Just under a year on from COP 21, three of the main players – the US, China, and India – have now ratified the Paris treaty on climate change initiatives. What does this mean for South East Asia and its energy policies? To date the region has yet to show any major shift from favouring coal as the fuel of choice.
How sustainable is "king coal's" reign in the long term?
Although gas generates around a third of the power mix in South East Asia, coal-fired power generation has been dominating the power development market since 2010. Across the region developers are still favouring coal, particularly for baseload power operation, with 26 GW of new coal planned to be built by 2020 versus 17 GW of gas. In addition, there is another 43 GW of coal plant likely to be sanctioned by 2020 and 33 GW more waiting in the wings.
Coal's three assasins?
However, how sustainable is "king coal's" reign in the long term? My economics lecturer once told the class that an economist is someone surrounded by assassins. There are three potential assassins for coal-fired power generation in South East Asia – these are the same "assassins" that have hit coal in Europe and the United States.
1) Gas competitiveness
2) Clean energy
3) Government policy
Whilst coal dominated new build when gas prices were US$ 13-15 per mmbtu, the economics becomes more interesting in the current climate of low gas prices. Any sustainable long-term price for gas in the US$6-8 per mmbtu range could see gas compete for new-build baseload plant.
Spot gas prices will remain subdued for some time, and are unlikely to recover this decade. The bad news for gas suppliers is that by 2020 almost another 100 mtpa of committed LNG supply capacity is due. Whilst gas demand is likely to grow at a much more subdued rate, leaving an over-capacity of around 30%. This does not even include pre-FID projects in East Africa, Canada, and the US that represent at least another 50-100 mtpa waiting in the wings.
Although gas prices have not fallen low enough to displace coal as the fuel of choice, the cost for policy makers of favouring gas ahead of coal is now much narrower than before the commodity price crash.
Wind and solar costs have respectively fallen 30% and 50% in the last five years. In many markets, globally, they are already cost-competitive (or are near to competing) with fossil fuel generation on grid-scale economics. The advantage that these technologies have in South East Asia is that they are less capital-intensive, and quicker to market.
Technology advances are likely to see further cost reduction. Some commentators suggest that renewable power plus battery technology costs could be cost-competitive by the end of the decade – if not sooner. If this happens then this would be a "game-changer".
It is hard to square that South East Asia countries are signatories to the Paris Agreement with the current coal plans. Although Indonesia and Vietnam have hinted that there is more room for gas in their mixes, given that these two countries have the largest planned coal-build. Whilst the Philippines' new government has stated that they are necessarily not bound by the treaty. It is still too early to ascertain any concrete changes in the energy policies in South East Asia and reconciling them with the Paris Agreement.
Given that new-build coal plant tends to attract strong local opposition in many markets, and with alternative power options from gas and renewables becoming cheaper, then Governments may be more inclined to meet carbon reduction plans by limiting coal's role in favour of gas or renewables.
The key issue for power developers will be whether or not the plant they are planning to build will be needed for the duration of the asset life. As an illustration on how quickly things move, the following headline dumbfounded me: in May this year not a single kWh of coal-fired power was produced on the UK grid. This is a remarkable shift from the coal-dominated UK power market I joined over 20 years ago.
The current market conditions favour coal but that could change beyond 2020. Someone, somewhere could easily be building a white elephant. Especially, if policy makers in South East Asia shift position and make power generation a central theme to their Paris commitments.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Power. The author was not remunerated for this article.
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Graham has worked 25 years in the global energy sector, joining Galway Group in October 2015. He is an experienced consultant in the gas and power sectors. Prior to joining Galway Group, Graham worked for Wood Mackenzie, moving in 2007 to Singapore to lead the Wood Mackenzie’s Asia gas and power research team.