LNG Alternatives for Clean Electricity Production

As G7 leaders prepare for their summit this weekend, several members, including Germany and Japan, are making misguided pushes to endorse public investments in fossil gas supply chains. However, according to new analysis published by Energy and Environmental Economics (E3), on behalf of NRDC, renewable energy and battery storage can provide lower-cost and lower-carbon alternatives to power generation fired by liquefied natural gas (LNG) while also supporting grid reliability as part of a broader approach to decarbonizing electricity grids (see Figure 1).

Figure 1: Strategies for decarbonizing electricity grid while reducing LNG demand

The global demand for LNG is driven, in part, by the assumption that gas-fired power infrastructure is necessary to provide firm generation, and that LNG represents a cleaner alternative to coal-fired generation. This report explores LNG-to-power alternatives in three countries currently at a crossroads with respect to LNG infrastructure: Germany, Pakistan, and Vietnam. These countries are representative of the broad range of factors relevant to LNG-to-power planning decisions, including electric demand growth, reliability needs, and the current level of LNG infrastructure build-out (among others). E3’s analysis finds that, despite their differences, all three countries have sufficient renewable energy potential to meet their projected electricity demand out to 2050, several times over (see Table 1). Given adequate renewable energy resources in all three countries, meeting future electricity demand and decarbonizing the power grid becomes a question of how to maximize these renewable energy resources while ensuring the reliability of the power system.

Table 1: Renewable potential by country relative to total electricity demand by 2050

To help meet normal, daily energy demands, E3’s analysis shows renewables (either solar or onshore wind) paired with four-hour lithium-ion batteries are a cheaper source of low-carbon generation than LNG paired with carbon capture and sequestration (CCS), and renewables are cost-competitive with unabated LNG-fired power plants (see Figure 2) in all three countries. Renewable energy alone (without storage) is a lower-cost and lower-risk option for bringing additional energy to the power grid compared with LNG-fired generation. When paired with short-duration lithium-ion batteries, wind and solar battery hybrid resources can contribute significantly to the grid’s reliability needs to cover a wide range of daily conditions. For grid reliability needs over multiday periods of low solar and wind production, there are a number of technologies reaching commercial deployment. E3’s study includes a sample of these long-duration, low-carbon technologies: 48-hour adiabatic compressed air energy storage (A-CAES), 150-hour iron-air batteries, and combustion turbines fueled by green hydrogen. These solutions are generally found to be more expensive than unabated LNG-fired power plants and vary in cost competitiveness against LNG paired with CCS.

E3’s work shows that the delivery of longer-duration, clean-firm power will require further technology innovation and commercialization. However, the development of new LNG infrastructure specifically to address this concern comes with its own challenges. For example, LNG-fired power generation is subject to significant price volatility from indexation to global oil and gas commodities (compared to stable lifetime energy costs from wind and solar), and LNG is not immune to risks of supply disruption and foreign currency requirements associated with all imported fuels (compared to the domestic fuel security of renewable energy production). LNG-fired power generation also produces conventional pollutants (nitrogen oxide, sulfur oxide, and particulate matter) like all gas-fired generation, while carrying a significantly higher carbon intensity than conventional natural gas due to the energy-intensive nature of liquefaction and shipping.

The high capital cost of LNG infrastructure also creates a higher risk of stranded costs for consumers. As solar and wind generation levels increase globally, gas-fired power plants will run at lower capacity factors, providing value primarily as peaker plants rather than as baseload resources. Lower capacity factors for LNG-to-power infrastructure will mean higher effective costs per megawatt-hour of electricity as the fixed costs of the infrastructure are spread over a lower volume of power produced; this makes it harder for buyers of LNG-fired power generation to reduce effective costs of power by reducing power production if LNG prices rise on the global market. Many LNG purchase agreements also require high contracted volumes over many years, which commit buyers to a large amount of gas offtake over a long horizon, creating a substantial purchase obligation that requires credit support and reduces buyers’ flexibility to reduce LNG consumption in the future if LNG prices, offtake demand, environmental policies, or other factors reduce the attractiveness of LNG use. Figure 2 shows the results of E3’s analysis of levelized costs of electricity (LCOE) of LNG versus low-carbon generation options.

Figure 2: LCOE of LNG low-carbon firm generation in Germany, Pakistan, and Vietnam

The study points out that E3’s cost estimates for LNG infrastructure likely underestimate the full cost for new-build LNG-to-power infrastructure, as the presented values do not include the costs of building LNG import terminals, gas storage, and associated pipelines, which may be necessary in many cases.

Finally, E3’s work demonstrates the catalyzing effect that changes in the cost of capital can have on the competitiveness of renewables plus storage, particularly in emerging economies where financing costs are typically higher than in wealthier countries. E3 estimates that the costs of renewables and battery storage could be 40 percent lower if the costs of capital (debt and equity) in Pakistan and Vietnam were reduced to the cost of capital in Germany. These reductions are more significant for renewables and storage technologies than for LNG options because of the larger contribution of capital costs to the levelized costs of renewables relative to LNG. 

This analysis substantiates why G7 leaders must stand firm against efforts to promote further fossil gas supply chain investments. The world’s leading scientific and energy authorities, from the Intergovernmental Panel on Climate Change to the International Energy Agency, have emphasized that new fossil gas investments are starkly inconsistent with global climate goals and environmental justice. In this vein, E3’s analysis serves as a timely illustration of the compelling clean energy alternatives to the use of LNG in the power sector. The world simply cannot afford G7 backsliding on fossil fuels when there are cleaner and cheaper decarbonization options. Click here to see the full report!