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Gas piles the pressure on coal

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LNG Industry,

According to a recent report from Wood Mackenzie, coal is facing increasing pressure from gas in the power sector, particularly in Asia.

Downward pressure on gas prices, combined with individual market conditions in Asia, are creating conditions in which gas may compete with coal in the region.

Coal currently accounts for 50% of power generation across the continent. However, with gas prices expected to soften after the summer months, Wood Mackenzie believes that the price differential between gas and coal is worth monitoring.

Graham Tyler, Research Director for Asia Gas and Power, said: “While gas-coal competition is more commonplace in the US and Europe, in Asia, this is a new dynamic as coal and gas prices have not been at close enough levels for this to be a consideration. Spot LNG prices have fallen to around US$7/million Btu in recent months and we do not forecast any sustained price recovery above US$10/million Btu with over a 100 million tpy of new LNG expected to be operational by 2020. This looming supply glut will create an environment where coal vs gas competition in Asia is a real possibility.”

Prakash Sharma, Research Director for Asia coal markets, said: “Benchmark thermal coal prices in the seaborne market are trading below the marginal cost of supply for many producers, and therefore are unlikely to fall significantly lower in the future. Coal prices are sitting at multi-year lows due to several factors including weakening demand and domestic protectionism in China: delivered thermal coal prices have fallen from a peak of around US$110/t in 2012 to below US$80/t in recent months already and historically, coal prices only fluctuated within a narrow band of US$2 - 4/million Btu." 

Commenting on the price differential between coal and gas, Mr Tyler added: “The price differential is key but there is not one single price across Asia at which gas will compete with coal. Instead, environmental initiatives and individual market influencers will determine the points at which the scales will tip in favour to gas. This is because Asia is not a singular gas market. Rather, it is a diverse range of markets with differing characteristics such as levels of economic development, fuel resources, market structures and government policies. The power markets are also discrete and have different dynamics even within some countries. Consequently, the factors that set the price at which gas will compete with coal differs between each market.

"South Korea reflects a mature economy with an energy market dependent on imported fuels, and therefore has relatively high fuel costs. It has also introduced a carbon cap and trade scheme in January, which will favour gas due to its lower carbon content and thus; lower related carbon costs. Whereas in China, air quality is a key issue and gas-fired power generation is subsidised in some provinces. China is also introducing a national carbon trading scheme; and other markets are also implementing or looking at carbon initiatives. These factors all make gas the more attractive option.”

The pressure on the regulated price is likely to result in an increase in gas-fired operations, according to Wood Mackenzie.

Soft pricing and environmental factors should result in gas playing an increasingly important role as Asia’s power demand growth looks set to average 5%/yr through to 2030, requiring an additional power generation capacity of 2000 GW. Soft gas pricing and environmental factors. The report concludes: “As long as gas prices remain low, industry players need to continue to watch for individual market influencers to see where the most upside for gas may emerge.”

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