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    Painful reappraisal for China’s gas [NGW Magazine]


Chinese gas demand forecasts for the long term are being revised as evidence mounts that renewables and low-emission coal will present stiff competition. [NGW Magazine Volume 5, Issue 22]

by: Shi Weijun

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Natural Gas & LNG News, Asia/Oceania, Top Stories, Insights, Premium, NGW Magazine Articles, Volume 5, Issue 22, China

Painful reappraisal for China’s gas [NGW Magazine]

The consensus view until recently was that the power sector – which accounted for about 18% of China’s gas consumption last year – would play a major role in boosting future demand. The International Energy Agency (IEA) had pictured demand from that alone reaching 84bn m³ by 2023, up from 50bn m³ in 2017. This would make it the biggest source of demand growth in the 2018-2023 period after industry.

The bullish forecast was founded on the policy-driven expansion of China’s gas-to-power fleet to rapidly reduce air pollution from coal combustion. Chinese gas-fired generation –concentrated in the Yangtze River Delta and Pearl River Delta – consumed 30% more fuel in 2018 than it had a year earlier and generated 281 TWh, according to the IEA’s Gas 2019 report.

But in November, Li Wang, deputy general manager of PetroChina’s gas marketing business, painted a much starker picture of the challenges facing gas-to-power in China. For electricity generation, gas faces stiff rivalry from coal in which China has advanced ultra-low emission (ULE) technology, and from renewables such as solar and wind, which have seen generation costs drop drastically over the past decade or so, Li told an industry event in Shanghai (NGW #21).

Gas-fired power has also been dogged by lingering concerns over gas supply stability after crippling shortages in the winter of 2017-2018 and doubts about the green credentials of gas, according to Zhu Xingshan, a senior director at the planning department of state-run CNPC

In 2018 the government banned new utility-scale gas-fired combined heat and power plants in its ‘Blue Skies’ action plan for combating smog between 2018 and 2020. Some experts have argued water vapour from gas combustion can combine with other air pollutants to form smog.

“In the current public opinion and policy environment, it is difficult to develop gas-fired power,” Zhu told the Shanghai event. “Its future depends on people’s perception of the environmental, low-carbon and flexible value of gas-fired power and the degree of security of China’s gas supply, as well as their determination to build a beautiful China.”

The doubts and competition from renewables and so-called ’clean coal’ mean new gas power plant construction has lagged expectations: China’s installed gas-fired capacity reached 96.4 GW at the end of September, according to the China Electricity Council (CEC), an industry lobby group. This means it is likely to miss an official target of 110 GW by the end of this year. Gas accounted for only 3.2% of the total power mix last year.

Li had forecast China’s annual gas consumption to roughly double over the next 15 years, reaching 600bn m3 by 2030 and 620bn m3 by 2035.

The prediction, while ambitious, is nonetheless achievable as Xi Ping’s recent commitment to carbon neutrality by 2060 opens the door wider to gas. Unlike many such promises by heads of government in Europe, Xi Ping is president for life. The giant Chinese market will need all forms of clean energy, which should leave room for gas to grow.

Policy-based drivers such as coal-to-gas switching and urbanisation will help Chinese gas demand grow in the near term, but there seems to be limited scope in the coal-dominated power sector. The problem facing gas in the generation stack is that it is neither the cleanest nor the cheapest fuel even if it is the cleanest despatchable fuel at today’s price. Gas ranks below zero-carbon renewables and nuclear in the political pecking order, and is roughly twice as expensive as wind or solar power – prices for which are dropping close to coal – while coal itself is cheaper and becoming cleaner too.

Widespread closures of China’s massive coal fleet to meet Xi’s scaled-up climate goals would likely stoke social unrest, so clean coal with carbon capture, utilisation and storage (CCUS) could gain traction.

While some analysts believe CCUS is too expensive and too little used to offset China’s massive carbon emissions, the technology is still expected to feature in the upcoming 14th Five-Year Plan (FYP) that will cover 2021-2025.

Government support is also anticipated for green hydrogen – produced from renewables by electrolysis – and increased investment in wind, solar, nuclear, electric vehicles and battery storage. Batteries and storage will challenge the main value of gas-fired power as they are predicted to become a more competitive peaking power than gas power plants.

Gas-fired power units play a critical role in peak-load adjustments thanks to their high flexibility, helping to safeguard stable power supply. They are likely to remain important sources of flexibility in renewables-rich power systems over the longer term, but less gas will be required in the power sector to fulfil these functions as batteries improve.

Some industry experts are adamant that the power sector cannot be ignored if the gas industry is to achieve Beijing’s long-standing target for gas: 15% of the primary energy mix by 2030.

“Power generation is the main area of growth for China's future natural gas consumption, with incremental gas consumption for power generation accounting for more than 35% of total consumption growth by 2030,” said CNPC’s Zhu.

Zhu predicted that under the right conditions, China’s installed gas-fired power capacity could reach 150 GW by 2025 – equivalent to 6% of national power capacity. This could rise to 250 GW or around 8% by 2030, and expand to 300 GW by 2035 with a 7.3% share then.

“More proactive policies and better CCS/CCUS technologies will be needed if gas is to support the goal of increasing its share of China’s primary energy consumption to about 15% by 2030,” Zhu said.

King Coal cleans up

Standing in the way of more gas-to-power is the greening of China’s coal fleet that has taken place over the past five years. ULE coal-fired power units are now as clean as their gas counterparts, operating well within pollution standards first introduced in 2014 that limit sulphur dioxide, nitrous oxides and soot concentrations in exhaust plumes to 35, 50 and 5 mg/m³ – in some categories emitting just half of the limit.

More than 83% of the coal fleet operated within the ULE policy at the end of 2019. In addition, the power fleet is likely to continue modernising and improving its environmental credentials during the 14th FYP. Industry analysts expect China to continue phasing out smaller, outdated and inefficient coal-burning power stations during the next five years, replacing them with larger and more advanced facilities.

This substitution means China’s overall coal-fired power capacity will be largely stable over the next five years at a time when electricity consumption is expected to rise more slowly than in the previous five years. This will squeeze the potential room for growth over the same period for gas-fired power generation.

Renewables on the rise

Beyond coal, renewables are shaping up to be a significant rival to gas in the power mix. Li from PetroChina noted that generation costs for wind power in China are predicted to fall from yuan 0.30-0.40/kWh ($0.4.5-0.6/kWh) this year to yuan 0.20/kWh by 2030, while the cost of solar will decline from yuan 0.26-0.30/kWh to yuan 0.20-0.23/kWh over the same interval. At this point both wind and solar will be cheaper than coal.

Fuel is the biggest expense for China’s gas-fired power generators, so plants will need to lower input costs to remain competitive with renewables. Gas power plants last year could tolerate a maximum gas price of yuan 1.60/m³ ($6.85/mn Btu), but this will need to drop to yuan 1.20-1.60/m³ this year and as low as yuan 0.80-0.90/m³ by 2030 to match cost reductions achieved by solar and wind.

Chinese power utilities were able to push down fuel costs in the first eight months of this year as they shipped in bargain-priced spot LNG cargoes in the wake of the Covid-19 pandemic. But Asian prices for spot LNG have recovered quickly since late August – rising from well below $3/mn Btu to $6/mn Btu and hitting a 20-month high in the second half of October.

In the longer term, more abundant gas supply within China, from a combination of higher domestic production and imports, and a more liberalised and competitive internal market could keep prices in check for power plants alongside other customers. But this is far from guaranteed.

Gas cheer-leaders may argue that any threat from renewables is nothing new and has yet to slow down the break-neck demand growth for the fuel. As far back as 2016, the Energy Supply and Consumption Revolution Strategy (2016-2030) policy document made clear the Chinese government would look to rely mostly on clean energy to meet additional energy demand during the 14th and 15th FYP.

But the money may now suggest China is getting more serious about a goal of 50% of electricity supply by 2030 coming from non-fossil fuel sources – including solar, wind, nuclear and hydro.

Looking at China’s investment in generation capacity to date this year, thermal power accounted for only around 11% of construction investment in the first nine months compared with 53% for wind and 22% for hydro, according to monthly data from the CEC.