This Article Was Written By Energy Watch | 23.12.20 | 1:06 PM Natural gas generates around a quarter of total electricity consumed globally (23%), second only to coal (38%). It is a fossil fuel that offers the ability to generate significant volumes of electricity without the same emissions burden as coal, while surpassing the complexities associated with nuclear power. As the cleanest burning fossil fuel, it represents an important part of the energy transition for many countries seeking to balance renewable energy uptake with base-load power generation. Discount natural gas from national reserves Natural gas is a fossil fuel resource which is created in unique geographical conditions over millions of years. Like companion fuels oil and coal, natural gas reserves vary significantly by country and region. The Middle East and Commonwealth of Independent State (CIS) regions are home to the world’s largest gas reserves. Recent estimates indicate that Iran, Russia, and Qatar boast the greatest proven reserves globally. National utilities and energy companies have long operated with integrated relationships, utilising shared natural resources for the benefit of the electricity ecosystem. In Malaysia for example, Regulated Piped Gas is an agreement – mandated by the government – that national utility TNB purchase a set amount of gas at a regulated price from energy company PETRONAS. This regulated price has been gradually increasing in recent years, as it moves to equalise with market pricing. This regulated price gap was introduced with the aim of providing valuable shared benefits to PETRONAS and TNB. A regulated gas price offered TNB some certainty on costs, enabling them to better plan and consider generation costs, given that gas comprises 40% of Malaysia’s electricity generation fuel source. That level of certainty is valuable in an industry which is driven by the need to provide secure, sustainable, and affordable electricity to customers. Regulated gas prices offered revenue stability for PETRONAS from the power industry As a critical financial anchor to the nation, PETRONAS likewise benefited from the value of this certainty. Regulated gas prices offered revenue stability from the electricity industry, a key client for Malaysia’s natural gas industry. Gas will play an invaluable part in the nation’s energy transition, providing a lower emissions alternative to coal power generation, while ensuring that high generation base-load power vital as a foundation to a national power system. In this regard, the Regulated Gas Price has played an important role. Yet despite the benefits of such an agreement, an increasingly volatile operating landscape can create notable challenges for both participating parties. The clash of certainty and volatility in regulated prices When fuel prices are rapidly changing, as in the current environment, certainty would seem most welcome. Yet set price agreements can actually trigger hurdles for operators attempting to remain globally competitive in this environment. Despite the Regulated Gas Price never rising above average market price in Malaysia, utility TNB were in discussions to source cheaper gas prices from global energy giant Shell in 2019. This shows how price swings can unlock time-sensitive market opportunities for operators. The challenges of cost certainty versus market pricing have been evidenced in many markets around the world. These challenges can be particularly acute in markets where gas is directly subsidised by government. In Indonesia for example, gas prices were recently capped at USD6/MBtu for power plants, in an attempt to reduce the cost of fuel for utility PLN. With 38% of the utility’s fuel expenditure spent on natural gas, this is expected to save the company 54.8 trillion rupiah a year. To balance these costs, the Indonesian Government is introducing measures to reduce the revenue it receives from gas producers’ contracts, although this will reportedly be balanced by reduced subsidies. However, this creates a notable challenge for gas market contractors, with a number of developers reportedly considering whether gas development projects are economically viable under this mandated price cap. That means certainty in gas prices today plants an unwelcome question mark over future domestic production targets. In Argentina, fuel prices were subsidised in the early 2000s to balance volatile exchange rates and inflation challenges. This led to gas being substantially subsidised for the electricity industry, artificially lowering electricity costs and disconnecting them from fuel prices. It is estimated that by 2015, Argentina was spending as much as 5% of GDP on subsidising consumer prices such as gas and electricity. Like Indonesia, this created real challenges for the pipeline of future gas developments in the country, while significantly undermining efforts to ensure sustainable and efficient electricity usage by consumers. Open market opportunity Natural gas is a valuable commodity, and one which can deliver great economic prospects. There is also opportunity to serve the electricity ecosystem with lower gas prices, but in doing so, countries often face challenges in balancing the sustainable nature of future development. TNB’s procurement from Shell reveals the volatility in the current wholesale market for fuel. It’s clear that mandated gas prices can contribute to reduced costs and more affordable energy in certain circumstances. However, subsidised or regulated prices can create issues around distorting market conditions, potentially undermining investment in the energy ecosystem, and limiting utilities’ abilities to adapt quickly in a changing market landscape. Malaysia’s Regulated Gas Price is an interesting balance between these two extremes. It offers valuable certainty for both seller and buyer, without creating a direct financial burden on the state in the form of subsidies. However, the case of TNB’s procurement from Shell reveals the volatility in the current wholesale market for fuel. In this scenario, regulated or subsidised prices can potentially create a financial burden, limiting a utility’s opportunity to quickly adapt to source supplies at temporarily lower prices. In a rapidly evolving industry landscape, the conflict between certainty and agility remains a difficult question to balance. What’s clear is the important role gas will continue to play in generating electricity for nations around the world.