Will China and India really be big markets for LNG?
Coal’s resilience and a stronger push for renewables may dampen the countries’ enthusiasm for seaborne gas
ASIA’s two largest emerging economies are unlikely to become the heavyweight markets for liquefied natural gas that exporters hope. A combination of overcapacity and stranded assets in coal-fired power generation and a friendly regulatory environment for solar and wind will temper the need for imported natural gas. The two countries are shifting away from coal, but towards renewables.
India and China are both strongly favouring the deployment of renewable energy, even as their enormous coal-fired-electricity sectors struggle with a glut of plants and falling utilisation. Plans for new fossil-fired units are being curtailed in an effort to cure the overhang of underused and even stranded assets, and to comply with tightening environmental regulations.
The result is that LNG is unlikely to play the kind of starring role in electricity generation that producers had hoped for in either country, even though supplies aimed at the region will mushroom in the coming years.
LNG is unlikely to play the kind of starring role in electricity generation that producers had hoped for in either country, even though supplies aimed at the region will mushroom in the coming years
China and India still need gas, and both are already significant markets for it. But they remain a long way behind more advanced economies. China’s consumers accounted for just 5.1% of world demand in 2014, India just 1.5%. The US, by contrast, soaked up 22.7% and the EU 11%. While gas now accounts for about a third of US power generation, 23% in South Korea and 26% in Europe, in China and India it is just 2% and 10%, respectively.
This ought to make the countries fertile markets for gas exporters. But it hasn’t panned out that way. While Western economies in the past 20 years have been rapidly scaling up gas-fired power capacity and building import terminals for LNG, China and India have been adding coal capacity and, increasingly in the past decade, supporting a rapid build-out of renewable power.
Power generation capacity from wind, solar and hydro sources has exploded: China’s renewables consumption has tripled since 2005, while the US’ has grown 50% and India’s has swelled by 78%.
Critically, both China and India are also investing heavily in nuclear generation at a time when atomic energy is being rolled back in parts of the West. The World Nuclear Association says that of 51 plants now under construction, 28 are in China and India, while 11 of the rest are located in Russia and Korea.
Still, in both India and China coal has dominated industrialisation and the growth in energy supply. New plants have benefited from considerably higher thermal efficiency, allowing older, less efficient units to be closed.
But even these improvements in technology have not halted rapid growth in overall capacity. Utilisation rates have therefore tumbled in both countries. In China, utilisation of coal-fired generating units has fallen for five consecutive years. In 2015, plants operated at an average 49.7% of capacity, even as installed capacity grew by 10.4%, according to estimates from the Institute of Energy Economists and Financial Analysis. For India, capacity utilisation dropped for a fifth year in 2015 to 61.1% while installed capacity increased by 10.8%.
China has acknowledged the problem. The government recently slapped a moratorium on construction of new coal-fired plants, even those already underway, in 15 provinces. This should enable operating rates at existing plants to improve as older, less efficient ones are shut. Solar and wind generation, which are starting from a very low base, will continue to grow strongly.
To be sure, China is also seeking to increase the share of natural gas in its total energy mix, aiming to have the fuel represent 10% of total consumption by 2020, compared with 6% now. To that end it is rolling back price controls for industrial and residential consumers in an effort to create more competition.
By easing price controls for residential and industrial users, the government would create a more competitive price environment that will allow domestic gas producers to invest in additional production. This would, in theory, also create an opportunity for cheaper LNG imports to gain greater market share.
Crucially, however, this relaxation of price controls does not extend to the power sector. China plans to increase gas-fired generation to 85 gigawatts by 2020 from 44 GW, or 3.5%, of the country’s capacity in 2013. By comparison, Japan, which bought four times more LNG in 2013 than China, generated 43% of its total power supply from gas.
Since gas-fired power generation represents a fraction of China’s electricity capacity, and will continue to be small after 2020, and given government support for renewables at the expense of fossil fuels, any future move to decontrol gas prices for the power industry is unlikely to lead to a boom in LNG demand from this sector.
India is taking a different tack. Coal is still seen as playing a prominent role in power generation. But rather than subsidising renewable energy to push its share of the market higher, the government is increasing taxes on coal to account for the external costs of the fuel and so level the playing field.
New Indian coal plants are being delayed. Energy minister Piyush Goyal wants to boost the operating rate and therefore profitability of the existing fleet. Domestic coal mining is being increased as the country targets energy self-sufficiency and smaller imports.
It all means that both countries are now plainly following a different path in their energy sector from those taken by the US and Europe. India does not have sufficient gas reserves to support a domestic industry, and doesn’t want to import the fuel, while China has decided that its gas should be used more efficiently than in power generation, as a domestic heating and cooking fuel and as an industrial raw material.
The US has capitalised on vast untapped reserves at home and a distribution network – combined with cheap supplies – that increasingly favours gas over coal. Europe, benefiting in recent decades from the North Sea and the availability of gas from neighbours, has developed an extensive distribution network to deliver the gas to market and the utility-scale plants to consume it.
That is not to say that demand for gas will not grow in some places. As China’s urban populations grow, so will consumption for clean domestic heating and cooking fuel, replacing the historical reliance on coal. But as the country’s strong reliance on heavy industry begins to tail off – part of the rebalancing of the economy towards services – there may also be a decrease in demand from a number of legacy sectors.
Indeed, it seems that both China and India want to leapfrog natural gas. Instead of adopting widespread use of the fuel as a bridge to a low-carbon future, China and India will keep burning coal to support their transition to an energy mix dominated by renewables and nuclear power.