Coal indexation in LNG pricing: why it matters
What’s inside this report?
Japan's power sector is in flux due to liberalisation and overcapacity. This is challenging the utilisation of gas generation, which is less competitive than coal.
In April, Tokyo Gas announced a 10-year deal with Shell to supply LNG using a coal-linked pricing formula – a rare move that broke the mould of the typical oil-linked contracts that have been used for decades in the market.
In this insight, we unpack the significance of the deal for Japan’s power sector and for LNG.
Contracts that make use of coal-indexation, such as the Shell/ Tokyo Gas deal, could be an important step to enable gas to better compete with coal-based power generation.
Prakash Sharma
Vice President, Multi-Commodity Research
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Why buy this report?
While the details of Shell’s contract with Tokyo Gas have not been made public, we explore how the deal could have been structured.
We apply our deep understanding of commodity dynamics, local energy dynamics and power market design to consider:
- How could a coal-indexed LNG contract be priced?
- What LNG price is required for existing gas plants to displace new coal power plants?
- What carbon price is required for existing gas plants to compete against existing coal?
Report summary
Table of contents
-
Executive summary
- What is driving the Shell-Tokyo Gas deal?
- What LNG price is required to displace coal in the power sector?
- How could the Shell-Tokyo Gas contract be structured?
- What carbon price is required for existing gas to compete against existing coal plants?
- Conclusion
Tables and charts
This report includes 6 images and tables including:
- Chart 1: DES LNG: new coal vs new gas plant
- Chart 2: DES LNG: new coal vs existing gas plant
- Chart 3: implied gas price using new coal plant breakeven, DES LNG Japan
- Chart 4: implied gas price range using coal and oil, DES LNG Japan
- Chart 5: DES LNG: existing coal vs existing gas plant (no Carbon)
- Chart 6: DES LNG: existing coal vs existing gas plant (with Carbon)
What's included
This report contains:
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