Liquefied natural gas (LNG) is unlikely to replace coal in India’s most coal-intensive industries, despite claims by global oil and gas companies that it serves as a transition fuel, according to a new report by the Institute for Energy Economics and Financial Analysis (IEEFA).

The report states that in India’s power sector — which consumes nearly 70 per cent of the country’s coal — LNG and natural gas have been priced out of the energy mix. Gas-fired electricity generation now contributes less than 2 per cent to the national grid in FY2025, down sharply from 13 per cent in FY2010, as gas fails to compete with cheaper renewables and domestically produced coal.

High costs remain a key barrier. In FY2024, average LNG prices were nearly nine times that of domestic coal and more than double the cost of coal imported from Indonesia, India’s largest supplier. Due to such uncompetitive pricing, 31 gas-fired power plants with a combined capacity of almost 8 gigawatts — representing 32 per cent of India’s total gas-based capacity — generated no electricity in FY2025. Of these, 5.3 GW were officially retired in April 2025 due to inoperability.

While gas plants still provide peaking power during periods of high demand, the IEEFA report suggests that this role may soon be taken over by the rapid deployment of battery storage systems through 2030. Renewables now make up 12 per cent of India’s electricity mix — four times their share from a decade ago.

India’s second-largest coal-consuming sector, iron and steelmaking, has also shown limited shift to gas. Though India is the world’s largest producer of direct reduced iron (DRI), a method typically reliant on gas, 80 per cent of its DRI production still uses coal-based rotary kilns due to lower costs. Since FY2016, natural gas use in this sector has only grown by 0.63 billion cubic metres — most of it sourced domestically rather than through imported LNG.

The report notes that limited coal-to-gas switching could take place among smaller industries as India’s national gas grid expands. However, this will depend on LNG pricing, infrastructure readiness, and the relative competitiveness of other fuels.

IEEFA concludes that natural gas demand is more likely to grow in sectors not traditionally reliant on coal, such as city gas distribution, transport, and fertilisers. Still, even in these areas, growth may be constrained by the high and volatile costs of imported LNG, sensitivity to end-user pricing, and the emergence of cleaner, cheaper alternatives.