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The US-China climate agreement

Hydrocarbon Engineering,

Last November, President Obama reached a climate agreement with China where he agreed to reduce US carbon dioxide emissions by 26 – 28% below the 2005 level in 2025 and China agreed to make ‘best efforts’ to have its carbon dioxide emissions peak around 2030 and to increase the share of non-fossil fuels in primary energy consumption to approximately 20% by 2030. To achieve the goals of this agreement, China needs to increase its natural gas use in lieu of coal and to increase its renewable share of generation. But, it faces obstacles to achieving both needs, the Institute for Energy Research (IER) highlights.

According to the US Energy Information Administration (EIA), China has the largest shale gas resource in the world, two thirds more than that of the US. To meet its 2030 commitment to cap carbon dioxide emissions, China must tap these resources as well as other domestic and imported natural gas supplies. China’s State Council set a target for natural gas to supply over 10% of the country’s primary energy consumption by 2020 – up from its current share of 6%.

While domestic conventional resources of gas are the major suppliers of natural gas today, China expects increasing contributions from unconventional and imported natural gas in the future. Imported natural gas by pipeline from central Asia, Myanmar, Russia and LNG primarily from Qatar and Australia are expected to supply approximately 102 billion m3 (3.6 trillion ft3) of gas in 2015 and at least 169 billion m3 (6 trillion ft3) in 2020. Unconventional natural gas resources (tight gas, shale gas, coalbed methane, and synthetic natural gas) will become major contributors to supply, producing 105 billion m3 (3.7 trillion ft3) in 2015 and 240 billion m3 (8.5 trillion ft3) in 2020 to satisfy 45% and 60% of the country’s demand, respectively.

To encourage domestic producers to drill for natural gas, China increased its domestic gas rates to equal much higher LNG prices. China expects to keep its electricity prices from escalating by balancing the higher natural gas prices with falling coal prices driven by lower demand due to China’s slower growing economy and cheaper imports of coal. Over the past two years, coal prices fell by 40%. Coal prices are now at a 6 year low.

IHS estimates that between 2011 and 2013, the lower coal prices saved utilities mote than RMB500  billion (US$83 billion) while the cost of the premium paid to add new gas fired power is estimated at RMB10 billion (US$1.6 billion).

But, for China to achieve these supply goals, it will require technical breakthroughs, including being able to extract its shale gas resources, which have a very different geology from this of the US. Beyond these technical needs, successful commercialisation of China’s shale gas resources includes the development of a production sharing contract system, more transparent market pricing, and access to technical data. Also, China lacks sufficient water, which is problematic since current drilling techniques for shale gas require it, IER emphasises.

Renewable energy

China’s plans include large increases in renewable energy, but hydroelectric generation dwarfs other renewables in China’s mix. China is by far the world’s largest generator of hydroelectricity. It is also adding solar and wind capacity, but some of its wind capacity lies idle, according to IER.

Despite China having more installed wind capacity that the US – in fact, the most in the world – it generated 20% less electricity from wind than the US in 2013. In 2013, China had almost 50% more wind capacity than in the US, 91 GW in China and 61 GW in the US.

Since 2010, China has been the world’s fastest growing market for wind power, but poor planning has resulted in many wind farms being disconnected from its power grids. Because wind resources are generally best in remote areas, many wind farms are located far from major electric grids and require extra transmission capacity to bring the wind power to consumers. In 2010, Chinese energy analysts used the term ‘garbage wind’ to reflect the 30% of the country’s wind farms that were not connected to the electric grid.

Chinese grid operators have had to curtail wind output, particularly in northern China, where cold and windy winters require stable base-load demand for heating. To meet this demand, coal fired generation is used, which caps the amount of energy wind farms can contribute, regardless of grid connectivity. For example, in Inner Mongolia, Jilin and Gansu provinces, wind curtailment has been as high as 20%.

In 2014, China expects to get 11% of the country’s energy consumption from renewable resources. Since 2010, it has connected more wind farms to its power grids, with 19% not being connected in 2012 and just 15% not connected in 2013, IER reports. It has also initiated a number of wind powered electric heating projects in northern China, which ahs reduced wind curtailments and coal usage. In 2013, the national average for wind curtailments was 11%.

Climate commitments

China has made a commitment to president Obama to try to peak its carbon dioxide emissions by 2030 and to increase its non-fossil fuels consumption, but to achieve these goals it will not be easy, IER concludes. The country’s rising middle class and rapid economic growth are placing tremendous pressure on its existing energy supplies.

However, China is a country of contradictions when it comes to energy. China is not only the world’s largest producer and consumer of coal, but also the world’s largest investor in renewable energy. Public concerns over air pollution and other environmental issues are pushing the government to rely less on coal, which currently supplies 70% of the country’s electricity, and more on natural gas, renewable energy, and nuclear power.

But to make the transition from coal to natural gas that the government wants will require an open and competitive environment so that natural gas prices can reflect market dynamics. It will need to import gas as well as producing it domestically. It has already made headway in obtaining gas imports from Russia and elsewhere. But, to capitalise on its shale gas resources will require outside ingenuity and changes in its mode of operation. Will China be able to make the change and meet its commitment to President Obama, the IER asks.

Adapted from a report by Emma McAleavey.

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