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Policy Levers on Coal-Gas Competition

Mark ThurberAssociate Director, Program on Energy and Sustainable DevelopmentStanford University

NGI Workshop: Global Competition Between Coal and Natural GasTresidder Memorial Union, Stanford University, CaliforniaOctober 15th, 2018

Challenges for natural gas relative to coal

• Not cost competitive with coal when delivered as LNG• Dysfunctional gas pricing and markets• Better for the environment... but not good enough?

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LNG generally not cost competitive with coal

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Data sources: IHS McCloskey, Bloomberg

• In many geographies, gas not priced based on supply and demand

Many gas-producing countries underprice gas to favored consumers

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Natural Gas Consumption (Bcm)

Fertilizer Power Generation Domestic Fuel Captive Use / LPG Shrinkage Petrochemicals Industrial Fuel Others

Data sources: Ministry of Statistics and Programme Implementation

Gas Usage by Sector in India

• Underpricing, subsidies diminish incentives for expanding supply• Gas supply chain often ends in power companies that can’t pay

Coal + Renewables (“German model”)

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• Want green credibility? Choose renewables• Want cheap power at scale? Choose coal=> Gas occupies awkward middle ground

Policy levers that help gas relative to coal

• Support for international shale gas development• Gas pricing and market reform (but requires reliable

downstream customer)• Air quality regulation• Carbon pricing• Very high renewable energy penetration

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Air quality regulation adds cost to coal (but coal might still be cheaper than gas)

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Data source: Health Effects Institute 2016

• Industrial sources more difficult to control than power plants (opportunity for gas)

Simulated Contributions of Coal Burning to PM2.5 in China

All Coal Burning Power Plants

Industrial Domestic

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LCOE

($/M

Wh)

Carbon Price ($/tonne CO2)

GasCoal

Nuclear

Solar

Effect of carbon price on power plant competitiveness

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Assumptions for LCOE calculationsDiscount rate = 5%Coal-fired plant: $2500/kW, 8.8 MMBtu/MWh, 0.8 tCO2/MWhGas-fired plant: $1000/kW, 6.6 MMBtu/MWh, 0.4 tCO2/MWhNuclear plant: $6000/kW, 10.5 MMBtu/MWh, 0 tCO2/MWhSolar plant: $2000/kW, 0 tCO2/MWhAll at 80% capacity factor except solar at 20%Fuel prices ($/MMBtu): coal - 2.7; gas - 8; nuclear - 1

RENEWABLES HAVE THEIR OWN INCENTIVES

NUCLEAR HAS ITS OWN PROBLEMS

Estimated Generation Cost(New Generic Power Plant Outside North America)

• Carbon price of $25-30/tonne CO2 makes gas and nuclear competitive with coal

• But in the real world...

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0 5 10 15 20 25 30 35 40

LCOE

($/M

Wh)

Carbon Price ($/tonne CO2)

GasCoal

Effect of carbon price on power plant competitiveness

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• Carbon price of $25-30/tonne CO2 makes gas and nuclear competitive with coal

• But in the real world...

Estimated Generation Cost(New Generic Power Plant Outside North America)

a carbon price matters most for gas

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00.10.20.30.40.50.60.70.80.9

LCOE

($/M

Wh)

Nuclear/Coal/Gas Capacity Factor

Gas

CoalNuclear

Solar

Effect of capacity factor on power plant competitiveness

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• Lower capital cost of natural gas makes it better able to absorb low capacity factors of a high-renewables world

Estimated Generation Cost(New Generic Power Plant Outside North America)

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Thank you