Liquefied natural gas (LNG) is unlikely to be the transition fuel that will help China ditch coal, but the onus will fall on renewable energy because of the sector’s faster-than-expected progress and cost competitiveness, according to a study.
China, the world’s biggest importer of LNG, has been increasing purchases of the fuel, but this has not reduced or slowed the use of coal, the report from the Institute for Energy Economics and Financial Analysis (IEEFA) said. China’s coal demand has increased more than LNG imports every year since 2017, the report added.
The share of power generated from natural gas in China has remained static at 3 per cent since 2015, while that of wind and solar power has quadrupled to 16 per cent in the same period, according to the report. This has caused the relative market share of coal in the power mix to fall from 70 per cent to 61 per cent during the same period.
“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, the report’s co-author and an LNG and gas specialist at IEEFA. “Looking ahead, annual capacity additions of coal, wind and solar will continue to exceed new gas-fired power capacity.”
With China leapfrogging to renewables without relying on LNG, LNG’s use as a transition solution to achieving net-zero emissions is in doubt. Natural gas has long been touted as a transition fuel for coal-reliant countries and industries on their path to clean energy, as gas-fired power plants produce 50 to 60 per cent less carbon emissions than coal-fired ones.
However, the high and volatile prices of LNG, exacerbated by the Russia-Ukraine conflict, have hindered the fuel’s outlook.
The average cost of imported LNG is nearly three times that of domestically produced coal and gas, data from Chinese customs shows. It is also between 37 and 61 per cent more expensive than pipeline gas imports from Russia and other Asian countries.
Power generated from coal in China tends to be US$30-US$40 per megawatt-hour cheaper than from natural gas, according to IEEFA.
Meanwhile, onshore wind and utility-scale solar are the cheapest power sources in China, costing roughly half as much as gas-fired power. Last year, China added a record 301 gigawatts of renewable capacity, nearly 60 per cent of the global total, as the country aims to cut the use of fossil fuel to below 20 per cent by 2060, the year China aims to achieve net-zero emissions.
The Chinese government has strongly encouraged domestic energy sources over imported LNG. The National Development and Reform Commission, China’s central economic planner, said last year that the exploration and development of petroleum and natural gas at home will be intensified and projects to replace coal with natural gas will be expanded.
Although LNG prices are expected to fall in the coming years, IEEFA believes they are unlikely to drop to levels that would make them competitive with coal or renewables.
“Policymakers in both LNG exporting and importing countries should approach claims about the necessity of LNG as a ‘bridge fuel’ with a high degree of scepticism,” said Sam Reynolds, LNG and gas research lead at IEEFA Asia.
“China’s case clearly shows that LNG has played a minimal role in displacing coal in the country’s largest coal-consuming sectors.”
