Xizhou Zhou, Director, China Energy, IHS Energy
Q3 – 2014
Power consumption—and smog—in coastal China are growing rapidly. Transmission of coal-fired and hydropower from inland is a cheaper solution than natural gas.
How fast is China's LNG demand growing?
As we know, China's natural gas market is growing very rapidly, and so is its LNG demand. It's quickly emerged to be one of the fastest growing LNG markets in the world. Even in 2013, during a year of relatively slow growth in many of the markets, China's LNG demand continues to surge. In fact, the last year it surpassed Spain as the third largest LNG importer in the world, now only second to Japan and South Korea.
Is the clean air drive stimulating further LNG consumption?
As we are aware, China's coastal areas, especially the urban centers, have experienced significant air pollution incidents in the past year, and it's become so egregious that in many places people wanted to see much more aggressive government actions and actions from the energy industry.
And, of course, today coal is in the crosshairs in the energy sector, and as a result of that we're seeing potentially more coal to natural gas switch. And in these coastal areas, of course, imported LNG is a critical source of new gas supply, and in many cities we are seeing coal fleets being retired early as a result of this clean air drive, and as a result of that, many of these old retired units and their sites are being converted to burn natural gas in power generation. In fact, today if we look at the number of new natural gas fired power plants under construction in the world; China is building most of it. And we still have in the range of 20 to 30 gigawatts of new natural gas plants being constructed in China for future power generation.
So over all, we do see more natural gas demand, and therefore, LNG demand in coastal China. And we do expect the clean air drive will generate more demand.
What other energy sources are competing with LNG?
For natural gas, the competitor in many markets is coal. And because of the clean air drive, as we have just seen, coal is out of favor in coastal China. Therefore, natural gas has to assess who else can compete with it and whether or not future costal demand will be primarily met by natural gas.
And when we look at different energy supply sources that's available to coastal China the obvious ones are nuclear, renewables – that includes hydro, wind, solar etc. And when we look at the coastal power markets we believe that these supply sources are simply not enough to meet future demand.
As an example, the coastal ten provinces in China today accounts for about half of the nation's electricity demand. And that's equivalent to the ten largest European markets combined. And before 2020 we expect electricity demand in these ten provinces to increase by another 50 percent, which is essentially France, Germany, Italy, and UK combined. Therefore, there is need for much for electricity generation capacity and more supply into the market. And if we don't have enough nuclear, not enough renewables, obviously the local generations resource is natural gas.
However, there is very surprising new contender in this picture that we've observed over the past few years, and that is inland-to-coastal market power transmission. As we are aware, most of China's natural resources are located in western China. And they've been landlocked often times in the past, they're very cheap, they're stranded. But China has been building a long distance, high voltage and ultra-high voltage transmission lines to coastal markets, to allow these stranded resources to be monetized. And when we think about the economics of that, they're extremely cheap as well. For example, coal-fired power in inland China costs only about half of what it is in coastal China. And hydro resources in western China are very cheap as well.
So, when we think about coal and hydro resources transmitted to coastal areas, we see them being much cheaper then gas-fired power in coastal markets, to roughly half of what it would cost for gas-fired power in coastal markets. So, that's what we see in the future. That's a surprising contender in coastal market for energy, and that's something that LNG obviously has to pay attention to. And in the latest IHS multi-client studies and presentations, we're highlighting this important development that could have global implications in gas.