Indian Gas Exchange (IGX) – India’s first Gas exchange was launched in June, 2020.
It is a digital trading platform that will allow buyers and sellers of natural gas to trade both in the spot market and in the forward market for imported natural gas across three hubs —Dahej and Hazira in Gujarat, and Kakinada in Andhra Pradesh.
Now only imported Natural Gas can be bought at the exchange, as domestically produced gas’s price is determined by the Government.
Imported Liquified Natural Gas (LNG) will be regassified and sold to buyers through the exchange, removing the requirement for buyers and sellers to find each other.
Why does it matter?
Exchange is a more efficient way of buying and selling. Buyers of Gas will not have to contact multiple dealers to get a fair price. Usually contracts for Natural gas are for longer durations like 6 months and beyond, exchange will provide more flexibility to buyers and sellers as it has shorter duration contracts for delivery on the next day, and up to a month.
Gas is a much cleaner fuel and the Government plans to increase the share of natural gas in its energy mix to 15% by 2030 from the current 6%. Moreover, many end user industries like power etc face shortage of gas. By building an efficient market, gas can be made available to end user industries at fair prices.
Regulatory changes required:
Right now the pipeline infrastructure necessary for the transportation of natural gas is controlled by the companies that own the network.
This creates a conflict of interest. The entity which owns the pipeline might be in competition with another entity which might want to use the pipeline to transport the gas which was bought on the exchange.
A utility like Gas pipelines can’t be replicated by all buyers and sellers. There has to be common infrastructure which should be available fairly to all at right charges.
What is required is an independent system operator for natural gas pipelines would help ensure transparent allocation of pipeline usage, and build confidence in the minds of buyers and sellers about neutrality in the allocation of pipeline capacity.
Moreover, natural gas is not included in GST. Every state has its own VAT rate which creates friction for buyers at the exchange.
It is crucial to remove these hurdles to ensure a vibrant Gas market in the country.
IGX as a business:
IGX is owned and operated by Indian Energy Exchange (IEX) which is a private entity. Right now we just have one energy exchange. Although the gas exchange business might not have significant volumes right now, first mover advantage matters a lot in this kind of business.
Exchange business has network effects.Read about Network effects here
Buyers go to the exchange where there are maximum sellers and sellers go to the exchange which has maximum buyers to get the best prices. Thus, it creates a flywheel effect. It is very difficult to remove the leader when these effects are prominent.
By moving in first, IGX will get this benefit as the market matures and volumes pick up.
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