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    Gas versus Coal Power: Challenging Conventional Wisdom



Gas certainly is uncompetitive with coal in continental Europe, explains Wood Mackenzie's Massimo Di Odoardo.

by: Drew S. Leifheit

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, Shale Gas , Environment, Top Stories, Gas to Power

Gas versus Coal Power: Challenging Conventional Wisdom

At the World Gas Conference in Paris, France, Massimo Di Odoardo, Director, Gas & Power Research, Wood Mackenzie, addressed the conventional wisdom over the global coal versus gas debate in a session dedicated to the role of natural gas in the power generation mix.

He offered, “In Europe, commentators love telling the story of the shale gas revolution and its effects on the coal price in Europe, the thesis being that cheap gas is displacing coal in the power sector in North America and boosting coal exports that, in turn, are reducing coal prices in Europe and displacing gas.

In a chart from 2011, he showed that cheap gas was displacing coal in the US, with gas prices below $25 Mm/Btu, that coal displacement was quite substantial.

With gas prices in the US currently well below $3/Mm Btu, he reported that Wood Mackenzie estimated some 3.7 BCF of gas to coal displacement in the US, but asked whether this would result in the increased export of coal into Europe. To address that, he also showed the European coal price and the share of US coal exports as a percentage of thermal seaborne trade.

“What it shows is that, while in 2012, when gas' price dips, coal exports increased from the US and effectively did contribute to a reduction in global coal prices; since then, though, coal export from the US has declined,” he explained, adding that in reality the coal markets are oversupplied, a consequence of overcapacity in the Pacific and much lower coal demand in China than expected.

US coal exports, he said, remain at the margins. “We estimate that for the cheaper coal in the US to be exported to Europe we need a coal price of about $75/Mm Btu, and with coal prices in Europe trading below $60/ton, coal exports from the US are going to continue to decline this year, despite these very low gas prices.”

Another contention in Europe, he said, is that gas cannot compete with coal, and that coal has no role whatsoever in price formation in Europe.

Gas certainly is uncompetitive with coal in continental Europe, explained Mr. Di Odoardo, whose diagram predicts coal switching given an EU Emissions Trading Scheme price of $7-10/ton at the $60 price of coal and natural gas under $6/Mm Btu.

According to a coal to gas switching mechanism in the UK, providing carbon price support, coal to gas switching can take place there with a gas price just under $7/Mm Btu. “It's effectively establishing some sort of 'soft floor' across all European gas prices,” he explained, “so not only can gas compete with coal in the UK, it is also a pretty strong determinant of price formation across European countries these days.”

Meanwhile, talk of the “Golden Age of Gas,” he reported, inferred that coal has no role in OECD Asia, with coal power going down by 1.5% in Q1 of 2015, compared to last year. “Increasingly, people are talking about 'peak coal' in China,” he commented, adding that he intended to challenge those conclusions in his presentation.

He noted the pressure on the Chinese government to clean up the environment along with the introduction of restrictions, in particular regarding the emissions of coal-fired power generation. “But, at the same time, provinces across China still believe coal remains the cheapest choice for producing electricity, and programs to support retrofitting are flourishing at the province level,” commented. Mr. Di Odoardo.

Given the restrictions on carbon emission are still not on the Chinese government agenda, it remains determined, he said, to keep coal production in the West, where pollution is less.

That coal production, he contended, along with substantial additional nuclear capacity in the East, will provide much competition for gas in coastal provinces.

In OECD Asia (i.e. Japan, Korea and Taiwan), he explained that over the last 5 years gas-fired power generation has outpaced that of coal in those countries, but at the same time coal is experiencing a new renaissance. “In South Korea, for example, there is about 10 gigawatts of additional coal capacity being brought online in the next couple of years,” he said.

In Japan and Taiwan, uncertainties about nuclear are certainly favoring both coal and gas, but coal still providing economic advantage has fuelled proposals to build new facilities.

“Unless a broader carbon policy is adopted in Asia, coal to gas competition is going to be extremely challenging for gas,” said Mr. Di Odoardo, who concluded that going forward US LNG exports are likely to put further pressure on global gas prices, coal switching in the UK is just a matter of time, and low gas prices might help introduce carbon pricing mechanisms in Asia.

Sund Energy's analyst Alan Whitefield introduced a study on the possible role that gas could have in the generation of electricity. Among the key messages, he offered, “The first is that regions are moving in different directions for generation. And coal and renewables are more to blame than gas itself.”

Meanwhile, relative fuel prices and costs matter greatly. “In Europe, coal and renewables have replaced gas somewhat, demand for gas has stagnated. However, there are some signs of green shoots of recovery in Spain and the UK, very recently.”

Gas has replaced coal in the US, he said, primarily due to price.

Renewables are growing everywhere, in all regions, he said, explaining: “It's domestic, popular with voters. Renewables bring secure supply when the sun shines and the wind blows. It makes people feel good, or so we're told,” explained Mr. Whitefield, who added that, of course, economic driver are also involved, like the price of gas compared to competing fuels.

Gas, especially LNG, he noted, is becoming cheaper. He mentioned other factors like the competition for flexibility and security of supply, and subsidies, among others.

China, he said, will be the big story in energy, with the country's gas demand growth for power far beyond that of other countries. “In total, the US leads the way in gas demand, but from a growth perspective it's China that stands out, with over 5% growth per year up to 2040, according to the IEA.”

Renewables growth, he explained, according to the IEA will be greatest in Europe and the US, and their combined gas demand for power generation far surpasses that of the rest of the world, but it is a complex picture.

Mr. Whitefield offered, “The recession, and a focus on efficiency, has reduced demand – we know this. EU policy points to the direction of further demand destruction for gas.”

Still, there are major differences within Europe, according to him.

“In some countries, gas is seen as a last choice for generation; other countries see it as the first choice. The key message is, electricity generated from gas is decreasing in Europe.”

Where should Europe go next? he queried. One certainty is that renewables will grow.

He commented: “As we know, they're intermittent and less predictable. Also, with more distributed generation, that makes demand less predictable, too.”

Noting the growth of nuclear in some countries, while decreasing in other, he called it a “messy picture.”

“Coal has a strong position, and gas is the last resort in some countries.”

It is a similar story in Asia, with uncertain demand in Japan for expensive LNG post Fukushima; despite carbon targets in Korea, the country still looks to burn more coal, with gas consumption going down. Demand for gas is growing in the Middle East, he stated, with power generation being the main driver, despite the increase there in renewables.

Mr. Whitefield noted the high potential for gas resources in the Middle East and North Africa, dubbing Iran a “big story” assuming sanctions are fully lifted. Price subsidies in MENA, he explained, are quite common, with higher prices charged for industry compared to that paid by households. Economic growth is certain, but, for example, development energy efficiency measures is uncertain.

In conclusion, he said, “There are different trends in different regions, but demand is falling, there's been overcapacity and high competition in most developed countries, Europe being the classic example. Coal prices are low, often lower than gas prices – this may change over time, and support to and growth in the renewable energy sector, with all fossil fuels losing market share to renewables, along with demand growth and baseload potential in developing countries.”

Roger Bounds, Global Head of LNG, Shell, raised the question of what role the natural gas industry can play as an industry to encourage a further uptake of gas and to see that it penetrates more fully.

Recognizing that global energy demand will continue to rise, he said, because populations are growing, primarily in cities which are energy dependent and where quality of life is improving. “With that affluence and improved quality of life, they also make greater call for cleaner air, sustainable development energy systems, and they can afford and are willing to pay for, are now prepared to make the choices which would lead them to choose gas and gas complemented by renewables.”

Given the increase in energy demand, how will it be allocated? asked Mr. Bounds.

He offered, “We believe that gas will play a leading role in meeting that energy demand. Gas is, and has been for some time, the fastest rising share of increase in demand for fossil fuels. And within gas demand, LNG is the fastest growing contributor to that gas demand.”

Gas is abundant, he said, and that's why it's coming on.

“Gas is acceptable,” he contended. “When consumers are given the opportunity to trade off between the price of gas versus clean air, they choose clean air. When consumers and utilities are given the choice between more flexible, reliable gas sources versus liquid fuels, they choose gas – so it is acceptable.”

Gas, he conceded, does not compete for baseload power versus coal, particularly when coal is used with subsidized renewables. He commented, “And that's really been the outcome of a policy failure in Europe, where gas has been squeezed out by a combination of cheap coal and subsidized renewables.”

However, Mr. Bounds said that gas, when complemented by the right sort of carbon price, can place as an economic choice. Such a choice, he explained, doesn't come about in a policy vacuum, but because of distinct policy choices and infrastructure that was put in place from the 1970s to 2000 in order to facilitate gas coming into the marketplace: pipeline networks, LNG receiving facilities and gas pricing schemes which allowed gas to be chosen. “Why it has slowed down since 2012 is also now due to those policy choices.”

-Drew Leifheit