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LNG versus solar power: what is the best option for

island power markets?
October 2017

Executive Summary
Worldwide, about 3,600 islands burn oil products for power generation; we estimate about 500,000 barrels per day
(b/d) is used in the power sector. Historically, this has been the only option available to markets lacking indigenous
fossil fuel, hydroelectric or geothermal resources of their own. Despite low oil prices, burning oil remains expensive,
with end-user electricity prices in island nations among the highest in the world. Oil products are also amongst the
most polluting and carbon dioxide-intensive options to produce electricity.

But things are changing. The shale gas revolution is branching out to global liquefied natural gas (LNG) markets,
reducing the price of LNG relative to oil; and the shift towards renewables and energy storage is making access to low-
carbon technologies an increasingly viable option.

Island power markets around the world are already beginning to move away from oil: Jamaica is investing in LNG-to-
power, while Hawaii has developed a number of solar-plus- battery storage projects. What option should other islands
go for?

Wood Mackenzie and GTM Research have assessed the levelised cost of energy (LCOE) of alternative options to
displace oil generation in a notional island market in which there is currently a 100 MW diesel-fired engine meeting
100% of electricity demand.

Developing a gas-fired power station provides a stand-alone option enabling immediate substitution away from oil,
however it also will need expensive LNG import infrastructures.

Solar PV – an alternative option - can only produce electricity during daylight hours. Consequently, it will need to be
paired with other technologies to be able to meet electricity demand. These could include: the existing power station
running with oil products; a new gas-fired power station using imported LNG as a feedstock; Li-ion battery storage; or a
combination of these technologies.

Clearly, the economics and viability of different options depends on many factors, including market size, location, solar
irradiation and the cost of capital. We outline the assumptions behind the economic modelling in the full version of
this report.
Key findings

LNG into power provides a stand-alone alternative to oil, though it requires development of capital-intensive LNG
import infrastructure. Building a 100MW combined cycle gas turbine (CCGT) power plant will require upfront capital
expenditure of US$80 million.
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We estimate this plant, operating at a utilisation rate of 74%, would require 150 million m cubic metres of gas per
year, or roughly 0.11 million tonnes per annum (mmtpa). We estimate this will require a small-scale regasification
3
terminal with a storage tank of 10,000 m of LNG and require investment of US$75 million for the regas infrastructure.
3
With a ship size between 5,000-10,000 m of LNG, shipping will also be expensive, at an estimated US$2.5 per million
British thermal units (mmbtu).

Based on an oil price of US$50/bbl and an LNG contract priced at 12.5% oil (+ US$ 2.5/mmbtu for the shipping), we
estimate LCOEs of an LNG-to-power solution to be 34% lower than the short-run cost of burning oil products. This
would enable the investment to break-even in less than five years and result in overall savings over the course of a
project’s 20-year lifetime could be US$700 million, or US$1.5 billionn should oil price increase to US$70/bbl.

Levelised Cost of Electricity, 2017

350.0
300.0
250.0
200.0
150.0
US$/MWh

100.0
50.0
0.0
Diesel LNG Solar PV + Solar PV + Solar PV + Solar PV + Solar PV +
Diesel LNG Li-ion Li-ion Li-ion
Battery + Battery + Battery
Diesel LNG

Source: Wood Mackenzie
CAPEX Fuel OPEX

*For the purposes of this analysis, we have assumed the existing source of power generation is diesel-fired. In some island markets, fuel oil is used for
power generation, which will have slightly different economics. We have only accounted for the short-run marginal cost of generating power from
diesel, as we assume that the project is already in operation, and that capital costs have been recovered.

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Solar PV costs have fallen drastically in recent years: the installed cost of utility-scale solar now average around
US$1000/kW globally, over 60% lower than costs in 2010. Solar PV is limited however, in that can only produce
electricity during daylight hours. Consequently, to displace substantial volumes of oil products in island markets, it will
need to be paired with other technologies. What are the options?

 Solar + oil: Building a 100MW solar PV plant, sized to meet peak demand in our island market and operate in
tandem with the existing oil generator, would require relatively low capital expenditure (US$104 million) and would
have an LCOE 25% lower than the cost of burning oil products. However, this option is only able to displace around
30% of the oil burnt for power generation.
 Solar + LNG: Combining solar with the LNG-to-power option would require high upfront capital expenditure, but
would result in full oil displacement and lower LCOEs, similar to those of the LNG-to-power solution only. This is
because the additional capital expenditure required to build solar is offset by the lower requirement for LNG compared
to the LNG-only solution, even once the higher unit cost for smaller shipping and storage have been accounted for.
 Solar + Li-ion battery storage: Li-ion batteries remain a relatively expensive solution at current costs. Installing a
100 MW (400 MWh) Li-ion battery along the solar PV + oil solution or the solar PV + LNG solution adds about US$170
million in capital expenditure, and results in little change in LCOEs. A solution providing full-system power generation
solely from solar + Li-ion batteries is technically possible, through the construction of an array of 240 MW (960 MWh)
batteries. However it will require US$1,200m of total capital expenditure and would result in LCOEs being almost
double those of burning oil products.

Levelised Cost of Electricity, 2025

250.0

200.0

150.0

100.0
US$/MWh

50.0

0.0
Diesel LNG Solar PV + Solar PV + Solar PV + Solar PV + Solar PV +
Diesel LNG Li-ion Li-ion Li-ion
Battery + Battery + Battery
Diesel LNG

Source: Wood Mackenzie
CAPEX Fuel OPEX

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Conclusions

 At current fuel prices and technology costs, opting for an LNG-only solution or a solar + LNG hybrid results in
similar LCOEs, although the solar + LNG solution is be more capital intensive.
 The economics of the LNG-only solution or that combined with solar varies substantially based on the amount of
gas-fired generation required and how the LNG is delivered. LNG requirements below 0.05 mmtpa would make the
LNG solution uneconomic compared to oil, as the higher unit cost for the importing infrastructures would negate the
lower cost for LNG. Consequently, the solar solution plus oil and/or Li-ion batteries will be more attractive for islands
that are too small to justify LNG imports based on economics.
 Through 2025 we estimate that oil prices will increase to US$68/bbl and that solar and battery costs will continue
to fall, by 17% and 49% respectively. Should that materialise, the solar + Li-ion battery only solution would become
increasingly competitive, achieving lower LCOEs than continuing to burn oil products. But while this solution would
have a zero carbon footprint, it would remain over 50% more expensive than the LNG only solution or the solar + LNG
solution, unless battery costs fall significantly below US$100/MWh. We think this is unlikely to happen ahead of 2030.

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