From the Editor: South Asia needs gas and renewables not coal [Gas in Transition]

Pakistan’s plans to raise its coal-fired generation capacity and not build any new gas-fired plants is nothing short of a looming environmental disaster.

It is also a clear demonstration of the far-reaching ramifications of the global shortage of LNG, which has been hugely accentuated by Russia’s invasion of Ukraine and the massive ramping down of Russian pipeline gas exports to Europe.

European consumers have been and are suffering. Electricity and gas bills have risen steeply, despite the price caps and other measures provided by governments.

However, European companies have been able to grab the majority of available Floating Regasification and Storage Units (FSRUs) to boost their import capacity. Despite a rise in energy poverty, Europe has been able to pay the high prices set by a market in scarcity.

Abandoned tenders

In contrast, financially-weaker countries have fared much worse and some have simply gone without. South Asian countries last year saw a raft of LNG tenders abandoned, owing to a lack of affordable bids and, in more than one case, no interest whatsoever.

In July last year, Pakistan LNG failed to attract any bids for 10 spot cargoes for delivery from July to September. In October, another tender, for 72 cargoes – one a month over six years – failed to attract any interest.

Bangladesh similarly saw its calls for LNG go unanswered, resulting in a shortage of gas imports and leading to some of the worst power cuts in a decade, impacting more than 100 million people.

New normal rather the ‘normalisation’

The situation is improving. In February, a tender issued by Bangladesh managed to attract seven bids, with Japan’s JERA winning at a price of $16.50/mn Btu for a cargo to be delivered on March 11-12. An earlier tender in January saw a cargo bought at $19.78/mn Btu from France’s TotalEnergies.

Spot prices for LNG in February had fallen to their lowest level since August 2020, but they remain at levels which still stretch the finances of developing countries. It is a new normal in which LNG looks set to remain pricey for some years until new capacity comes on line and Europe finds other ways to compensate for the loss of Russian gas.

But is this a reason to abandon LNG for coal?

Extreme crisis

Pakistan’s position is extreme. It is in the midst of a severe economic crisis not helped by devastating floods last year. It was already receiving IMF funds under a deal agreed in 2019, and its foreign currency reserves have reached critically low levels.

The next tranche of IMF funding has been held up by a lack of agreement between the government and the IMF over the measures which the Fund wants to accompany the hand out. The government has already agreed and implemented fuel price hikes and a market-based exchange rate.

However, a recourse to coal at the expense of LNG makes no sense. As a cheaper emergency option, increased coal-fired or even fuel oil-fired generation are understandable, given the government’s cash-strapped position, but new plant construction is not.

Seaborne steam coal prices have also been volatile, following a similar trajectory to LNG over the past 18 months. Like LNG, they have now fallen, but not back to the levels prior to the price spike in late 2021 and the elevated price levels seen through 2022 after Russia’s invasion of Ukraine.

Moreover, Pakistan’s problem is not one of a lack of generation capacity, but a lack of affordable fuel. It has other serious problems in terms of the reliability and efficiency of its electricity grid and the amount of circular debt within its energy sector. None of these will be resolved by building new coal plants on borrowed money.

Chinese coal funding

Islamabad will have to pursue options for which it can attract funding. The desire for more coal-fired power plants indicates a willingness to replicate projects like the Shanghai Electric Thar coal plant, which has a capacity of 1.32 GW and runs on domestic coal. The plant has been built as part of the China-Pakistan Economic Corridor, which, in turn, is part of Beijing’s Belt and Road Initiative.

However, Chinese money may no longer be forthcoming, at least for coal. A study by Finnish thinktank the Centre of Research on Energy and Clean Air found last year that Beijing had ended plans for 15 coal-fired power plants abroad, although many of the cancellations were the result of changes to domestic policy in the countries intending to host the plants.

Nonetheless, it suggested that China is serious about the pledge it made in September 2021 not to build any new coal-fired power projects abroad. Japan and South Korea, also formerly large supporters of coal-fired project exports, made similar statements in June 2021. International lending and OECD credit export agencies have moved away from support for coal-fired projects.

As a result, Pakistan may struggle to raise the finance to realise its new coal-fired ambitions.

LNG – “no longer part of the long-term plan”

Even if a new coal-fired plant can be financed and built, it will not be operational until the LNG market has normalised to a greater extent than now, as more US and Qatari LNG production come onstream. Pakistan will still have gas-fired plant capacity ready to operate, and almost certainly, given the lack of investment in its domestic gas production, a need for gas imports.

If the always highly uncertain prospects of both the Iran-Pakistan-India and the Turkmenistan-Afghanistan-Pakistan-India pipelines are discounted, that will mean LNG.

There is not much that can be done immediately to ease Pakistan’s energy problems and those more broadly across South Asia. LNG is in short supply and the production side of the market is slow to adjust because of the long lead times of new projects. These, it should be said, are not helped by opposition to new investment in the gas sector and LNG export projects even when the consequences for increased coal use are all too clear.

Renewables by far the best short and long-term option

The answer, of course, is not coal, but renewables. For a country with a population the size of Pakistan, its wind and solar sectors are miniscule. It had only 1,335 MW of wind capacity at the end of 2021, according to International Renewable Energy Agency data, having added just 99 MW in 2021. Similarly, it had only 1,083 MW of solar power. Bangladesh’s wind and solar power capacities at 3 MW and 329 MW are equally ridiculously low and stand in stark contrast to their neighbour India’s 40 GW of wind and nearly 50 GW of solar at the end of 2021.

Wind and solar are cheaper than new coal plant construction, the required project capital is lower and the returns are quicker. They do not need fuel imports because there is no fuel.

If funding cannot be found in the west, then it is highly likely to be forthcoming from the east. China is hungry for new markets for its solar panels and is making ever larger inroads into both the on- and offshore wind export markets.

Pakistan needs to emerge from its current crisis on a sustainable path by boosting its renewable sector as much as it possibly can until LNG becomes more affordable. Given its low starting point with renewables and its lack of investment capital, it needs external support, but it should not waste the gas infrastructure it already has, which could continue to underpin its electrical system and industry without coal, while a viable renewable energy sector is developed.