Singapore — China's Ministry of Ecology and Environment proposes to replace coal with clean energy as feedstock in the heating systems of 7.09 million households in northern provinces by the end of October, in a move that could boost natural gas demand and LNG imports this winter.
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The last time coal-based boilers in Chinese cities were switched to gas, in the winter of 2017-2018, it triggered severe fuel shortages, exposed a lack of gas supply infrastructure, pushed up trucked LNG prices to over $25/MMBtu and shut factories that did not have gas supply.
The fuel switch has been proposed in a draft action plan for tackling air pollution in northern China, posted by China's environment ministry on its website Sept. 28. The draft has already been sent to the national policy planner -- the National Development and Reform Commission -- and other government departments, including the National Energy Bureau, provincial governments, as well as major state-owned oil, gas, coal and electricity companies, for comment.
The deadline for feedback is Sept. 30, with no comment considered to indicate approval, the ministry said.
Under the proposal, the regions in northern China include the Beijing, Tianjin, Hebei, Shanxi, Shandong, Henan and Shaanxi provinces and the clean energy options include clean coal, electricity and natural gas depending on the actual situation in each region, according to a ministry official.
The government will continue to support subsidies for coal-to-gas and coal-to-electricity in rural areas, and the natural gas city-gate price will not be raised during the heating season in the northern regions, according to the draft.
The objective is to achieve 2020 air quality targets under the Three-Year Action Plan of the Blue Sky Defense in 2018, the ministry noted. The plan aimed to curb air pollution in China, especially around the Beijing-Tianjin-Hebei regions, the Yangtze River Delta and the Fenhe-Weihe Plain, which are heavily industrialized regions.
The impact of the proposal, which emphasizes existing local fuel supply conditions, remains uncertain on LNG and gas markets. This is partly because the government learnt lessons in the crisis of 2017-2018 and the region has seen extensive build-out of gas supply infrastructure since then, while China's gas supply has grown considerably in the last two years.
"The key will be the weather -- there is talk it could be cooler than average. This might mean that there could be more demand for heating, so it could see coal used for heating anyway, in tandem with gas," Matthew Boyle, lead analyst for global coal at S&P Global Platts Analytics, said.
"If it is for environmental reasons, then this might cause gas utilization to run at higher rates but given that coal used in heating has been progressively declining since 2017, then as a headline, it looks significant, but probably is part of a trend in China to reduce pollution in the winter period, especially around Beijing," Boyle added.
China's apparent demand of natural gas rose 8.6% in 2019, accounting for 8.1% of primary energy consumption, according to China's 2020 natural gas development report released earlier this month. It said urban gas and industrial sectors were the two largest sectors, accounting for 37.2% and 35.0% of total gas demand, respectively.
Not only is household demand a big contributor to gas demand, the northern regions being targeted are the second largest gas consuming region in China accounting for about 20% of the country's gas demand, behind eastern China, which accounts for around 30% of demand, according to the report.
Policy changes in 2017 resulted in 4.74 million households switching from coal to gas or electricity by the end of the year, out of the 5.33 million households targeted, a study by the Oxford Institute of Energy Studies showed, citing Chinese government information published in March 2018.
In addition to antipollution measures, China is now working towards a longer term plan for carbon neutrality by 2060 that will require curbs on coal burn.