Increased prices of petrol due to a steep increase in taxes in the recent past is set to increase the adoption of compressed natural gas (CNG) -driven vehicles, Crisil Research said in a report on Wednesday.

“CNG was always cheaper than petrol, but the price differential between the two has widened rapidly in the past two years. Today, the cost of running a CNG car is around 44 per cent less than a petrol variant, if you consider the CNG price of ₹42.7 per kg in New Delhi,” said Mayur Patil, Associate Director, CRISIL Research.

In calendar 2021, Crisil Research expects Brent crude to rise by around 23 per cent on-year to an average $50-55 per barrel from $42.3 per barrel in 2020, riding on a gradual recovery in economic activity globally. That would mean around four per cent increase over the average closing price of December 2020.

In comparison, domestic gas prices are expected to rise over 20 per cent to $2.5-3.5 per million British thermal unit (mBbtu) in calendar 2021 from $2.45 in 2020. “While the percentage increase in domestic gas prices is similar, the differential between petrol and CNG retail prices will remain wide because of higher taxes on the former,” it explained.

“Tax now accounts for over 60 per cent of the retail selling price of petrol, compared with 47 per cent in 2019. Given that the government has to find the money to ramp up public spending – and is also promoting usage of cleaner fuels – it is unlikely that the tax on petrol will come down to previous levels anytime soon,” said Hetal Gandhi, Director, CRISIL Research.

The government is also ramping up city gas distribution (CGD) networks, which would also drive up CNG consumption, Crisil noted.

Within CGD, the CNG segment – accounting for nearly 40 per cent of CGD demand – is expected to log a compound annual growth rate of around 25 per cent between fiscals 2021 and 2023, it said. A total of 136 ‘geographical areas’ have been awarded under Rounds 9 and 10 of CGD, which are expected to cover around 71 per cent of the cumulative population.

“While growth in CNG vending outlets has more than doubled to 2,434 between 2015 and 2020, it is still significantly fewer than petrol outlets. The expansion of CGD network and increasing adoption of CNG as a fuel for personal vehicles will ensure this number increases faster than before,” said Crisil.

CNG vehicles account for around five per cent of the passenger vehicles sold in the country annually. With the implementation of Bharat Stage VI standards, prices of diesel vehicles have risen sharply, pushing most commercial players - such as radio-taxi companies - towards CNG, said Crisil.

The price competitiveness of CNG is evident in consumption volumes, which have logged a CAGR of round 11 per cent over the past three years, it added. About 1.8 lakh CNG cars and passenger vehicles were sold last fiscal versus 1.4 lakh in fiscal 2015.