Why CNG vehicles may continue to enjoy strong demand despite rising gas prices

The CNG vehicle industry in India has demonstrated remarkable resilience despite a substantial increase in global gas prices, a trend likely to continue in the medium term, according to a report by CARE Ratings. The report highlights that during the financial year 2023, sales volumes of CNG vehicles surged by 40.7 per cent compared with the previous year despite a 49 per cent rise in average gas prices.

The increase in global gas prices is a result of post-COVID-19 economic recovery, the ongoing Russia-Ukraine conflict, and production decisions taken by major fuel producers. The CNG vehicle market in India has displayed unexpected resilience, according to CARE Ratings.

All categories of CNG vehicles, except CNG goods vehicles, have experienced significant demand growth. The decline in demand for CNG goods vehicles, on the other hand, can be attributed to ashift towards electric light commercial vehicles (LCVs) among last-mile delivery operators.

What's driving demand for CNG vehicles?

According to the report, the sustained demand can be attributed to a significant price difference between petrol and CNG, which translates to lower operating costs for CNG vehicle owners, even amidst the upward trend in gas prices. Boosting demand further, the revision of the fuel pricing formula in April 2023, which was aimed at reducing volatility in CNG prices, is expected to contribute to CNG vehicle sales in the medium term.

CNG is not just greener but cost-effective too

Emphasizing the cost benefits of CNG, CARE Ratings Senior Director Yogesh Shah highlighted that the fuel continues to offer substantial cost savings for individuals with long commutes and taxi drivers who cover extensive distances on a daily basis.

"With the reduction in CNG prices and improved stability under the newly administered Price Mechanism, the attractiveness of CNG as a fuel has been further enhanced, which will drive CNG vehicle sales in FY24," Shah said.

Lower volatility seen in CNG rates

According to CARE Ratings, the government has addressed volatility in gas prices through its new pricing mechanism.

"Natural gas produced from nomination fields of ONGC/OIL, New Exploration Licensing Policy (NELP) blocks and pre-NELP blocks will now be indexed to crude oil prices and be subject to a floor and a ceiling. However, gas produced from new wells or well interventions in the nomination fields of ONGC and OIL would be allowed a premium of 20 per cent over the APM (administered price mechanism) price," it said. 

Previously, domestic gas prices were determined as per the 2014 domestic gas pricing guidelines, which provided for the declaration of prices for a six-month period based on the volume-weighted prices prevailing at four gas trading hubs — Henry Hub, Albena, National Balancing Point (UK) and Russia for a period of 12 months, and a time lag of a quarter, it pointed out. 

The road ahead for CNG vehicles and EVs

As the electric vehicle infrastructure expands and the cost of electric vehicles decreases due to advancements in battery technology, it is expected that internal combustion engine-based vehicles, including CNG vehicles, will gradually be replaced by electric vehicles. 

Currently, EVs make up around one per cent of new automobile sales in India whereas CNG vehicles contribute to 8.8 per cent of all passenger vehicles.

The vast majority of CNG vehicles present on roads are in the form of commercial vehicles especially vehicles like trucks and buses.

With range limitations and charging infrastructure still lacking, EVs will take longer to take away market share from long-haul commercial vehicles.

Catch latest stock market updates here. For all other news related to business, politics, tech, sports and auto, visit Zeebiz.com.