China's changing energy landscape

Now that improving the environment has been made a clear political priority, we assess the impact on power, gas and coal.

Since taking office early last year, China's new leadership has demonstrated its intention to lower air pollution by taking several major steps towards energy reform.

Unveiled in September 2013, the Air Pollution Prevention and Control Action Plan (APPCAP) contained a range of policies aimed at coal-to-gas switching to help lower Sulphur Dioxide (SOx), Nitrogen Oxide (NOx) and dust emissions.

Initial goals focused on expanding the role of gas through demand targets or coal consumption caps, amounting to a moving target in China's energy landscape.

Yet the policies have since evolved as they started to conflict with other policy objectives, mainly economic growth. APPCAP has shifted the focus away from mass switching to gas and towards managing coal emissions.

This remains broadly positive for gas, despite some near-term growing pains as new supplies ramp up. Gas demand in China will increase from around 207 billion cubic metres (bcm) in 2014 to 335 bcm by 2017, with demand from power, transport and the residential/commercial sector contributing most growth in the near term. 

Pre and Post AppCap

Between 2020 and 2033, we estimate demand will have an annual compound growth rate of 4%, reaching 655 bcm as China becomes the world's second largest gas market after the US. Economically developed regions (such as the Yangtze and Pear River Deltas) that can afford higher energy costs will drive uptake.

However, the purpose of APPCAP is not to penalise coal. Now that the focus of APPCAP is on emissions control rather than fuel switching, coal will enjoy a guaranteed, cleaner future.

Primary Energy Demand

We forecast that coal will remain the dominant fuel in China's energy mix, supported by several new market-based incentives. By 31 December 2014, Beijing, Tianjin, and Hebei must complete Flu Gas Desulphurization (FGD) retrofits to 94 units (24 GW), de-NOx retrofits to 70 units (15 GW) and dust-removal retrofits to 66 units (17 GW).

Meanwhile Shandong, Shanxi and Inner Mongolia must complete 191 units (52 GW) of d-NOx retrofits before the same deadline. These retrofits are around 30-43% of provincial level power fleets and will help meet environmental objectives using coal rather than gas.

However, for some sectors, detailed environmental policies are still being formed and it is likely that progress for initial announcements will be followed up with more specific guidelines.

Yet despite the unclear timeline, it's evident that policies will continue to evolve to ensure a balanced approach to China's economic, political and social priorities which will have an enduring impact on energy supply and demand.

Read more
A moving target – assessing the impact of China's environmental policies [Subscription required]
China's environmental policies and their impact on gas demand [Subscription required]
Policy change supports Wood Mackenzie view that China's coal switching targets are not achievable [Subscription required]
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Our broad range of commodities research includes our China Gas and Power Service which gives you clear insight into the country's market dynamics. It provides analysis on the key provinces, from supply, demand and price dynamics to the outlook for power capacity, fuels and transmission.

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