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[Oil Observer] Electric power: the general direction of gas industry development

The power generation with natural gas is characterized by high energy conversion efficiency, less emissions of pollutants, smaller investments required, shorter construction periods of power plants, smaller floor area as well as shorter startup and outage time. The power generation with natural gas has been developed considerably overseas. Currently, the installed capacity for natural gas power generation in the US is 39.4% of the total installed capacity, and that in Japan is 29%; Howeverthe power generation with natural gas in China is much lower due to our resource endowment problem, therefore the corresponding installed capacity in China occupies only about 3% of the total installed capacity. At present, China has entered the rapid development period of natural gas, and the power generation with natural gas as the main natural gas utilization direction will also inevitably evolve with the development of natural gas.

1. Foreign experience in natural gas power generation

1.1 Global electric power development trends

In the 20 years between 1970 and 1990, the developed countries completed their electric power sector through the development of coal, natural gas and hydroelectric power. The nuclear power industry experienced steady growth from the 1970s to mid-1980s, but began to decline after the “Chernobyl incident” in 1985. The global power industry began to transition from 1990 to 2000. Due to the growth of electricity demand in the developing countries, the push for the liberalization of the power market, and the eased restrictions on the use of natural gas for power generation, the power generation with natural gas ushered in a new stage of development.

The developing countries (especially in Asia) also ushered in overall economic development in the 1990s, also bringing a new round of growth in electricity demand. Most Southeast Asian countries, following the practices of US and Europe, reduced power industry regulation and thus the new power plants in most of the countries during this period were natural gas power plants. However because of the special nature of its own endowment of natural resources, China chose to focus on the development of coal power. Apart from China, the global power market has begun to enter the era of natural gas power generation since late 1990s.

1.2 Global development mode of natural gas power generation

Currently, the more mature models for global natural gas power generation development include the American-European models exemplified by the US model and the Japanese-Korean modes exemplified by the Japanese mode.

1.2.1 American development mode of natural gas power generation

The US is one of the countries with the most mature development of natural gas in the world. The power generation with natural gas started early and has fully developed. The current installed capacity for natural gas power generation accounts for about 40% of their total installed capacity. In the development process, the installed capacity for the US natural gas power generation has been rising, and the generated energy with natural gas has occupied an increasing proportion of the total energy generated. In the last twenty years, the proportion for the generated energy with natural gas has risen to from 13% to 25%.and the proportion of gas consumption for power generation with respect to the total gas consumption has reached up to 31%

According to the EIA predictions, by 2040, the generated energy with natural gas in the United States will account for 30% of the total energy generated.

 The US power generation with natural gas has gone through two stages of development, and the current system of the gas industry, pipeline system and infrastructure are at an almost perfect level.

In the early development of the natural gas market, the US accumulated relatively sound gas pipeline networks, and the natural gas was mainly for residential and commercial purposes. 

 

 

During the development of natural gas market, the power generation with natural gas presented gradual development, and the proportion of gas consumption for power generation in respect to the total gas consumption increased from 9% in 1935 to 18% in 1972.

Based on the impact of the first oil crisis and the urgent search for alternatives to oil fuels, the US government promulgated thePower Plant and Usage of Industrial Fuels Act in 1978, to forbid the public electric power companies to generate electricity with natural gas.

With the increase of proved reserves of natural gas and the environmental benefits of natural gas power generation, the US government lifted restrictions on the use of natural gas for power generation in 1987, and the power generation with natural gas entered the second stage of rapid development, with the consumption for power generation becoming greaterthan household consumption in 1998. Currently, the gas consumption for power generation accounts for over 30% of the total gas consumption. 

1.2.2 Japanese development model of natural gas power generation

The Japanese base-load power mainly includes nuclear power and coal power, and the natural gas power generation mainly undertakes medium-load power and peak-load power, in particular playing a crucial role in daily peak shaving. At present, the installed capacity for power generation with natural gas accounts for about 29% of the total installed capacity in Japan. Japan has gradually reduced power generation with petroleum and increased power generation with natural gas and nuclear power since the global oil crisis in 1973, and has developed the three pillars of natural gas power generation, coal power and nuclear power until the earthquake in Japan in 2011.

The nuclear power safety issues occurred after the earthquake in 2011, the Japanese government shut down nuclear power plants in 2012, and the proportion of energy generated with natural gasincreased accordingly. In 2010, Japanese gas consumption for power generation accounted for up to 63% of the total gas consumption, and further increased after the nuclear safety incident occurred. In 2012, the gas consumption for power generation accounted for about 75% of the total gas consumption.

The US possessed a strong pipeline infrastructure in the initial period of gas consumption and relatively mature household and commercial gas market. In contrast, Japan had an undeveloped gas pipeline system in the early period of introduction of natural gas and limited demand of household and commercial users. Japan mainly utilized natural gas power generation to support a large-scale introduction of natural gas, in particular in the first several years of introduction of natural gas. The long-term “take or pay” contracts of LNG were mainly supported by natural gas power generation, the gas consumption for power generation accounted for a relatively large proportion of the national gas consumption. Later with the development of the household and commercial gas market and the construction of pipeline infrastructure, the household and commercial gas consumption increased and the proportion also gradually increased. However, the gas consumption for power generation remained stable.

1.3.1 The natural gas power generation is an important force to promote the natural gas market.

Natural gas power generation is the main component of the natural gas consumption market. Currently natural gas for power generation in North American and European countries accounts for over 30% of the total gas consumption. Natural gas power generation is an important factor in promoting the growth of natural gas consumption. In the rapid development stage of the natural gas market, the gas consumption for power generation kept the growth consistent with household gas. After the natural gas market has matured and household and commercial gas has developed stably,the natural gas consumption growth is mainly driven by power generation. 

 

Country

Proportion of gas consumption for power generation /%

Country

Proportion of gas consumption for power generation /%

US

31

Malaysia

45.8

Britain

32

India

47.5

Italy

41.4

Singapore

91.2

Spain

52.6

Thailand

77

South Korea

38.6

 

 

 The Proportions of Gas Consumption for Power Generation in the Total Gas Consumption in Some Countries in 2011

 

In the development process of the natural gas industry regardless of the construction of natural gas pipeline infrastructure, natural gas power generation is an integral part of the natural gas market, and the development of natural gas power generation has effectively promoted and guaranteed the development of the natural gas market.

1.3.2 The role of policies in the development of natural gas power generation industry

The development speed of natural gas power generation is not unrelated with government policies, and the United States and European countries have implemented intervening policies in the development process of natural gas power generation.

The US government promulgated the Power Plant and Usage of Industrial Fuels Act in 1978 to forbid the public electric power companies to use the natural gas for power generation, but later released the restrictions on the natural gas power generation, which allowed natural gas power generation to develop rapidly.

EU (EC then) issued a directive in 1975 to limit usage of natural gas for power generationwhich was canceled in 1991, and the natural gas power generation increased rapidly afterwards.

At present, natural gas power generation in the United States and European countries is mainly affected by market factors, and Japan has always supported natural gas power generation due to its own endowment issues of natural resources.Japan hasencouraged natural gas power generation by taking various policy measures, including direct investment, preferential loans and tax reliefso that the natural gas power generation can come into being and develop greatly. 

2. China's development trend of natural gas power generation

2.1 China has entered a golden period of development of natural gas power generation.

Whether it is in terms of the security of gas supply, gas demand or policy environment, conditions present a development opportunity for natural gas power generation in China.

2.1.1 The conditions of gas supply have matured gradually.

Compared with the US developmental stage of its natural gas industry, it can be judged roughly that China's natural gas industry will be in the rapid development stage by 2030 and then enter the mature development stage after.
In the last ten years, the rapid increase in the supply of natural gas in China provides the gas source conditions for the development of natural gas power generation. This includes: the completion and operation of the “West-East Gas Pipeline project”, “West-East Gas Pipeline II project”, and “Sichuan-East Gas Pipeline project”, the operation of LNG terminals in Fujian, Guangdong, Shanghai, Dalian, Jiangsu, Zhejiang and other places,the “Ocean-Land Gas Transmission project”.The above reflects a new pattern of diversification - domestic gas and imported gas, the conventional gas and unconventional gas, the gaseous gas and liquefied gas and other types of gas sources coexist – is all formed in China's coastal areas.
According to the 12th Five-Year Plan for Natural Gas Development, it is predicted that China's supply capacity of natural gas will be of 269.5 billion cubic meters in 2015. According to foreign development experience, the gas consumption for power generation accounts for over 30% of the total gas consumption.That proportion however, is only 20% in China currently. Based on China's actual situation of natural gas supply, 53.9 billion cubic metersof natural gas can be used to generate electricity to meet the installed capacity of power generation of 65-70 million kW. Currently China's installed capacity of natural gas power generation is of about 30 million kW, with the development potential of up to about 37.5 million kW.

2.1.2 Policy environment

According to the 12th Five-Year Plan Research Report in Electric Power Industry released by China Electricity Council, China shall adopt the combination mode of “large-scale”, “medium-scale” and “small-scale” for the power generation with natural gas (including coalbed methane and other gases), and plan to build large-scale gas-fired units in combination with the introduction of foreign pipeline gas and LNG terminals, to mainly address the peak shaving capacity of seasonal power (nuclear power, wind power and hydropower) to the power grid.

On October 14, 2012, the National Development and Reform Commission issued the Natural Gas Utilization Policy, which expressly agrees that the combined heat and power (CHP) with natural gas is developed as a priority project and the power generation with natural gas is developed as a permitted project in the areas where no large-scale coal bases are located.

The energy generated with natural gas, as the clean energy generated in the most practical way currently, attracts more and more attention of the local government. In some regions developed economically, such as Beijing, Shanghai and Shenzhen, the energy development planning has clearly promoted the development of natural gas power generation.

In the national or industrial policies, the country’s natural gas development is positioned - mainly for peak shaving of power grid; in the specific development, the power generation with natural gas is supported and utilized, in particular the CHP project with natural gas. In the economically developed regions and cities, people have realized that the natural gas power generation is consistent with the energy and economic development trend, and proposed specific plans of natural gas power generation.

2.13 Demand for gas power generation is increasing day by day

The degree of economic development in some parts of our country is high, but the pressure of energy conservation and emission reduction is becoming gradually greater. The contradiction between economic development and environmental protection is becoming increasingly evident, exemplified by the constant haze in Beijing at the beginning of this year and how it drew people’s attention to environmental protection. Gas power generation has the characteristics of high energy exchange efficiency and low pollution discharge. The discharge of CO2 from gas power generation is about 38.5% of that from a coal-fired power plant, discharge of NOx is less than 20% of that from a coal-fired power plant, and the discharge of dust and residue is zero. Therefore the effect of energy conservation and emission reduction from power generation through natural gas is remarkable. 

The peak grid regulation safety calls for the development of gas power generation. With the economic development, “two high and one low” (high peak-valley difference, high season difference and low load rate) the characteristics of cosmopolis electric load in part of the cities of our country is more and more obvious, and the contradiction in grid peak regulation is also very prominent. The gas power generator has the characteristics of short time in start and stop, which is suitable for grid peak regulation.

Furthermore, with the continuous extension of the capacity of the electric system, the promotion of nationwide networking and the strengthening of the development of new energy, the safety and flexibility of grid will become particularly important, and the characters of gas power generator set can guarantee the safety and flexibility of grid.

There is great potential in gas power generation installation. So far, seen from the current development status, gas power generation in developed countries has been in long-term development, and gas power generation installation has taken reasonable proportion in installed gross capacity, among which the US is 39.3%, Japan is 29%, UK is 34.1%, South Korea is 26.6%, while our country is only about 3%, indicating that there is still a considerable gap in the development of gas power generation between our country and developed countries, and there is great development potential in gas power generation installation in our country.

The author has done the situational analysis in our country’s gas power generation installation in the future, and by 2015 the gas power generation installation of our country will reach 50,000,000kW and 60,000,000kW in low and high situational models.

In a combination of gas supply situation of our country, by 2015 the gas power generation installation of our country shall reach about 60,000,000kW. According to the experience of overseas gas power generation and the positioning of gas power generation in our country, our country’s gas power generation will develop in areas with certain degrees of economic development and with abundant gas sources such as “Yangtze River Delta”, “Circum-Bohai-Sea” area, Sinkiang natural gas origin and Sichuan natural gas origin, etc. 

2.2 Problems existing in natural gas development of our country

2.2.1 Feed-in tariff

Pricing mechanism of the feed-in tariff of gas power generation in our country has yet to be unified and the relationship among natural gas price-generating cost-feed-in tariffs have not been well established. The gas sources of fuel gas sets that have been put into operation are different, and so are the prices of gas. The fee-in tariff varies among provinces, and is basically “one set one price” within one province. The reason is that the price of gas for power generation is mainly controlled by means of “cost plus” by the government, which is not unified and fails to reflect the market value of gas for power generation.

Power generation of our country is basically coal power, the feed-in tariff of generator set is subject to coal power, which fails to reflect the characteristics of environmental protection and peak regulation of fuel gas sets and causes weak economic competitiveness of most sets. So far, the loss of gas power generation is mainly compensated by means of subsidy around our country. 

2.2.2 Contradiction between gas price reform and electricity price reform
Gas power generation crosses two industries, natural gas and electricity power, which both have development characteristics related to the national economy, and the peoples' livelihood. In terms of price reform, the electric power system reform decided by the State Council in 2002 specified the electric power reform goal of “break the monopoly, introduce competition and form the electricity price market of regional competition, and confirmed the four steps of electric power reform - “plant-grid separating, main-supplement separating, transmission-distribution separating and competitive gridding”, and competitive grid became the important link of the marketization of electricity price; in terms of gas price reform, in 2011 the NDRC published Notification on Pilot Reform of Pricing Mechanism in Guangdong and Guangxi Areas, and the gas pricing method of Guangdong and Guangxi areas shall be priced by means of “market net back”. The target of natural gas price reform is that the ex-factory price of natural gas shall be liberalized by government and formed by free market competition.

Seen from the effect of pilot reform, the gas price shows a rising trend, which will more weaken the competitiveness of gas power generation. However, gas power generation is an indispensable part in gas market, and how to reflect its power generation character and environmental protection value in price decision forms the important factor that influences the competitiveness of gas power generation.

3. Conclusions and suggestions

Gas power generation is clean and efficient, which meets the development direction of energy conservation and emission reduction and industrial structure adjustment of our country, and the rapid development of gas industry of our country has guaranteed the gas source for gas power generation. According to overseas development experience and the positioning and role of gas power generation in our country, it is predicted that by 2015 the installed gas power-generating capacity of our country may reach about 60,000,000kW, and gas power generation of our country may have entered into the golden opportunity age.

Since the feed-in tariff of gas power generation has not been unified so far and it still employs “one set one price”, and the role of peak regulation and environmental protection of gas power generation has not been reflected in feed-in tariff yet.

It is suggested to straighten the relationship between natural gas, gas power generation, grid and environment to reflect the peak regulation role and environmental protection value. Add “supplemental electricity price for peak regulation” and “compensating electricity price for environmental protection” on the basis of feed-in tariff, or implement “two-step electricity prices” to reduce the influence of generation hours on the income of generator sets.

It is suggested that the locals should strengthen the medium-term and long-term plan of gas power generation and reserve the development space for gas power generation; strengthen the policy guidance of gas power generation to provide good development environment for gas power generation; and provide subsidy support in finance.

Power enterprises should strengthen communication and coordination with natural gas enterprises to provide source guarantee and technical force for gas power generation and effectively promote the development of gas power generation. (other Author: Huang Hui)

 

 

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