A new report by economists at The Brattle Group finds that the financial viability of LNG projects is increasingly being threatened by competition from renewable power sources, especially in Asia. They warn that “this increasing competition has significant ramifications for the many LNG export projects now in development across North America and for buyers of LNG that have signed long-term contracts”.
The authors of the report analyze “the current and projected cost of gas-fired generation using LNG from North America versus the current and projected cost of renewable power in markets outside of North America and compare the results for select international energy markets through 2035.”
They conclude that “the declining cost of renewable power and the resulting prospect of increased penetration of renewables in the global power generation mix suggest market participants should be cautious in thinking that the LNG supply glut is necessarily a temporary problem. Rather, renewable cost trends suggest that renewable power will increasingly compete with LNG as a fuel source for power generation in overseas markets. If the costs of renewable generation are low enough overseas, such low costs could dampen the attractiveness of North American-sourced LNG as a fuel for electric generation and the willingness of market participants to continue to contract for LNG export infrastructure.’”
“The increasing competition between renewable power and gas-fired generation using LNG should be considered carefully by participants in the global LNG markets. This competition increases the uncertainty in global gas demand and the future LNG requirements in markets now being targeted by North American LNG export developers,” the report notes. “Both investors in LNG infrastructure and buyers of LNG under long-term contracts will want to consider these risks before making large and long-term commitments to buy or sell LNG.”
The risks are largest for Asian markets, notes the Brattle Group: “There is a real possibility of a significant shift towards more renewable power generation in some of the key Asian markets targeted by the LNG industry. While the current shares of wind, solar, and gas in China are each less than 5% of China’s total electricity generation, all three sources of electricity generation are projected to increase substantially over the next 25 years as the share of coal generation as a percentage of total generation is projected to decline significantly from around 75% today to roughly 50% by 2040. 1 Gas, wind, and solar (as well as nuclear) will therefore all be competing to serve China’s growing electricity needs. The relative costs of LNG and renewables discussed in this paper will likely be a significant factor determining which technologies achieve the highest penetration levels.”
The following graph compares cost of wind power versus CCGT (combined cycle gas turbines) in China:
The report, “LNG and Renewable Power: Risk and Opportunity in a Changing World,” is authored by Brattle Principals Jürgen Weiss and Steve Levine, Associate Yingxia Yang, and Senior Associate Anul Thapa.