A new report by economists at The Brattle Group finds that competition between renewable power and gas-fired generation using liquefied natural gas (LNG) from North America is increasing in overseas markets as a result of declining renewable power costs.
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 for export capacity from new North American LNG export projects. Many of the proposed projects that are not yet under construction are already facing an uncertain future due to the collapse of global oil and LNG prices. Additionally, the start-up of several new LNG projects in the next few years is likely to result in an over-supplied LNG market. LNG export developers and buyers of LNG that have signed long-term contracts for LNG export capacity are hopeful that the worldwide LNG supply glut is temporary and that market conditions in the post-2020 time frame will improve.
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 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. It is available for download below.