone tariff will significantly reduce the cost of transportation of gas for the customers. This will encourage demand from the industrial customers located away from the source of gas and will lead to greater adoption. It will also attract greater investments into building the future gas infrastructure.

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Other enablers that will support the growth

Some other key enablers include the deregulation of pricing for domestically produced gas. It will provide freedom to price and market domestic gas and in turn boost domestic production, making it more viable for players to invest and provide open access to all stakeholders. The inclusion of natural gas under GST is another critical factor that will bring better visibility in terms of pricing thereby, boosting trade through gas markets.

To develop our markets, we need to build the value chain based on our own indigenous price benchmarks from our own gas-to-gas competition from several sources like domestic, old and new; RLNG being imported under spot and long term, etc. Generating demand from different sectors including price-sensitive ones is critical. The gas exchange(s) can provide such competition and price benchmarks. To have truly vibrant gas markets in our country, we need to get more diverse sale options (like domestic gas/RLNG ) and more diverse buyers (like Fertiliser, Power, Industries, etc) and also have a key policy and regulatory enablers in place.

Conclusion

Open access to pipeline infrastructure and other monopoly elements in the supply chain is the basic tenet of the competitive markets. The taxation on the gas should be made independent of the seller’s state. Only transmission charges can be linked to the location of the seller. Though, the entry-exit transmission tariff removes that restriction also. Therefore, while the buyer makes choice for the seller, his concern should be only at gas price, otherwise, taxation and transmission should be independent of the seller’s location. This model can create a virtual hub or trading point at the country level. The supply-side and buy-side diversity and liquidity on the gas exchanges can help create a truly Indian gas benchmark. Though such benchmarks will be correlated with one of the global benchmarks like TTF, HH, or JKM, still, Indian benchmark will have Indian play of demand-supply, domestic generation, and marginal value for Indian industry.

Read Part 1 of this article: ‘India’s ambition towards building a gas-based economy will need more elaborate policy reforms’

Rajesh K Mediratta is the Director at Indian Gas Exchange and Director at Strategy & regulatory Affairs, Indian Energy Exchange. Views expressed are the author’s own.