The slew of North American liquefied natural gas (LNG) export projects currently in the works could face stiff competition from renewables in Asian and European power generation markets, according to a new report from economists with The Brattle Group.
The report, “LNG and Renewable Power: Risk and Opportunity in a Changing World,” notes, as other analysts have, the recent softening of LNG demand in key markets like Asia (see Daily GPI, Jan. 13). While many forecasters see demand growing beyond 2020, this isn’t a safe bet, according to Brattle.
“The analysis in our paper suggests that market participants should be very cautious in thinking that the LNG supply glut is necessarily a temporary problem, because another important dynamic in world energy markets is the declining cost of renewable power and the prospect of increased penetration of renewables in the global power generation mix and thus competing with LNG as a ‘fuel source’ for power generation.”
The report notes that the expectation of significant long-term LNG demand growth in China, driven partly by power generation, “should be seen as highly uncertain given the potential for a significant shift toward more renewable power in China and throughout Asia that could limit the growth in gas demand and the need for LNG.” In Europe, “the ongoing shift toward more renewables may reduce the incentive to import significantly larger amounts of LNG.”
Using price forecasts from the Energy Information Administration combined with infrastructure costs for liquefaction, shipping and regasification, the report’s authors found that wind generation at a capacity factor of 25% would be cost-competitive with gas-fired generation using LNG at a delivered cost of $11/MMBtu -- reflecting full recovery of infrastructure costs plus a commodity price of about $3/MMBtu.
“Moreover, our analysis shows a risk that wind power in China with capacity factors as low as 20% may become competitive with combined-cycle generation using North American LNG within the next five years” when delivered LNG prices are expected to rise above $13/MMBtu. Meanwhile, in a renewable-focused European market like Germany, a combination of “wind and solar and/or strengthening carbon price could equally lead to renewables becoming less expensive than combined-cycle generation using North American LNG in the coming years.”
These calculations do not account for possible distribution and transmission costs associated with greater integration of renewables, the authors noted, though they said carbon pricing could potentially become a more significant part of markets other than Europe and thus “tip the scale further in favor of renewables.
“Also, the cost-overrun and delay risks associated with the massive infrastructure investments needed to export LNG are potentially significant.”
The long-term nature of most LNG contracts also presents risks moving forward as the world responds to climate change, the report notes.
“As our analysis has shown, even with relatively moderate carbon prices, the economics shift significantly in favor of renewable energy, creating an additional and likely substantial risk for LNG as a fuel in a likely increasingly carbon-constrained future.”