A drive to cut electricity prices for end-users has prompted Beijing to reduce gas-fired power plant tariffs, which has threatened the survival of many of them, Wood Mackenzie reports, adding to already substantial pressure on the industry from the ongoing trade war with the United States.

“The new regulations will cause at least a 5 to 6 percentage point decline in the already poor margins of gas power plants,” said Wood Mac principal consultant Frank Yu. “Delivered fuel costs at most gas power plants have only declined by 10% to 13%, while revenues have been cut by 16% to 28% due to the new regulations. Most projects are now loss-making or barely breaking even.”

Power tariffs in the country have declined by an average of 25 percent over the past three years, while gas-fired power plant tariffs were slashed by between 16 and 28 percent in some key markets.

This means that some 8 billion cubic meters in gas demand from Chinese power plants could disappear by 2025 as fewer new gas-fired plants are being built and utilization rates fall because of the low tariffs, in some cases almost as low as those for coal-fired plants—the cheapest ones.

The silver lining is that power demand in China will continue to grow in the coming years. In fact, according to Yu, China will account for nearly 50 percent of the global growth in power demand over the next ten years. This would mean more solar and wind farms, and also more coal. But it will have to also include more gas, despite the unfavourable economics and the fact that China uses predominantly imported gas power generation technology, which further undermines the competitiveness of such plants.

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Cost-competitiveness was identified as a hurdle for gas demand in another report recently as well. The Global Gas Report by the International Gas Union also noted that China—along with India—was among the countries where dependence on imported gas affected demand for the fuel negatively, benefiting low-cost coal.

By Irina Slav for Oilprice.com

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