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Coal grows in prominence in Southeast Asia

As leaders gathered for Singapore International Energy Week (SIEW), coal was at the forefront of discussions

With the city shrouded in smog there was a sense of foreboding as speakers talked about the seemingly relentless projections for coal’s ascent. Coal is the dirtiest of all fossil fuels - it creates more pollution than oil and natural gas when burned.

The region, a key pillar of Asia’s growth, is the only part of the world where the share of fossil fuels in the energy mix is expected to rise, with coal destined to be the number one fuel in the ten countries making up the Association of Southeast Asian Nations (Asean), overtaking oil within two decades.

Southeast Asian energy demand is forecast to expand by 80% to just under 1,100m metric tons (mt) of oil equivalent in 2040 as the regional economy triples, data from the International Energy Agency’s (IEA’s) latest outlook shows. As a result, Asean is exerting more influence on world energy markets.

One key issue facing the region is growing oil imports, the head of the IEA, Fatih Birol, told delegates at SIEW. Over the period of the outlook, net oil imports will more than double to 6.7m b/d, a similar level to China’s imports today, and southeast Asia’s dependence on oil imports will hit almost 80% as a result of declining supply and rising demand.

The GasTech conference, which ran in parallel with SIEW, was also in town, where expectations of bullish Asian gas demand generally prevailed. But Birol warned that coal in most cases remains the fuel of choice in southeast Asia because of its compelling economics.

Coal-fired power has a significant economic advantage over gas-fired power. To produce 1 kWh of electricity from coal is 70% cheaper than from gas even in the low price environment, as long as there are no environmental restrictions or government regulations on pollution, Birol says.

Putting aside potential regulatory or environmental policies, Birol believes a $50/mt carbon price would be needed to make gas competitive with coal, but he expects that to be a tall order.

With demand for electricity set to triple by 2040 coal is the cheapest option to generate electricity. To meet the rise in demand, 400GW of power generation capacity – roughly equal to the combined installed capacity of Japan and Korea today – will be added across southeast Asia by 2040, of which 40% will be coal-fired, the IEA’s central scenario shows. The share of coal in power generation climbs from 32% to 50%, contrary to the trend seen in most other parts of the world, while that of natural gas falls from 44% to 26%.

Worryingly, based on the IEA’s analysis, even in 2040, over half of the coal-fired power plants will be using sub-critical, inefficient technologies, which “is definitely not good news for the environment,” Birol said as he presented the southeast Asian energy outlook. In many other parts of the world there is a push for more efficient coal-fired power plants, which would reduce the climate change implications of coal as they help lower local pollution and CO2 emissions.

However, he conceded that it would “definitely be double standards if I were to say that countries should not use coal. It would be unfair as IEA member countries used coal to boost economic growth”

In the absence of a carbon price, coal will be the fuel of choice in future. But governments in southeast Asia need to push clean-coal technology and discourage sub-critical plants now otherwise the inefficient technologies will be locked in for decades to come, cautioned Birol.

China took a major decision last year when it shut down inefficient coal-fired power plants to address a social backlash against local pollution. As a result 2014 was the first time coal use did not rise in China, where cleaner burning natural gas and renewable technologies are being promoted to lower pollution.

Liquefied natural gas (LNG) developers, such as Australia’s Woodside Energy and the US’ Cheniere Energy, said they are banking that citizens in developing Asian economies will demand cleaner air thereby forcing regulators to take action.

James MacTaggart, general manager of Asian new markets at Shell, said that “more energy for less CO2 has no silver bullet, but gas can be part of the solution. We need to get that message out into the policy debates. Decisions made now will have ramifications for decades to come.”

Still, only very competitively priced LNG has a chance to beat coal in Asia, even with the downward pressure on gas prices amplified by new supplies, reckons the IEA.

From a gas company’s point of view it is critical that they make themselves more attractive, especially in Asia. There are many alternatives, not just cheap coal, but also renewables, which are becoming cheaper and squeezing the markets for gas, warned Birol.

Arthur Hanna, managing director of global energy strategy at Accenture, says that LNG demand growth in Asia is not as good as the consultancy modelled a few years ago. Japan has a diminishing demand profile as it starts to restore nuclear power, while China’s demand will be stymied to a degree until it fully integrates infrastructure at its ports with pipeline distribution networks. Meanwhile, South Korea’s focus on renewables has put a dampener on LNG demand there and India will continue to suffer from inefficient infrastructure build out, he said.

As a result there will be more liquidity in the market, which Charif Souki, chief executive of US LNG developer Cheniere Energy, told delegates will translate into a more dynamic Asian LNG trading market. He added that the markets for gas in Asia had not been given the opportunity to expand at the pace they could have because of inefficient pricing mechanisms. But with an oversupply looming and the evolution of various regional gas trading hubs, that could change.

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