‘Shadow pricing’ eyed to make LNG competitive in power supply chain

by Myrna Velasco October 3, 2016

http://www.mb.com.ph/shadow-pricing-eyed-to-make-lng-competitive-in-power-supply-chain/

The integration of ‘shadow pricing’ is seen as a feasible way to make liquefied natural gas (LNG) cost-competitive in the diversified technology basket for the restructured Philippine power sector.

In an interview, Jefferson Edwards, Royal Dutch Shell General Manager for Global Gas and LNG Market Development, has explained that with shadow pricing, the cost associated with externalities such as environmental impacts – in the case of energy technologies with colossal carbon emissions – must be factored in.

As defined in markets, shadow pricing could refer to a dollar (or Philippine peso) value that shall be assigned “to an abstract commodity that is not ordinarily quantifiable as having a market price, but needs to be assigned a valuation” in the conduct of a cost-benefit analysis.

Some energy markets refer to it as ‘carbon pricing’ or ‘carbon tax’ – but for the Philippines, this is a highly debatable topic because Filipino consumers are generally not receptive to such ‘cost additions’ in their electric bills.

But for LNG or gas to make its way into the market-driven electricity sector in the Philippines, Edwards opined that “having a shadow price on CO2 (carbon dioxide) — could be necessary, especially considering it when government makes decision in putting in gas in the energy mix.”

He added “in our view, those are some of the issues that must be resolved around the competitiveness of gas on a mid-merit basis and also its environmental impact.”

Edwards acknowledged though that “different countries do it different ways.” For instance, while China does not enforce a carbon tax, its government is setting more restraint now on the use of coal on its power generation and it has been diversifying its energy sources into the cleaner alternatives.

Several Southeast Asian countries have also been embracing gas as they diversify away from the dominance of heavy CO2-emitting technologies like coal plants and while also addressing concerns on other technology developments, such as social dislocation concerns of big hydro projects – these are the likes of Myanmar, Indonesia, Vietnam and Singapore.

Primarily in Myanmar, Edwards noted that “LNG is to bridge until all of their deep well explorations will be available – it is still working to build its gas market. And they’re very concerned about environmental concerns, so coal is not very popular in Myanmar; even big hydro projects have challenges – what they like is gas having minimal environmental footprint to get it to land.”

For the Philippines, its power market is badly in need of mid-merit capacity that can be provided ideally by gas. However, the slowness of government on policy formulation and in laying down the regulatory frameworks had been stalling investment flows and project developments.

When the Malampaya field winds down operations around 2024, the country has to get its acts early on if it wants to ensure sustainability of resource that could meet a vital component of its supply chain – either for base or mid-merit capacity.