(Bloomberg) -- China’s effort to promote natural gas over coal to cut pollution is facing resistance from buyers who prefer cheaper to cleaner.
The world’s largest energy consumer seeks to raise the share of less-polluting natural gas to 10 percent of its energy mix by 2020 from 6 percent last year. Yet even with the government cutting the cost of gas, it remains almost three times more expensive than coal when used to generate electricity. That’s putting a damper on the switch from a fuel that now accounts for more than 60 percent of demand.
“I do not believe the government’s target of 10 percent will be met,” said Peter Lee, an analyst with BMI Research in Singapore. “While gas use will still grow, it will prove challenging to achieve such a significant jump.”
The goal of increasing reliance on natural gas comes amid broader efforts to reduce the country’s coal mining overcapacity and improve the quality of life in cities choked with smog. A greater appetite from China for natural gas would be a boon to producers of liquefied natural gas from the U.S. to Australia saddled with a global glut, as well as neighboring gas suppliers in Central Asia and Russia.
Prices for coal and oil products will probably remain depressed for the next two years, making natural gas unattractive, according to Liu Guangbin, an analyst with Shandong-based SCI International. Electricity generated from gas costs almost three times that from coal -- about 0.6 yuan a kilowatt-hour in eastern China, while coal-fired output costs 0.22 yuan, according to Liu. The government needs to more aggressively cut prices or adopt stringent environmental policies if it wants to achieve its goal, he said.
China’s State Council, National Development and Reform Commission and National Energy Administration didn’t respond to faxed requests for comment.
A 10 percent share of the energy mix would be equivalent to about 350 billion cubic meters of demand in 2020, which requires consumption growth of more than 10 percent per year, according to forecasts from Bloomberg Intelligence and North Square Blue Oak Ltd., a research company.
The Shanghai city-gate price -- a wholesale cost of gas delivered to distributors -- was cut in November to 2.18 yuan a cubic meter. That’s about $9 per million British thermal units, compared with $2.039 for U.S. benchmark prices and $4.24 in the U.K. as of Thursday.
China’s government controls prices of fuels from gasoline to diesel to natural gas as a way to control margins for state-owned enterprises and manage consumption. The current pricing system for natural gas, implemented in 2013, is linked to the import prices of fuel oil and LPG, the easiest substitutes for industrial and residential use, respectively.
“During much of 2015, this Shanghai city-gate benchmark price was pegged on historic values of fuel oil and LPG long after those fuels had dropped quite considerably,” said Howard Rogers, director of natural gas research at the Oxford Institute for Energy Studies. “The issue for China is, yes, they need to burn more gas and less coal in power generation. That can only be done through government policy to directly influence that switch.”
China’s gas consumption in 2015 expanded by 3.7 percent, the slowest pace in a decade, to 191 billion cubic meters, missing a target of 230 billion, according to an annual report from China National Petroleum Corp.’s Research Institute of Economics and Technology. Gas demand growth this year may accelerate to only about 6 percent, according to the median estimate of six analysts in a Bloomberg survey.
"It’ll be very difficult to achieve the 2020 target if the government doesn’t further lower natural gas prices,” said Tian Miao, an analyst at North Square Blue Oak, who estimates the average cost of power generation from natural gas is three times that of coal.
China expects its carbon emissions to peak in around 2030 and has been seeking to lower its reliance on coal to reach that goal. It’s also committed to increase the ratio of non-fossil fuels used in primary energy consumption to 15 percent by 2020 and pledged at the Paris climate talks in December to raise that share to 20 percent by 2030.
There have been signs the price cuts in November had an impact. Imports in April jumped 27 percent, extending March’s 33 percent surge, which “may reflect gas companies’ expectations of stronger demand after the government recently cut wholesale prices,” according to Bloomberg Intelligence.
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Copyright 2017 Bloomberg News.
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