I've Got The Power - The Challenges Facing LNG-Fueled Independent Power Projects Overseas

A major driver for global growth in natural gas use, including LNG, derives from the power-generation sector. Large Japanese utilities introduced LNG into the power fuel mix in the early 1970s. More recently, a number of utilities in other countries have increased their use of gas-fired generation — and their imports of LNG — largely due to gas’s lower emissions profile and the flexibility that gas plants offer in balancing variable demand loads with variable dispatch profiles, including wind farms and solar facilities. The growing availability of LNG has also spurred interest among independent power producers (IPPs) in developing similar gas-fired projects, but so far fewer than 10 such projects have come online and some do not operate at their full potential. Why has LNG-to-power made such little headway in the independent-power segment? In today’s RBN blog, we examine the special nature of IPP-owned LNG-to-power projects and the challenges they pose not only to their sponsors but to LNG suppliers.

The use of LNG for power generation in international markets historically has been dominated by bilateral deals between LNG suppliers and large incumbent utilities that enjoy a monopoly within their service territories. The credit rating of buyers such as Tokyo Electric Power Company (TEPCO) and Japan’s Chubu Electric, coupled with their ability to commit to LNG supplies for up to 25 years, provided a number of first-generation liquefaction/LNG export projects with the certainty their developers needed to make the costly investments in those assets. These utilities were under no obligation to purchase power from third-party producers, but instead expanded their generation fleets as needed and their consumers picked up the tab.

Portfolio players have not featured much with regard to IPPs, either as project sponsors or as suppliers. The reasons are not particularly clear, but they are expected to take a greater interest in IPP customers as they are able to demonstrate access to LNG supply to match the requirements for power purchase agreements (PPAs), something that traders have problems achieving.

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