The government plans to set up a natural gas trading hub after unbundling GAIL India into two separate entities — a marketing and a pipeline company.

The oil ministry is expected to move a cabinet note to split the state-owned firm soon as its marketing and pipeline businesses should be at arms-length and not provide any advantage. The unbundling process is expected to be completed within this fiscal, officials said.

They said the trading hub would be set up after the unbundling which would aid in better price discovery for domestic as well as imported gas with the aim to become a leading hub in Asia, competing with Singapore, Shanghai and Tokyo.

The trading exchange, or the hub, will be on the lines of the existing online platforms that trade in power.

The hub is tentatively expected to come up in the early part of next fiscal, the officials said.

Natural gas can be traded freely at the hub with prices determined by the market and no regulatory intervention. Gas hubs require a highly developed infrastructure, including pipeline networks, regasification and storage capacities to facilitate trading at short notice periods.

An effective hub requires interest from both suppliers and consumers along with adequate volumes. Creating a hub is a complex process as it requires time for the market-determined prices to emerge.

These hubs are platforms for deregulated prices and therefore, the participants should be assured of no regulatory intervention even if the prices go against the government’s interest.

Regulation allowing domestic and foreign participants to trade, and access pipelines and regasification facilities is also essential. An abundant supply of gas is necessary to allow the commodity to be traded in significant volumes. An effective hub would also require transparency, and liquidity, and volatility should be meaningful for all the stakeholders.

Analysts pointed out to a number of challenges to set up a hub.

There is significant gap in the prices of domestic gas and regassified LNG, which makes it difficult to arrive at a single price.

Besides, there is lack of pipeline connectivity across the country, while the product prices of two major consumers — the fertiliser and power sectors — are regulated to a large extent.

The unbundling of GAIL India is a pre-condition to set up a trading hub.

The hub is more likely to be used for pricing LNG supplies to India as the country has struggled to secure cargoes at acceptable prices. A domestic gas hub could act as a means to deliver more affordable LNG, the analysts added.

India, the world's fourth-biggest importer of liquefied natural gas (LNG), does not have a free market regime for gas. Natural gas is sold on the basis of a government-mandated formula that links the local price to international rates, while most long-term import contracts are linked to crude oil.

Cheaper power

A large number of discoms are making a beeline for the power supplied by NTPC under the SCED system which facilitates supply of cheaper electricity on priority, reports PTI.

Under SCED (Security Constrained Economic Dispatch), implemented over a year ago, power generating companies raise capacity utilisation of more efficient plants, or of those units which are located closer to coal mines and thus have lower freight cost. As a result, the cost of production goes down, which benefits both the distribution companies and end consumers.

The mechanism then pools supply from selected stations on a national-level “merit order”, under which power is first dispatched from lower fuel cost units whenever any state seeks electricity from the central pool.