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SCI View: China Gas Power Outlook 2020

SCI99

2020-05-09

In 2019, the gas power utility only took up 21% of China’s natural gas consumption, far below the average level of developed countries. In China, coal is still the main fuel of power generation, considering China’s coal-rich reservoir. By far, gas power only took up 5% of China’s total power utility, but because of its eco and clean nature, natural gas is gaining more and more support from China government to replace coal in the power utility, and this progress is accelerated by the global LNG supply glut and historical low price level.

Currently, in China, the industrial-use natural gas is still the leading downstream sector, and gas power has surpassed natural gas vehicle and vessel and city gas to be the second-largest sector. However, compared with the U.S. and European countries where gas power had reached 40% of natural gas utilization, the gas power sector in China was still in its very early stage. Moreover, as for the power utility, the gas power took up over 30% of the total power utility in the U.S., U.K., Japan, etc., but in China, it only took up 5%, far below the global average level at 20%-30%.

In China, coal, as the main source of power generation, its power utility proportion reaches 55.02%, while that of gas power is 5.18%. Natural gas, as environment-friendly and clean energy, its power utility proportion is small, while it has vast space for development supported by the national policies. However, in recent years, the gas power industry underperformed during the tight supply fundamentals, and the gas power installed capacity growth was milder than expected.

Since the 1960s, China’s gas power sector sprang up and developed slowly. At the beginning of the 21st century, gas power accounted for a relatively small proportion of China’s power utility, and it was mainly concentrated in eastern China. During the 10th Five-Year Plan and 11th Five-Year Plan, China accelerated the exploration and exploitation of natural gas, and the proportion of gas power units in the power equipment increased greatly. During the 12th Five-Year Plan, the research, development and technology of gas power improved, so the domestic gas power capacity rose rapidly. During the 13th Five-Year Plan, China’s gas power installed capacity accounted for 5% of the total power utility. In general, the gas power utility grew fast, but its proportion in the power sector was still small.

Problems

Supply

China is rich in coal but lack of oil and gas, so China’s natural gas output is much lower than the consumption volume. Besides, most of the domestic natural gas output is conventional natural gas, and the unconventional natural gas only accounts for 16%. At present, China’s conventional oil and gas fields have limited exploitation potentials, and some oil and gas fields become increasingly depleted. The shortage of domestic natural gas reservoirs can lead to unstable and tight supply, which seriously restricts the investment enthusiasm of downstream sectors. Additionally, China’s natural gas import policy resists the high import dependence rate due to the national energy security issue, so the unstable supply is one of the major reasons restricting the development of China’s gas power industry.

Price

Natural gas is not abundant in China, and the price is vulnerable if the product is rare. Therefore, when the high prices of natural gas weigh on the prices of gas power, gas power will lose its economic advantages. In addition, the feedstock cost of coal power plants is lower than that of gas power plants, so the price trend of natural gas exerts a significant impact on the development of China’s gas power industry.

Technology

The core technology of China’s gas power is not fully mastered, and the gas power plants fail to rise capacity, restricting the development of China’s gas power industry. Besides, the national policies, the natural gas storage and transportation infrastructure construction, and plants’ cost affordability are also the main factors restricting the development of China’s gas power industry.

Opportunity and Outlook

In 2019, 10 ministries including NDRC, MOF and MEE jointly issued the Guidelines on Promoting the Biogas Industrial Development, which accelerates the development and utilization of the unconventional natural gas industry. According to the Biomass Energy Development 13th Five-Year Plan issued by the National Energy Administration, the annual consumption volume of biogas will reach 8 bcm in 2020.

The development of biogas and other unconventional natural gas can greatly increase the domestic natural gas supply, effectively reduce the import dependence degree and improve national energy security. Besides, the cost of biogas in some regions can be lower than the hub price, which increases the diversity of gas sources of gas power, improves gas supply guarantee, reduces fuel costs and improve economic advantage. At present, the international crude oil prices plummet, and the price advantage of natural gas long-term contracts gradually appears. Moreover, the spot price of natural gas hits a record low, and this may be one of the development opportunities of China’s gas power industry.

Driven by the environmental protection policy, China’s gas power installed capacity showed an upward trend, while the natural gas price for power plants trended down from last year, so gas power plants showed a higher interest in power generation. Affected by the supply glut under coronavirus, LNG spot prices in Northeast Asia will stay at lows in 2020, and the low international crude oil prices under the oil meltdown will push down the import cost of oil-linked long-term cargoes. Therefore, some LNG receiving terminals will use low-priced gas resources to seize the market in Guangdong, Fujian, Zhejiang, Jiangsu, Beijing and Tianjin, which will stimulate the growth of gas power utility.

In the future, supported by the innovation and development of gas power core technology, the gas power installed capacity will mount up, and the cost at gas power plants will decline. Accordingly, the price of gas power will decline, and more participants will show a higher interest in investment and construction. Therefore, China’s gas power sector will make a breakthrough during the next Five-Year Plan.

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