The energy industry in China is undergoing an unprecedented transformation towards a diversified, clean, digitalized and market-oriented industry. This trend is driven by the ongoing technological innovation and regulatory reform. The application of natural gas as an efficient, clean and low-carbon energy is one of the main focuses in China’s energy transformation.
In June 2017, the National Development and Reform Commission (NDRC), together with twelve other commissions, drafted a memo to set natural gas as one of China’s main energy sources. The memo reinforces the importance of natural gas and boosts the confidence of the industry.
Nevertheless, natural gas still faces a series of challenges such as high retail price, low marketization level, lack of awareness among end-users and slow policy development etc.
To promote the sustainable application of natural gas, PwC Strategy& published the Natural Gas Application Opportunities in China report sponsored by Shell. The report pointed out that the prospect of the natural gas downstream market in China is promising due to the progress of the current reform. However, further promotion of natural gas consumption in China needs to prioritize specific regions and industries accordingly. In order to develop the optimal strategy for the prioritization process and identify the most appropriate application of natural gas, the following factors needs to be considered: (Note: the application of natural gas in transportation industry is not included in this report scope)
Firstly, natural gas has significant value in reducing the environmental and social cost of burning conventional coal. If China can achieve the official target of 10% natural gas in the primary energy mix by 2020, the environmental and social cost will be reduced by 85 billion RMB taking externality into account. That is approximately 0.1% of China’s GDP, or 0.6% of annual fiscal expenditure or 5.2% of the environmental and health expenditure in 2015.
Secondly, the promotion of natural gas should focus on the high value-added markets. For example, the focus can be industrial and commercial users with high energy consumption, high energy density and ambitious sustainability target as well as combined heat and power (CHP) generation facilities and distributed power generation facilities.
The coal-to-gas initiative in the industrial sector is suitable for industries with large market size, high financial affordability and low natural gas penetration such as food, textile and paper industries.
The current natural gas penetration rate in the industrial sector is lower than 24%. Not only does natural gas reduce emissions due to its low carbon content and high efficiency, but it also mitigates policy risks, saves land costs, increases output and reduces equipment breakdown time for end users. Business model innovations such as point-to-point LNG supply offers more options and flexibility to industrial users.
Urbanization will drive the replacement of coal gas and LPG with natural gas as the main fuel for residential uses in China. Due to insufficient infrastructure, the penetration rate in the residential sector and per capita consumption of natural gas in China are significantly lower than those in developed markets.
With rapid urbanization, infrastructure improvement and rising environmental awareness among people in China, natural gas has a promising future in the residential sector as a clean, safe, convenient and efficient fuel.
Natural gas-fired CHP embedded in smart energy system is expected to develop rapidly. The Distributed Energy System (DES) of natural gas could be applied in areas that have high energy utilization, large installed capacity and high emission reduction demand such as data centers, industrial parks and traffic hubs.
With the promotion of energy data analytics and the concept of “Energy Internet”, the distributed energy system with natural gas combined heat and power will become one of the key energy solutions for industrial and commercial users. It will make the energy system more integrated and competitive.
Coal-fired power generators are facing huge risks of becoming stranded assets. On the other hand natural gas can play a more active role in renewable energy integration and power peak shaving. Currently many planned coal-fired projects in China are suspended due to concerns of the environment and overcapacity. At the same time, most provinces have set ambitious Renewable Portfolio Standard (RPS) targets to encourage the development of renewable energy. Comparing to coal, natural gas can better meet the peak shaving demand and the demand for flexibility in a high renewable energy system.
The promotion and development of natural gas in China is supported by plenty application scenarios and significant systematic advantages. However, the downstream application of natural gas is facing uncertainties such as high costs, low marketization level, lack of awareness among end-users and slow policy development. Therefore, the report offers a few policy recommendations, including:
The natural gas pricing mechanism should reflect the value of the clean, efficient, safe and flexible characteristics of natural gas to internalize the externalities. The contribution of natural gas to emission reduction and efficiency improvement should be reflected in its price relative to other energy products.
Support coal-to-gas switch of industries and regions with high potential by providing subsidies for tax, equipment and natural gas price. The regulator should develop transparent pricing on the transmission and distribution gas pipeline cost, establish comprehensive standards and processes to promote business model innovations such as point-to-point supply of LNG, and encourage competition among energy supplies.
Promote successful coal-to-gas switch cases to raise market awareness and provide capacity building support to enable better end-user decision over energy consumption.
The implementation of those recommendations can enable the marketization process and help China meet the 13th Five-Year Plan natural gas development goals. PwC Strategy& intends to promote market awareness by publishing this report, explore collaboration opportunity with the industry and contribute to China’s energy reform and sustainability initiative.