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

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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
    • Gas and LNG contract prices closely follow the oil price fall
    • Coal prices also shift downwards but with a lag
    • 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
    • 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
    • Price Assumptions
    • Full year switching impact under low WACOG price and coal price scenarios

Tables and charts

This report includes 7 images and tables including:

  • Historical commodity prices (rebased to January 2016)
  • Coal-to-gas switching economics (Japan and South Korea)
  • Coal-fired power capacity distribution by efficiency
  • Factors influencing coal-to-gas switching in Japan and South Korea

What's included

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  • Document

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

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