China is the world's largest consumer of coal and the largest emitter of greenhouse gasses. With that in mind, Beijing’s recent announcement that it intends to become carbon neutral by 2060 and is aiming for its CO2 emissions to peak before 2030, was welcome news. The growth of renewables is essential to decarbonize energy systems, but it is expected that natural gas will also play an important role due to the intermittency of green energy and natural gas’ low CO2 emissions compared to coal. While the outlook for natural gas in the long-term remains strong, innovations in coal-dependent technologies and investments in renewables suggest a different reality in the short term. Demand for gas in the power sector is expected to grow slower than expected as competing sources have lower costs.
The transformation of King Coal
The Chinese economic miracle of the past four decades has created major environmental problems including rampant air pollution. Coal is already the most important source of power production in China which accounts for a whopping 57.7 percent of the Asian giant’s power mix. Air pollution has become a serious social issue and a source of discontent for Chinese citizens that are increasingly vocal in their demand for further improvements in their quality of life.
Beijing's coal-to-gas policy, therefore, was intended to clear the skies over China's heavily polluted cities. Decreasing greenhouse gasses was not the main goal when the policy was announced in 2017. However, it does fit perfectly with Beijing's more recent ambitions to become a clean energy technologies powerhouse and reduce its greenhouse gasses.
Recent innovations and developments suggest that the switch to natural gas is becoming more challenging. Ultra-low emission (ULE) technology for coal-fired power units has been improved significantly to reduce SOx, NOx, and soot emissions. The innovation of ULEs has reduced diffusion of the harmful particles to 35, 50, and 5 mg/m3 respectively, which is well within pollution standards. Related: The Battle For Dominance In China’s Oil Market
Already, more than 83 percent of the coal-fired plants operate ULE units, and modernization is expected to continue during the upcoming 14th five-year plan (FYP) until 2025. In this period smaller and less efficient units will be closed in favor of larger and cleaner ULE facilities. This trend will most likely go at the expense of investments in natural gas-powered plans.
The squeeze of renewables
Besides coal, renewables are also becoming a serious threat to natural gas demand in the power sector in the short term. In general, renewables and gas-fired power plants are complementary to each other due to the latter’s flexibility and the former’s intermittency. Power grids have mechanisms to balance the grid which are implemented regardless of renewables. The growing share of green energy in the power mix requires additional flexibility. The conclusion is that from a certain percentage the growth of renewables goes hand-in-hand with natural gas.
However, the Chinese power mix hasn’t reached the necessary level of ‘saturation’ yet, meaning additional solar and wind capacity will go at the expense of more costly sources. The marginal costs of fossil fuel power plants are always higher than renewables'. Fluctuating prices can become a challenge to maintain competitiveness. Last year, the boundary for gas-fired power plants was RMB 1.60/m3 ($6.76/MMBtu) that will need to decline to RMB 1.20-1.60/m3 this year.
It is expected that renewables such as solar and wind will be able to produce electricity for costs as low as RMB 0.80-0.90/m3 by 2030. Therefore, the future brings even more challenges for operators of fossil fuel power plants.
Some analysts expect gas prices to remain low due to a combination of factors. First, Chinese companies have been instructed to increase domestic production. Also, the Chinese market is being liberalized and decoupled. This means that producers can’t own and operate pipelines anymore which is intended to lower the market access threshold for smaller companies and strengthen competition. It is uncertain, however, whether this is enough to maintain natural gas’ competitiveness.
The Chinese government is already investing heavily in renewables due to economic and environmental reasons. Furthermore, coal’s importance in the short term is not expected to change due to technological improvements and the massive domestic mining industry. However, in the long-term, the outlook for natural gas remains strong.
By Vanand Meliksetian for Oilprice.com
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