The government has not yet extended the FAME-II scheme, which provides subsidies for electric vehicles. This has led to a slowdown in EV sales, which has created an opportunity for CNG to regain market share.
30 Jun 2023 | 5537 Views | By Shahkar Abidi
Once the fuel of choice for taxis and auto-rickshaws in India, CNG which saw a rise in prices in recent years had fallen out of favour with the simultaneous stabilisation of diesel and petrol prices. However, a report by Nuvama Institutional Equities suggests that CNG is once again in competition ...
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Once the fuel of choice for taxis and auto-rickshaws in India, CNG which saw a rise in prices in recent years had fallen out of favour with the simultaneous stabilisation of diesel and petrol prices. However, a report by Nuvama Institutional Equities suggests that CNG is once again in competition with traditional fuels, thanks to the positive recommendations of the Kirit Parekh Committee and falling spot LNG prices.
Furthermore, with the government indicating its unwillingness to extend the FAME benefits beyond March 2024, the development is likely to further tilt the benefit in favour of other fuels, including CNG.
For instance, the cost of CNG is now 45% less than that of petrol, and 32% less than that of diesel. Earlier, the price differences were about 41% against petrol and 23% against diesel. This has made CNG a more attractive option for consumers, and it is expected to drive growth in the segment over the next few years. According to the Nuvama report, India's City Gas Distribution (CGD) networks will distribute more gas over the course of the following ten years (FY23–FY33) at a CAGR of 7-8%.
The Kirit Parekh Committee, which the government established to review the natural gas industry, suggested a number of actions to increase the use of CNG, including expanding the number of CNG stations and lowering the cost of fuel. These recommendations have already started to have an impact, with CNG prices falling by around 10% in recent months.
Secondly, the report suggests that the LNG market is likely to remain tight over the 2022-2025 time period, amid slowing supply growth and declining Russian flows to Europe. Russia now accounts for less than 10% of Europe’s gas supply mix. Nonetheless, a gradual rebalancing of European gas markets puts LNG on an overall downward trend. Spot LNG prices have already declined 85% to US$ 9/MMBTU from their peak of US$70/ MMBTU in Q2FY23. Moreover, a wave of LNG supply is likely to hit the market in 2024, as new capacities come on stream due to a surge in Final Investment Decisions (FIDs) due to the Russia-Ukraine crisis.
In addition, although EVs’ operating expenses are lower than CNG variants, the upfront capital cost of about 40% for EVs is much higher in comparative terms. The government has not yet extended the FAME-II scheme, which provides subsidies for electric vehicles. This has led to a slowdown in EV sales, which has created an opportunity for CNG to regain market share, which is expected to further weigh heavily on customers’ minds, thereby creating further opportunities for CNG to regain market share. Under the FAME-India Scheme, incentives are provided to EV buyers that are linked to battery capacity, i.e., Rs 10,000/KWh for an e-3W and an e-4W, with a cap of 20% on the cost of a vehicle. FAME-II was launched to support the production of 1 million EVs and 7,000 e-buses in India. It offers a discount of up to 40% on the cost of locally manufactured vehicles and claims it as a subsidy from the government. Therefore, the on-road pricing of EVs is already inclusive of the subsidy benefits provided by the government. However, the FAME-II subsidies are not likely to be extended after March 2024.
Concurrently, the penetration of CNG vehicles is on the rise since they offer higher mileage than other internal combustion engine (ICE) vehicles. The mix of CNG vehicles has improved to 9% in FY23 (versus 5% in FY13). In fact, CNG car sales hit a record-high in FY22, registering over 3,86,000 units (up 62% YoY). EV penetration continues to be minuscule, although it is picking up pace with a share of 2% in FY23 (versus 0.1% in FY20), the report adds.
As a result of these factors, CNG is once again a viable option for motorists in India. The fuel is cleaner and cheaper than petrol or diesel, and it is also becoming more readily available in many parts of the country. With this, it remains to be seen how the two will fare in the future.