Will coal-to-gas switching in Japan and South Korea finally become reality in a low oil price world?
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.