High prices take toll on gas strategies for South Asia [Gas in Transition]

South Asian states led by India are embarking on an evolution of their power generation systems that will constrict long-term gas growth, as the region’s biggest economies embrace renewable sources and to some extent coal to drive their energy transition and wean themselves off expensive fossil fuel imports.

Economic output in South Asia is expected to grow faster than every other emerging market/developing economy region in 2023-2025, reaching 5.8% this year and 5.6% next year, according to the World Bank’s latest update for the region released in October.

The forecast underlines the Indian subcontinent’s status as a dynamo for the global economy, but a major drag on growth prospects is a coal- and gas-dominated energy mix that has struggled to meet demand through local supplies. The region is a net energy importer and relies on imports to meet more than 60% of oil and gas demand.

The high import dependency means South Asian states are vulnerable to the sort of global energy price shocks that have left some developing countries struggling to keep lights on. At the same time the region is sitting on considerable renewable energy resources that are largely untapped – up to 799 GW of solar power and 477 GW of wind power is available, but just 4% and 8% has been exploited respectively, according to figures presented by Keshan Samarasinghe, an energy and environment consultant at the Asian Development Bank (ADB), at the Asia-Pacific Forum on Green and Low-Carbon Development in Changsha in late October.

The biggest economies in South Asia – India, Pakistan and Bangladesh – are undergoing policy shifts and transition to alternate sources of supply, to meet their growing demand and align with commitments to their climate agendas.

India’s energy transition underway

India reflects this trend, as the country – traditionally reliant on coal – is slowing down coal capacity additions while rapidly expanding renewables generation. This is primarily driven by an oversupply of baseload capacity and falling costs of renewables.

India’s power demand has doubled in the last 12 years with plenty more room for growth, as the world’s fifth-largest economy is forecast by S&P Global to expand GDP by an annual average of 6.7% from 2024 to 2031. In the next decade alone India will need $350bn in power generation investment to meet growing power demand, according to energy consultancy Wood Mackenzie.

Fortunately the country boasts some of the world’s cheapest renewables thanks to low-cost financing, skilled labour and round-the-clock affordable electricity for manufacturing. This has supported rapid deployment of large-scale wind and solar that now make up 30% of India’s installed power generation capacity compared with 20% in 2018.

Non-fossil fuel sources supplied 20.6% of India’s electricity generation last year, with wind and solar alone accounting for more than half of this share, according to the Statistical Review of World Energy. With an eye on its long-term decarbonisation targets India plans to increase the share of non-fossil fuels in its capacity mix to 64% and in the generation mix to 44% by 2030.

“There are huge opportunities for renewables development for utility solar, onshore and offshore wind, as well as hybrid renewables and storage projects. In addition, grid investments could require a similar amount of investment [as $350 billion] to support the capacity buildout and deliver power to consumers,” Alex Whitworth, Wood Mackenzie’s head of Asia-Pacific power and renewables research, said in a keynote speech at the Renewable Energy India Expo recently.

India’s renewables boom sits alongside a continued role for its coal-fired power fleet, which is still growing despite an aspirational target for the country – one of the world’s top carbon emitters – to achieve net zero by 2070. India has 30.4 GW of coal-fired power capacity under construction and another 34.9 GW in pre-construction stages.

The country is projected to be the world’s third-biggest electricity consumer by mid-century after China and the US, so the future of its coal fleet will have a major impact on global carbon emissions.

The emphasis on renewables and coal will likely restrict long-term growth opportunities for gas. Indian gas demand has returned to growth this year, increasing by 11% year/year in the first nine months to 48bn m³. This is a reversal from last year when consumption declined by 6.3% yr/yr to 60.4bn m³ as a tight global gas market reduced power sector gas burn by nearly one-quarter and slowed industrial demand growth to just 2%.

The International Energy Agency has projected Indian demand to expand at an average rate of around 8% yr/yr in 2022-2026, adding more than 20bn m³ of incremental demand.

At the inaugural India Energy Week held in Bengaluru in February, Prime Minister Narendra Modi set a big target for New Delhi to raise the share of gas in the energy mix to 15% by 2030 from 6% presently. But this ambition faces hurdles, especially over the differentiated pricing of domestic and imported supplies.

Pricing formulas for gas differ depending on the source, which means the average gas market pricing in India neither fully reflects imported LNG realities nor domestic gas market fundamentals. This has created transactional difficulties across the gas value chain from suppliers down to consumers.

Gas is likely to struggle in the long run to gain a foothold in India given the relatively high cost of LNG and limited availability of domestic gas, which met 54% of consumption in the first nine months. In the capacity mix, the contribution from Indian gas-fired power capacity will continue to remain low at less than 2% by 2050, according to S&P Global. And over the long term gas will be relegated to a peak shaving role within the power generation mix, contributing to less than 1% in the overall balance.

Dhaka rethinks dash for gas

Bangladesh, one of the world’s fastest-growing economies, has started to discover how costly it can be to rely on gas. The fuel makes up 43.8% of current installed power generation capacity in Bangladesh, which has been importing LNG since 2018 to supply gas-fired power plants.

Dhaka’s prioritisation of gas in the past decade helped limit the country’s dependence on coal – which accounts for 15.1% of the generation mix – but has also left it exposed to global LNG price volatility due to limited domestic gas production potential.

Fuel price spikes in recent years led to shortages and a surging energy import bill, inflicting rolling blackouts and soaring inflation that has hovered at 10% in recent months. Foreign currency reserves have fallen about 20% this year, according to credit ratings agency Fitch, and the country has taken out a multibillion-dollar loan from the International Monetary Fund to steady its economy.

“Bangladesh probably [is] at risk about their future energy generation. Bangladesh is trying to go for renewable energy generation sources like solar and wind in the future,” Samarasinghe from the ADB said at the Changsha forum.

As the regional South Asia grid develops, Bangladesh is also expected to import hydropower-based electricity from Nepal and Bhutan, along with renewably-generated electricity from India. Imports met 9.01% of Bangladesh’s power demand in the 12 months up to the end of June 2022, and are expected to eventually become the country’s second-largest source of electricity.

Coal, then renewables for Pakistan

Similar to Bangladesh, Pakistan is rethinking the role of gas in its long-term energy plans after surging LNG prices and the ongoing economic crisis made imports of the fuel unaffordable. Amid the energy crunch the present strategy is diversification to coal as a cost-effective alternative in the short term, leveraging vast reserves in the local Thar coalfield, followed by greater exploitation of domestic hydro resources and renewables after this decade.

Thermal power – supplied by domestic and imported coal and gas, and furnace oil – made up 55% of Pakistan’s installed power mix in June 2022, followed by hydro on 28%, according to the Indicative Generation Capacity Expansion Plan covering 2022-2031 that was released in February. Nuclear, wind and solar represented 10%, 5% and 1% respectively.

By 2027 thermal power’s share will be down to 42% while hydro will edge up to 30% and solar surging to 20%. And by 2031 Pakistan envisages hydro, solar and wind taking up 34%, 21% and 10% respectively.

LNG meanwhile will find its position shrinking from 19% in 2022 to 17% in 2027 and then 13% in 2031. Pakistan Energy Minister Khurram Dastgir Khan told media in June that “LNG is no longer part of the long-term plan”, adding that the country planned to quadruple domestic coal-fired power capacity to 10 GW in the medium term from 2.31 GW.

Following Khan’s comments though Pakistan tipped its toe in the global LNG market for the first time in more than a year in late September, when state-owned importer Pakistan LNG held a tender for two LNG cargoes for delivery in the first half of December. Vitol succeeded in a bid to supply one of the cargoes. Pakistan LNG then issued a tender on November 20 seeking a spot cargo for delivery in early January.