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Will coal-to-gas switching in Japan and South Korea finally become reality in a low oil price world?
*Please note that this report only includes an Excel data file if this is indicated in "What's included" below
Report summary
Economic coal-to-gas switching has been a regular feature of the European power market over recent years, but economic displacement has remained limited in Japan and South Korea despite weak LNG spot prices through 2019. However, market dynamics have shifted dramatically into 2020 with oil prices collapsed in March and continue to hit new lows. This will make contacted LNG volumes sold on an oil-indexed basis considerably cheaper through the year and drag down weighted average cost of gas (WACOG) prices in Japan and South Korea. The sharp reduction in WACOG marks a fundamental change in the coal-to-gas switching story in North Asia in 2020, as the generation cost gap between coal and gas could narrow significantly, a precondition for more switching. We expect the improving economic incentives to drive more coal-to-gas switching in 2020. But challenges to wide-scale switching will remain.
Table of contents
- Executive summary
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Low oil prices will improve economic incentives for coal-to-gas switching
- Gas and LNG contract prices closely follow the oil price fall
- Coal prices also shift downwards but with a lag
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What is the switching price and volume potential?
- Price: WACOG needs to fall towards US$5.5/mmbtu, which is expected in H2 2020
- Volume: 5.3-14.9 Mt downside risk for coal and 4.5-7.5 Mt upside potential for LNG in 2020
- Monthly impact based on Wood Mackenzie’s WACOG forecast and coal price scenarios
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Other challenges remain which will limit switching opportunities
- Weaker coal power demand amid the coronavirus outbreak and South Korean curtailment polices
- Nuclear and coal curtailment measures in South Korea already curtail less efficient coal capacity
- LNG procurement patterns and storage options offer little cushion for the market in 2020
- Coal procurement flexibility improves, but Japan remains risk adverse in making short-run switching decisions
- Conclusion
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Appendix
- Price Assumptions
- Full year switching impact under low WACOG price and coal price scenarios
Tables and charts
This report includes the following images and tables:
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Historical commodity prices (rebased to January 2016)Coal-to-gas switching economics (Japan and South Korea)Coal-fired power capacity distribution by efficiency
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Factors influencing coal-to-gas switching in Japan and South Korea
What's included
This report contains:
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