NATURAL GAS VEHICLES SECURING A SUSTAINABLE TRANSPORT FUTURE FOR INDIA KNOWLEDGE PAPER

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2 NATURAL GAS VEHICLES SECURING A SUSTAINABLE TRANSPORT FUTURE FOR INDIA ASIA PACIFIC NATURAL GAS VEHICLES ASSOCIATION (ANGVA) 5TH INTERNATIONAL BIENNIAL CONFERENCE & EXHIBITION, INDIA PREPARED BY- MERCADOS ENERGY MARKETS INDIA PVT. LTD. (AF-MERCADOS EMI) KNOWLEDGE PAPER NOVEMBER 2013

3 Foreword Asian economies are expected to increasingly drive global economic growth. Their energy demand will also rise in proportion. The supply of requisite energy to meet the social and economic aspirations of people in the Asian nations is their legitimate requirement. As these economies grow and their energy needs increase, the impacts of this changing dynamic will be felt not only within each of the countries but also in the global energy markets. India s energy situation is particularly sensitive, especially with regard to production and consumption of Oil. Since India depends heavily on imports for meeting its energy requirements, it poses significant costs and risks. This is causing adverse impact on the country s fiscal position besides inflation and Rupee devaluation. Largely, India is indispensably dependent on imported liquid fuels in the transport sector which presents energy security challenges. In this context, it becomes imperative to identify pathways to make a transition to alternatives that reduce or mitigate the risks and costs. Natural Gas Vehicles present a viable and marketready alternative to our dependence on liquid fuels. The availability as well as price of gas are much better placed as compared to liquid fuels, and are likely to remain so in the future. Thus use of natural gas for vehicular applications can help in advancing our energy security through a more secure, lower cost and ecologically benign energy option. The infrastructure is now ready with a large pipeline rollout program underway, leading to nation-wide penetration of the network. This will enable natural gas vehicles to expand beyond cities into the towns, suburban and rural areas and also along the road network and highway backbone. New applications for public and goods transport across the length and breadth of the country can transform India s transport sector. I sincerely believe that there has been no better time to make this transition and bring about transformative change in the transport sector of India. I congratulate ANGVA and all the organizers of the conference for the well timed initiative to bring this event to India and wish the participants all success in forging new alliances to move forward. (B C Tripathi) Chairman, GAIL Gas & C&MD, GAIL (India) Limited

4 Disclaimer Information in this publication is intended to provide only a general outline of the subjects covered. The information and opinions contained in this document are derived from public and private sources which we believe to be reliable and accurate but which, without further investigation, cannot be warranted as to their accuracy, completeness or correctness. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Mercados Energy Markets India Private Limited accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. For further detail or information please contact: Nikhil Moghe, Senior Manager Mercados Energy Markets India Private Limited 1202, Tower B, Millennium Plaza Sector - 27, Gurgaon [email protected] Landline:

5 ABBREVIATIONS Abbreviations/Symbols: General & And % Per cent ANG APM BS CAGR CGD CNG CSE EPCA FY GA HVJ IEA JV LCV LPG LNGV NELP NGV NOx OECD OEM(s) OMC PM PM2.5 PNGRB RSPM USA Adsorbed Natural Gas Administered Pricing Mechanism Bharat Stage Compounded Annual Growth Rate City Gas Distribution Compressed Natural Gas Centre of Science and Environment Environment Pollution Control Authority Financial Year Geographical Area Hazira Vijaypur Jagdishpur pipeline International Energy Agency Joint Venture Light Commercial Vehicle Liquefied Petroleum Gas Liquefied Natural Gas Vehicle New Exploration Licensing Policy Natural Gas Vehicle Nitrous Oxides Organisation for Economic Co-operation and Development Original Equipment Manufacturer(s) Oil Marketing Company Particulate Matter Particulate Matter less than 2.5 micron in size Petroleum and Natural Gas Regulatory Board Respirable Suspended Particulate Matter United States of America

6 VAT Value Added Tax Abbreviations: Units bcm INR kcal kg kl km MMSCMD MMTPA ppm scm billion cubic meters Indian Rupee kilo calories kilo gram kilo liter kilo meter Million Standard Cubic Meter per Day Million Ton Per Annum Parts per million standard cubic meter Abbreviations: Company Names/Reservoir Name AGL BGL BP CUGL EPA GAIL GAIL Gas GEECL GSPC HPCL IGL KG MGL MNGL PPAC RIL TNGCL VMSS Adani Gas Limited Bhagyanagar Gas Limited British Petroleum Central Uttar Pradesh Gas Limited Environmental Protection Agency GAIL (India) Ltd. GAIL Gas Ltd. Great Eastern Energy Corporation Ltd Gujarat State Petroleum Corporation Hindustan Petroleum Corporation Limited Indraprastha Gas Limited Krishna-Godavari Basin Mahanagar Gas Limited Maharashtra Natural Gas Limited Petroleum Planning & Analysis Cell Reliance Industry Limited Tripura Natural Gas Company Limited Vadodara Mahanagar Sewa Sadan

7 TABLE OF CONTENTS 01 India s Impressive Developments in NGV Indicates to a Much Larger Potential NGVs would Address India s Energy and Socio-Economic Challenges Gas Supply Dynamics How does it Impact NGV Development Do we have Necessary Infrastructure to Fuel NGV Growth? Policy and Fiscal Imperatives What, When and How Much? NGV Technology Changing Paradigms NGV Economics India Needs a Roadmap for Sustainable NGV Programme Some Interesting Facts 33

8 1. India's Impressive Developments in NGV Indicates to a Much Larger Potential 1. India's India s Impressive Developments Developments in NGV Indicates in NGV to Indicates a Much Larger to a Potential Much Larger Potential Owing to its sustained economic growth, increasing disposable income and rising urbanization, India witnessed high compound annual growth rate (CAGR) of 9.9% in vehicle population during the period Despite multiplying the country s fleet over two and half time during last decade, India is still pegged at low vehicular penetration of around 117 vehicles per 1000 persons compared to 500 plus for most of the developed countries. Thus, with continued growth of economy, transport sector is likely to expand substantially in the coming years. Owing to to its its sustained economic growth, growth, increasing increasing disposable disposable income income and and rising rising urbanization, urbanization, India witnessed India witnessed high compound high compound annual growth annual rate growth (CAGR) rate of 9.9% (CAGR) in vehicle of 9.9% population in vehicle during population the period during the Despite period multiplying Despite the country s multiplying fleet over the two country s and half fleet time over during two and last decade, half time India during is still pegged last decade, at low India vehicular is still penetration pegged at of low around vehicular 117 vehicles penetration per 1000 of around persons 117 compared vehicles to per plus for most persons of the compared developed to countries. 500 plus Thus, for with most continued of the developed growth of countries. economy, transport Thus, with sector continued is likely to expand growth substantially of economy, in transport the coming sector years. is likely to expand substantially in the coming years. Figure 1: Snapshot of Indian Road Transport Sector Figure 1: 1: Snapshot of of Indian Indian Road Road Transport Sector Sector Registered Vehicles in India (in Million) Registered Vehicles in India (in Million) Vehicles per 1000 Vehicles per 1000 person person Source: Road Transport Yearbook, Ministry of Road Transport & Highways, Source: Road Transport Yearbook, Ministry of Road Transport & Highways, Source: The liquid Road fuel Transport consumption Yearbook, in the Ministry Indian of transport Road Transport sector accounts & Highways, for around % of the total The liquid fuel consumption in the Indian transport sector accounts for around 40% of the total petroleum products consumption. The consumption of petrol and diesel grew at the rate of petroleum products consumption. The consumption of petrol and diesel grew at the rate of 7.5% and 7.5% and 5.1% respectively during the period 2002 to 2013 as compared to a growth of 3.8% in 5.1% respectively during the period 2002 to 2013 as compared to a growth of 3.8% in total consumption total consumption of petroleum products. The extant fuel consumption of Indian transport sector of petroleum products. The extant fuel consumption of Indian transport sector clearly indicates a strong clearly indicates a strong dependence on petrol (24.8%) and diesel (72.8%). dependence on petrol (24.8%) and diesel (72.8%). 72% Two Wheelers 1% 72.8% 2.8% 8% 5% Others 24.0% Cars, Jeeps & Petrol Taxis 14% Diesel Source: Road Transport Yearbook, Ministry of Buses Road Transport & Highways, Auto LPG 1 Others include tractors, trailers, three wheelers, LMV and other miscellaneous vehicles that are not categorized separately. Goods Vehicle NG 72% separately. 72.8% Natural Gas Vehicles Others Securing a Sustainable Transport Future for India The liquid fuel consumption in the Indian transport sector accounts for around 40% of the total petroleum products consumption. The consumption of petrol and diesel grew at the rate of 7.5% and 5.1% respectively during the period 2002 to 2013 as compared to a growth of 3.8% in total Figure consumption 2: Vehicular of petroleum population products. growth ( ) The extant and fuel and composition consumption (2011) of (2011) Indian 1 transport 1 sector clearly indicates a strong dependence on petrol (24.8%) and diesel (72.8%). Composition of Vehicle Population (%) Figure 2: Vehicular population growth ( ) 0.4% and composition (2011) 1 1% 8% 5% Composition of Vehicle 14% Population (%) Two Wheelers Cars, Jeeps & Taxis Buses Goods Vehicle Transport Sector Fuel Share (%) % Transport Sector Fuel Petrol Share (%) Natural Gas Vehicles Securing a Sustainable Transport Future for India 6 2.8% 0.4% Diesel Auto LPG 1 Others include tractors, trailers, three wheelers, LMV and other miscellaneous vehicles that are not categorized NG 1

9 High reliance of transport sector on oil raises several concerns including that of fuel subsidy, fiscal deficit, emissions and energy security which encourages India to invest in cost efficient and environment friendly fuels viz. natural gas. The question thus arises Can Natural Gas Vehicles (NGVs) play a larger role in India s growing transport and mobility needs NGVs have experienced rapid growth worldwide especially in the past decade. Concerns of carbon emissions, high oil dependency and economics have largely driven the growth of NGV. Although, NGVs have witnessed strong growth in past few decades and continue to do so, it still contributes a miniscule share (~ 1%) of the world s total road transport. However with better availability of technology and equipment in last few years, NGVs are poised to meet the requirements of transport sector at a much larger scale. Figure 3: Market share of NGV in total fleet in various countries (%) China Egypt India Tajikistan Brazil Peru Myanmar Malaysia Iran Colombia Argentina Bolivia Pakistan Armenia Bangladesh 1% 5% 5% 5% 5% 7% 8% 11% 14% 24% 24% 26% 26% 30% 61% 0% 10% 20% 30% 40% 50% 60% 70% Source: The Contribution of Natural Gas Vehicles to Sustainable Transport, IEA, 2010 Box 1 Snapshot of Worldwide NGV Market 2 Almost 80 countries from all five continents use NGV/CNG. More than 10 million vehicles run on this fuel today. NGV refuelling at over 20 thousand filling stations spread throughout 2,400 cities worldwide. More and more governments promote natural gas as the core of their energy matrix to break the dependence generated by the permanent liquid fuels importation. The world average indicates that driving an NGV is 66% cheaper than using a gasoline vehicle and 33% more economical than diesel. 2 Source : 2 Natural Gas Vehicles Securing a Sustainable Transport Future for India

10 India is regarded as a country with possibly one of the biggest potential worldwide for the implementation of Natural Gas Vehicle (NGV) programme and indeed the country has witnessed significant growth in recent years. The rapid growth came due to price differential that not only fuelled the commercial interest of passenger transport service providers, but public at large. In 1990s, campaign to improve local air quality drove policy makers to look out for cleaner fuel options. The switch over to natural gas was later mandated by Hon ble Supreme Court in 1995 and resulted in installation of a body called The Environmental Pollution (Prevention and Control) (Prevention Authority. and Control) In the Authority. year 2001, In the the body year recommended 2001, the body the use recommended of Compressed the Natural use of Gas Compressed (CNG) among Natural users Gas and (CNG) paved among way for users India s and first paved large way scale for CNG India s programme. first large scale Since CNG then, NGV programme. programmes Since were then, introduced NGV programmes in over 30 were cities, introduced few mandated in over by 30 court cities, decision, few mandated leading the by growth court decision, in NGV population leading the up growth to the in current NGV population estimated up level to of the over current 1.8 million estimated including level of threewheelers, 1.8 million buses, including taxis three-wheelers, and small/ light buses, commercial taxis and vehicles. small/ light commercial over vehicles. Figure 4: NGV penetration across India 3 so far NGV Population Refilling Station Sales ( 000 MTs) Other States Uttar Pradesh Haryana Maharashtra Gujarat Delhi Other States Uttar Pradesh Haryana Maharashtra Gujarat Delhi Other States Uttar Pradesh Haryana Maharashtra Gujarat Delhi Source: Petroleum Planning and Analysis Cell (India) Source: Petroleum Planning and Analysis Cell (India) The growth of NGV s witnessed represents only a start and there are significant indications of The growth of NGV's witnessed represents only a start and there are significant indications of a a quantum leap in deployment. The NGV segment in India constitutes only about 5% of total quantum leap in deployment. The NGV segment in India constitutes only about 5% of total natural gas consumption and is supported by network of over 900 NGV refilling stations. natural gas consumption and is supported by a network of over 900 NGV refilling stations. Around 90% of the NGV population is limited to the states of Gujarat, Maharashtra and Delhi. Around 90% of the NGV population is limited to the states of Gujarat, Maharashtra and Delhi. There There is is considerable considerable room room for for growth growth provided provided the the right right ingredients ingredients are are in in place. place. This This includes includes necessary necessary impetus impetus to to extend extend NGVs NGVs to to new new cities cities and and also also deployment deployment in in new new applications applications like like inter-city transport transport in in passenger passenger and and goods goods haulage haulage segments. segments. As As such such applications expand, expand, greater innovation is is also also necessary in in the the form form of of usage usage of of natural natural gas gas and and its its storage, storage, as as compared to the present use only in compressed form. This knowledge paper aims to investigate NGV as an alternate option for transportation This knowledge paper aims to investigate NGV as an alternate option for transportation in India covering policy imperatives, technological options, economics, infrastructural in India covering policy imperatives, technological options, economics, infrastructural needs, gas availability and market development. Even as the requirements are analysed needs, gas availability and market development. Even as the requirements are analysed primarily in the Indian context, the paper summarises some emerging global trends that primarily in the Indian context, the paper summarises some emerging global trends that are of relevance for India. are of relevance for India. 3 NGV population as on , Refilling stations as on March 2013 and Sales figure for Natural Gas Vehicles Securing a Sustainable Transport Future for India 3

11 2. NGVs would Address India s Energy and Socio-Economic Challenges As one of the largest energy importers in the world, India has genuine concerns on the impact of energy on its economy and ecology. India imports most of its oil and much of its coal and natural gas requirements. The overall energy mix is heavily dominated by polluting fuels - coal in particular. Figure 5: Fuel-wise energy consumption of India Source: BP Statistical Review 2013 and AF Mercados EMI The implications of this energy dependence for India merits critical analysis on four dimensions (i) Energy and Mobility Security implications; (ii) Environmental Implications; (iii) Fiscal Implications and ; (iv) Overall economic/currency impact. A. Energy and Mobility Security India s primary energy consumption is dominated by coal 4 (~52.9%) followed by oil (30.5%). During last decade, the total energy requirement of India has grown at a CAGR of 6.1%, leading India to become the 3rd largest energy consuming nation worldwide (~4.5%). India oil imports are currently over 75% of its total oil requirement. Heavy reliance on oil imports while the petroleum prices are not fully unregulated, poses serious threat of destabilization caused by price shocks in international market. Both oil and coal are traditional fuels with limited reserves and relatively low reserve to production ratio. In contrast, natural gas reserves both in India and across the world are substantially more. It is estimated that world has approximately 55 years of reserves of natural gas considering current usage. With new 4 BP Statistical Review, Natural Gas Vehicles Securing a Sustainable Transport Future for India

12 conventional and unconventional reserves being added continually, the availability of natural gas is more certain than the alternatives. This is also likely to result greater price stability as compared to other hydrocarbon and carbon fuels. Mobility is a basic need for the modern world population. With one in every five persons of the world living in India, the country cannot afford shocks that adversely affect mobility its citizens. Hence it becomes an imperative that India starts now in the quest of this basic security need. Natural gas and NGVs can become the primary vehicle of this quest for energy and mobility security. B. Environmental Concerns Use of natural gas in India for transport was primarily driven by the environmental and health concerns. Even before adoption of stringent Euro emission standards, the Indian cities of Delhi and Mumbai embarked on a roadmap to substitute diesel with cleaner natural gas. NGV programmes in Delhi and Mumbai lead to significant improvement in the air quality and emission levels. It is worthwhile to note that during nineties, the sulphur content of diesel was as high as ppm and it was only in year 2000 when Euro I equivalent norms were enforced for all four wheelers. A World Bank study on source apportionment of particulate matter less than 2.5 micron in size (PM2.5) in selected Indian cities released in 2004 shows that, depending on the season, the contribution of diesel fuel to the total PM2.5 ambient concentration can be as high as 61 % in Kolkata, 23 % in Delhi and 25 % in Mumbai. Several other studies have also indicated that diesel engines contribute ~40% to Nitrous Oxides (NOx) vehicular emissions. Figure below indicates India s current position on the historic trajectory of particulate matter (PM) norms in other countries. Figure 6: Historic trajectory for diesel PM norms Other Indian Cities gram / km Indian Metros Europe Japan USA Source: Centre of Science and Environment (CSE) Natural Gas Vehicles Securing a Sustainable Transport Future for India 5

13 The car segment in India has undergone dieselisation in last decade. The share of diesel vehicles in new car segment has increased from 4% in 2000 to 40% in If industry estimates are to be believed the share of diesel cars in small segment is as high as 70%. This has led to detrimental effects on local air quality in many densely populated areas as the current emission norms in Indian cities are equivalent to European standard about a decade ago and it is time to revisit the issues and reassess the impact of various transport fuels on the environment. Box 2 Emission advantage of CNG over other transport fuels A study undertaken by TERI in found that that even the first generation CNG bus technology meeting Euro II emissions standards had significant Particulate Matter (PM) reduction and moderate NOx emissions advantage compared to the diesel counterparts. The PM levels from the Euro II CNG bus were found to be nearly 46 times lower than its diesel counterpart. A similar test conducted on diesel engines fitted with advanced emission control components and run on very low sulphur fuel resulted in emissions comparable to Euro II compliant CNG emissions. The results of the emission test are tabulated below Table 1 Comparative emissions of diesel and CNG buses in India Type of bus CO (g/km) HC (g/km) Euro II diesel bus on 500 ppm sulphur fuel+ DOC NOx (g/ km) PM (g/km) CO 2 (g/km) Euro II diesel bus on 350 fuel + DOC ppm sulphur Euro II diesel bus on 50 ppm sulphur fuel+ CRT Euro II CNG bus three way catalytic converter Source: ARAI test, under TERI study on Fuel Choice for Transport and the Environment Another study undertaken by Washington DC based Resource For the Future (RFF) has analysed the air quality trends in Delhi over a period of 15 years ( ) and observed that the CNG programme has made most significant impact on air quality in Delhi. The conversion of buses to CNG has helped in reduction of Respirable Suspended Particulate Matter (RSPM), CO, SO2 and has not contributed to increase in NO2. To summarize, the NGV technology choice is appropriate in terms of meeting the objective of emissions reduction which in turn enables India to achieve its public health ambitions. Even as other fuels make progress with progressive investments in refineries to improve fuel quality, the advantages of natural gas as a clean burning fuel with minimum interventions and treatment always places it at an advantage over other fuels and can lead India to leapfrog in achieving its emission reduction targets. 5 Whereas the above study is dated, some of the recent studies conducted on emissions from various vehicular fuels indicate that the CO and HC emissions from newer CNG technologies have significantly reduced. 6 Natural Gas Vehicles Securing a Sustainable Transport Future for India

14 Science and Environment (CSE) carried out tests of fuel samples from retails outlets and other points. The results of the study reveal 8.3 % sample failure of the sample tested against 1-2 % reported by oil companies in the past. A World Bank study (2004) found that the CNG programme initiatives in Delhi have helped India to curb on premature death annually at least 3629 in Delhi and at least 5308 in Mumbai. It is worthwhile to note that even the Supreme Court of India order 2002 has highlighted the impact of pollution on health of people. Box 3 Relevant extracts of Hon ble Supreme Court of India order 2002 The scientific studies indicate that air pollution leads to considerable levels of mortality and morbidity. Fine particulate matter, or respirable particulate matter (RSPM)-PM10 (i.e. matter less than 10 microns in size)-is particularly dangerous. The researchers find that fine particle related pollution leads to lung cancer and cardiopulmonary mortality. Their research indicates that with an increase of every 10 micrograms per cum) of fine particles, the risk of lung cancer Increases by 8 per cent. A study conducted with regard to children in Bangalore show that the incident of asthma in percentage of children raised from 9% in 1979 to 29.5% in 1999, thereby corresponding increase in vehicles from 1.46 lacs in 1979 to lacs in Similarly, a study by the Chittaranjan Cancer Institute and Environmental Biology Laboratory of the Department of Zoology of Kolkata University done between November, 1997 and May 1999, found that about 43% of the children in Kolkata are suffering from respiratory disorders compared to 14% among the rural children. As per the study reflected in the Indian Journal of Medical Research July, 2000, the culprit for the aforesaid was pollution in the ambient air. In an issue of Parivesh a magazine published by the Central Pollution Control Board relating to air pollution and human health, dealing with diesel exhaust particles and its health effects, particulars are given with regard to major air pollution related diseases in India which are as follows:- (1) Acute Respiratory disease: 12% of Deaths,13% of NBD. Largest fraction in the world Indian ARI in children alone under 5 is responsible for more than 2% of entire GBD. (2) Chronic Obstructive Pulmonary Disease (COPD): 1.5% of Deaths; 0.9% of NBD (3) Lung Cancer:0.4% of Deaths; 0.1% NBD (4) Asthma:0.2% of Deaths; 0.5% of NBD (5) Tuberculosis:8% of Deaths; 5% of NBD; Largest in the world (6) Perinatal:6% of Deaths; 7.5% of NBD; Largest in the world (7) Cardio Vascular Disease: 17% of Deaths; 5% of NBD (8) Blindness: 0% of Deaths; 1% of NBD; Largest in the world NBD/GBD: National/Global Burden of Disease. Natural Gas Vehicles Securing a Sustainable Transport Future for India 7

15 C. Fiscal Implications In the past five years, Government of India has been forced to come to the rescue of Oil Marketing Companies (OMC) that incurred very substantial under recoveries on diesel, amounting to over INR 92,061 Cr in Financial Year (FY) While the Administered Pricing Mechanism (APM) has been formally abolished for petroleum products in 2002, implicit subsidies remain in place by the government s policy to protect Indian customers by not allowing OMC to effectuate price increases that would reflect changes in global market prices. In FY , Government allowed OMCs to abolish the entire subsidy on petrol effective from 26th June 2010 which resulted in significant price differential between petrol and diesel. The price differential further widened due to upward spikes in crude oil prices and exchange rate which has been the major reason for rapid dieselisation of transport segment in India. Thus, expansion of NGV programme in India would help the Government to curb on its rising fuel subsidy significantly. India s fuel subsidy bill is the single largest contributor to the Fiscal Responsibility and Budget Management (FRBM) Act target breaches. If India has to stay within the fiscal targets that GoI has set for itself, natural gas and NGVs can play a very important role in that quest. D. Overall Economic and Currency Implications The Indian rupee has witnessed unprecedented volatility due to high import pressures, as can be seen in the chart below. This has had severe impact on Indian economic growth and has dented its standing as an emerging global power. Figure 7: Under-recovery on petrol and diesel Source: PPAC, MOPNG 8 Natural Gas Vehicles Securing a Sustainable Transport Future for India

16 Figure 8: Currency movements 6 Source: Reserve Bank of India GoI has stepped in to curb gold imports that were contributing to the volatility. However it is unable to intervene on coal and oil imports, which have been playing a huge role in the balance of payments. Natural gas usage limits the impact on the economy and the currency in several ways: (i) Delivered cost of natural gas on a per BTU basis at the point of consumption is lower than oil. Hence the cost impact of crude import gets correspondingly lowered as depicted in the figure below. Figure 9: Savings 7 in crude import bill at various NGV penetration level- India Source: AF Mercados EMI Analysis (ii) Further, while the cost of transportation and handling of natural gas within the country is higher as compared to oil, at the landfall point imported gas is much cheaper than imported oil. Hence the foreign exchange exposure is significantly lower. On account of all of the above factors it is important to move towards natural gas, particularly for oil substitution in transport and also certain stationary applications. 6 Indicates movements of RBI reference rate 7 Savings calculated at LNG DES 13% linkage and exchange rate of INR 61/$. Natural Gas Vehicles Securing a Sustainable Transport Future for India 9

17 3. Gas Supply Dynamics How does it Impact NGV Development has 1.3Supply trillion cubic metres of proved and indicated gas reserves as onit 2012 and the 3. IndiaGas Dynamics How does Impact has been almost flat around 30 bcm during the period of 2002 to Traditionally, production NGV Development most of India s gas supply has flown from the western coast of the country, mainly from the gas India has in 1.3the trillion cubichigh metres of proved and indicated reserves as on 2012 anddiscoveries the production fields Bombay region. However, in recentgas years with the significant hasbeing been almost flatthe around 30 bcm during the period of 2002 to Traditionally, most of India s made in eastern offshore areas, the focus as far as gas supply is concerned has gas supply hastowards flown from thecommenced country, mainly from gas fieldsenabling in the Bombay shifted the the east.western In yearcoast 2009,ofRIL its KG D6the production India to high region. However, in recent years with the discoveries madea in thebefore easterndeclining offshoreto areas, witness a sizable growth; however thesignificant production could lastbeing for about year the the focus as far as gas supply is concerned MMSCMD in August has shifted towards the east. In year 2009, RIL commenced its KG D6 production enabling India to witness a sizable growth; however the production could last for about a year before to gas the MMSCMD in August Figure 10:declining Domestic production Figure 10: Domestic gas production % CAGR BCM ONGC + OIL Private / JVCs Source: PPAC Source: PPAC While several new fields viz. KG-DWN-98/2 (ONGC), KG-OSN-2001/3 (GSPC) and Sohagpur While several new fields viz. KG-DWN-98/2 (ONGC), KG-OSN-2001/3 (GSPC) and Sohagpur East & West East & West CBM (RIL) expected to commence production in next few years, the natural gas CBM (RIL) expected to commence production in next few years, the natural gas demand is estimated to demand is estimated to imports be supply constrained. LNG imports have the played a vital role ingap bridging be supply constrained. LNG have played a vital role in bridging demand supply for natural the demand supply gap for natural gas in India. Figure below indicates the increase in LNG gas in India. Figure below indicates the increase in LNG imports since imports since Figure 11: LNG import in India Figure 11: LNG import in India Source: PPAC Source: PPAC 10 Natural Gas Vehicles Securing a Sustainable Transport Future for India Natural Gas Vehicles Securing a Sustainable Transport Future for India 16

18 The rising share of LNG in the total gas supply mix of India is an indication of increasing dependability of gas demand on LNG. With several new LNG terminals being planned along west and east coast, India is likely to increase its re-gasification capacity from current 13.5 MMTPA to 53.5 MMTPA by end of FY Figure below indicates geographical location of various operational and planned terminals and the estimated capacity growth. The rising share of LNG in the total gas supply mix of India is an indication of increasing dependability of gas demand on LNG. With several new LNG terminals being planned along west and east coast, India is likely to increase its re-gasification capacity from current 13.5 MMTPA to 53.5 MMTPA by end of FY Figure below indicates geographical location of various operational and planned terminals and the estimated capacity growth. Figure 12: LNG terminals in India existing and planned Mundra Dahej Hazira Dhabhol ` Gangavaram Kakinada LNG Capacity (MMTPA) Ennore Kakinada Gangavaram Mundra Dhabhol Kochi Hazira Dahej Total LNG capacity Kochi Ennore Operational Planned Stages Source: AF Mercados EMI Analysis Dynamics of gas availability is rapidly changing and has significant implications for the NGV market in the country. Incrementally less domestic supplies would be available for the NGV segment as fertilizer and power would take major share of allocations from new fields. Thus, the demand of NGV market expansion will be largely depended on the LNG supplies. Though the re-gasification capacity is looking up in near future, the price of RLNG will remain a key concern for the large scale development of NGV market. The question that arises in this context is that on the impact of R-LNG prices on NGV penetration. However the counterfactual presents an equally pertinent question - What is the effect on high NGV penetration on delivered LNG prices to India? As this paper goes on to argue, high penetration of NGV can offer a large and stable market for natural gas that is very aligned to the inherent dynamics of gas sector operations. Natural Gas Vehicles Securing a Sustainable Transport Future for India 11

19 4. Do we have Necessary Infrastructure to Fuel NGV Growth? Gas Infrastructure in India is relatively under-developed when compared to the mature gas markets viz. US, UK and Europe. The development of pipeline infrastructure in India has remained uneven geographically and states proximate to gas source have benefited the most. Around 60-65% of total pipeline networks are concentrated in the states of Gujarat, Maharashtra, Delhi, Haryana, UP, Rajasthan and MP while the southern and eastern states continue to face the issue of inadequate pipeline connectivity with the national grid. India, currently, has a network of ~13,000 km of natural gas transmission pipelines with a design capacity of around 337 MMSCMD. The capacity utilization of the pipelines however has been lower. The average capacity utilization of natural gas pipelines as on 30th September, 2013 has been ~45%. Thus, increasing the penetration of NGVs would lead to improvement in the capacity utilization of the pipelines networks. The existing network is expected to expand to around 28,000 Kms of pipelines with a total design capacity of around 721 MMSCMD in next 5-6 years taking the country close to formation of National Gas Grid connecting all major demand and supply centers in India. Figure below depicts expected pipeline infrastructure by end of 12th Plan Figure 13: Gas pipeline network in India (by end of 12th Plan) Source: Vision 2030, Natural Gas Infrastructure in India, PNGRB 8 Source: PPAC data. Excludes pipelines under commissioning 12 Natural Gas Vehicles Securing a Sustainable Transport Future for India

20 Expansion of city gas distribution is expected to cover around 60 additional Geographical Areas (GA s) by end of 13th Plan. Petroleum and Natural Gas Regulatory Board (PNGRB) future plan foresees significant investment for next two decades in CNG programme. The regulatory board is planning to harness the ultimate City Gas Distribution (CGD) potential of 240 cities; of this most feasible 60 GA s are planned for 12th and 13th Plan. The restoration of CGD bidding is expected to catapult the development of CGD infrastructure in near future. Gas pipeline and retail distribution networks have strong inter-linkages that are essential for the overall development of gas markets including NGV markets. Widespread penetration of NGV is not possible unless adequate pipeline connectivity is extended to new CGD networks. On other side, development of retail distribution would enable robust demand creation which in turn is an impetus for new pipeline corridors. So far, the NGV programmes in India have focussed on Intra-city transportation and ignored the potential market of Inter-city transportation which is mainly dominated by heavy commercial segment. The key impediment for development of Inter-city NGV market has been the lack of refilling infrastructure along major highways. However, going forward, the upcoming infrastructure development will be able to support development of NGV refilling stations along major highways to overcome the current distance haul limitations (~150 Kms per cylinder fill). The figure below indicates the major national highways that cater to major road transportation movements across length and breadth of the country and plots the existing and planned CGD networks. Figure 14: Major road highway and potential NGV corridors by end of 13th plan Srinagar Amritsar Delhi Agra Lucknow Jaipur Kolkata Ahmedabad Paradip Visakhapatnam Mumbai Hyderabad Kakinada Bengaluru Chennai Kochi ` North South Highway East West Highway Existing CGDs Planned CGDs Potential NGV Corridors Gas Pipe Line Existing / Planned Source: AF Mercados EMI Analysis Natural Gas Vehicles Securing a Sustainable Transport Future for India 13

21 From the figure above, the following highway segments clearly emerge as potential for Inter-city NGV transportation. Table 2 Potential segments for inter-city NGVs Highways Areas Covered Pipeline Connectivity Dadri Panipat Pipeline (Operating) A m r i t s a r Bangalore Segment Amritsar, Jalandhar, Ludhiana, Ambala, Panipat, Sonipat, Karnal, New Delhi, Gurgaon, Manesar, Rewari, Jhajjar, Alwar, Jaipur, Kota, Bhilwara, Udaipur, Chittorgarh, Mehsana, Gandhinagar, Ahmedabad, Anand, Vadodra, Surat, Valsad, Daman, Vapi, Thane, Mumbai, Pune, Raigad, Satara, Kolhapur, Belgaum, Bagalkot, bijapur, Dharwad, Hubli, Koppal, Davanegiri, Tumkur, Bangalore, - Dadri Bawana Nangal Pipeline (Operating) Bhatinda Srinagar Pipeline (Awarded) HVJ Pipeline (Operating) Mehsana Bhatinda Pipeline (Awarded) GSPL Gujarat network (Operating) Dahej Uran/ Dhabhol Panvel Pipeline (Operating) East West Pipeline Dabhol Bangalore Pipeline (Operating) C h e n n a i Howrah Segment Chennai, Nellore, Krishna, Kakinada, Rajahmundry, Vizag, Srikakulam, Vizaignagaram, Cuttak, Jajpur, Jagatsinghpur, Baleshwar, Purba Mednipur and Kolkatta Ennore Nagapattinam Pipeline (Under Bidding) Kakinada Srikakulam Pipeline (Under Bidding) Ennore Nellore Pipeline (Under Bidding) Durgapur Kolkatta Pipeline (Under Bidding) Jagdishpur Haldia Pipeline (Planned) Surat Paradip Pipeline (Awarded) Agra L u c k n o w Howrah Segment Agra, Auraiya, Kanpur, Lucknow, Rae Bareli, Allahabad, Varanasi,, Bokaro, Asansol, Durgapur, Ranchi and Howrah Jagdishpur Haldia Pipeline (Planned) HVJ Pipeline (Operating) Source: AF-Mercados Analysis 14 Natural Gas Vehicles Securing a Sustainable Transport Future for India

22 Considering the huge potential of the NGV market in India, it is vital that a conducive and enabling environment is provided so that the intended results are achieved in a cost efficient manner. An integrated approach that results in effective planning and timely execution of gas infrastructure project is essential. With the above perspective in place, some of the key issues being faced by infrastructure development are as follows: Lack of central level planning for gas infrastructure that leads to development of pipelines and distribution networks only in prospective regions of the country Lack of Gap funding for infrastructure projects that are unviable. However, in long run would seed development of new regional markets Risk of revenue loss due to uncertainty in the transportation volumes on account of dwindling domestic supply Project delays cause by delays in obtaining environmental, forest and other statutory clearances Regulatory logjam over CGD bidding criteria and process resulting in delays in evaluation/ award of CGD licenses and loss of investor s sentiments. NGV market needs robust gas transmission and distribution infrastructure for inter-state/ cross-country implementation and unless the above infrastructure constraints are appropriately addressed, scaling up of NGV development is far from reality. Natural Gas Vehicles Securing a Sustainable Transport Future for India 15

23 5. Policy and Fiscal Imperatives What, When and How Much? Globally, NGV market has proven its ability to emerge as profitable and sustainable in long-run. However, to achieve a self-sustaining NGV market with reasonable penetration and market size, initial Government support in terms of enabling policy and fiscal environment is essential. The NGV market is at the cusp of transformation and thus, appropriate market seeding and stimulation at this point can provide the much needed impetus to scale-up the implementation of NGV programme in both inter and intra cities. The figure below illustrates the key elements of the overall policy and fiscal environment that impacts the development of NGVs in India. Figure 15: Policy and regulatory framework affecting NGV market in India Source: AF-Mercados Analysis National Auto Fuel Policy - The Auto Fuel Policy was framed by the Government of India around which gives a roadmap for achieving various vehicular emission norms over a period of time and the corresponding fuel quality up- gradation requirement. While it does not recommend any particular fuel or technology for achieving the desired emission norms, it suggests, taking into account security of supplies and existing logistics perspectives, that liquid fuels should remain as main auto fuels throughout the country and that the use of CNG/LPG be encouraged in cities affected by higher pollution levels so as to enable vehicle owners to have the choice of the fuel and technology combination. Auto fuel policy provided the initial thrust for local bodies to enforce stringent vehicle emission norms. However, even then India remains way behind in implementing cleaner fuel and vehicle emissions parameters. This is evident from the fact that eighty per cent of Indian cities have RSPM levels above the permissible limits and there is an increasing risk of 16 Natural Gas Vehicles Securing a Sustainable Transport Future for India

24 NOx levels crossing the standards. Some of the key issues that needs to be addressed are: Disparity in emission standards. Currently, the entire country has vehicles running on Bharat Stage (BS) III emission norms except for 15 major metros and state capitals where a higher BS IV norm has been adopted due to limited availability of higher quality fuel in the country Lack of required infrastructure for fuel supply and the manufacturers to upgrade their technology to enact unified standards across India Policy does not deter use of inefficient vehicle technology There is an urgent need for India to move to 10 ppm sulphur fuels by end of 12th plan and subsequently to BS VI standards by China has already adopted the more stringent Euro 5 standard and has also set a goal to reduce vehicle pollution by up to 40% by improving both its technology and the fuel quality in the near future. Box 4 International experience China s policy initiatives over last few years to support NGV development The Ministry of Transportation : Promote LNGVs in Liaoning, Ningxia, Jiangsu, Shandong, Shanxi and Guangdong firstly and fan out to the whole country. New Ambient Air Quality Standards PM2.5 Limits: Beijing, Tianjin, Hebei, cities along Yangtze River Delta and Pearl River Delta will first implement the standard. 12 th Five-Year Plan for Natural Gas : Increase NGV pilot cities and provide subsidies the 11 th Five - Year Plan the 12 th Five -Year Plan improving equipment manufacturing industry 11 th fiveyear plan: Government encourages development and use of new types of vehicles which enhance energy saving and environmental protection NG Utilization Policy : Gas used by residents (including NG vehicle use) is classified as a Priority Class. The Management Method of Special Funds for Energy Conservation and Emission Reduction in Transport: NGV (LNGV included) will enjoy subsidies. The Energy Conservation and Emissions Reduction Comprehensive Work Plan for the 12 th Five-Year Plan ( ) Period: Encourages the use of natural gas vehicles in transportation. The Guidelines on Building Low-Carbon Transportation System and The Energy Conservation and Emission Reduction 12 th Five-Year Plan for Road and Waterway Transport: Promotes the application of natural gas vehicles. The Energy-Saving and New Energy Vehicle Development Plan ( ): Outlines the necessity of developing and using NGVs (LNGVs included). Source: Westport, China Natural Gas Vehicles Securing a Sustainable Transport Future for India 17

25 Fiscal Incentives to Promote Natural Gas in Transport Sector Traditionally, India s national policy on gas utilisation has been largely focussed on supply and pricing for power and fertilizer sector. Support to NGV programme was extended by allocation of small share of APM gas primarily due to judicial mandates. However, since then are has been no policy initiative at central level to encourage the utilisation of gas in transport sector. A rationale review of the extant gas allocation policy and its priorities considering the several benefits of replacing petrol and diesel with natural gas may be undertaken to provide a small share of domestic gas supply to upcoming CGDs. Box 5 Case study of Delhi Fiscal incentives to NGV programme Delhi is one state which has devised multi-dimensional fiscal incentive for promoting the growth of NGVs. These Include: Value Added Tax (VAT) subsidy on purchase of new vehicle in lieu of phasing out old diesel light commercial vehicles. The Delhi government has taken the decision to phase out 15 year old diesel light commercial vehicles (LCVs). This is complemented by a fiscal incentive scheme that has been prepared to encourage voluntary phase out the vehicles that are less than 13 years old. To enable the transition the Delhi government has announced a subsidy scheme. The subsidy will be equivalent to VAT (12.5 per cent) that will be provided on purchase of new LCVs No VAT on sale of CNG fuel for automotive consumption. This has enabled the price differential between CNG and Diesel to continue thereby making conversions economically viable Levying of Air Ambience fee of INR 25/ KL on sale of diesel. This is an attempt to neutralize the revenue loss from CNG subsidy Financial support for three wheelers and taxis in terms of subsidised loan for conversion of diesel vehicles to CNG. The scheme was support by Delhi Finance Corporation. Internationally, there has been precedence wherein States have offered some form of incentives for converting fleets to NGVs Natural Gas Vehicles Securing a Sustainable Transport Future for India

26 Box 6 Incentives for NGVs various states in the USA 9 Various states of USA (27 States) offer incentives like grants or rebates, soft loans, state tax credits etc. Eight states have extended tax incentives ranging from $500 to $ 7,500 per vehicle, thirteen states have provided grants and rebates ranging from $ 2,500 to $ 25,000 per vehicle and six states have implemented loan programs at interest rates of 0% to 5%. The following table summarizes the incentives on light duty vehicles in various states of USA. State Tax Credit Rebate/ Grant Loan Incentive Value (Per Vehicle Unless Noted) Arkansas Up to $5,000 (<8,501 lbs) or up to 8,000 (8,501-14,000 lbs) California $3,000 (<8,501 lbs) or $8,000 (8,501-4,000 lbs) Colorado 10.5% of total vehicle costs, up to $6,000 per vehicle Connecticut Unspecified funding for public fleet NGVs only Florida 50% of incremental costs, up to $25,000 Georgia 10% of total vehicle costs, up to $2,500 Illinois 80% of incremental costs, up to $4,000 Indiana Up to $150,000 per fleet conversion project (max for all vehicles purchased) Louisiana 50% of incremental costs Maryland $3,000 (<8,501 lbs) or $5,000 (8,501-14,000 lbs) Mississippi Zero-interest loans for municipal vehicle NGV fleets only Natural Gas Vehicles Securing a Sustainable Transport Future for India 19

27 Montana 50% of conversion costs, up to $500 Nebraska 5% interest loans, up to $750,000 per borrower North Carolina Up to 80% of incremental costs Oklahoma Tax credits of 50% of incremental costs, 3% interest loans Oregon Low-interest loans (terms not specified) Pennsylvania 50% of incremental costs, up to $25,000 Texas $2,500 rebates (up to 9,600 lbs), grants up to 90% of total costs (8,501+ lbs) Utah Tax credits of 35% of total cost up to $2,500, grants of 50% incremental costs Virginia Unspecified grants and loans for public fleets only Washington Exemption from 6.8% state sales tax on vehicle purchase West Virginia 35% of new vehicle purchase price or 50% of conversion costs, up to $7,500 Taxation Regime ]The long-term sustainability of NGV growth should be primarily designed on the differential taxation rather that the direct subsidies. This enables the market to adjust and absorb the cost of transformation and not collapse like some of the older global programmes. For instance, New Zealand provided generous financial incentives both for conversion and establishing refuelling stations, so that the number of CNG vehicles doubled every year. When the new Labour government began deregulating the economy, 20 Natural Gas Vehicles Securing a Sustainable Transport Future for India

28 withdrawing financial incentives for the CNG industry, the NGV market almost collapsed in New Zealand. The country now has only 201 NGVs, almost negligible as compared to the peak of 110,000 in past. Similarly, In Argentina, no direct subsidies are provided for use of CNG however, high tax rate is levied on gasoline that encourages fuel switching. As per International Energy Agency (IEA), the tax rates vary substantially in OECD countries. For instance, the tax rate of diesel varies from 0.4% to 64.4% (average ~42%) while the tax rate for petrol varies from to 72.6% (average ~57%) and for natural gas from 4.8% to 51.1% (average ~18%). India needs harmonisation of taxes in terms of; i) rationalization of tax rate for CNG among states and ii) assess the inter-fuel tax rate differential that may be needed to encourage fuel switchover. The table below compares VAT rate on CNG in few states. Figure 16: VAT rates on CNG in select states of India Source: AF-Mercados Analysis Further, in addition to rationalization of VAT rates, it is prudent to revisit the applicability of excise duty on sale of CNG. The compression of natural gas for supplying to the vehicular segment entails change of mass density in order to increase the storability. Hence conversion of natural gas to compressed form is only for the purpose of transportation and should not be considered as manufacturing, thus Excise duty should be exempted from CNG. CNG Pricing The new CGDs that are now being established are based on free market prices and LNG import. In Gujarat, a sizeable portion of the CNG sales is based on market-driven prices. Its gas basket, therefore, includes a small share of domestic gas and a larger share of imported LNG. As a result, the CNG prices are high compared to old cities like Mumbai and Delhi. Similar price trend is visible in other new cities viz. Ujjain, Bareilly, Sonepat, Meerut, Kota, Dewas and Gwalior etc. As more cities begin to introduce CNG programs across different states, CNG prices will have to be rationalized across the borders to prevent cross-border disparities especially in case of cities located in adjacent states. Thus, there is an emerging need for rationalization and liberalization of CNG pricing to not only reduce the disparity in prices among various Natural Gas Vehicles Securing a Sustainable Transport Future for India 21

29 cities but also to accelerate the NGV penetration in new cities. It would be worthwhile to assess a price pooling mechanism for the CGD segment as this will reduce the price disparity in the CNG prices across cities thereby providing the desired impetus for the growth of NGV programme in new cities and enabling various states to reap environmental/ health benefits of cleaner fuel. The Hon ble Gujarat High Court in its recent order has emphasised on equalization of CNG prices among cities. Specific extract from the order is reproduced below. The Government of India is directed to allot natural gas for domestic and vehicular usage at the same rate to the city of Ahmedabad at which the same is supplied to Delhi and Mumbai to enforce the right of equality Figure 17: CNG prices 10 in India Source: AF Mercados EMI Analysis 10 As on November Natural Gas Vehicles Securing a Sustainable Transport Future for India

30 Box 7 Recent CNG Price Pooling initiative in India Recently, Ministry of Petroleum and Natural Gas issued guidelines for allocation/ supply of domestic natural gas to CGD entities for CNG (transport) and PNG (domestic) segments, in compliance with the judgment of Gujarat High Court (WP PIL No. 47/2011 & 54/2011). The salient features of the policy are as under: Current allocation/supply of domestic gas for all CGD entities stands cancelled except in case of Tripura Natural Gas Company Limited and Assam Gas Company Limited (due to technical issues) 11 GAIL would be allocated 6.4 MMSCMD of domestic gas for supplying to all operating CGD (including Central PSUs and others) entities for CNG (transport) and PNG (domestic) segment at uniform base price Additional gas requirement beyond 6.4 MMSCMD may be sourced by CGD entities through RLNG supplies GAIL would distribute the available pool of domestic gas in proportion to the demand for CNG (Transport) and PNG (Domestic) segments for all operating CGDs without discrimination (including the demand arising from New CGDs) The above initiative is likely to reduce the price disparity among various cities and is likely to benefit the newer cities that largely depend on RLNG supplies for meeting gas requirement of NGVs. A small proportion of domestic gas would improve the price economics of NGVs and result in higher NGV penetration/ conversions (for illustration, an additional supply of one MMSCMD can convert buses or cars or autos. This quantum of volume will require around 100 CNG refilling stations). 11 Based on standard consumptions by respective vehicle category Natural Gas Vehicles Securing a Sustainable Transport Future for India 23

31 6. NGV Technology Changing Paradigms The CNG vehicles in India are a mix of retrofitted/conversion vehicles and OEM vehicles. In the initial years of introduction of NGVs, the OEM market was dominated by Tata Motors, Bajaj Auto Limited and Ashok Leyland, however in the last few years some of the other major players like Volvo, Eicher Motor, Marco Polo, and Maruti Udyog etc. have entered into CNG market. The CNG program has not touched the large highway truck market, except in Mumbai, which bans the entry of old trucks into the city, if not converted to CNG. Table below maps various Original Equipment Manufacturers (OEMs) with CNG vehicle capability in India. Table 3 OEM manufacturer in India 12 OEM Trucks Bus Light Goods Vehicle Car Three Wheeler Tata Motors Bajaj Auto Limited Volvo Eicher India Marco Polo Maruti Udyog Ashok Leyland Toyota Hindustan Motors Mahindra & Mahindra Honda Cars India Hyundai Piaggio Scooter India TVS Motors Source: AF-Mercados EMI Analysis 12 Based on industry sources 24 Natural Gas Vehicles Securing a Sustainable Transport Future for India

32 CNG Buses The technology enhancements, which the NGVs have undergone is directly linked to clean bus transportation programme. The genesis of the program was the 1998 Hon ble Supreme Court order, which made it mandatory to the augment the CNG bus fleet to at least 10,000. Following the Hon ble Supreme Court order, most of urban cities in India have adopted a similar model to replace the highly polluting diesel buses or commercial vehicle. The NGV program for buses was introduced to reduce the diesel-related pollutants like PM and nitrous oxides (NOx). Several studies have shown that CNG programs in Delhi have indeed contributed to a significant (24%) reduction in vehicular pollution. Studies also indicate that reduction of sulfur in diesel and petrol had a significant impact and warned that an increase in usage of vehicles can offset the lower per kilometer emissions. In India, the bus industry had started with conventional stoichiometric engines with three-way catalytic converters but while moving to Euro III they moved to lean burn CNG engines, which provides a better power and torque compared to stoichiometric engines. The PM reduction is achieved from buses running on either engines, but the NOx emission in stoichiometric engines is way more than that of lean burn engines. Recently, USA has developed an advanced version stoichiometric engines that show the higher levels of NOx reduction potential, as well as improved fuel efficiency and torque. The new move is towards stoichiometric operation with an electronic fuel control valve and three way catalysts, along with a cooled exhaust gas recirculation, a combination which improved fuel efficiency and torque. This was a significant step bringing the technology to meet the EPA 2010 and Euro 6 emission standards. The latest development sends a clear signal to the cities on the verge of changing to new CNG systems that the technology adopted should be sustainable, which will control the emission for a long term rather than frequent switching of technologies involving retraining. CNG Light Duty Vehicles (Three Wheeler/Passenger Cars) The Hon ble Supreme Court mandate of 1998 also made it compulsory for three wheelers and commercial cars. Although, the three-wheeler and commercial car owners found it tough to convert to CNG based systems because of high costs of conversion, the Delhi Government offered a 4% interest subsidy to the owners. Although, some of the owners found it difficult to meet the qualification criteria for loan, but the incentive of reduced operational costs because of cheaper fuel negated the increased cost of conversion, which allowed a smooth conversion from petrol/diesel based system to CNG system. Future outlook for Natural Gas Vehicles CNG hybrid bus: A large scale industrial programme has simulated innovation, with the development of prototype for CNG hybrid technology. The technology claims to provide a fuel saving of around 20% to 30% conventional IC Engine. Hythane: The blending of hydrogen with natural gas, the pilot project launched in Delhi demonstrates Natural Gas Vehicles Securing a Sustainable Transport Future for India 25

33 the possibility of shifting towards a new generation fuels and technology needed to combat pollution and climate change. For instance, in the year 2010, first H-CNG dispensing station was commissioned in Delhi. An 80/20 CNG/Hydrogen blend is identified by the stakeholders involved as the optimal ratio in terms of costs, range and emissions. 13 Adsorbed Natural Gas: Although the technology of Adsorbed Natural Gas (ANG) is at a developmental stage the fuel provides higher density compared to CNG and is stored at a pressure of 35 bars. Liquefied Natural gas: Although vehicles running on LNG have been deployed in China, USA and Europe, the fuel can be extensively used in the heavy duty truck segment, where currently there is no defined policy on natural gas usage. The fuel is stored at a higher density than CNG and refuelling frequency is also very low, which makes it a favourable fuel for heavy duty trucks/locomotives travelling long distances. Table below illustrates the summary of the fuels currently under developmental stage and their relative advantage over other natural gas fuels Table 4 Future fuels characteristics: Summary Fuel type Basic advantage Preferred vehicle Countries using the technology CNG Hybrid bus 20% to 30% fuel efficient than conventional IC Engines Bus India (under testing phase) Hythane Low Green House Gas emission Light Duty Vehicles USA, Europe (under trial) ANG Lower storage pressure compared to CNG Currently under testing phase USA, Europe (under test) LNG Higher fuel density, less refuelling frequency Heavy Duty Vehicles and Rail Locomotives China, USA and Europe. Pilot projects held in India Source: AF-Mercados EMI Analysis 13 Energy and Resources Institute, 2004 & CSE, Natural Gas Vehicles Securing a Sustainable Transport Future for India

34 Box 8 Increased role of LNG in transportation Case Study 1: LNG vehicles in China LNG based vehicles brings in advantage in terms of significant reduction in vehicle tonnage and increase in operational range. LNG as a fuel is used primarily for Class 8 trucks, also known as tractor trailers or semis. A typical LNG system operates at -162 degree Celsius and at low pressure (3 to 5 bars) and can store as much as 2.5 times the conventional CNG system, which helps in reducing the size and weight of the truck. Since LNG like diesel and gasoline is present in liquid form, so the refuelling time is comparable to that of diesel and gasoline. Although, overall complexity of the system along with high maintenance costs of the cryogenic parts possess a challenge to implement these systems to be implemented on a large scale. LNG based vehicles are plying along major cities in Xijiang, Inner Mongolia, Guizhou, Guangdong, Fujian, Hainan and Jiangshu. These regions have robust pipeline networks and LNG re-gasification infrastructure which has enabled creation of LNG refilling infrastructure. Natural Gas Vehicles Securing a Sustainable Transport Future for India 27

35 LNG based vehicles are plying along major cities in Xijiang, Inner Mongolia, Guizhou, Guangdong, Fujian, Hainan and Jiangshu. These regions have robust pipeline networks and LNG re-gasification infrastructure which has enabled creation of LNG refilling infrastructure. Figure 18: Map indicating concentration and population growth of LNGV. Figure 18: Map indicating concentration and population growth of LNGV. Source: Westport, China Source: Westport, China If industry estimates are to are be to believed, believed, liquefied liquefied natural gas natural may power gas may 2, 47,000 power vehicles 2, 47,000 by 2015, vehicles up from by 2015, up from 51,000 last year, reducing the country s dependence on oil imports. China 51,000 last year, reducing the country s dependence on oil imports. China currently has 5 million heavyduty trucks. There may be 6, 94,000 LNG-powered trucks by Also, LNG is gaining momentum as a currently has 5 million heavy-duty trucks. There may be 6, 94,000 LNG-powered trucks by transportation fuel in China which is mainly lead by local municipals. For instance, in Beijing, there are plans to introduce Also, 3000 LNG LNG is gaining fuelled buses momentum by end of as this a transportation year. fuel in China which is mainly lead by local municipals. For instance, in Beijing, there are plans to introduce 3000 LNG fuelled buses Natural Gas Vehicles Securing a Sustainable Transport Future for India Natural Gas Vehicles Securing a Sustainable Transport Future for India

36 Case Study 2: Recent developments - LNG based locomotives Locomotives are comparatively recent application running on natural gas fuel. Russia is the first country to successfully launch natural gas based locomotives with its powerful GT1-001 engine. The GT1-001, developed by Russian Railways, has a capacity to drag 16,000 tonnes in 17 rail cars, has set a new world record for a single prime mover with an internal combustion engine. The engine can generate 8300 kw of power and when fully fuelled the locomotive can cover a distance of 750 km with a top speed of 100 km per hour. The engine in the locomotive uses plane s reaction engine, which makes awful noise, which is the reason why the locomotive is utilized primarily in the uninhabited areas. Recently, a more advanced dual fuel engine technology, running on 80 per cent LNG and 20 per cent diesel, is under development in North America. The premise behind duel fuel engine are minimum engine modification and the ability of the engine to switch to 100 per cent diesel burning in case the LNG is not available or there is a technical fault with the LNG system. The proportion of LNG could be pushed as high as 95 percent but only with engine modifications that would render it difficult to switch back to pure diesel burning. In recent years, countries like India, Peru and Sweden have also introduced independent LNG locomotive programs; while the Canadian National Railways is working on consortium to integrate Westport s high pressure direct injection (HPDI) technology and natural gas fuel system technologies into an EMD locomotive. Natural Gas Vehicles Securing a Sustainable Transport Future for India 29

37 7. NGV Economics One of the most significant parameters when introducing a new fuel for use in road transport, or increasing its market share, is the relative prices of fuel and the taxation and subsidy regime. The inter-fuel taxation and subsidies has a large share in the end-user prices of fuels. In India, the NGV economics is primarily driven by following dimensions Tax rate for various fuels viz. petrol, diesel and natural gas. For example Tax rate on natural gas varies from 2% to 26% among various states resulting in regional disparity in fuel prices Proportion of domestic supply is higher for old NGV programmes viz. Delhi and Mumbai while newer cities are likely to rely on expensive LNG Local factors viz. emission standard, air quality standards, state government preference / strategy etc. Above factor together results in price differential in fuel prices essentially indicating that the CNG s economic advantage over petrol and diesel varies among cities. The table below computes the payback period in the cities of Mumbai and Delhi. Table 5 CNG conversion economics 14 Vehicles Average Daily Run (Kms) Conversion Cost (INR) Payback period (Months) Delhi Mumbai Private Car Taxi Auto Bus Source: AF-Mercados EMI Analysis Table 6 Cost advantage of CNG over petrol and diesel Landed Cost at City Gate ($/ MMBTU) Likely CNG Price (INR/ Kg) Advantage over Petrol 53.7% 47.0% 40.4% 33.7% 27.1% Diesel 38.0% 29.1% 20.2% 11.3% 2.4% Source: AF-Mercados EMI Analysis Analysis undertaken in paper clearly indicates that the payback period have extended on account of reduction in price differential. Thus, the future growth of NGV programmes cannot solely depend on the alternate fuel economics and needs to be driven by an enabling policy framework to enhance and de-risk the fuel security for the Indian transport industry. 14 Based on fuel prices applicable as on 1st November Indicates the initial cost difference of a CNG and diesel bus as no diesel bus is being converted to CNG due to technical incompatibility 16 Based on petrol and diesel prices applicable as on 1st November 2013 in the city of Delhi 30 Natural Gas Vehicles Securing a Sustainable Transport Future for India

38 8. India Needs a Roadmap for Sustainable NGV Programme In last two decade, India has progressed significantly in the implementation of NGV programmes in the light commercial vehicle and the bus segments. The NGV potential harnessed so far has remained limited to intra-city vehicles concentrated in few cities that contribute almost 70% of the total countries NGV volume. With expanding pipeline and distribution infrastructure, basic infrastructure for NGV is expected to be in place to harness huge latent potential of densely populated cities. The inter-city bus and truck segment also remains unexploited, even though they contribute heavily to the green house gas emissions. The Central and State and also the Regulator have a critical role to play in realization of the huge inter-city potential. The extant regulatory regime is silent on the issue of developing NGV refilling stations along the highways that are not part of any authorised GA. Since this is critical for scaling up the NGV growth to next level, the Regulator could consider designing a mechanism for development of NGV infrastructure along highways in consultation with industry stakeholders. Last couple of rounds in CGD bidding had evoked interest of players (including private) across industry segment. However, the initial impetus was lost due to regulatory logjam over bidding evaluation/ criteria. With new bidding criteria in place and announcement of round 4, licensing rounds for development of new cities seems to be back on the agenda. The Government can also play its part in the development of the NGV market by adopting an integrated policy approach for appropriately addressing the issues concerning the auto fuel policy, fuel pricing, gas infrastructure development and fiscal/ taxation incentives. Undoubtedly, India cannot achieve its fuel efficiency target without large scale penetration of NGVs. Thus, there is an emerging need for a national roadmap for NGV Implementation that appropriately addresses the key policy, fiscal, taxation and pricing related challenges for sustainability and scalability of NGV as a fuel option for transport sector. Natural Gas Vehicles Securing a Sustainable Transport Future for India 31

39 Figure 19: National roadmap for NGV Implementation Extending soft or subsidized loan to CNG conversion kits Fiscal Incentives Financial assistance to state road utilities for investing in large scale switchover to natural gas or other advanced vehicle technologies Concession rate for excise duty on manufacturing of CNG vehicles by OEMs Taxation Exempting Excise duty on sale of CNG Appropriate tax rate differential between natural gas and petrol/ diesel to encourage use of clean fuel States to co-ordinate and harmonise the tax rate on sales of CNG to curb on the extant tax disparity Move towards a unified emission standards across the country Policy Evolve a uniform pricing mechanism for transport sector across the country Allocating a small proportion of domestic gas supply from new fields to support NGV programes in new cities Restrict use of inefficient technology Statutory Compliance Mandate use of NGV for public transportation in cities that have retail gas distribution networks. Further set timeline for implementation of NGVs program in top polluting cities Move to 10 ppm sulphur emission regime and ensure implementation by end of 12th plan 32 Natural Gas Vehicles Securing a Sustainable Transport Future for India

40 9. Some Interesting Facts Natural Gas Vehicles Securing a Sustainable Transport Future for India 33

41