Asia's energy crunch boosts coal and LNG, but threatens their future

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LAUNCESTON, Australia (Oct 5): The current energy squeeze has led to record high prices for coal and liquefied natural gas (LNG), but what happens once the short-term crisis is over will depend on how importing countries choose to respond, especially those in Asia.

At a basic level, energy importers have two options, namely to increase investments in fossil fuels in order to ensure that they always have sufficient supplies, or go down a path of boosting investment in renewables and energy storage in order to reduce reliance on foreign fuels.

How governments, utilities and the wider public in countries suffering fuel shortages view the experience is likely to shape their future response.

If the prevailing view becomes that fossil fuels are still the bedrock of energy and therefore supplies must be secured over the long term, then the response will be investment in new coal mines and power plants, as well as spending on natural gas exploration, liquefaction, re-gasification terminals and gas-fired power generators.

If the other view gains prominence, then investment should switch massively to renewables such as wind and solar, backed up by battery storage, pumped hydro and even gas-fired peaking plants designed to operate only during brief power shortages.

The response to the current crisis is unlikely to be uniform across Asia, for example China and India, the two biggest importers of coal but also massive domestic producers, are likely to choose different paths.

While the two most populous nations are trying to boost domestic coal output, China is more likely to keep coal front and centre of its energy mix given its vast domestic reserves and the heavy industry that relies on electricity being available and relatively cheap.

India, which already has substantial investment in renewable energy, may turn further away from coal and LNG, given the sting of the current price squeeze may be remembered for longer in the south Asian nation.

PRICE SURGE BLUES

The rise to record highs for thermal coal, used in power plants, and spot LNG in Asia is obviously a short-term boon for producers of the fuel, but is likely a long-term negative.

Put simply, high prices and shortages of available cargoes undermines the central selling point of coal, namely that it is cheap and reliable.

While the polluting fuel has historically been both of these, now it is expensive and difficult to source.

Futures for coal at Australia's Newcastle port, the Asian benchmark for high-quality thermal coal, hit $240 a tonne on Monday, a record high and almost 400% higher than the 2020 low of $48.50 in September that year, a time when demand was low because of the coronavirus pandemic.

While the extent of the rally is unprecedented, it will serve as a warning to potential builders of coal-fired generators, as well as making many existing units uneconomic.

Add to that the widespread withdrawal of financing for coal projects, with heavy-hitter China being the latest, and the risks around coal, both from a price and availability perspective, are tilted to the downside.

LNG has a better story to tell than coal, given major companies are still investing heavily in the fuel and the current supply crunch is likely a temporary situation that may persist until after the northern winter.

However, the surge in the weekly spot price <LNG-AS> to a record $32 per million British thermal units (mmBtu) last week will likely again give pause for thought to would-be users of the super-chilled fuel.

However, the majority of LNG in Asia is still sold under long-term contracts, most linked to the price of crude oil, and this pricing mechanism may well help the fuel as it removes some of the volatility seen in spot prices.

Oil-linked contracts are also at risk from what happens to crude in an increasingly carbon-constrained world, with several leading industry figures and analysts warning of insufficient investment being likely to lead to higher prices in years to come.

This also undermines LNG's appeal to investors, who have to grapple with long-term pricing uncertainty and an increasingly well-funded environmental campaign against LNG that highlights the carbon emissions over the whole of the product, rather than just the end-use burning that the industry prefers to focus on.

For renewables such as wind and solar, the price story is their major advantage over coal and LNG, given ongoing deflation and improving technology.

Once installed, wind and solar are cheap to operate and maintain and don't rely on imported fuels, even if the operational life of the assets is less than for fossil-fuel equivalents.

However, renewables biggest bugbear is their intermittency and the subsequent need to firm up dispatchable power with either storage like batteries and pumped hydro, or with fossil-fuel alternatives like gas-fired peaking plants.

Installing these technologies cuts the price advantage of wind and solar, but doesn't undercut the fact that this type of energy isn't reliant on imported fuel.