Dragon-Power: Does China’s HUGE solar expansion leave space for LNG?

Feb 12

The fact that China, with its big energy consumption and rapid economic development, drives energy markets won’t surprise anyone. Yet even avid China-watchers were surprised by recent energy statistics from the Middle Kingdom. Thus as we enter the Year of the Dragon, it’s worthwhile digging a bit deeper into the numbers.

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Renewables

Chinese Solar PV additions in 2023 are simply astonishing: 217GW. China’s single-year additions are more than any other nation’s total installed capacity, and China’s own total installed capacity now stands at over 600 GW.

Wind power additions in 2023 were a further 76 GW, with annual wind & solar generation increasing by almost 400 TWh. Chinese net renewable power additions now exceed electricity demand growth, leading to reduced fossil fuel consumption for power generation.

Solar Capacity (GW)

(Note: The actual delta is even bigger than the chart indicates, as the Chinese numbers are based on AC peak capacity, whereas other countries report DC peak capacity. DC usually needs to be converted to AC and system design leads to “clipping” of peak production rates, which means that the stated DC peak capacity tends to be about 20% larger than the AC peak capacity.)

Economics, LNG & Coal

Is this renewable energy build-out a temporary phenomenon? How about coal and LNG? The economics are fairly clear, the long term implications for LNG less so.

The latest generation of combined cycle gas power plants have a heat rate of around 7 MMBtu/MWh; best-in class plants heat rates can approach 6.2 MMBtu/MWh. For older combined cycle power plants the metric is around 8 MMBtu/MWh, and steam or single cycle power plants’ heat rates often exceed 10 MMBtu/MWh. Current LNG spot prices are just under USD 10/MMBtu, thus leading to fuel costs of USD 62-100+/MWh for gas power plants (ignoring other Opex and sunk-cost Capex). Chinese renewable (solar PV, onshore / offshore wind) levelized cost of electricity (LCOE) estimates on the other hand range between USD 23-50/MWh.

Thus at current LNG prices, on LCOE basis even the most expensive utility-scale renewable power is cheaper than the cheapest fuel-cost only LNG-based gas power.

But whilst average levelized costs are crucially important for the general trajectory, four other aspects also shape the overall outcome:

Energy security: Renewables win in terms of energy security, given Chinese domestic supply chains and absence of fuel procurement requirements. But since coal won’t be fully replaced anytime soon, and pipeline gas can be problematic as Europe recently learned, LNG provides a relatively clean, flexible and dispatchable fuel source. Note that China’s power industry coal consumption, at ~50 Exajoules per year, is 2.5 times the size of the global LNG market. Thus even relatively small amounts of coal to gas substitution can make a big difference in terms of LNG demand.
Intermittency: At current pace, the renewable build-out may soon lead to oversupply during peak supply hours. China has an impressive amount of hydroelectric power and quickly-expanding battery storage capacity, both of which can help to shift supply profiles. That said, given the huge scale of China’s electricity market, batteries won’t be “the solution” any time soon. Natural gas can fill in the gaps, and since the associated gas demand would also be intermittent, it lends itself to coal power plant conversions or simple cycle “peaker” plants rather than the more Capex-intensive combined cycle power plants.
Grid constraints: The IEA’s Electricity 2024 report references grid constraints as a reason for some solar PV project delays. That said, these constraints appear to get resolved rather quickly, as the reported growth figures are already net of grid-induced project delays.

Market Size & Growth: 2023 Chinese electricity demand was just under 9,200 TWh, with over 5,400 TWh (2021, IEA) produced by coal. Total renewable energy growth in 2024 is forecast to exceed 600TWh, thus at current pace it would take about 9 years for renewables to replace coal. This ignores demand growth however. Average demand growth over the past 15 years has been just under 400 TWh per year. Expected net renewable growth thus amounts to about 200 TWh in 2024. At that pace, it would take 27 years to replace coal power generation. If renewables growth could increase by another 50% to 900 TWh per year, net additions would be about 500 TWh per year, enabling coal replacement within about 11 years. But electricity demand growth may also increase again given China’s fast pace of vehicle electrification - and renewables growth may be lower or significantly higher. (Past forecast errors do not instill confidence in getting this exactly right.) And intermittency still needs to be solved on a large scale.

Takeaways

Given favorable economics and energy security aspects, it is all but certain that China’s massive renewable expansion will continue or even accelerate, subject to grid- and intermittency-constraints. LNG’s role will likely expand in the short- to medium-term in order to increase gas supply security and to reduce overall emissions. This development is far more policy-dependent than the renewables expansion however, given LNG’s cost, thus the longer-term growth outlook is less clear. The challenge for LNG will be to find its space between lower cost and employment generating but polluting coal, cheaper but less secure pipeline gas and cheap & clean but intermittent renewables.

Overall “it’s complicated”. In 2020, China set a goal of 1.2 TW renewables by 2030 - which the country will exceed this year. China seems to surprise itself, thus we need to be humble about our ability to make predictions. It will certainly be a fascinating space to watch though, with huge implications for global energy markets.

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