Natural gas from imported LNG will continue to play a major role in replacing coal and liquid fuel-fired electricity generation and reducing emissions, in both developed and developing economies, the International Gas Union (IGU) has said in a report.
However, capital constraints, availability of local gas production, gas infrastructure and national energy policies will impact coal-to-gas substitution rates, IGU said in its ‘World LNG Report 2020’.
Regional differences in triggers for coal to gas switching (including gas versus coal price differentials, policies on carbon emissions, and prospects for carbon pricing) are important as well as policy roadmaps which influence infrastructure investment.
In its 2019 World Energy Outlook, the International Energy Agency has estimated that a carbon price of $60-$80/tonne CO2 would be needed to provide enough support for the power sector to switch from coal to gas in China, whereas emissions savings from switching could be unlocked in Europe as soon as carbon prices exceed $20/tonne CO2.
As a result, simple measurements such as current coal-fired power capacity are not reliable indicators of the opportunities for importing LNG as a replacement for other fuels. Natural gas and LNG also have the potential to help balance variable renewable electricity generation and meet peak power demand, the report said.
The economics of LNG-supplied natural gas fired generation will become more challenging as their demand profile adjusts to balance variable renewable electricity generation and meet peak power demand.
Current forecasts by the IEA indicate renewables could account for two-thirds of world electricity generation output and 37% of final energy consumption by 2040 under its “Sustainable Development Scenario.”
Under this forecast, IGU noted LNG trade supporting displacement of coal-fired generation must find ways of working with renewable electricity infrastructure development to find the best uses of natural gas-fired generation in a “renewable electricity world.”
Final investment decisions in 2018 and 2019 have emphasised traditional project designs and orientations with most FIDs taken on integrated projects that have relied on equity financing.
In large part, this tendency to focus on traditional commercial models is associated with stable oil and relative fuel prices, as well as the significant demand uncertainty faced by legacy as well as growth markets.
The continued evolution of the LNG market, with for instance more liquidity, may incentivise use of broader portfolio approaches, incorporating the flexibility of short-term and spot markets to allow for arbitrage and hedging as energy prices change.
While traditional market approaches of long-term supply contracts are expected to continue to be in the mix to ensure supply security, more innovative spot and short-term project orientations are expected to cover more uncertain demand tranches, the IGU said.
As some of the newer commercial models rely on external financing, the developers behind them had to convince that their market access is secured, by having 80% to 90% of offtake sold under long-term SPAs.
Very few projects were able to do this, on the contrary, most FIDs in 2018 and 2019 were taken by larger players that were able to rely on equity financing, and take FID without the need for long-term SPAs in place for their export volumes. Concerns around reduced importance of economies of scale do not appear to be developing, except where barriers to development constrain the feasibility of large-scale projects.
In the late 2010’s, a significant debate over project scales and economies of scale emerged but recent projects with new configurations, like modular adjustments, appear to have settled the concern. For example, liquefaction added in smaller increments to reduce CAPEX risk.
Economies of scale from what might become the fully-developed projects appears to be less of a concern now than controlling for project risk. For some players, and especially new market entrants, this is likely to serve as a model, especially for liquefaction projects, the IGU said.
However, for other players, project scales that take full advantage of economies of scale will continue to be the driving consideration for project design, although staged expansion through rollout of multiple trains in the case of liquefaction is expected to continue.
Ultimately, additional liquidity and availability of LNG benefits market functionality, and if by the time a next wave of sanctioning is required, some of the barriers faced by newer commercial models will have been addressed, and the industry could see the emergence of more advanced project configurations, the IGU said.