S&P Global: Guangdong province's market-based power subsidy supports gas demand growth
Subsidy can be adjusted in line with fluctuations in the price of gas
China's Guangdong province recently rolled out a market-linked subsidy for local gas-fired power plants, in a move that is likely to help reduce losses on electricity sales and support demand growth for natural gas, according to industrial sources and analysts, S&P Global reports.
The new subsidy policy will allow grid operators to adjust the subsidy paid to gas-fired power plants in line with fluctuations in the price of gas, so that a portion of higher gas prices can be passed on to consumers, Guangdong Power Trading Center said in a notice on June 1.
Guangdong Power Exchange Center – the official power trading platform in southern China – said the policy is aimed at sustaining and developing gas-fired power generation in Guangdong, one of China's most heavily industrialized provinces. The exchange is jointly owned by state-owned China Southern Power Grid and government-owned local power producers.
Guangdong is the largest consumer of natural gas in China at 33.6 Bcm in 2022, of which around 49% went into power generation compared with the national average of 17%, according to data from the National Energy Administration.
Guangdong has the highest gas consumption for power in China because it has the highest gas-fired power generation capacity, which totaled 39.55 GW in 2023, accounting for 31% of the country's total gas power capacity; and 20.5% of the province's total generation capacity that is second only to coal at 37.6%, exchange data showed.
Many gas power plants in Guangdong have been unwilling to increase production outside their annual contracts in the past two years, mainly due to losses caused by high gas prices, slowing progress of some new projects.
In 2023, gas-fired power generation in Guangdong accounted for only about 13% of actual total power generation, ranking behind coal, imported electricity and nuclear power, industrial data showed.
Guangdong aims to have gas-fired power capacity of 55 GW by 2025, state planner Guangdong Provincial Development and Reform Commission (GPDRC) said May 2023, implying annual growth rate of 17% during 2023-2025. However, capacity only grew 15.5% in 2023, slightly behind target.
Generation losses
Guangdong typically offers subsidies to gas-fired power plants to offset high generation costs, allowing them to compete with low-cost coal power in the market. These subsidies were previously fixed and did not reflect changes in feedstock gas prices.
Subsidies are paid by the grid operator to the power plants, and in turn collected from industrial and commercial users by the grid. It is normally the difference between the on-grid gas power tariff and the on-grid coal power tariff -- both are reference prices -- in the Guangdong market, according to the state planner.
The on-grid gas power tariff in Guangdong is about Yuan 0.655-0.69/kWh, depending on the generating unit, while the benchmark coal power tariff is around Yuan 0.463/kWh, implying subsidy of around Yuan 0.192-0.227/kWh, according to industry sources. The on-grid tariff was based on natural gas price of around Yuan 2.5-2.9/cu m, which has hovered above Yuan 3/cu m in the past two years, resulting in widening losses in gas-fired power generation.
China has been shifting its electricity pricing structure away from guided tariffs to market-based pricing and gas-fired power plants in Guangdong are mostly paid under medium- to long-term contracts plus the price of the spot power and other subsidies.
In 2023, these contracts accounted for more than 80% of power traded and were priced around Yuan 0.554/kWh, implying revenue of around Yuan 0.746-0.781/kWh after adding subsidy of around Yuan 0.192-0.227/kWh.
Meanwhile, the cost of power generation is estimated around Yuan 0.81/kWh including fuel and fixed costs, based on Yuan 3.4/cu m gas price and 3,000 hours utilization.This means the cost of power generation was higher than the revenue.
Under the new policy, subsidy might rise to Yuan 0.249-0.333/kWh depending on seasons and generating units, Yuan 0.057-0.106/kWh higher than the original level. And theoretical revenue might rise to Yuan 0.833-0.917/kWh after adding capacity payment, above the Yuan 0.81/kWh cost price, data from a power plant source showed.
The new subsidy policy also allows subsidies to be adjusted based on the cost of gas calculated under a formula with different gas prices such as Brent, Henry Hub and Platts JKM.
Subsidies will be increased when the gas procurement cost exceeds Yuan 2.9/cu m, decreased when the cost falls below Yuan 2.5/cu m and left unchanged when gas costs are between Yuan 2.5-2.9/cu m, but the adjustment will stop when the cost is higher than Yuan 3.5/cu m or lower than Yuan 1.8/cu m, according to the new policy.
Evolving pricing structures
The market-linked subsidy should prevent some plants from bankruptcy, but the benefit is capped if the fuel cost of gas-fired power plants exceeds Yuan 3.5/cu m.
The new subsidy policy provides an incentive for new investment in the sector and helps improve the income of flexible assets on the power supply side, but its impact on the entire gas power industry is not revolutionary and the subsidies are also limited, Han Bing, Principal Research Analyst at S&P Global Commodity Insights, said.
However, China has been implementing power market reforms and pushing for market-oriented pricing mechanisms, with the goal of establishing a national unified power market preliminarily by 2025 and more comprehensively by 2030.
A unified power market will have much broader implications for gas-fired electricity as it will allow the fuel source to find its place in a more efficient power market that interconnects localized generation resources. A unified market will provide the most efficient price signals for gas to compete with coal and renewables, time dispatch with seasonal demand and allow gas plants to respond to global price volatility or domestic decarbonization policies more efficiently.