Investing in gas could be a myopic approach for China's future energy needs.

Investing in gas could be a myopic approach for China's future energy needs.

In China, natural gas is being hailed as a transitional fuel in the country's energy shift, offering a cleaner alternative to coal and a partner to renewable energy. However, its role is fraught with challenges that make it a challenging detour rather than a clear bridge towards a low-carbon future.

China has rapidly expanded its gas-fired power capacity, installing more in 2024 than any other country, signalling growing reliance on natural gas. Despite this growth, natural gas faces significant hurdles in fulfilling its intended role.

One of the primary challenges is price and supply vulnerabilities. China is heavily dependent on imported liquefied natural gas (LNG), which exposes it to volatile global market prices that are higher than domestic or pipeline gas. This price volatility makes LNG expensive, particularly in northern China where pipeline gas is cheaper, limiting LNG’s competitiveness for electricity production.

Another issue is the unclear positioning of natural gas in China’s energy transition. While it is promoted as a cleaner transition fuel, its role remains ambiguous and sometimes contradictory within China’s policy framework, as the government balances coal reduction targets with energy security and cost considerations.

Moreover, China’s energy system has been long shaped by coal, which continues to be a major obstacle to renewable and cleaner energy expansion, including natural gas. Additionally, China’s low current carbon prices limit the market competitiveness of gas versus coal. Higher carbon prices could make gas plants more competitive in the short term and boost renewables’ competitiveness in the long term, but for now, low carbon pricing dampens incentives to switch fully to gas or renewables.

In summary, natural gas is positioned as a transitional fuel in China’s energy transition but struggles due to cost, supply dependency on LNG, unresolved policy clarity, and persistent coal reliance. Meanwhile, China heavily invests in renewable capacity and clean energy technologies to meet its carbon peaking goal before 2030 and carbon neutrality by 2060.

Notably, gas power strongly relies on government subsidies and is highly concentrated in coastal and economically advanced regions. Gas power accounts for just 3.2% of total generation in China, compared to 43% in the United States. Sichuan, a gas-rich province in China, is experiencing an explosive increase in gas power capacity, with 2.88 GW commissioned in 2024 and 8.33 GW under construction, expected to operate in 2025. However, this increase may lead to a gas shortage, as the new gas power capacity is estimated to consume 8.4 bcm of gas every year.

Guangdong, the province with the biggest fleet of gas power plants in China, commissioned more new gas power capacity in 2024 than the rest of the country combined. However, the province is facing an overcapacity of 23 GW of coal and 13.5 GW of gas power capacity, along with a nuclear power unit, expected to generate three times more electricity than Guangdong's 2024 consumption increase.

The global gas price is also vulnerable to geopolitical turbulence, as shown by the soaring LNG prices due to the Russia-Ukraine conflict in 2022, causing many gas power units in Guangdong to stop running. The tariff war initiated by the Trump administration in April 2021 will hit Guangdong especially hard, as its export value accounts for a fifth of China's total exports, and 16% of its exports go directly to the American market.

Jiangsu and Zhejiang, provinces with the most gas power capacity after Guangdong, are also heavily reliant on exporting to the American market and face an uncertain future. In response to energy security concerns, the provincial authority approved 10 coal power units in late 2022, citing unreliable gas supply caused by geopolitical risks as one of the key reasons.

In an effort to address these challenges, the Chinese government has issued the "Natural Gas Utilisation Management Measures" in June 2024, encouraging the use of gas power for peak-valley load management. This move is aimed at addressing the intermittency issues associated with renewable energy and ensuring a stable energy supply.

Despite these challenges, China continues to invest in natural gas infrastructure and technologies, recognising its role as a transitional fuel in the country's energy transition. However, the path towards a low-carbon future remains uncertain, as China navigates the complex interplay of cost, supply, policy, and technology factors that shape its energy landscape.

1. China's Committee for Development and Reform has pledged to ramp up clean energy investments, aiming to reach carbon neutrality by 2060, while balancing the role of natural gas as a transitional fuel during the energy transition.
2. In light of the ongoing challenges associated with natural gas, such as price and supply vulnerabilities, the SDGs have emphasized the need for increased investment in renewable energy sources to achieve carbon neutrality.
3. The Finance Ministry has suggested implementing market-based mechanisms, like higher carbon prices, to incentivize industry players to shift from coal towards cleaner alternatives like natural gas and renewable energy.
4. The energy sector faces a crucial juncture as China moves towards carbon peaking before 2030, with the importance of clean energy materializing in the context of reliance on natural gas, renewable energy, and a challenging transition away from coal.

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