Coal and gas account for more than 60% of fuel used for electricity generation
Where does electricity come from? If we follow the path through the switch, down the transmission wires and back to the power station, we eventually return to fuel.
The fuel used in power stations provides the source of energy to generate electricity that powers our homes and businesses. So it comes as no surprise to learn that the cost of that fuel has a noticeable impact on the cost of producing and consuming electricity. Primary amongst them are coal and natural gas.
Coal (39.2%) and gas (22.8%) account for more than 60% share of the fuel used for all electricity generation globally. That means changing prices can have an electrifying global impact. So what does that mean in Malaysia?
Coal and gas consumption in Malaysia
Coal consumption for generating electricity is at an all-time high in Malaysia, with gas consumption not far behind.
Understanding fuel consumption involves the simple acronym ‘ktoe’. That stands for kiloton of oil equivalent, which means how much energy a fuel releases equivalent to the energy of burning a thousand tonnes of crude oil. It’s a common measure to compare the energy of fuel.
Taking this measure for a side-by-side comparison from Malaysia’s Energy Commission shows just how much Peninsular Malaysia & Sabah’s energy landscape has expanded over the last few decades, underpinned by a growing demand for coal and natural gas.
Asia is driving coal & gas demand
Asia-Pacific is now the global driver of coal use, as economic growth and a rapidly emerging middle class, alongside increasing urbanisation and industrialisation, drive energy demand growth. In 2000, Asia-Pacific was responsible for just half the world’s coal use. Today it accounts for almost three quarters of total coal use globally, with impressive new infrastructure projects like Malaysia’s Manjung power station leading the way.
coal offers the ability to rapidly scale up power production in the face of substantial economic growth.
This growing trend is motivated by coal and gas largely been seen as accessible and affordable fuel sources within the region, but responsible long-term use will require increasingly innovative technologies to manage overall emissions of coal fired power plants.
It’s easy to see why coal is seen as so accessible in the region. Of the top five coal producers globally, only the USA sits outside the Asia-Pacific. In this environment, coal is not only seen as affordable, but a relatively secure short-to-mid-term fuel source to power growing economies.
This is primarily because coal offers the ability to rapidly scale up power production in the face of substantial economic growth. Such rapid growth would otherwise require very high upfront investment in non-carbon generation, in addition to upgrading the grid. This contrasts with Europe, where more developed energy grids, substantial falls in the price of renewables, and increased consumer demand for sustainability, have shifted initiatives away from fossil fuels and towards more renewable sources.
Coal is a volatile story
The story of coal is one of volatility. Prices have varied significantly in past years due to rising environmental concerns, a challenging investment environment, and surges in Asian demand.
A recent International Energy Agency (IEA) report on coal highlights this volatility. Thermal coal costs have been largely influenced by moves within China, which, as a dominant coal producer and consumer, can have big impacts on global market prices.
The results of a volatile market are clear throughout the region. Indonesia, Southeast Asia’s largest coal producer, recently reached a six-year high for thermal coal prices, up over 32% year-on-year. With more than 60% of Malaysia’s coal imported from Indonesia, which is also a major supplier to Vietnam, Thailand, and other regional economies, it’s easy to see how price rises have impacts beyond one nation’s electricity generation costs.
Accelerating supply and demand for natural gas
Global natural gas supplies reveal a story in two parts. On one hand, demand increased by 3% in 2017, on the other, production has been rapidly expanding, driven by the United States. Once again Asia is a driver of demand in natural gas, with China alone expected to account for 37% of the global increase in natural gas consumption between 2017 and 2023, and becoming the world’s largest importer by 2019.
per unit of energy, gas is a more expensive fuel for electricity generation than coal.
Natural gas is an option to coal when it comes to base-load power. However, per unit of energy, gas is a more expensive fuel for electricity generation than coal. Power producers also have to weigh up the demand for natural gas in an industrial setting – this is expected to be the main driver for natural gas demand in coming years.
This dual-factor creates a dynamic market where prices don’t simply respond to the demand of power generation. These changing market conditions actually represent a global story of gas in three parts.
Gas prices are a story in three parts
Global gas prices are a story in three parts. The United States and Europe form two sides of that triangle, both large markets for natural gas, but driven by huge pipelines delivered on long-term contracts.
Asia’s gas is predominantly LNG, liquefied natural gas transported by ship. That makes for a more complicated picture. Asia is also home to the two largest importers of natural gas – China and Japan. So natural gas prices do suffer risk of volatility.
Asian gas spot prices hit a three year high in January this year, driven by cold weather throughout Asia, and progressed to a four year high in June. These are just some examples of the challenges of volatility and demand that lead to rising prices
In Malaysia, changing natural gas prices are influenced by a steady shift towards market prices from a previously subsidised fuel cost. Liberalisation of the gas supply market is set to support a more competitive price by 2019, creating an environment where short term cost rises to reach market levels are balanced against a more sustainable and competitive market.
What does this mean for electricity consumers?
As prices remain volatile, so too does the challenge of providing a secure and reliable energy supply, while at the same time maintaining affordable electricity prices. That means managing an electricity ecosystem requires regulation and market structures that can evolve to meet changing conditions.
This mechanism allows energy providers to adjust tariffs based on the changing prices of fuel
The MESI 9+1 reforms that have transformed Malaysia’s power sector in recent years represent the nation’s journey to introduce mechanisms to balance this volatility. Adaptive market measures have been implemented, such as imbalance-cost pass-through (ICPT), or as it’s known in other markets – fuel price pass through. This mechanism allows energy providers to adjust tariffs based on the changing prices of fuel required for electricity generation. Such measures provide a framework that help the electricity supply industry remain flexible against volatile fuel prices.
In a landscape that is constantly shifting, we can look to certain trends to indicate where prices are going. The first is that rapidly growing economies in Asia will continue to drive coal and natural gas demand. And the second is that the price of those commodities is unlikely to remain constant.
In that landscape, the ability to be flexible is crucial. To meet a nation’s electricity needs, a fair pricing framework is needed to reflect the changing costs for electricity. This requires consumers to pay for their part, because no matter what – a sustainable electricity supply industry is the only way to make sure that the lights stay on.