China will raise electricity tariffs for power plants running on natural gas in at least eight provinces, the National Development and Reform Commission has announced.
Prices of on-grid tariffs at gas-fired power plants will be raised in Shanghai, Jiangsu, Zhejiang, Guangdong, Hainan, Henan, Hubei, Ningxia and others, according to local media which carried the NDRC statement Wednesday.
The move is aimed at helping power plants address the cost challenges of higher gas prices, according to the NDRC, which said only that the price hikes would soon be decided by provincial authorities.
The on-grid tariff is the price at which power companies sell electricity to grid companies, and is distinct from prices that end-users pay.
Local media on Wednesday reported that the adjustment to the on-grid tariff for gas-fired power plants in Shanghai has already been decided and will rise from Yuan 0.454 (7 cents)/kilowatt-hour to Yuan 0.504/kWh. The new tariff has been backdated to September 25, Sina Finance reported. WILL NOT FULLY OFFSET HIGHER GAS PRICES
In July this year, the central government raised citygate prices for non-residential consumers of natural gas, including power plants, by an average 15.4% across the country, with average citygate prices at around Yuan 1.95/cu m, or about $8.90/MMBtu.
At the time, the NDRC said power companies affected by the higher gas prices would likely be given subsidies on their gas purchases or handouts by local governments to offset the higher costs.
Sina Finance said however that the price increase in Shanghai is not large enough to completely overcome the cost burdens of utilities, especially since gas prices rose 17% to Yuan 2.72/cu m in July.
"Raising the on-grid power price will improve the profitability of those gas-fired power plants, but it could reduce the incentive for utilities to make the switch from coal or hydropower" as this would mean electricity produced from gas-fired generation would be more costly than that from the two alternative fuels, said a source from Guangdong Oil & Gas Association.
In end September, the NDRC ordered power utilities to cut their on-grid power prices to reflect a fall in coal prices. State utility Huaneng Power on Tuesday said it would cut its on-grid tariffs for coal-fired power generating units by between 2% and 5%. UNECONOMIC POWER PLANTS
Only 2% of China's power utilities currently run on gas. China National Offshore Oil Corp. is currently the largest owner and operator of gas-fired power plants in China, fueled mainly by LNG imports from its terminals along the eastern coast in Guangdong, Fujian and Shanghai.
Existing gas-fired power plants which have sales contracts to buy imported LNG from CNOOC's Guangdong Dapeng terminal now pay around Yuan 2/cu m for gas from Australia's North West Shelf project, the Guangdong source said.
But gas-fired power plants in Guangdong are only used for peak shaving in the summer months from May to September, when demand for power is at its highest. Those power plants usually remain shut during the rest of the year.
"I don't think the tariff hike will have any short-term impact on LNG purchasing really. Gas does not make up a big proportion of the power generation market," said an LNG trader in China.
New gas supplies will be more expensive as well. Gas from the Second West East Pipeline is pegged at around Yuan 3/cu m in Guangdong while newbuild power plants that use LNG from Qatar will have to pay even higher prices, the source added.
In a report on Wednesday, Macquarie Research said the required on-grid power tariff for a gas power plant with a minimum 10% internal rate of return in China is estimated at over $110/megawatt-hour, second only to a solar power project, and nearly double the $60/MWh tariff for a coal-fired plant.
Fuel costs in a gas-fired power plant make up 60% of overall costs, versus under 50% in coal-fired plants.
"Nonetheless gas-fired power plants are still being commissioned in China, since the local governments effectively absorb the higher cost" in favor of vastly lower emissions of carbon dioxide and particulate matter compared with coal, the report said.
Macquarie expects gas demand from the power generation sector to reach 85 Bcm/year by 2020, or nearly 22% of total gas demand. This is up from an estimated 26 Bcm this year, or 16% of total gas demand.
