Fast build-out of renewable energy sources (RES) in China could meet the country’s entire new electricity demand this year, paving the way for the country’s power sector to achieve peak emissions in 2025 – as the actual installed RES capacity will most likely exceed the government’s target. LNG, in contrast, is too expensive on a cost basis to displace coal.
In industrialised provinces in eastern China, where the energy demand is high, the deployment of distributed photovoltaic projects could accelerate as utilities seek to reduce their reliance on thermal coal. In fact, it is renewables – not LNG – that displaces coal for power generation in China and much of Asia.
Domestic coal outcompetes LNG on cost
Comparing the costs, the price of imported LNG to China is too high to materially displace coal. According to Chinese customs data, the average cost of imported LNG is nearly three times that of domestically produced coal and gas. It is also between 37 and 61 percent more expensive than pipeline gas imports from Russia and other Asian countries.
Coal generation is typically US$30-40 per MWh cheaper than gas-fired power generation, analysis by by the Institute of Energy Economics and Financial Analysis (IEEFA) shows. Onshore wind and utility-scale solar are found to be “the cheapest power sources,” costing roughly half as much as gas-fired power generation.
Though LNG prices are set to fall in the coming years as more US liquefaction capacity comes to the market, IEEFA analysts anticipate “prices are unlikely to drop to levels that are competitive with coal or renewables.”
Wind power displaces thermal coal
In fact, China’s growing LNG imports have not reduced or slowed the expansion of its coal consumption. Since 2017, coal demand has increased more than LNG imports every year. In the electric power sector, which accounts for 60 percent of China’s total coal usage, the share of gas-fired power generation has remained at just 3 percent since 2015, while the share of wind and solar generation has quadrupled to 16%. Although coal-fired generation has increased during this time, its relative market share in the power mix has fallen from 70 to 61 percent.
“While coal has not been displaced in absolute terms, wind and solar have contributed more than gas to reducing coal’s share in the generation mix,” said Christopher Doleman, IEEFA’s specialist for LNG and natural gas. “Looking ahead, annual capacity additions of coal, wind, and solar will continue to exceed new gas-fired power capacity.”
Policies control coal-to-gas switching
Government policies in China strongly favour the use of domestic energy sources – notably coal, energy from wind and solar as well as hydropower, and indigenous natural gas.
Recent policies aim to “strictly control” coal-to-gas switching and position coal, rather than gas, as the cornerstone of electrical reliability. For instance, there are plans to retrofit 200 MW of existing coal-fired capacity to balance the integration of intermittent solar and wind generation. On the other hand, the government’s gas strategy aims to make sure that imports of both pipeline gas and LNG do not rise above 50 percent of total consumption.
