The National Energy Administration’s (NEA’s) 2014 energy targets and policy priorities do not contain any significant deviations from past policy announcements, although in some cases they reflect an intensification of previously announced targets. The targets for the natural gas, coal, and renewable energy industries indicate that the government is pursuing its overriding policy priorities relatively aggressively, and in some cases meeting its original targets early.
Coal demand to remain depressed
Absolute coal demand will continue to remain high in China, but demand growth prospects in the industry remain poor. China’s depressed coal consumption growth is primarily a result of government policy drivers, such as moderating economic growth rates and reducing energy consumption growth by increasing energy efficiency, and addressing environmental pollution.
Ambitious gas targets despite supply bottlenecks
In addition, the government is continuing its drive to reduce the share of coal in China’s overall energy mix. The target to reduce the share of coal in China’s overall energy mix to 65% in 2014 (down from 67% in 2012) represents an acceleration of previous plans, which envisioned coal coming down to 65% of total energy consumption by 2015. Reducing coal consumption growth has accelerated in recent years, as the government has come under increasing pressure to address the negative environmental effect of coal use, particularly air pollution. In the wake of record-breaking air pollution levels in major coastal cities such as Beijing and Shanghai in 2012/13, the government has stepped up its programme of switching coal-fired capacity to natural gas, with priority sectors including residential heating, industrial boilers, and power generation.
In addition to capping coal consumption, China has enacted among the world’s strictest nitrogen oxide (NOX), sulphur dioxide (SO2), and particulate emissions limitations for the electricity sector and industry. These policies, aimed at controlling environmental pollution, have accelerated both the growth of natural gas consumption and the need to ramp up domestic supply, pipeline and LNG imports, and gas transmission infrastructure, as natural shortages have recently forced the government to temporarily scale back some of its coal to gas switching ambitions.
In China’s upstream sector, the government has set an ambitious target to increase natural gas production to 131 Bcm, up 12% from 2013, with a particular focus on increasing exploration activity and ramping up gas production from China’s northwest and the Erdos Basin, Bohai Bay, Sichuan and new offshore developments, such as CNOOC’s deepwater developments in the Pearl River Basin. Although the government’s original shale gas target of 6.5 Bcm of production in 2015 is unlikely to be achieved, the government clearly expects 2014 to be the year that China’s shale gas programme sees a significance breakthrough. The NEA has set a shale gas production target of 1.5 Bcm, far higher than 2013 production levels of just over 200 MMcm.
Rapid wind and solar growth
The NEA’s 2014 renewable energy targets are particularly notable, in part because they reflect the fact that China has frequently built renewable energy capacity to levels in excess of original targets. China is on track to meet its 12th FYP target of increasing the share of non-fossil fuel energy in total consumption to 11.4% of total energy consumption in 2015, up from 8.6% in 2010. China has already overshot its original target of increasing the share of non-fossil fuel energy to 30% of total electric power generation by 2015, and is pushing beyond this to raise non-fossil fuel energy up to 32.7% of total energy consumption in 2014.
The NEA has also set a relatively ambitious target for new added wind power capacity in 2014, which will entail total capacity growth of almost 24%. The government has not set a target for grid-connected wind capacity, although the Chinese wind market is beginning to recover from its lowest point in 2012, when a large share of already constructed wind farms were unable to produce electricity due to delays in grid connection.
China’s target to increase photovoltaic (PV) solar capacity by roughly 67% in 2014 reflects the rapid pace with which solar developers in China have responded to government incentives, designed to spur domestic demand and potentially water down Chinese solar manufacturers’ exposure to unpredictable export markets.
Outlook and implications
Wind and PV solar developers stand to benefit from strong government targets in 2014, although the issue of grid connection bottlenecks will remain a risk affecting profitability in the sector. A natural gas consumption target of 14.5% above 2013 levels also indicates that gas shortages over the winter of 2013-14 (although mild weather means that these shortages have not been as severe as the government originally feared they might be) have not significantly dampened the ambition of China’s “dash for gas”. This long-term policy support will continue to be an important driver for global upstream gas developments and the construction of new LNG export facilities, as well as pipelines from Central Asia. Chinese demand will also push up the price of Asian LNG short-term contracts and spot cargoes this year, given that supply from China’s long-term gas import contracts – many of which were signed under relatively low prices – is hitting a plateau this year, meaning Chinese short-term and spot demand will increase.
