2 January 2025 : Indian Express Editorial Analysis
1. Energy Churn Ahead
(Source – Indian Express, Section- The Editorial Page- Page No. – 08)
| Topic: GS3 – Indian Economy |
| Context |
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Analysis of the news:
Reduced APM Allocation and Rising Gas Costs
- The city gas distribution (CGD) sector is facing substantial challenges due to a sharp reduction in the allocation of gas under the administered price mechanism (APM) for priority sectors such as domestic piped natural gas (D-PNG) and compressed natural gas (CNG).
- The allocation has been slashed from 72% in the second quarter of the financial year to 44% as of November 16.
- To fill this gap, companies must depend on costlier alternatives like high-pressure high-temperature (HPHT) gas and imported regasified liquefied natural gas (RLNG), which are 1.5 to 2 times more expensive than APM gas.
- This shift is expected to increase gas costs by approximately ₹5 per standard cubic meter (scm) or ₹7 per kilogram in the priority segment, significantly affecting profitability.
Impact on Profitability and Volume Growth
- The reliance on expensive gas sources will disproportionately impact the D-PNG and CNG segments, which account for two-thirds of the sector’s volumes.
- Despite currently stable crude prices of $70-75 per barrel offering limited relief, the cost implications are substantial.
- The sector is also grappling with stiff competition from diesel in the medium and heavy commercial vehicle segments.
- CNG’s cost competitiveness against diesel has eroded over the past quarters, and potential diesel price cuts could further narrow the gap.
- On the three-wheeler front, new CNG vehicle registrations have stagnated, and the PM e-Bus Seva scheme is accelerating the adoption of electric buses, which make up 7% of CNG volumes.
- These dynamics have led to a slowdown in CNG volume growth, which remained at 11% over the last two years.
Limited Pass-Through Ability and Earnings Decline
- CGD companies may struggle to pass on the increased gas costs without adversely affecting volumes.
- Assuming that only half of the cost increase is passed on to consumers, earnings (EBITDA) in the CNG segment are projected to drop, potentially erasing ₹2,300 crore from the sector’s profits in the next financial year.
- The commercial and industrial segments, which constitute one-third of CGD sector volumes, are also highly price-sensitive.
- Previous gas price hikes led to a 25% decline in consumption in 2022-23 as competing fuels like propane gained traction.
- This sensitivity limits the ability of these segments to mitigate the broader profitability challenges.
Consolidation Driven by Financial Constraints
- Larger CGD players with established networks, CNG infrastructure, and favorable gas procurement contracts are better positioned to weather the current headwinds.
- Strong balance sheets and completed capital expenditure programs provide them with a competitive edge.
- Conversely, smaller entities without robust financial backing, reliant on spot gas purchases, and burdened by significant capital expenditure, are expected to struggle.
- Eleven areas without strong parentage are identified as potential acquisition targets.
- Furthermore, 61 areas operated by PSUs or entities with strong parentage but requiring substantial investment may face increased debt dependency, creating additional consolidation opportunities.
| Practice Question: The reduction in administered price mechanism (APM) gas allocation and reliance on costlier alternatives is reshaping the city gas distribution (CGD) sector. Discuss the economic and environmental implications of this shift, and suggest measures to ensure sustainable growth in the sector.(250 Words /15 marks) |
For more such UPSC related Current Affairs, Check Out: 01 January 2025 : Indian Express Editorial Analysis
