A recurring theme in the Chinese government’s latest five-year energy plans (FYPs) is the continuous optimisation of its energy consumption mix. For example, in the case of Shanghai municipality’s 13 th FYP (2016-2020), the share of coal in its primary energy mix has fallen from 38% to 31%. By contrast, the share of natural gas increased from 10% to 12%, and renewables grew from 14% to 18% in the same period. And the remaining comprises electricity imports from neighbouring provinces (mainly hydro and renewables). On the face of it, this implies that renewables contribute more than gas to reducing coal’s share in the energy mix. As China aims to decarbonise its energy system, natural gas/liquefied natural gas (LNG) is viewed by many as a bridge fuel in the country’s energy transition. This paper examines the implications of Shanghai’s natural gas market transformation and assesses the role of LNG in the energy system under the new context. The reason for taking Shanghai as an example is twofold. First, Shanghai is the most affluent city in China, with a strong demand for clean air and relatively higher gas affordability. It would be interesting to see how natural gas fare in its energy market. Second, the analysis of the effect of policy at the provincial level could probably arrive at similar conclusions elsewhere in China. The paper approaches the question by comparing coal and gas in Shanghai’s power generation. From an economic point of view, natural gas-fired power generation cannot compete with coal-fired power generation because the abundance of domestic coal effectively makes coal the cheapest cost in terms of generation. In addition, the current electricity pricing regime implies that the high cost of gas-fired power generation is difficult to pass through. On the policy front, the current climate policy favours renewable energy with significant subsidies to support its development. In contrast, there is a lack of definitive policy for developing gas-fired power generation in Shanghai. The analysis of the development of the city’s natural gas market in recent years provides little empirical evidence supporting the argument that LNG will materially displace coal in the city’s power mix. Instead, the growth of renewables rather than natural gas or LNG has eroded the share of coal generation in the city’s power mix. The finding could be highly relevant to other parts of China as Shanghai’s case study illustrates the typical conundrum of gas-fired power generation. Another finding is that the role of natural gas in power generation is still unclear, and there is a lack of definitive policy for gas-fired power generation. As China actively pursues a modern energy system and a new power system that integrates various energy types and demands greater flexibility, gas-fired power generation could play a more critical role. Therefore, there is an increasing need to review and redefine the role of gas-for-power from the perspective of a new power system.
CAO et al. (Mon,) studied this question.