Navigant Research Blog

Is Natural Gas a Key Solution to China’s Air Pollution Problem?

— January 12, 2016

The recent air quality Red Alert issued by Beijing on December 8, 2015 has again drawn everyone’s attention to China’s notorious air pollution caused mainly by burning coal. As a cleaner alternative to coal, natural gas has become a focus of China’s energy reform. In 2014, the Chinese State Council  announced an ambitious target of increasing natural gas consumption from around 6% to above 10% of the total energy mix by 2020. Despite China’s determination, the road to a natural gas boom will likely be bumpy due to the risk of timely supply development and the challenge of forming a competitive market.

Supply Development

To support the projected growth of natural gas consumption, China is counting on its unconventional shale gas resource. China has the largest shale gas resource in the world (almost twice the size of shale resources in the United States), but development has been slower than expected. By the end of 2015, the production capacity of Fuling shale gas—the only shale gas field under commercial development in China—had just reached 0.48 bcf/d (billion cubic feet per day), less than 3% of the country’s total natural gas consumption. China also lowered its 2020 shale production target by half to 2.9 bcf/d. Even with a lower target, to increase the shale gas production sixfold in 5 years will require tremendous investment and innovation that will need to equal or exceed the shale gas revolution in the United States. Whether shale gas will become the main driver for natural gas consumption in China is still uncertain.

In addition to domestic production, China also needs natural gas imports through pipelines and liquefied natural gas (LNG). China currently operates two pipelines that import natural gas from Central Asia and Myanmar. The China-Myanmar gas pipeline has been severely underutilized since it began operation in 2013. The Central Asia Gas pipeline has also experienced frequent winter supply disruptions. Although a new pipeline from Russia will increase the import capacity, the lack of stable pipeline import will likely persist due to the geopolitical uncertainty. On the LNG side, since the regional LNG price is currently linked to oil prices, high price volatility will be a constant challenge to Chinese buyers. The current low LNG prices also pose challenges for LNG suppliers looking at serving the Chinese market. In general, cost and supply reliability are the two major factors that serve to place a cap on future levels of natural gas imports in China.

Chinese Market Development

The lack of a competitive market is perhaps the biggest challenge to China’s natural gas industry. Unlike in the United States, where natural gas prices are determined by the market, Chinese natural gas prices are determined by the national government. Since the natural gas prices do not promptly reflect market dynamics, natural gas sellers often have to operate at a loss while natural gas consumers sometimes prefer cheaper alternative fuels. In addition, China also needs a robust natural gas transportation system that can distribute natural gas in a timely and efficient way across its vast area. Currently due to the limited access to pipeline gas and lack of storage facilities, gas shortages are common. The recent gas supply crisis in Beijing highlights the vulnerability of the natural gas system. Whether China can boost gas consumption will depend on infrastructure development and market maturation.

2015 marked China’s slowest growth rate of natural gas demand in more than a decade, casting further questions on the prospect of achieving the country’s national target by 2020. Unless immediate actions are taken to address the challenges on both the supply and demand side of the Chinese market, the role of natural gas to fight air pollution might yet prove some ways off in the future.


China PEV Market Coming of Age, Bypassing Hybrids

— June 17, 2015

With the largest market for new vehicle sales at over 23.5 million in 2014, significant smog issues, and lofty goals for plug-in electric vehicle (PEV) and hybrid sales growth, China has long been seen as the biggest global opportunity for plug-in and hybrid vehicles. That hope has failed to materialize, with PEV sales through 2013 never surpassing 20,000 and hybrid sales far weaker. However, signs of a robust PEV market in the country are finally emerging, with 2015 sales figures indicating around 28,000 PEVs sold through April, just a few thousand less than the nearly 32,500 sold in the United States during the same period.

These figures are encouraging, but it should be noted that many of the PEVs sold in China would not qualify as highway-capable vehicles in the United States; therefore, these comparisons aren’t exactly apples to apples. Regardless, for hybrids like the Toyota Prius, there isn’t much to say except that compared to the number of plug-in options now being sold in China, there are few hybrids.

Toyota and Honda have long tried to jump-start hybrid sales in the country, but dismal sales figures have been consistent. Since 2005, Toyota has only sold 90,000 hybrids in China. In late April, Toyota once again announced it was doubling its efforts through two new hybrid platforms scheduled to be introduced sometime this year as part of a grand strategy to make hybrids account for 30% of the company’s sales in the country. Given Toyota’s goal of doubling current annual sales in China, this 30% could mean up to 600,000 hybrids annually.

Good Luck

Though sales of hybrids still outpace PEVs in most major markets globally, market share is beginning to lag in established markets while PEV sales continue to grow, specifically in the United States. In fact, since the beginning of 2014, monthly sales of hybrids in the United States have fallen in every month, with the exception of May 2014. It is likely that more expensive PEVs with significant energy cost savings and lucrative government incentives are cutting into the established PEV market share. However, it’s also likely that less expensive fuel efficiency gains through stop-start technologies, engine downsizing, and vehicle light-weighting alongside low oil prices are also having an impact.

Monthly Hybrid Sales, North America: 2013-2015

Scott Blog Chart

(Source: Navigant Research)

Caught in between low-level, inexpensive fuel efficiency improvements and expensive alternative fuel options with significant incentives and energy costs savings, the plugless hybrid business case is eroding. Prospects for the platform are not likely to improve, as stop-start technology is likely to permeate rapidly through the global automotive industry and PEV costs continue to decline. In China, the steady flow of new PEV introductions alongside growing interest in stop-start batteries could negate hybrid interest altogether, making Toyota’s 30% hybrid by 2020 goal difficult—if not impossible—to achieve.


China Spurs EV Development

— April 28, 2015

China has aggressively supported the production and purchase of electric vehicles (EVs) since 2010. The government’s goal to deploy 500,000 EVs by 2015 may seem unrealistic. Nonetheless, this target serves as a reflection of the government’s intention to combat pollution and save energy by means of EV deployment. Chinese automakers have struggled to improve the fuel efficiency of conventional vehicles. Between 2010 and 2014, fuel efficiency improved by 5.8% annually in Japan, 3.3% in Europe, and 1.8% in the United States—but only 1.1% in China. As such, the government’s support for EV deployment seems to be the preferred solution for China’s situation.

Incentives Spur the Market

Only around 70,000 EVs were on the road in China during 2014. This is still an almost 250% increase from the 2013 figure, and many experts forecast strong growth in the coming years. To further spur demand for EVs, the government has implemented various incentive programs applicable to approved EV models, which are locally produced. As of 2014, there was a ¥35,000 ($5,600) purchase subsidy for plug-in hybrid electric vehicles (PHEVs) and a ¥60,000 ($9,700) purchase subsidy for battery electric vehicles (BEVs). BYD’s Qin, one of the most popular EVs in China, retails from around ¥210,000, but with government subsidies, customers usually pay between ¥120,000 and ¥160,000 for the PHEV. Qin sold 11,200 units in the first 10 months of 2014.

In addition, the 10% purchase tax is waived for new energy autos, which include EVs, PHEVs, and fuel cell vehicles (FCVs). The government plans to allocate around ¥4 billion for this tax initiative, which is in effect between September 1, 2014 and December 31, 2017. Because the tax break applies to imported EVs as well, foreign car makers have been eager to enter the Chinese market. In 2014, BMW’s i3 and i8 EVs, as well as the Daimler and BYD joint venture EV model Denza, were launched in China. On top of the central government’s efforts, incentive programs and EV targets exist in mega-cities, such as Beijing, Shanghai, and Shenzhen. Beijing plans to deploy 170,000 electric taxis and at least 4,500 electric buses by 2017.

Due to the strong government support, many Chinese automakers, such as SAIC Motor, Dongfeng Motor, FAW, and Changan, as well as automobile components companies, are nowadays interested in manufacturing EVs. In March 2014, Wanxiang, an auto parts manufacturer, acquired American EV maker Fisker. Also, Foxconn, an IT manufacturer, has partnered with Tesla to enter the EV market.

Opportunities and Challenges  

Even though it’s difficult for foreign companies to enter the Chinese EV market, some—including General Motors (GM), Nissan, Hyundai, and Daimler—have jumped on the bandwagon via joint ventures with Chinese companies. However, two major variables are critical to China’s future EV market growth—charging infrastructure and battery technology. While charging equipment and infrastructure investment became open to the private sector recently to speed up development and construction, China lacks a national infrastructure standard. This can lead to operability issues from one city to another.

In addition, Chinese EV battery technology is in a transition from lithium iron phosphate (LFP) batteries to manganese-series batteries. Most EV markets around the world use lithium manganese oxide (LMO) and lithium nickel manganese cobalt oxide (NCM) batteries, which have better performance than LFP batteries. However, Chinese battery manufacturers currently lag behind their competitors in Japan, South Korea, and the United States in this area. Therefore, battery technology, as well as charging infrastructure standards and governance, will significantly influence the future of China’s EV market along with the sustainability of the current incentive programs and subsidies.


International Innovation Thrives in the Bay Area

— December 8, 2014

Just over 69 years ago, the United Nations (UN) Charter was signed in San Francisco.  That Charter, bringing the UN into creation, has many social, cultural, and humanitarian directives, as well as articles aimed at “international co-operation in solving international problems of an economic character.”  That spirit of cooperation is alive in San Francisco, as evidenced by many international innovation showcases that aim to spur collaboration between the United States and other countries, spread some of the startup magic found across the Bay Area, and simply showcase innovation around the globe.

For example, the German government helps sponsor the German Accelerator in both Silicon Valley and New York.  Its upcoming Captivate event is a startup pitch fest that brings German and German-American funders and entrepreneurs together with brief company pitch sessions.  The Japan Society of Northern California is sponsoring its annual Innovation Showcase in early 2015 to highlight Japanese startups and award the title of “Emerging Leader” to one Japanese and one American entrepreneur whose companies are relevant to both U.S. and Japanese innovation.  The City of San Francisco itself helps spur economic connections with China through its ChinaSF program.  ChinaSF leaders say the program has recruited over 50 companies from the Bay Area to China and created more than 300 jobs since 2008.

The Intelligent Factory

The most recent of these events was the California France Forum on Energy Efficiency Technologies, held in late November in San Francisco.  Focused on manufacturing and the smart factory concept, where IT is deeply integrated into the energy performance of industrial facilities, the forum was sponsored by Prime, a Paris-based high tech incubator, and French energy major EDF.  I spoke on a panel that examined the challenges and potential role of industrial energy management (see Navigant Research’s report, Industrial Energy Management Systems), along with Ethan Rogers of the American Council for an Energy-Efficient Economy (ACEEE), who discussed the potential energy savings in the industrial sector.

Specifically, Rogers identified ACEEE’s scenario-based modeling that determined that the U.S. industrial sector could save between $7 billion and $25 billion in annual energy costs by 2035 through energy efficiency gains.  Also on the panel was Arnaud Legrand, CEO of Energiency, a spinoff from Orange/France Telecom that aims to use big data analysis to improve industrial energy use through a software as a service-based solution, and Michel Morvan, co-founder of CoSMo Company.

CoSMo’s approach, based in the study of complex systems, is to use simulation to understand the regimes of behavior of industrial systems, accounting for supply chain, energy uses, workforce, and other inputs.  Morvan views the factory as a system of systems, and his company has developed approaches to simulate the core elements as well as the interconnections between the systems.  In this model, the goal is full energy optimization.  CoSMo is set to fully launch in mid-2015.


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