www.ifc.org/thoughtleadership NOTE 65 • MAR 2019
Natural Gas and the Clean Energy Transition
By Alan F. Townsend
In the clean energy transition, the value of natural gas infrastructure is very important for operating the
energy system. Gas-fired power plants contribute to optimized energy systems when they are designed
to operate flexibly, responding to demand patterns and the variable supply of renewable energy. Smart
electricity grids, renewable energy, battery storage technology, and gas-fired power plants in combination
will generally be the lowest cost, low-carbon solution to the growing energy requirements of emerging
markets. Private investors and financiers are responding to these opportunities, but the full potential will
only be reached with improvements in policy, regulation, and procurement in destination markets.
The de-carbonizing power sector solution for most
countries will be characterized by several factors, including:
Coal Relative CO2
• A smart, integrated, and expansive network; 70% Gas emissions by mix
10%
• Increasing penetration of photovoltaic (PV) solar, wind, 100
and other lower cost renewables;
• Battery storage serving the short duration requirements Renewables
of the network and its need to balance variable 20%
renewables in real time;
Renewables
• A mix of gas-fired power generation capacity that supports 30%
further penetration of renewable energy, provides long- Gas
50% 60
duration balancing resources, and ensures supply is reliable
even when renewable energy generation is low.
Technically, this mix is already available on a commercial
Coal
basis and its components are becoming more efficient and 20%
cheaper over time—dramatically so in some cases. This
evolution will provide time for discovery and development 27
Gas
of revolutionary breakthroughs that are expected to bring 40%
an end to both expansive integrated networks and fossil
fuel-fired generation, though it is far from clear when
Renewables
exactly this will happen.
60%
Figure 1 highlights the importance of gas-fired generation
and the logic of de-carbonization. In many countries,
especially in Asia, new energy has been a mix of coal
and variable renewables, with natural gas sometimes FIGURE 1 Gas and the Clean Energy Transition
marginalized. Flexible and efficient, gas produces half the Source: Author
About the Author
Alan F. Townsend, Senior Industry Specialist, Energy, Infrastructure & Natural Resources, IFC. His email is atownsend1@ifc.org.
1
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emissions of coal per kilowatt hour (kWh), plus low or no Developed Markets Show the Way
sulfur oxides (SOx), nitrogen oxides (NOx), and particulate
Two of the biggest de-carbonizers on an absolute and
matter (though methane leakages need to be kept low). If
relative basis are the United States and the United Kingdom
its use can be expanded, so can renewables. The result is a
(Figure 2). They have dramatically reduced their coal burn
40 percent decrease in total emissions, even with some coal
in the power generation sector while greatly increasing
remaining in the system.
the penetration of renewables and natural gas. In the
Gas can be economical even when the capacity is utilized United Kingdom, a modest carbon tax has been enough
flexibly, leaving room for more renewables. In the stylized to essentially eliminate coal from the country’s power
example, when coal is eliminated from the system, emissions generation mix. The United States has no carbon tax, but
have been reduced by 73 percent. The final step toward zero the shale gas revolution has lowered the cost of natural gas
greenhouse gas emissions, which is some years away, is when to a level that leaves many coal-fired power plants unable
new storage technology, more efficient renewables, and ultra- to compete. In Europe and Korea, despite the occasional
smart grids obviate the need for gas at all. policy inconsistency, trends are in a similar direction—the
combination of renewables and natural gas is pushing coal
The renewables/flexible gas solution is economically
out of the mix.
available now. That is, for most countries, the combination
of flexible gas, variable renewables, smart networks, and Emerging markets have embraced natural gas as a power
storage will be least-cost for all capacity additions going generation fuel but rarely as a strategic component of a
forward. This is because, even without considering the cost clean energy mix. Grids are often weaker, battery storage
of carbon emissions: has not entered most such markets, renewables policies
vary widely and have sometimes been volatile, and many
• PV solar, wind, and natural gas-fired turbines and
markets continue to develop new coal-fired power projects.
engines have lower unit capital costs than coal-fired
Access to natural gas has frequently been a significant issue.
equipment, and there are natural incentives to combine
Most emerging markets only had access to local gas reserves
solar, wind, and gas such that the required capital
that came to market via pipelines. Until 2008, almost no
expenditure is least-cost compared to a coal-heavy mix.
emerging markets imported liquefied natural gas (LNG).
• The all-in cost of PV solar and wind in many markets
That changed with the advent of floating storage and
is below the marginal cost of natural gas, so total fuel
regasification units (FSRUs), which are essentially floating
costs can also be minimized.
LNG terminals. First in Brazil and soon thereafter in nations
such as Argentina, United Arab Emirates, Indonesia, and
Largest reductions Malaysia, FSRUs have opened new markets to LNG. In 2007
United States
there were 17 importing countries. By end-2018 there were
40 importing countries and almost all new importers are
Ukraine emerging markets that have developed FSRU-based terminals.
Mexico IFC has analyzed FSRU examples globally to understand
the motivations behind the individual projects, and the
Britain findings are striking (see Figure 3). Countries have turned
to FSRUs primarily for three reasons: they needed LNG
South Africa
for a secure supply of natural gas, to provide back-up to
-40 0 40 80 120 hydroelectricity, or to make up for declining domestic gas
reserves. In many cases, the consequence of not having
Largest increases access to LNG was a steep increase in the amount of oil
burned in power generation. That changed when FSRUs
Iran
came on-line.
European Union There isn’t a single emerging market LNG terminal in
which the initial investment was primarily or even partly
Turkey
driven by the desire to complement variable renewables.
India And coal substitution is the primary motivating influence
for only one project, Indonesia’s Java-1 LNG-to-power,
China which is under construction (LNG-to-power refers to
-40 0 40 80 120 facilities that import and regasify LNG and then use it
to generate power). These findings suggest that, although
natural gas has a compelling role in a clean energy mix,
FIGURE 2 Change in CO2 emissions, 2016-17, million tons LNG development in emerging economies has so far been
Source: The Economist driven by other concerns. As policy catches up to power
2
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Oil substitution because they have lacked legitimacy across a wide range of
20% stakeholders in politics, the media, the donor community,
finance, and in the end-user/consumer community.
Energy security
The dearth of financed deals may also result from
11% Gas shortage governments having too many deals under negotiation
30% (the logic seems to be that is the way to get the best deal).
But when saying “yes” to one party is a de facto “no” to
everyone else, sometimes no decision can be made. When
Coal the various ministries across the government apparatus are
substitution not aligned and not effectively coordinating across energy,
2% transportation, industrial, and environmental policy
streams, decision-making can also be paralyzed.
The market seems to be waking up to the peril of negotiated
Hydro
deals that can’t be closed. Accordingly, the industry has
complementation
18% Seasonal requirement become enthusiastic about participating in transparent
18% and competitive tendering processes. Such processes are
now ongoing in a diverse range of markets, including
Benin, Lebanon, Cyprus, Sharjah (United Arab Emirates),
FIGURE 3 Primary motivation for floating storage and
Colombia, and Australia, and drawing significant interest
regasification units (FSRUs) – 44 projects total from LNG suppliers, traders, and FSRU firms.
Source: Author
The next step is to recognize the capacity value of LNG-
sector decarbonization pressure, new opportunities will to-power infrastructure. Brazil’s Porto de Sergipe, a 1,500
arise for gas-to-power. MW project, demonstrates this value. The project, now
under construction, is economically supported by a fixed
Unbalanced Supply and Demand annual capacity fee sufficient to paying for a full range
of fixed and non-fuel operating costs, including the lease
Meanwhile, the LNG-to-power market is struggling. Even
on the FSRU. The plant is fully dispatchable. And when
as the industry has responded to the potential for FSRUs by
it runs, it will run because hydro reservoirs are low, and
speculatively ordering many new, state-of-the-art vessels,
its energy will be very valuable indeed in a country with
there has been a noticeable slowdown in FSRU awards (Figure
memories of drought-induced power rationing.
4). While projects already under construction will add new
importers to the roster of LNG consuming countries, no new Porto de Sergipe will be the most efficient gas-fired plant in
emerging market terminals outside of China are scheduled to Latin America, with thermal efficiency of 62 percent. But
open beyond the early months of 2021.
About two dozen FSRUs are either available today or will be
No. of countries with
available as they come off contract between now and 2024. Floating Onshore
LNG-receiving terminals
Rates for FSRUs are barely half what they were five years 14 42
New terminals or expansion phases online
ago and several FSRUs are being used as LNG carriers.
12 36
While there are several reasons for the combination of
demand contraction and supply expansion in the FSRU 30
Number of countries
10
space, one factor looms especially large in explaining the Forecast
steep fall in bankable projects: bad procurement practices. 8 24
Of three dozen operating or under-construction projects
6 18
in emerging markets, it can be argued that almost all have
either been fully competitively bid or have had significant 4 12
aspects subjected to competition by tender.
2 6
The flip side of this is that bilateral negotiation has
produced almost no examples of FSRU projects being 0 0
successfully concluded. Yet parallel, bilateral negotiation 2008 2010 2012 2014 2016 2018 2020 2022
is an approach that is commonly seen in markets ranging
from Ghana and Sri Lanka to Myanmar. And this approach
has not seen any projects obtain financing and be brought FIGURE 4 New terminals or expansion phases online 2008-22
into operation. This raises an important question: Why for floating or onshore LNG storage
haven’t the negotiated deals been financeable? Probably Source: International Gas Union (IGU)
3
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when it rains it will not be needed, and LNG offtake can Significantly, the basis for investment decisions has
be reduced because the supply contract is highly flexible as changed. Older projects have been underpinned by long-
well. Brazilian power customers will benefit: if the plant is term offtake contracts with creditworthy buyers. Recent
forced to run because it must buy the gas, the annual cost investment decisions have relied much less on contractual
of LNG will be about $600 million (at $10/million British offtake and more on the equity strength of sponsors like
thermal units (mmBtu)). Projects like Porto de Sergipe and Qatar Petroleum, Shell, Petronas, and Mitsubishi. Markets
Panama’s AES Colon illustrate a critical fact of today’s newly opening to LNG are always steps down the credit
LNG-to-power space: that all players in the supply chain, quality ladder.
other than the LNG supplier, can be indifferent to actual
LNG consumption if contracts are structured appropriately. Abundant LNG Reserves
This is a key insight because, consistent with the clean This raises an important question: Why are producers
energy mix approach, there are two steps for gas in the committing billions to new LNG production despite the
transition. First, an increased market share for gas as it difficulties now seen in opening new emerging markets,
replaces dirtier fuels. And second, a decreasing share for and amid a global slowdown in gas turbine sales? There are
gas as it is replaced by the combination of renewables and several factors involved in the answer: Natural gas reserves
storage. This path for gas should be a conscious goal of are plentiful, but often far from potential markets; and
energy policy makers. LNG is often the preferred solution for remote gas reserves.
Like the LNG-to power market, power generation Those plentiful reserves mean that there is plenty of
equipment suppliers are also struggling. The big equipment competition to get new projects to market, and firms
manufacturers, especially General Electric and Siemens, are that can take the equity approach (as opposed to being
under pressure. Siemens estimates that suppliers of turbines dependent on limited recourse project financing) have a
of over 100 MW can manufacture 400 such units per year, distinct advantage. The LNG market is globalizing and
but demand going forward will be no more than 110 units commoditizing, reducing the risk of bringing on new
per year. Demand is soft for smaller units too, including supply if production costs can be contained. Finally, there
both turbines and reciprocating engines. is the reality that climate politics might turn some natural
gas reserves into stranded assets at some point. This was
LNG supply is nonetheless growing rapidly. The world
certainly a factor behind Qatar’s recent decision to lift
is currently in the middle of the biggest LNG supply
the moratorium on further North Field development and
expansion in history, driven in recent years by rapid
commit to increasing LNG production capacity by nearly
expansion of Australian and U.S. supply. By 2023,
50 percent, taking its output potential to 110 million tons
the International Energy Agency (IEA) projects that
per year, or over 140 billion cubic meters (bcm) per year.
gas liquefaction capacity will exceed 500 billion cubic
meters (bcm) of natural gas per annum, or about 400 A more flexible market helps. LNG companies know that,
million tons of LNG (Figure 5). And recent investment at worst, they will need to dump unsold LNG into the
decisions—in Qatar, Canada, the United States, and other liquid markets of Europe, where annual utilization of LNG
places—will add to supply after 2023. import capacity runs at 20 to 30 percent. Chinese demand
is the wildcard: In 2017–18, China bought many of the
available cargos, and European terminal utilization was
low. In late 2018 and into 2019, China’s appetite waned
2011 because of a warmer winter, and LNG suppliers had to put
Other
more into Europe.
The truism of the
United current market is that when China buys
States
2017 LNG, it turns a buyer’s market into a seller’s market.
China is now Australia
the second largest buyer of LNG globally. It
surpassed Korea this year and may overtake Japan as the
Qatar
largest LNG destination by 2020. China underscores a core
2023 environmental truth about natural gas: it is not just about
the carbon. The purpose of Chinese LNG purchases has
been to improve air quality in northern China, an effort
0 100 200 300 400 500 that has been stunningly successful and is expected to
continue for some time. China’s LNG binge has contributed
Qatar Australia United States Other
directly to increased confidence among LNG project
sponsors, and that confidence translates, in part, to positive
FIGURE 5 Global LNG supply growth 2011-23 (bcm) investment decisions for new capacity.
Source: International Energy Agency (IEA)
4
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Conclusion 110.0
For emerging markets, LNG-to-power should be an
100.0
essential part of a clean energy strategy. To make that
happen, a handful of principles should be incorporated into 90.0
the policy framework of individual countries:
80.0
• Countries need to embrace transparent and competitive
tendering processes when awarding rights for energy 70.0
infrastructure and energy supply.
60.0
• Natural gas has proven its carbon advantage relative
to coal, and as China has shown, natural gas can have 50.0
an immediate impact in reducing local pollution; these
40.0
benefits should be incorporated in policy frameworks.
May 18
May 15
May 16
May 14
May 17
Sep 18
Sep 15
Sep 16
Sep 14
Sep 17
Jan 18
Jan 15
Jan 16
Jan 17
• Attention should be paid to replacing coal with a mix of
flexible gas and renewables.
AQI PM10 PM2.5
• In an increasingly flexible and commoditizing sector,
LNG buyers and FSRU lessors should be clear about
their requirements and should be careful about FIGURE 6 China: Particulate Matter and the Air Quality
overcommitting on volume, tenor, or other factors; but Index have been decreasing since 2015 (annualized basis)
contracts (with the right flexibility) remain critical pieces
Source: CNEMC, Citi Research
of the commercial supply chain. Buyers in today’s gas
market should be assertive but should also value stable
relationships with reputable providers of LNG and The private sector needs to be at the heart of efforts to
infrastructure. mobilize finance for the clean energy transition. There is an
opportunity to apply a maximizing finance for development
(MFD) approach (Box 1) for gas that will address policy
Box 1: Maximizing Finance for Development— reform, market readiness, and enabling investments aligned
1
Cascade Objective and Algorithm to country climate targets.
Maximize financing for development by leveraging ACKNOWLEDGEMENTS
the private sector and optimizing the use of scarce
The author would like to thank the following colleagues
public resources. WBG support will continue to
for their review and suggestions: Sumeet Thakur, Senior
promote good governance and ensure environmental
Manager, Global Infrastructure–Energy, Global Infrastructure
and social sustainability. & Natural Resources, IFC; Tunc Alyanak, Senior Investment
When a project is presented, ask: “Is there a Officer, Infrastructure–Europe and Central Asia, Global
sustainable private sector solution that limits public Infrastructure & Natural Resources, IFC; Francisco
debt and contingent liabilities?” Avendano, Operations Officer, Climate Policy Team, Climate
Business, IFC; Julia Heckmann, Research Analyst, Global
• If the answer is “Yes”—promote such private Infrastructure–Energy, Global Infrastructure & Natural
solutions. Resources, IFC; and Thomas Rehermann, Senior Economist,
• If the answer is “No”—ask whether it is because of: Thought Leadership, Economics and Private Sector
Development, IFC.
–– Policy or regulatory gaps or weaknesses? If so,
provide WBG support for policy and regulatory Please see the following additional EM Compass Notes
about energy opportunities in emerging markets:
reforms.
Energy Storage–Business Solutions for Emerging Markets (Note
–– Risks? If so, assess the risks and see whether 23); Creating Markets in Turkey’s Power Sector (Note 33); Using
WBG instruments can address them. Blockchain to Enable Cleaner, Modern Energy Systems in Emerging
Markets (Note 61).
If you conclude that the project requires public
funding, pursue that option.
1
See for example: World Bank Group. 2017. “Maximizing Finance for Development: Leveraging the Private Sector for Growth and Sustainable
Development.” Report prepared by the World Bank Group for the Development Committee, September 17, 2017, p. 6–7.
5
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Box 2: About IFC and investing in LNG in emerging markets
IFC—a sister organization of the World Bank and and a senior lender ($200 million) to the Golar Power/
member of the World Bank Group—is the largest ebrasil Porto de Sergipe Project. IFC has been the lead
global development institution focused on the or co-lead debt arranger for LNG projects in Bangladesh,
private sector in emerging markets. We work with Panama, Brazil, and El Salvador.
more than 2,000 businesses worldwide, using our IFC operates in partnership with the most significant
capital, expertise, and influence to create markets companies in the LNG and power businesses. Our
and opportunities in the toughest areas of the world. projects involve supply commitments from Qatar
In fiscal year 2018, we delivered more than $23 billion Petroleum, ExxonMobil, Shell, BP, and Total. Equipment
in long-term financing for developing countries, and sometimes equity and EPC services have come from
leveraging the power of the private sector to end General Electric, Siemens, and Wartsila. Three of the four
extreme poverty and boost shared prosperity. For largest FSRU owners, Excelerate, Golar, and BW, provide
more information, visit www.ifc.org. vessels to IFC-financed projects. The largest commodity
IFC has invested equity and debt in the first LNG firms trade LNG through IFC-financed infrastructure,
terminals to come into operation in Pakistan and including IFC client Vitol. Leading financial institutions
Bangladesh. IFC is senior lender ($150 million) to the AES/ such as FMO, JICA, and Goldman Sachs work with IFC to
Motta Group Colon LNG-to-power project in Panama, support lending and project bonds.
Additional Selected EM Compass Notes Previously Published by IFC Thought Leadership
Note 64: Institutional Investing: A New Investor Forum and Growing Interest in Sustainable Emerging February 2019
Markets Investments
Note 63: Blockchain and Associated Legal Issues for Emerging Markets January 2019
Note 62: Service Performance Guarantees for Public Utilities and Beyond—An Innovation with January 2019
Potential to Attract Investors to Emerging Markets
Note 61: Using Blockchain to Enable Cleaner, Modern Energy Systems in Emerging Markets November 2018
Note 60: Blended Concessional Finance: Scaling Up Private Investment in Lower-Income Countries November 2018
Note 59: How a Know-Your-Customer Utility Could Increase Access to Financial Services in Emerging October 2018
Markets
Note 58: Competition Works: Driving Microfinance Institutions to Reach Lower-Income People and October 2018
the Unbanked in Peru
Note 57: Blockchain Governance and Regulation as an Enabler for Market Creation in Emerging September 2018
Markets
Note 56: A Practical Tool to Create Economic Opportunity for Low-Income Communities July 2018
Note 55: Peru’s Works for Taxes Scheme: An Innovative Solution to Accelerate Private Provision of June 2018
Infrastructure Investment
Note 54: Modelo Peru: A Mobile Money Platform Offering Interoperability Towards Financial Inclusion May 2018
Note 53: Crowding-In Capital Attracts Institutional Investors to Emerging Market Infrastructure April 2018
Through Co-Lending Platforms
Note 52: Crowding-In Capital: How Insurance Companies Can Expand Access to Finance April 2018
Note 51: Blended Finance—A Stepping Stone to Creating Markets April 2018
6
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Note 48: Increased Regulation and De-risking are Impeding Cross-Border Financing in Emerging January 2018
Markets
Note 47: From Farm to Fork: Private Enterprise Can Reduce Food Loss Through Climate-Smart October 2017
Agriculture
Note 46: Precision Farming Enables Climate-Smart Agribusiness October 2017
Note 45: Beyond Fintech: Leveraging Blockchain for More Sustainable and Inclusive Supply Chains September 2017
Note 44: Blockchain in Financial Services in Emerging Markets—Part II: Selected Regional September 2017
Developments
Note 43: Blockchain in Financial Services in Emerging Markets—Part I: Current Trends September 2017
Note 42: Digital Financial Services: Challenges and Opportunities for Emerging Market Banks August 2017
Note 41: Blockchain in Development—Part II: How It Can Impact Emerging Markets July 2017
Note 40: Blockchain in Development—Part I: A New Mechanism of ‘Trust’? July 2017
Note 39: Technology-Enabled Supply Chain Finance for Small and Medium Enterprises is a Major June 2017
Growth Opportunity for Banks
Note 38: Can Blockchain Technology Address De-Risking in Emerging Markets? May 2017
Note 37: Creating Agricultural Markets: How the Ethiopia Commodity Exchange Connects Farmers and April 2017
Buyers through Partnership and Technology
Note 35: Queen Alia International Airport—The Role of IFC in Facilitating Private Investment in a Large April 2017
Airport Project
Note 34: How Fintech is Reaching the Poor in Africa and Asia: A Start-Up Perspective March 2017
Note 33: Creating Markets in Turkey’s Power Sector March 2017
Note 32: Private Provision of Education: Opportunities for Emerging Markets February 2017
Note 31: Improving Emerging Markets Healthcare Through Private Provision February 2017
Note 30: Masala Bond Program—Nurturing A Local Currency Bond Market January 2017
Note 29: Toward a Framework for Assessing Private vs. Public Investment in Infrastructure January 2017
Note 28: The Importance of Local Capital Markets for Financing Development January 2017
Note 27: How Banks Can Seize Opportunities in Climate and Green Investment December 2016
Note 24: De-Risking by Banks in Emerging Markets—Effects and Responses for Trade November 2016
Note 23: Energy Storage—Business Solutions for Emerging Markets November 2016
Note 22: Mitigating the Effects of De-Risking in Emerging Markets to Preserve Remittance Flows November 2016
Note 20: Mitigating Private Infrastructure Project Risks September 2016
Note 19: Creating Mobile Telecom Markets in Africa September 2016
Note 18: Seven Sisters: Accelerating Solar Power Investments September 2016
7
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