BOFIT Weekly Review 2015/48
China lowers and deregulates natural gas prices
Last week (November 20), China’s National Development and Reform Commission (NDRC) lowered the average price of natural gas by 28 %. The cut applies to the “city-gate” price local gas distributers pay pipeline operators at the city limits. Lower gas prices should especially benefit domestic businesses, which accounts for 80 % of gas demand. The decision to lower gas prices does not directly affect the subsidised price paid by households.
With the drop in global energy prices, the competitiveness of gas in China has fallen due to regulated rates. As a result, many operators have shifted to dirtier fossil fuels. On-year growth in demand for gas, which decelerated already last year, is only 2 % this year (well below the double-digit growth figures seen just a few years ago). The government hopes to stimulate gas and overall demand through lower prices.
The NDRC also deregulated gas rates for non-residential use and continued with its critical pricing reforms in the gas sector that it began five years ago. The reform is aimed at making domestic rates reflect the world market gas prices. Operators can now agree on gas prices below the reference price, and within a year will also be allowed in their contracts to price gas as much as 20 % above the reference price. The NDRC wants to see price formation taking place on the Shanghai gas exchange, which was launched last summer. In this way, the markets will genuinely develop and function in a transparent manner.
Natural gas represented less than 6 % of Chinese primary energy consumption in 2014. Under the latest energy strategy, gas should exceed 10 % by 2020. Domestically produced gas met about 70 % of demand last year, with the rest satisfied by imported gas.