Assessing the Sustainability of Gas as a Transition fuel
What is the role of natural gas in a low carbon world? The benefits of coal-to-gas switching seem clear – gas is less CO2 intensive than coal in combustion, is lower on a life-cycle basis in electricity, and can reach power efficiency quicker than coal power. However, a closer look reveals large extremes in outcome depending on the route from well to gate.
What would the demand for natural gas be like under a stable climate? We compare key climate scenarios from the Intergovernmental Panel on Climate Change (IPCC), International Energy Agency (IEA) and Oil & Gas majors to consider different demand trajectories. The difference in outcomes is vast and this split is also clear in CapEx. We also stress test new pipeline NPVs using IEA demand trajectories and find a -$2.2bn swing from the Stated Policies Scenario (STEPS) to Net Zero Energy (NZE) on a 40Y return.
While switching between unabated fossil fuels does not provide a long-term answer, there remain significant benefits from coal-to-gas switching in specific circumstances. Industry and regional end-demand shows medium-term opportunities to displace coal. Under a Sustainable Development Scenario (SDS), expansion occurs in ASEAN, China, and India, requiring new capacity additions by 2040. To understand the relationship between coal and gas, we model the impact on fuel prices in $/GJ under CO2 price scenarios and find the parity inflection point for coal to gas switching in China. With reform increasing imports of lower-cost gas to China, under a scenario in which gas prices decline, cost parity could be as low as $18/tCO2. We also find that using existing infrastructure to convert coal power to a gas power plant can be cheaper than building a new power plant.
Recent increases in CO2 and gas prices also favour the switch directly to renewables. Under the IEA’s SDS, the Levelized Cost of Energy (LCOE) of gas rises to much more than the amount modelled for solar. Moreover, both China and India have the highest coal-to-gas switching potential but also structurally lower LCOE for renewables, so would need increases in lower cost gas imports and higher CO2 prices to see gas switching.