Recent cuts in the allocation of cheaper Administrative Price Mechanism (APM) gas to Compressed Natural Gas (CNG) providers are raising concerns about the future of CNG vehicle sales in India. With CNG historically being a more affordable fuel option compared to petrol and diesel, these reductions could undermine its competitiveness and hurt the growth of CNG vehicle volumes.
Since the beginning of FY24, the share of APM gas allocated to the CNG sector has drastically decreased, from over 85% to just 72%. This reduction marks the steepest cut in APM gas supplies for CNG ever. As a result, city gas distribution (CGD) companies are increasingly reliant on more expensive liquefied natural gas (LNG) to meet demand. The shift to LNG, however, could lead to higher CNG prices for consumers, potentially dampening the demand for CNG vehicles.
Industry sources warn that if CGD companies are forced to raise prices significantly, CNG may no longer be the attractive alternative fuel option it once was. This could lead to slower growth in CNG vehicle sales, which had been growing at a compound annual growth rate of 15% from FY20 to FY24. In the worst-case scenario, further deallocation of APM gas could hurt vehicle conversion volumes and impact the overall profitability of CGD companies. Additionally, any price hikes could lengthen the payback period for consumers who have converted their vehicles to CNG, reducing the economic advantage of switching to this fuel. As CGD companies struggle with shrinking margins and increased costs, they may scale back the discounts they offer for conversions, which would slow down the adoption of CNG vehicles.
The decline in APM gas availability also means that new geographical areas with high growth potential are receiving lower gas allocations. These areas, which were previously a source of optimism for the sector, may now experience slower development. The long-term success of CGD companies will likely depend on securing favorable supply contracts, particularly those involving term LNG or high-pressure high-temperature gas sources. The government’s change in policy has raised concerns about the future availability of low-cost gas for the CNG sector, the need for CGD companies to adapt by sourcing more expensive LNG may shift the economic landscape of CNG. These changes could substantially affect the vehicle market and hinder further growth unless price adjustments and new supply strategies are carefully managed.
