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March 6, 2019

Alternative fuels and subsidies


March 6, 2019

Only 20 percent of our population has access to clean piped natural gas (PNG); the rest use biomass in the form of uplahs and shrubs or even trees, the latter causing deforestation.

The way most biomass is used causes health issues. A smaller percentage use expensive LPG or kerosene. If rural migration is to be discouraged, lives in the rural areas have to be improved. The PNG network cannot be extended to these areas; LPG, biogas and kerosene are the alternative clean fuel options. Already, small and poor consumers in the urban areas are being offered PNG at highly subsidised rates. We will explore the potential role of these clean fuels and see if some subsidies can help in this respect.

According to an Ogra report (2016-17), LPG consumption stood at 1.2 million tons, with the share of domestic, industrial and commercial sectors respectively at 37 percent, 36 percent and 27 percent. LPG share in the gas market stands at less than eight percent’; 58 percent of the LPG demand is met through local production and the rest is imported.

LPG is almost as expensive as petrol, in February 2019 selling at Rs121 per kg Ogra-controlled rates and Rs150 per kg in the black actual market. In MMBtu terms, this boils down to Rs2669 per MMBtu controlled and Rs3309 in actual market. Compared with the PNG tariff of Rs142, LPG prices are 19 times higher. Compared with the highest PNG tariff which is being protested against, LPG prices are 83 percent higher. Only 20 percent people have access to the PNG network and the rest are consuming biomass while the wealthier ones use LPG. Clearly, some reforms are required in LPG prices.

For comparison’s case, LPG is subsidised in India for the poor and the subsidy is transferred directly to LPG consumers account to avoid misuse. On February 8, subsidised LPG cylinder price was IRS493.53 per cylinder of 14.2 kg. There is a subsidy of around IRS200 per cylinder. In Pakistan, the Ogra-controlled/suggested price is Rs1427 per cylinder of 14.2 kg. In Pakistan, LPG price is 30 percent higher than the corresponding price in India. However, India is trying to substitute LPG by PNG (Piped Natural Gas). A possible motivation could be convenience, safety and price. Pakistan LPG retail is at Rs.2669 per MMBtu, as opposed to the highest gas tariff of RsRs.1460 – at which there is a lot of hue and cry.

LPG prices are almost equal to gasoline prices and are twice that of CNG. Thus, it appears that there is practically no advantage to use LPG as a substitute to gasoline. However, CNG prices are almost 50 percent of LPG and gasoline prices, a clear substitution case. Kerosene at Rs82 per litre is 77 percent of the HSD price and 91 percent of gasoline.

In India, kerosene is sold at Rs56 per litre as opposed to Rs82 per litre in Pakistan. In some states like Chennai, it is sold at 50 percent of the price elsewhere. India is moving towards PNG, and LPG and kerosene demand is going down there. There has been and continues to be a major adulteration problem in India of mixing cheaper kerosene with expensive gasoline and HSD. Kerosene subsidies are going down in India. Kerosene and LPG rates are almost equal in India in terms of MMBtu prices.

There is a general case of subsidies on LPG, if LPG prices are compared with PNG prices. At a minimum, waiver of all taxes may be considered. After all, largesse and support should not be restricted to PNG network areas. LPG-Air-mix plants have been built keeping this in view. However, these plants benefit the rich who live in the developed network areas. The poor invariably live in remote areas and ‘kachas’. As a reference, the gas tariff of LPG-Air mix plants of Rs600 per MMBtu may be kept in mind. However, it may be too much of a subsidy if extended to the LPG cylinder. After all, LPG-air-mix and LPG cylinder should have some comparability, if not equality.

In the northern areas, there is a humanitarian case as well as an environmental one, to provide cheaper alternative fuel. There is poverty there and trees are cut for house-hold fuel needs. LPG is sold in the actual black market at much higher prices there. There is a strong case to provide subsidies both for kerosene and LPG for these areas .The minimum subsidy that can be provided is the waiver of the GST and the petroleum levy. This subsidy can be a general one and additional subsidies out of budget should be provided to the poor. One is tempted to suggest that the Indian LPG pricing of subsidised LPG may be considered as a reference. On the same argument, there is a case for subsidy on kerosene. So long as poverty and inequality persist, there would be a strong argument for subsidies to the poor, be they in the fuel sector or elsewhere.

Subsidies are always opposed by the IMF. Cheaper LNG meant for northern areas may be sold in other areas or in commercial vehicles. No perfect safeguard is available against malpractices. However, solutions can be explored and implemented. The involvement of public-sector companies in distribution can be adopted as some safeguards.

Eighty percent of the population is using LPG, kerosene or bio-mass. Biogas can be cheaper and competitive in agricultural rural areas, something policymakers may pay attention to. LPG-Air mix plants have been installed and the present government has not cancelled those schemes. Biogas may be substituted in place of LPG in agricultural areas. Biogas-based small distribution networks are feasible. Provincial governments and local bodies may be encouraged and facilitated to establish these plants.

Biogas is not a new concept. It has not acquired as much of a market share as it could have. Most of the biogas schemes have been focused on small family-sized biogas production. There has not been much of a movement for community-based production and distribution. Public-sector companies like SSGC and SNGPL are in the best position to facilitate this. A policy is required to encourage and finalise such systems. Technical assistance, demonstration projects, cheaper credit and loans can go a long way in increasing the role of biogas and improving the living conditions in our rural areas. Punjab and Sindh are quite adequately positioned in this respect.

The writer is a former member of theEnergy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.

Email: [email protected]

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