As much of the world slowly moves towards a more sustainable energy future, gas is seen by many as a transition fuel, able to generate less polluting power than coal, whilst still providing a low cost, reliable supply.
As a result, coal-for-gas substitution in the power sector is expected to drive demand up until at least 2050, according to most forecasters. The global gas market is set to grow both in comparison to other fossil fuels and in absolute terms, with a strong increase particularly in emerging regions, including India, China and Africa. The switch will be supported by climate and clean air targets, and relatively low anticipated gas prices.
A move away from coal and towards gas in the power sector has already been underway for a while in some developed countries such as the UK and US. In the Organisation for Economic Development and Cooperation (OECD), which represents developed countries, electricity generated from gas in 2016 was virtually equal to that from coal for the first time ever. The switch is now beginning to affect China, driven by concerns over city smog, and is expected to expand to other developing countries over future years. Global investment in coal-fired power plants is set to fall “dramatically” from recent record highs, according to the International Energy Agency (IEA).
International trade in gas was up about 47 billion cubic meters (bcm) at 1,044 bcm in 2016 – around 4.5% higher than 2015. Coal, on the other hand, saw market size contract in 2016, with production down by about 2%. The biggest growth areas were in pipeline gas trade to Europe and Mexico, and liquefied natural gas (LNG) trade to Asia. Despite the buoyant demand, prices are remaining competitive with coal in some areas, helped by cheap US shale gas and a supply overhang expected in the LNG markets until the early 2020s. Coal prices have been weak for some time, but firmed this year following a cut in output from China, the world’s biggest producer (and consumer) by far.
US and UK lead the gas transition
The most significant recent shifts from coal to gas have been in the US, UK and China. In the US, coal consumption fell nearly 9% in 2016, following a 14% drop in 2015, and it is now 38% below 2005 levels. For the first time, 2016 saw the US produce more electricity from gas than from coal, while CO2 emissions were at their lowest level since 1992, when the economy was 80% smaller. (Coal emits twice the CO2 that gas does, along with NOx, SOx and particulates, which gas does not produce.)
Rather than environmental policy, it has been cheap shale gas that has enabled the switch to gas and consequent lower emissions – which is ironic considering how unpopular fracking is with environmentalists. The dramatic rise in US shale output has pushed down prices, enabling gas to easily outcompete coal on commercial grounds alone.
The UK has also performed well recently, thanks to cheaper gas and a significant carbon price floor, which stands at around £18/t CO2 emitted – well above the EU’s ETS (emissions trading system) carbon price of just over Euro5/tCO2. As a result, the UK experienced its first day without coalfired power in 130 years last summer; and in the first half of 2017, coal accounted for just 2% of UK power generation – down from 25%-plus only 3-4 years ago. The falls have helped cut CO2 emissions and improve air quality. Gas-fired generation, on the other hand, now dominates, regularly supplying over half of UK total daily power output – especially on days with low wind.
In the EU as a whole, gas demand rose about 8% in 2016, while coal demand fell 10%, despite upward pressure on coal use in Germany as it closes nuclear plants and parts of eastern Europe, where investors are still busy building new coal plants. In Poland, for example, gas demand is expected to fall from 17.3 bcm in 2016 to 13.9 bcm in 2018, and 11.5 bcm by 2023 as the country attempts to cut reliance on Gazprom, according to Polish regulator URE.
The rapid fall in renewable costs could also present a threat to the expansion of gas-fired generation, especially in the wake of very low auction prices in some parts of the world, according to recent analysis from Bloomberg, McKinseys and others.
China wants clean air
Coal is also still receiving heavy investment in Asia, but policymakers are looking for alternatives, especially where city smog pollution has reached dangerous levels. In China, for example, the switch away from coal to gas and other cleaner options is driven primarily by government policies to combat air pollution (particulate, NOx and SOx pollution at city level), and this may extend elsewhere in developing Asia. Unlike the US, gas prices are higher than coal, so any switch is reliant on policy.
China has set a goal of getting as much as 10% (360 bcm) of its energy from gas by 2020 – up from 6% in 2015. Since 2013, it has targeted replacement of 'sanmei' or dirty coal especially, while regional and local governments have also imposed their own targets – with Beijing’s municipal government, for example, aiming to cut coal consumption by more than half by 2020 to combat smog. As a result, such coal use has dropped from 774 Mt in 2012, to 469 Mt in 2017, and this is expected to continue downwards to around 100 Mt in 2035. Gas demand, on the other hand, has risen, reaching about 210 bcm in 2016, up 8% on 2015. The trend is accelerating his year, with demand in first four months of 2017 up 12% from a year earlier, according to China’s National Development and Reform Commission.
Dr Fatih Birol, head of the IEA said recently: “In China, as well as in India, the growth in natural gas is significant, reflecting the impact of air-quality measures to fight pollution as well as energy diversification… The share of gas in the global energy mix is close to a quarter today but in China it is 6% and in India just 5%, which shows they have a large potential to grow.”
Gas certainly provides a far cleaner alternative to coal, and until the problems of renewable intermittency are solved, it represents the cleanest form of reliable power available. For many countries, replacement of coal with gas is the easiest way to quickly reduce CO2 emissions and clean up polluted city air, which – in combination with ample gas supply – should ensure significant growth over upcoming years, especially in the gas-to-power sector.
Learn more about natural gas's place in the energy transition at Europe's leading midstream gas and LNG event, the Flame conference in Amsterdam.
