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Energy consultancy Wood Mackenzie noted today in a statement that coal is facing increasing competition from gas in the Asian power generation mix. Downward pressure on gas prices as well as individual market conditions in Asia are creating conditions in which it might compete with coal in the region.
Asia Pacific demand is driving the largest ever level of investment in power generation capacity over the next two decades, with over 2,000 GW expected to be added by 2030.
However, it should not be presumed that coal is an automatic first choice for baseload operation with gas restricted to peak/mid-merit.
While we do not expect coal prices to fall significantly lower in the near-term, gas prices in particular are coming under increasing pressure as supply rises and the pace of demand in key markets slows.
Spot LNG prices have fallen as low as US$7 per million British thermal units (mmbtu) in recent months and, with over 100 million tonnes per annum (Mtpa) of new supply expected to be operational by 2020, near-term recovery is unlikely.
The price differential between coal and gas will certainly be one to watch but it is worth noting that Asia is not a singular gas market and the conditions required for gas to displace coal are influenced by a range of factors.
In this example, on a short-run basis, a delivered coal price of US$77/ t gives an implied price of around US$3.8/mmbtu. If gas prices go higher than this level then coal-fired generation will be cheaper and out-compete gas. If gas prices fall below this point then gas triumphs.
However, environmental issues can also impact economics. If we consider carbon, the price at which gas can compete subsequently rises to US$6.2/mmbtu and US 8.1/mmbtu for a new build using a US$30/tCO2 carbon tax. The actual level that gas competes with coal will vary by market and regulatory structure.
Consequently, it is evident that there is very real potential for gas to take an increasing share of the 2,000 GW of power needed by 2030. Industry players will need to watch individual markets closely and consider the dynamics of gas-coal competition.
Source: Wood Mackenzie
