Increasing Petrol Prices leads To Adoption of CNG Vehicles: CRISIL

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With price differential widening to about 44%, the elevated prices of petrol due to a steep increase in taxes in the recent past is set to increase the adoption of compressed natural gas (CNG)-driven vehicles, says CRISIL.The last time petrol prices had crossed the Rs80 per litre mark was in October 2018, when Brent crude had surged to $80.5 per barrel. The price has now touched an all-time high of Rs85.2 per litre in New Delhi even though Brent has slid to about $55 per barrel. This was after a roller-coaster 2020 when it surged to $63.6 in January and then plunged to a two-decade low of $23 in April 2020.

The increase is due to higher excise duty, which rose by Rs13 to Rs32.98 per litre in 2020, and value-added tax (VAT). Hetal Gandhi, director of CRISIL Research says, “Tax now accounts for over 60% of the retail selling price of petrol, compared with 47% in 2019. Given that the government has to find the money to ramp up public spending – and is also promoting usage of cleaner fuels – it is unlikely that the tax on petrol will come down to previous levels anytime soon.” 

During the current fiscal, the Indian government is expected to earn incremental revenues of about Rs1.4 lakh crore because of higher excise duty – despite petrol and diesel sales volume likely declining 10%-16%. In calendar 2021, CRISIL Research says it expects Brent crude to rise about 23% year-on-year (y-o-y) to an average $50-$55 per barrel from $42.3 per barrel in 2020, riding on a gradual recovery in economic activity globally.

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That would mean an around 4% increase over the average closing price of December 2020. In comparison, it says, domestic gas prices are expected to rise over 20% to $2.5-3.5 per million British thermal units (mBbtu) in calendar 2021 from $2.45 in 2020. “While the percentage increase in domestic gas prices is similar, the differential between petrol and CNG retail prices will remain wide because of higher taxes on the former,” it added.

Parallely, the Union government is ramping up city gas distribution (CGD) networks, which would also drive up CNG consumption. Within CGD, the CNG segment – accounting for about 40% of CGD demand – is expected to log a compound annual growth rate (CAGR) of around 25% between fiscals 2021 and 2023. CNG vehicles account for about 5% of the passenger vehicles sold in India annually.

With the implementation of Bharat Stage VI standards, prices of diesel vehicles have risen sharply, pushing most commercial players, such as radio-taxi companies towards CNG. The price competitiveness of CNG is evident in consumption volumes, which have logged a CAGR of about 11% over the past three years. About 1.8 lakh CNG cars and passenger vehicles were sold last fiscal versus 1.4 lakh in fiscal 2015. 

Mayur Patil, associate director of CRISIL Research, says, “CNG was always cheaper than petrol, but the price differential between the two has widened rapidly in the past two years. Today, the cost of running a CNG car is about 44% less than a petrol variant, if you consider the CNG price of Rs42.7 per kg in New Delhi.”

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What would also ramp up the share of natural gas in India’s energy mix is trunk gas pipelines being laid, and deeper penetration of the city gas distribution (CGD) network. A total of 136 ‘geographical areas’ have been awarded under rounds 9 and 10 of CGD which are expected to cover around 71% of the cumulative population. “While growth in CNG vending outlets has more than doubled to 2,434 between 2015 and 2020, it is still significantly fewer than petrol outlets. The expansion of CGD network and increasing adoption of CNG as a fuel for personal vehicles will ensure this number increases faster than before,” the rating agency concludes.