Asian electricity and gas price drivers and trends · Asian electricity and gas price drivers and trends Presentation at the 18th World Chlor-alkali Conference, Singapore Mike Thomas

Asian electricity and gas price drivers and trends Presentation at the 18th World Chlor-alkali Conference, Singapore Mike Thomas ([email protected]) 19 June 2014

mailto:[email protected]

The Lantau Group Confidential and Proprietary

Observation

• Asia faces unprecedented energy cost challenges due to high cost of natural gas

• Compounded by growing environmental concerns

• Exacerbated by overly simplistic regulation and policy

• Complicated by insufficient use of analysis to identify and resolve key issues and risks

• Often at the expense of the larger users due to cross-subsidies favouring domestic customers

1

Costs have been increasing – sometimes avoidably so


We analyse energy and gas markets for a wide range of stakeholders

2

Collate data and information on fuels,

power, transmission and policy issues

Analyze data and information

(supply/demand fundamentals, materials

costs, investment requirements)

Review regulatory drivers and possible

tariff adjustments

(including seller financial performance)

Develop projections and scenarios

Assist clients plan/respond/mitigate

Approach and value added

Government policies and

market design

Transmission and distribution related

cost

Financial performance of

incumbents

Fuel market dynamics

Fundamental cost

drivers of power and

gas tariffs

Government and

regulatory policy

“radar”

Risk factors and

longer-term

budgeting support

Opportunity

identification /

negotiations

support


Asian industrial customers enjoy some of the lowest electricity tariffs (late ‘13)

Note: Assumed typical industrial customer is connected at tension level greater than 1kV and less than 66kV, consumes

2,187,840kWh per month, with contract demand of 3000kW

9.6

11.3 11.3 12.1 12.1

13.0 13.7 13.7 13.9 14.2 14.4 14.9 15.2 15.6

16.4 16.4 17.1 17.4

18.1 18.6 18.9 19.4

20.3 20.4 20.7 21.2 22.1

23.2

24.9

29.1 29.3 29.6

0

5

10

15

20

25

30

35

S¢/kWh

Still

subsidised

No Subsidies

Market-priced

natural gas

Rising fuel costs

Reducing subsidies

Strong cross-subsidies

So

urc

e: T

LG


But the tariff environment has been changing rapidly over the past two years…

4

43%

28% 27% 26% 18% 17% 15% 14% 10% 8%

-9% -20%-10%

0%10%20%30%40%50%

Tokyo

Jakart

a

Taip

ei

Beiji

ng

Kua

laLum

pu

r

Seo

ul

Ban

gkok

Hong

Kon

g

Hano

i

Manila

Sin

ga

pore

Sep 2012,

Tepco, Japan (Tokyo)

June 2012 Phase 1

Taipower, Taiwan

Jan 2013,

Kepco, S. Korea

PLN, Indonesia

Oct 2013 Phase 2

Taipower, Taiwan

April 2013,

PLN, Indonesia

May 2013,

Kansai, Japan (Kansai)

Jan 2014,

China (BJ,

TJ, SH and

HK) and

Malaysia

Nov 2013,

Korea

April 2014,

Chubu, Japan

May 2014,

Indonesia

Two-Year Tariff Increases (Large Customers)

So

urc

e: T

LG


In the 1970s, oil prices shot up, creating a “coal window”

5

Oil

Coal

Up to that point, many Asian countries were using oil for power generation


Almost all of Asia shifted away from oil

6

It was a simple world from something expensive towards something cheaper

Almost everyone

moved away from oil

If you had no other choices, you

moved quickly towards coal

0

20

40

60

80

100

1978 1980 1982 1984 1986 1988

Hong Kong Malaysia

Thailand Philippines

Indonesia

Percent

0

20

40

60

80

100

1978 1980 1982 1984 1986 1988

Hong Kong Malaysia

Thailand Philippines

Indonesia

Percent

Hong Kong

So

urc

e: W

orld

Ba

nk


The opening and closing of the coal window was followed by a period of growth

in use of natural gas for power generation

7

1991 Discovery of

Malampaya gas

field

1997 NPC/FirstGen sign GSPAs

with SPEX/OXY

2001 Commission of

Malampaya

2006 Singapore

commits to

LNG imports

1995 Hong Kong

first gas unit

commissioned

Decisions are easy when the same choice gives you: “green”, “cheaper”, and “local”

1992 Singapore first

gas unit

commissioned

Thailand gas &

oil

development

Malaysia

gas and oil

development

Coal

Window #1


Around 2005, a second Asian coal window opened and continues to this day

8

And so here we are….most new gas in Asia is linked to the price of oil

Oil

Coal

Coal Window #1 Coal

Window #2


Gas is Asia’s confounding challenge

9

0

2

4

6

8

10

12

14

16

18

20

US

D m

mb

tu

Henry Hub

UK NBP

Asia LNG

price

assuming

13.85 slope

Sourc

e: W

orld B

ank


Most Asian countries face the need to import natural gas (typically as LNG)

10

0

1,000

2,000

3,000

4,000

5,000

6,000

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

mm

cfd

North_Contracted Northeast_Contracted Gulf of Thailand_Contracted

Myanmar_Contracted LNG_Qatar

Demand growth?? Today

Thailand Vietnam

0

500

1,000

1,500

2,000

2,500

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

mm

cfd

CuuLong_Contracted NamConSon_Contracted

Southwest_Contracted Demand

Supply Gap

Impact of coal

build

Peninsular Malaysia

Supply

Gap

0

1,000

2,000

3,000

4,000

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

mm

cfd

Contracted JDA via Songkhla Contracted Indonesia to KertehContracted CAA PPM3 to Kerteh Contracted PM to KertehDemand

0

1,000

2,000

3,000

4,000

5,000

6,000

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

mm

cfd

Java_Contracted Sumatra_ContractedKalimantan_Contracted Demand

Supply Gap

Indonesia

So

urc

e: V

ariou

s g

ove

rnm

ent sta

tistics a

nd

TL

G a

na

lysis


Imported LNG usually comes in at the “market price”, and local (domestic gas)

is priced differently – leading to a kinked gas supply curve

The shift from domestic (often subsidised) gas, to market-priced gas has been a challenge

11

Imported LNG Price

Quantity of gas

US

D m

mbtu

Unseen

Domestic

Supply

Curve

Domestic Gas

Price

Imported

LNG

Domestic

Gas

Who gets this?


PTT Retail sales

to Industry

Low-Priced

Legacy

Domestic

Gas

Myanmar

Imports

Excess

LNG

Gas “pooling” mitigates impact of LNG prices – Thailand example

12

Gas Separation

EGAT

Single Buyer

Pool 1

Pool 2

IPPs, SPPs and

EGAT

Generation


PTT Retail sales

to Industry

Low-Priced

Legacy

Domestic

Gas

Myanmar

Imports

Excess

LNG

Gas “pooling” mitigates impact of LNG prices – Thailand example

13

Gas Separation

EGAT

Single Buyer

Pool 1

Pool 2

IPPs, SPPs and

EGAT

Generation

+7.35 GJ

-7.35 GJ

+7.35 GJ


0

20

40

60

80

100

120

140

Coal Gas

(Legacy)

Gas

(Pool 2)

Gas

(LNG)

Re

al

Le

ve

lis

ed

Co

st

($/M

Wh

)Fuel

O&M

Capital

Electricity pricing in Asia will be pressured upward as long as gas mix

increases and cross-subsidies reduce….

14

Source: TLG analysis

There is only

this

There is no

more of this

Gas

Market Price

CCGT


Coal prices have been coming down, providing some cover for countries with

significant coal in their fuel mix…

15

40

60

80

100

120

140

160

180

200 New Castle Coal Index, USD/metric tonne

So

urc

e; W

orld

Ba

nk


But increasing the use of gas for power can be more expensive

16

0

1

2

3

4

5

6

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Approximate Thailand

Legacy Gas Prices

Market Value of Gas

New Gas Plant Optimal Utilisation

Gas Price / Coal Price

Economic quantity of gas is about

1/5th the tempting quantity

Use gas

Use coal

The Terrible No Good Very Bad Economics of Gas for Baseload Power in Asia

“TODAY” “OLD DAYS”


Coal has a place in the Asian power sector, even despite CO2 emissions...

17

For Asia to stay competitive on electricity pricing – a new approach is needed

These values are much

greater than the cost of CO2

credits traded in other

countries

So

urc

e: T

LG


The other issue is “who pays”

Larger customers in Asia typically pay a larger portion of utility costs

18

1.61

1.50

1.43

1.38

1.36

1.25

1.12

1.11

1.09

1.08

1.06

1.06

1.00

0.96

0.91

0.88

0.84

0.77

0.69

0.66

0.63

0.59

0.57

Wellington

Rome

Amsterdam

Seoul

Tokyo

Brussels

Helsinki

New York

London

Lisbon

Paris

Berlin

Singapore

Sydney

Hong Kong

Bangkok

Madrid

Jakarta

Hanoi

Shanghai

Taipei

Kuala Lumpur

Beijing

Ratio of residential tariff compared to commercial electricity tariff in 2012

Asia cities

Rest of World

Source: TLG analysis

Residential tariffs

Greater than

Small Commercial tariffs

Residential tariffs

Less than

Small Commercial tariffs

Politicized tariffs (cross-subsidies) create pressures – either larger customers pay more or the

power utility earns less

So

urc

e: T

LG


The Bad News

• Shift to market-priced fuels throughout Asia

– Depleting local supplies

– Increased reliance on imports

Exposure to global markets increasing!

• Environmental costs rising

• Reduced appetite for subsidies

• Yet protection for domestic customers

19

• Tariffs have increased sharply in many

countries

• Most of the bigger increases have been

achieved, but some further adjustments are

likely

• Protection of domestic customers at expense

of larger customers will become more

sensitive

• Worth greater focus on demand response

and energy efficiency investments

• Increased power sector exposure to global

fuel markets means more frequent tariff

adjustments

Rising Costs are Real Impacts


The Good News

20

• More gas supplies for the region

– Russia

– Australia

– USA

• Gas demand growth under control?

– Japan’s nuclear restart?

– Malaysia shift to coal (example)

– China slowing growth

– Renewables uptake growing

• Oil forward curve?

– Downward except for Middle East strife?

• Ample supply

• New sources from USA

• Slower growth in China

• Industry shake out mostly hits smaller,

inefficient mines, relatively few of which are

for power generation

Gas prices more likely to ease than to

increase

Coal prices more likely to stay low

than to increase


Thank You

Contact

Mike Thomas [email protected]

Liutong Zhang

Xinmin Hu

Xiao Yue

By phone +852 2521 5501 (office)

By mail 4602-4606 Tower 1, Metroplaza

223 Hing Fong Road,

Kwai Fong, Hong Kong

Online www.lantaugroup.com

Rigour

Value

Insight

Energy Power Utilities

21

mailto:[email protected]

http://www.lantaugroup.com/


Appendix – China energy story

22


China’s story is about fuel choice, grid development and environmental

regulation

23

Xinjiang

Tibet

Qinghai

Gansu

Inner Mongolia

Ningxia

Sichuan

Yunnan

Guizhou

Chongqing

Fujian

Taiwan

Jiangxi

Guangxi

Hunan

Hubei

Henan

Anhui

Jiangsu

Shanghai

Shandong

Liaoning

Jilin

Heilongjiang

Shaanxi

Hebei

Beijing

Zhejiang

Hainan

Shanxi

Guangdong

China’s hydropower bases

and major West-China

Power Exporting Sources

but increasing seasonal

and temporal power

shortages

China’s coal/unconventional gases/wind/solar energy bases and

China’s future energy warehouses

Transmission and transport constraints

Water constraints and fragile ecosystems

Improper infrastructures

Economic growth faster than national average

China’s most developed and

populated regions and

energy/power demand centers

Must import from other regions

Lack of energy resources

Environmental issues are extreme

Well developed infrastructure


China’s on-grid (wholesale) power costs vary widely by location

24

China on-grid coal plant tariffs after the December 2011 hike, Yuan/MWh

Higher wholesale power costs in wealthier provinces

250

190

327

310 305

287

435

349

368

424

519

442 462

473

480

460

421

418 455

477

425

412

406

403

358

375

414 401

482

468

> 460

400 - 460

300 - 400

<300

• Policy and underlying cost

factors favour concentrating

tariff increases in wealthier

provinces

‒ Broad desire to

support development

in inner provinces to

balance China’s

growth


The world’s most expensive grid – yet to be completed

25

Rapid expansion of ultra-high voltage DC Systems

State Grid also has even more ambitious plans to expand the

UHV AC network to tap remote resources for eastern load

centres

0

50

100

150

200

250

300

350

400

450

500

110kV 220kV 330kV 500kV 750kV 1000kVTra

nsm

issio

n P

roje

ct

Co

st

(RM

B/k

m)

20062007200820092010

UHV project costs are much more expensive than

the others

Grid development is a longer-term watching brief – it is at least three years behind original

plans, and has implications for the timing and extent of natural gas (higher cost) in the eastern

provinces


Environmental pressures will push up gas usage – but higher costs will have to

be recovered…

26

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

LNG importsInternational pipeline importsDomestic production

23%

18%

8%

13%

China natural gas supply sources Comparative supply costs of gas into Shanghai

0

2

4

6

8

10

12

14

16

US

D/M

MB

tu

Oil-index

LNG

(slope:

13.5)

Canadian

LNG US

Gulf

LNG

Turkmen

pipeline

gas

Other

pipeline

gas

Domestic

conventio

nal gas

CBM Shale


China Summary

27

Fuel costs have risen but are now easing, but

non-fuel costs are still rising

-

5

10

15

20

25

30

35

-

50

100

150

200

250

300

350

2005 2006 2007 2008 2009 2010 2011 2012

Hu

an

en

g f

inan

cin

g c

ost

(RM

B/M

Wh

)

Hu

an

en

g f

uel

co

st

(RM

B/M

Wh

)

Fuel Cost Financing Cost

Source: Huaneng Power International annual reports

Increasing environmental control cost

• China has more than 817 GWs of thermal

generation that fail to meet China’s National Air

Emissions Standards. Investment of US$ 31

billion is required with an on-going increase in

annual operational costs of US$ 10 billion

Rising renewable energy surcharge cost

• China is just starting to pay extra to

increase renewable energy, but the total

amount of power purchased remains very

low compared to thermal and hydro

generation

Other costs are rising as well (Labor, equipment

and material cost)

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

2006 2007 2008 2009 2010 2011 2012

Maintenance Cost (RMB/MW/Year)

Documents

Asian electricity and gas price drivers and trends · Asian electricity and gas price drivers and trends Presentation at the 18th World Chlor-alkali Conference, Singapore Mike Thomas