Analysis: Provincial power tariff cuts to undermine China’s natural gas demand growth

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Highlights

Guangdong, Zhejiang provinces cut power tariffs for gas-based generation

Gas-fired power producers cut utilization rates on thin margins

Gas-fired power to reach peak development in this decade: analyst

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Singapore —
Several Chinese provinces have cut power tariffs for gas-fired plants in a bid to make electricity produced from natural gas cheaper and boost economic activity. However, the move is likely to backfire as it hurts power plant margins and restricts natural gas consumption.

Shrinking margins have forced gas-fired power plants to slash utilization rates, which threatens to curb demand for both piped natural gas and imports — depending on the plant location — after gas use in the power sector already declined in the first half of 2020 due to the pandemic.

In the longer term, the low tariffs could jeopardize new gas-fired plant construction in China, and affect its target for gas-fired power generation under the five-year economic plan, which is set to be renewed for the next five years with expanded targets for gas use in the power sector.

Chinese provinces like Guangdong and Zhejiang have cut regulated gas-fired electricity tariffs — the at which electricity is sold by power producers to provincial distribution utilities that sell retail electricity to end-users. They were meant to boost manufacturing competitiveness after a slump in economic activity due to COVID-19, and to make gas-fired electricity cheaper than .

Although import costs of natural gas fell sharply this year due to COVID-19, the was still smaller than the cut in tariffs for high-utilization gas-fired power plants, said an executive with a gas-fired power plant in Guangdong.

“We are still marginally profitable now, but the margin will be further squeezed with the increase of natural gas prices in future,” the executive said, adding that feedstock accounts for more than 80% of total generation costs.

The import cost for both LNG and pipeline gas averaged about $6.59/MMBtu during January-August, down 18.4% from $8.08/MMBtu in 2019, data from China’s General Administration of Customs showed.

These moves are expected to have a huge impact on the economics of current gas-fired power plants and may discourage investment decisions for new gas-fired plants, Wood Mackenzie consultant Frank Yu said.

GAS-FIRED POWER TARIFFS

In August, China’s southern Guangdong province cut power tariffs for some high-utilization gas plants by 30.4% at Yuan 0.463/kWh, a level close to the price of coal-fired power, according to the provincial National Development and Reform Commission, or NDRC. High-utilization power plants operate at more than 3,500 hours/year.

Tariffs for some low-utilization gas plants were cut by up to 9% to Yuan 0.605-0.64/kWh while tariffs at power plants that used Australian LNG as feedstock were cut by 9.2% at Yuan 0.484/kWh, showed S&P Global Platts calculations based on official data.

Before the cuts, Guangdong had established a power trading hub as part of electricity market reforms that allowed all kinds of electricity to be traded. Although the trading volume was only 5%-10% of the province’s total electricity demand, it facilitated on-grid parity for different sources.

In eastern China, Zhejiang province cut its gas-fired power tariffs twice this year in February and July, resulting in a 20% drop to Yuan 0.4952-0.5552/kWh, according to provincial NDRC notices.

The province also conducted ‘coal parity’ trials at one gas-fired power plant in August, cutting tariffs by Yuan 0.799/kWh to match coal-power tariffs of Yuan 0.4153/kWh, the provincial NDRC said.

Guangdong’s gas-fired power generation is estimated to account for a quarter of China’s total gas-fired generation capacity while Zhejiang is also a major gas-power generator.

GAS VS. COMPETING FUELS

Market participants consider renewables to be the biggest rival for natural gas, with generation costs for solar energy estimated to have fallen by about 90% since 2007. Gas-fired power has also lost ground to coal, as China tolerated higher coal use since 2019 due to better price economics and energy security concerns amid rising tensions with the US.

WoodMac’s Yu said renewables-based power was already cheaper than natural gas in 2017, and is expected to fall by another 20%-25% in the next 10 years, making it even cheaper than coal by 2025-30.

“Natural gas is expected to reach peak development in this decade,” he said, adding that China’s natural gas power generation is expected to continue growing, but only account for 5%-6% of the power mix, mainly due to its role in meeting peak demand.

China’s installed capacity of natural gas power was about 95.31 GW by August, accounting for 4.6% of its total power capacity, according to the China Electricity Council, or CEC. Natural gas accounted for about 3.2% of the total power mix in 2019.

This still falls short of the country’s natural gas power development target set for its 13th five-year plan, which targets 110 GW of gas-fired capacity by 2020 and more than 5% of the total installed capacity.

In comparison, the installed capacities of renewables, including wind, solar and hydropower, have reached or exceeded the target set in the 13th five-year plan ahead of schedule, according to CEC data.

Author

Analyst Cindy Liang and Eric Yep

Editor

Manish Parashar

Commodity

Coal , 
Power, 
Natural Gas

Source: Platts

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