Natural gas’ renewable energy paradox

A project developer once said that building a gas-fired power plant was like running a lemonade stand on a hot day, where your cart is next to a (very competitive) ice cream truck, the price of lemons just hit a record high, and the weather forecast says it might rain... heavily.

Investing in gas-based power generation in Asia is a complex decision driven by many factors, and a new report by S&P Global Commodity Insights highlights how the pace of renewable energy growth adds to this complexity.

While natural gas is increasingly critical to support renewable energy penetration in many Asian economies, the aggressive expansion of renewable capacity, in turn, threatens to curb gas-fired power generation in many countries.

Asia accounts for over 60% of the world's population and approximately 52% of global electric power demand, making it the focal point of economic growth and industrial expansion.

By 2035, rising living standards are forecast to increase power demand by over 40%, and natural gas will play a crucial role by managing renewables' intermittency and replacing coal and oil. In developed Asia, higher power demand will come from the advent of artificial intelligence and data centers.

In the base-case outlook, gas use in Asia's power sector is forecast to rise from 280 Bcm in 2024 to 368 Bcm in 2035, led by China and Southeast Asia, with a slight decline in Japan, South Korea and Taiwan (JKT), according to the report titled "Eye of the tiger: Asia's ambition for 400 Bcm of natural gas in power by 2035."

"Overall, Asia is transitioning from fossil fuels to cleaner energy sources driven by decarbonization commitments," according to the report. "Natural gas is pivotal in this transition, facilitating the shift from coal and oil while providing grid flexibility for renewable integration."

Backing renewables

Mainland China will lead global renewables growth, with solar and wind capacity expected to grow over 80% by 2030, and storage capacity more than doubling in the same period, said the report.

Mainland China is expected to see coal generation peak before 2030, and by 2035, solar and wind are forecast to be the largest source of electricity, necessitating some gas-fired power development for system balancing.

In Southeast Asia and the JKT markets, natural gas fulfills baseload and midmerit power generation needs, with a significantly higher share of around 28% to 31% in the power fuel mix.

By around 2030, Southeast Asia and China will individually surpass the JKT region in terms of natural gas use in the power sector. Southeast Asia faces grid constraints in integrating renewables and the absence of alternative baseload fuels like nuclear energy, leaving gas to fill the gap.

In India, where coal is the primary baseload fuel with a 75% share in generation, gas is projected to meet 40% of data centers' expanding power demand by 2030. However, due to expanded battery storage and grid capabilities, this will decline to 35% by 2035.

The renewables challenge

However, accelerated renewables growth also presents one of the largest downside risks for gas use in power generation across geographies, most significantly in China, where renewables are expanding the most.

Because of the scale of renewables growth in China and Southeast Asia, the risks of accelerated renewables impacting gas power demand are much higher. But in JKT, renewables development is constrained by land availability, reducing the risk of renewables versus gas competition.

The need for new gas-fired capacity in JKT arises from replacing older gas fleets in Japan, incremental power demand growth in South Korea and Taiwan, and coal plant retirements, the report said.

In JKT, higher power demand because of the AI/semiconductor industry and the pace of nuclear restarts poses bigger question marks for gas-fired usage, rather than the risk from renewables.

The other major challenge to gas is a fight for market share with coal – markets like China risk accelerated coal build-out as the government has approved a substantial amount of coal capacity and Southeast Asia faces the risk of slower coal phase-out.

"The direction of energy and climate policy is the most important factor that will shift the outlook for gas. Changes in the choice between gas, coal and renewables are the main downside risk," the report said.

Tactical decisions

These factors mean that building a gas-based power plant will be a strategic decision for policymakers and a tactical decision for corporate project developers. Projects will depend on highly localized factors such as energy policy, decarbonization financing and power market design.

The role of gas in the local economy will differ with every plant, as we are already seeing in the case of new LNG importers like Vietnam, the Philippines and Cambodia. In some cases, LNG terminals are starting imports to meet local gas demand even when associated power plants and pipelines are incomplete.

As energy security becomes a more prominent focus owing to geopolitical challenges, declines in indigenous gas supply are forcing greater reliance on imported LNG, which has its own strings attached.

Subsequently, gas' role in Asia's power stack will become far more complex than that of a transition fuel.