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26 April 2019

China’s energy tanker begins to turn, and we see its new direction

We often assume that the Chinese leadership is inscrutable on every subject, not least of which is its energy policy, but evidence has emerged this week that supports both views, that China genuinely wants to do its best for climate change, but it is behaving opportunistically, week to week, in order to get there. The outcome is not so very different from any of the major western powers, resulting in less coal fired power plants being built, a major investment in gas as a cross-over fuel, and a systematic forcing of renewables down to a price where they no longer need to consider anything else.

The only danger is perhaps if it runs out of road on its exist route from coal, or over commits to gas, and misses out on solar opportunities in particular.

A month ago there were rumors that China has going to go hell-for-leather to build as many coal plants as it could to ensure its economic growth was not curtailed. Estimates were that as many as 300 to 500 new coal power plants would be built by 2030, which would have killed off any chance of China, or the world, hitting the IPCC targets.

But while China had the opportunity in its 5 year plan to set its cap for coal plants as high as 290 GW higher than current output, peaking only in 2030. That cap was never realistic economically – it kept the coal company’s share prices high, but was never going to happen. And this week local analysts have made it clear while a few coal plants might get built, it will only be in geographies where growth is in jeopardy and there are no other options. So as China ended its moratorium on coal plants being built, it is the fall in the cost of renewables that is really getting in the way of more coal. It looks remarkably like market forces, but say it in a whisper.

And last week China looked once again at its solar program, and tweaked its rules, encouraging lower prices still by prioritizing projects which were prepared to operate on a “parity” footing with other technologies, effectively forcing prices down further.

It is tough for a technology like solar, which has been subsidized for ten years,  to come out into the harsh light of economic reality, but solar in particular in China should be ready for this. The big stick that the authorities carried was the fact that China almost halved solar installations in Q1, but the carrot was the prioritization of parity billing. As that drives down solar pricing, it has a knock on effect on Wind power, which is also under more pressure to fall in price, but which so far is achieving it best.

But there was no real gas on the horizon, used by most countries to drop their CO2 aggressively and rapidly from coal to gas, roughly halving CO2 in the meantime and giving them breathing space to cultivate renewables. Using LNG China could at least see its CO2 stable, rather than constantly rising.

Enter ExxonMobil, operating somehow within a trading war between the US and China, and somehow managing to catch a 20 year deal offering liquified natural gas (LNG) supply at 1 million metric tons a year, initially only for use by China’s Zhejiang Provincial Energy Group. Chances are this gas is surplus to requirements in the US, which is now operating within a huge over-supply due to fracking, so much so that some providers last week were reported as given away natural gas for free, so that US suppliers did not have to store it.

If you think about it, when reserves of gas were being searched out renewables were about a tenth the size they are today. And unlike gas reserves, you don’t find renewables use them up and then need more. You build them out and they continue to produce for 25 years without any further material costs. So for each 1GWh of renewables, you are replacing 25 GWh of fossil fuels over 25 years.

That has created a compression on pricing of LNG, and that has finally made it irresistible to China, who in turn have weaponized it as a charm offensive by partnering with a US company, rather than turning to the countries which supply its coal, Indonesia, Australia and Russia. The message is Mr Trump, we can help one another.

Interestingly China imposed a 10% tariff on LNG from the US last year but even with that tariff in place, pricing is so low currently at a 20 month low, it won’t make any difference. What China is buying is not a strategic amount of gas, but this is the first order for one region and ExxonMobile will be aware of that. It could end up at 20 to 30 times that amount, and serve as a platform for US firms to sell CCGT gas turbines as well, and to help China dump coal even faster.

So we can see the dynamic tension caused by a trade war, a continued growth path for China, and the need to get off coal fast, all coming together into a set of “opportunistic” moves by China. In the long run China will continue to push wind and solar towards parity pricing levels, and then switch tack once again, and likely dump the gas – but this can be gradual over 20 years, and beyond the influence of even a two term President.

The Chinese National Energy Administration issued data in April that thermal energy in Q1 fell by 30% while spending on hydro and wind rose 48% and 30%. And Solar fell 45%. Once solar adjusts pricing to parity, its growth is likely to be in step with hydro and wind, and then there is likely a ten year uninterrupted growth in energy requirement from China, where the bases is shifting towards renewables after a lift in the use of natural gas. Somewhere in there green hydrogen will either begin to happen also at parity or it won’t and China will take another opportunistic view.

But despite this Shanghai-listed China Coal Energy saw its commercial coal output leap by 38.1% in Q1 while it began to stop Australian coal at the ports, some say because Australia has a new government and the last one was critical of China and in particular Huawei, others simply suggest that if the need for coal is falling, spending more money at home makes sense, which is pure pragmatism.