United States: LNG And Renewable Power - Risk And Opportunity In A Changing World

Last Updated: January 18 2016
Article by Jürgen Weiss, Steven H. Levine, Yingxia Yang and Anul Thapa

Executive Summary

Two important trends are transforming the energy industry across the globe. The production of relatively low-cost unconventional sources of natural gas—primarily in the United States and Canada, but potentially also in other parts of the world—has led to much heightened attention to the possibility of increased use of Liquefied Natural Gas ("LNG") in world markets and a large number of proposed LNG export projects in North America. Several LNG export projects are under construction in North America (and will begin exporting in the next few years), and many more are proposed with the hope of being part of a "second wave" of LNG projects to begin service in the post-2020 time frame. At the same time, both technological progress and concerns about climate change risks are stimulating the development and deployment of various types of renewable energy sources around the world.

While the natural gas industry has traditionally viewed LNG as a substitute for oil in many markets, this paper explores whether the evolution of renewable energy sources suggests that LNG may be competing less with oil and more with renewable energy sources in markets outside of North America in the coming years. Such competition is evident in electricity generation markets as natural gas combined-cycle units and renewable energy sources compete to serve future electricity demand. Competition between natural gas and efficient electric heating (using heat pumps, for example) is less prominent, but emerging in some countries (e.g., Germany). Thus, there are important and intensifying linkages between global natural gas and electricity markets that will impact developments in renewables markets and have feedback effects into the natural gas market.

This emphasis on LNG development takes place against a backdrop of several important market dynamics, including the recent collapse in world oil prices, a slow-down in China's economy and its demand for natural gas, the commissioning of new LNG export projects in Australia, and a reduced need for natural gas in Japan due to the re-start of some of the country's nuclear power plants. As a result of these factors, Asian LNG prices, which had risen to $15/MMBtu (or more) in recent years, have now collapsed to roughly $6-$7/MMBtu, and the significant price differential between world oil prices and North American natural gas prices (that gave rise to the North American LNG projects now in development) has now declined dramatically. The deterioration of this price differential is bad news for both the LNG export projects in development (but not under construction) in North America and the energy companies that signed up for long-term LNG export capacity from the new North American export projects (that are under construction and one of which will begin service in early 2016). These market suppliers need LNG delivered prices in Asia to be in the $10-$11 range in order to be profitable. With several more LNG export projects coming online in the 2015-2020 period and an expectation of continued low oil prices, global LNG markets are likely to be oversupplied for the next several years and the low LNG prices now observed seem likely to persist for some time. The fate of many of the proposed North American LNG export projects is increasingly uncertain in the new price environment (and some LNG export projects have already been delayed).

Thus, two important questions facing global LNG markets today are how quickly LNG supplies associated with the new LNG projects coming online over the next few years will be absorbed, and at what point in the future there might be a rebound in global LNG prices such that new LNG export terminals (beyond the terminals now under construction) are needed. The LNG export developers in North America (as well as buyers of LNG from the projects now under construction) are hoping that the worldwide LNG supply glut is temporary and that market conditions in the post-2020 time frame will improve.

The analysis in our paper suggests that market participants should be very cautious in thinking that the LNG supply glut is necessarily a temporary problem, because another important dynamic in world energy markets is the declining cost of renewable power and the prospect of increased penetration of renewables in the global power generation mix and thus competing with LNG as a "fuel source" for power generation. In fact, in some regions such as Germany and California, where renewable penetration has been high, gas demand growth has already been stunted by the penetration of renewables in the generation mix (causing a reduction in gas demand growth for power generation).

There is a real possibility of a significant shift towards more renewable power generation in some of the key Asian markets targeted by the LNG industry. While the current shares of wind, solar, and gas in China are each less than 5% of China's total electricity generation, all three sources of electricity generation are projected to increase substantially over the next 25 years as the share of coal generation as a percentage of total generation is projected to decline significantly from around 75% today to roughly 50% by 2040.1 Gas, wind, and solar (as well as nuclear) will therefore all be competing to serve China's growing electricity needs. The relative costs of LNG and renewables discussed in this paper will likely be a significant factor determining which technologies achieve the highest penetration levels. Of course, the uncertainties regarding the costs of both renewables and delivered LNG over the coming decades remain significant and other factors not discussed in this paper will influence China's future electricity generation mix. Nonetheless, the expectation of declining costs of renewables (discussed in this paper) relative to LNG is noteworthy and creates the possibility of a potential shift towards even more renewable generation than is currently forecast in key Asian markets.

Since many LNG forecasts suggesting that the LNG supply glut is temporary rely on the assumption that natural gas demand from China and other countries in Asia will more than double in the next 20 years (in part due to gas demand in the power sector), these forecasts should be seen as highly uncertain given the potential for a significant shift towards more renewable power in China and throughout Asia that could limit the growth in gas demand and the need for LNG. Likewise, in Europe, despite the fact that declines in domestic natural gas production (as well as the perpetual desire to diversify away from Russian-sourced natural gas) are leading many to look at LNG as a potential alternative, the on-going shift towards more renewables may reduce the incentive to import significantly larger amounts of LNG.

LNG infrastructure is very capital intensive across the entire LNG supply chain. As a result of the billions of dollars of fixed costs, LNG projects and associated financing arrangements usually require long-term contractual arrangements for the necessary infrastructure. These contractual arrangements allow the developers of the LNG infrastructure to pass the risk of their projects on to their counterparties. For example, the developers of LNG export projects may sell their export capacity to large energy companies (such as BP, BG, Total) who then assume the risk for selling LNG to overseas customers. In other cases, the developers may contract directly with overseas end-users. In either case, the risks can be substantial, especially because how much gas will be needed overseas is uncertain, e.g., for gas-fired electricity generation purposes future needs may not be known with any meaningful precision at the time long-term contracts are signed. LNG project developers will also not be completely shielded from risk for several reasons: the capital recovery period may extend beyond the term of their initial long-term contracts, the capacity of a given LNG project may not be fully subscribed, they will be subject to the ongoing creditworthiness of their counterparties, and they may face demands for contract price adjustments as market conditions and the competitive LNG landscape changes. Thus, market participants along the LNG supply chain need to understand how the development of renewable resources in overseas markets could impact the need for LNG imports in those markets.

Ultimately, investments in North American LNG terminals2 require that the prices paid for LNG in overseas markets are greater than or equal to the price of U.S. natural gas supplies (e.g., at Henry Hub) plus the cost of all infrastructure necessary to liquefy and deliver LNG to overseas markets (including a fair rate of return on that infrastructure). If the cost of renewable generation is low enough overseas (i.e., below the cost of new gas-fired generation burning LNG from North America), it could dampen the attractiveness of North American-sourced LNG as a fuel for electric generation and the willingness of market participants to continue to contract for LNG export infrastructure.

We find that the competition between renewable power and gas-fired generation using LNG delivered from North America is increasing in overseas markets. Our conclusion is based on an analysis of the costs of developing new gas-fired generation in Asian and European markets that use LNG from North America as a fuel source compared to the costs of developing new renewable generation in those markets. Our estimate of the delivered cost of LNG from North America includes both the forecasted commodity cost of North American gas supplies (from the U.S. Energy Information Administration) and the infrastructure costs of liquefaction, shipping, and regasification necessary for North American gas to be consumed in Asian and European markets.

To continue reading this article, please click here


1 See, for example, World Energy Outlook 2015, p. 634, which forecasts the share of gas-fired generation (as a percent of total electricity generation) in the New Policies Scenario to grow from 2% in 2013 to 8% in 2040. WEO forecasts the share of wind generation to grow from 3% to 10%, and the share of solar PV to grow from 0 to 3% over this time period. Growth in generation from gas, wind, and solar PV over this time period is forecast to be 788 TWh, 886 TWh, and 353 TWh, respectively. Growth in installed capacity from gas, wind, and solar PV over this time period is forecast to be 160 GW, 321 GW, and 258 GW, respectively.

2 While this paper specifically discusses the risks posed by the declining cost of renewable energy to North American LNG developers and their customers, a similar dynamics between renewables and LNG could also broadly apply to other regions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.