The Oil Price Slump’s Impacts on Chinese Clean Energy Sectors

Decisive factor in e-mobiity

In China, the development of new energy appears to be indifferent to the recent global oil price slump, although there are much more nuances on the matter. 

We examine the impact of oil prices on different clean-tech sectors in China and discovered: 

  • Electricity and H2 transportation: subsidy and policy are and will still be the prime determinator for EVs and FCVs’ development in China. The recently launched policies promoting new infrastructure investment and the two-extra-year subsidy provide the surviving chance for E-mobility in China
  • Shipping: the tumble would slow down China’s effort to “clean up” the domestic ships.
  • Renewable power: oil price slide does influence on coal import costs, which is a factor supporting the decline of the coal-fired power price in China. But the coal-linked power pricing in the renewable market brings challenges to renewable projects in the coming two years. 
  • Oil companies’ investment and transition: Chinese NOCs have been slow and timid on their energy-transition plan anyway. As some many benefits from the price downturn, the investment commitment to clean energy remains unchanged. 
  • China’s overall energy policy: energy security is still the top priority.  

E-Mobility: Short-term Cost Comparison Not a Determinator

Conventional wisdom believes that when the oil prices drop, the growth momentum of E-mobility markets will wane. The logic is that the cost competitiveness of the electricity-powered transportation would declines when conventional fueled transport enjoys lower costs.   

In new energy vehicle markets in China, however, that correlation between oil prices and E-mobility development may be less noticeable, assuming that the low oil prices would not stay for long.

In China’s electric vehicle sector, the fluctuation of productions and sales continues to be policy-oriented and reflect Beijing’s subsidization and tax regimes closely. 

Even more so, the policy-driven development model characterizes China’s H2 fuel cell vehicle market. 

2019 is a perfect example. Following Beijing’s hint to scale back EV subsidies, China’s EV production and sales year-on-year growth rate dropped—for the first time in the past decade. 

In the nascent fuel cell market, policy uncertainty and expectation could quickly determine the manufacturers’ performance. The market reacts quickly—on a monthly basis—to the national policy and even to the informal official expressions. 

It is doubtful to expect the current decrease of international crude price would decide the consumption behaviours in China’s EV and FCV markets. 

Especially in FCVs, government tender plans and government purchase are the current market fundamental. 

The policy direction right now is favourable to the E-Mobility and new energy sector. 

China has recently unleashed the national “new infrastructure investment” strategy in a bit to combat the likely hit by a global recession. EV charging infrastructure is one of the seven key areas that Beijing urged local rulers and the state-run firms to invest on. The new policy would be a more substantial factor influencing on the E-mobility market overall. 

Under the new strategy, the State Council last week announced to provide two extra years for new energy vehicle subsidy and tax exemption measures—a significant U-turn from its intention last year to scale back financial support. The switch provides a critical surviving window for E-mobility sectors. 

The shipping sector in China would stall a recent momentum to move toward decarbonization. China’s river system shipping has been running on diesel, and many domestic ships remain the polluters. 

Some eastern provincial governments began to look into the matter and unleashed several guidelines last year to push the sector to “clean up.” But these efforts may be slowed down due to the changing competitiveness between alternative fuel and diesel. 

However, LNG alternative solutions could face some real impact while hydrogen solutions have not been studied thoroughly or implemented yet, therefore facing little setbacks in the near term. 

Renewable Power: Linked to Coal-fired Power Pricing  

There are nuances in terms of the hydrocarbon price impacts on China’s renewable power sector. 

Firstly, in China’s power generation market, oil is not a competitor at all with renewable power; even natural gas is not a rival of the solar and wind power units. That is in part due to the fact that China has very limited hydrocarbon-based power units. Burning oil for power is uncommon in China—unlike in Japan—as we articulated in a previous comparison of East Asian countries’ power mixes. 

Natural gas power plants serve mostly as peakers in the market. And due to the pricing inversion (sort-of liberated imported gas prices versus highly regulated and capped gas power price) in natural gas power market, the progress of the gas-fired power development remains limited in the past year. As a result, hydrocarbon does not compete head-to-head with renewable plants. 

Coal, on the other hand, does. 

While international coal prices do not link crude prices, the plummet of oil prices in a longer time frame would lead to a similar downturn of coal prices. There is some competitive relationship between hydrogen carbon and coal in industrial sectors, and a lower shipping cost would facilitate cheaper coal trading. 

Jan-Feb this year, China imported 68.06 million ton of coal, underlining a sharp 33.1% year-on-year growth. The increase in coal import is due to China’s decision to tighten coal import from March onward. But in part, it is also related to the oil price decrease in the global market. 

The coal price drop could boost an interim increase in coal-fired power units. In the longer run, China is determined to curb coal consumption and shut down inefficient coal units, which is a leading factor leading to the coal price drops. The energy policy direction also means, in a longer run, China is unlikely to revamp the former full-frontal coal power construction and will continue to encourage renewable power progress.  

Although coal prices drop may not hinder renewable new build progress, a lower coal price (and eventually a lower coal-fired power price) will add pressure on renewable power operators to cut cost. 

China has been clear on the horizon for wind and solar to become subsidy-free. From next year, most new renewable projects would be selling a local coal-fired power price. Indeed, that price mark could be even lower, as the cost of coal continues to drop. 

The underlining issue is that, still, China’s power pricing mechanism is largely coal-linked, given the renewable pricing’s formula. This setup, in reality, pushes renewable to compete head-to-head with the coal prices. 

In the coming two years, Beijing is likely to push down electricity prices further to boost manufacturing competitiveness and to reflect the dropping coal prices. The economic cases of renewable power investment face uncertainty. 

The Energy Transition of China

From a nation energy policy perspective, China is unlikely to deviate from its current path of decarbonization, despite the short-term oil price slump. 

Energy security remains Beijing’s No.1 priority in policymaking. That means, a growing dependence over hydrocarbon remain a top issue to address. In that sense, the “re-electrification” process to adopt electricity in transportation, power, industrial process, and residential sectors is not an empty phase. 

The tightening environmental measures, heavily promoted by the top authority, has become a “red line,” prohibiting local government officials invest in the high carbon footprint industries. 

As a result, at least part of the local governments’ investment preference is, thus, shifting from the resources sector—such as the heated shale gas exploration—to green tech. 

In that sense, hydrocarbon projects with uncertain return in the long run become hard to compete with some of the “emerging” project options like EV or FCVs. 

Meanwhile, the oil price plunge—at the very least—would not worsen the Chinese government’s bank account to pay out the new energy subsidies.

As the world’s largest oil & gas importer, China could enjoy a lower cost of crude. And the national balance will increase, accordingly. 

In 2019, China spent some $240.4bn on oil import (11.6% of total import spending) at an average price of $64.97/barrel. If the average imported cost dropped to $35/barrel, then China would already save $110bn that could account for 0.78% of national GDP. 

The Energy Transition of the NOCs

For the integrated Chinese National Oil Companies (NOCs), the impacts are much more complicated. 

The three prime NOCs—CNPC, Sinopec, and Cnooc—are both upstream producer, crude importers, and downstream retail sellers, owning refineries and fueling networks. 

The crude price downswing is likely to limit their budgets this year to spend on upstream E&P, as the cost of domestic productions is uncompetitive. And the three face a shooting-up stranded cost. 

China has long adopted a “ceiling and floor” pricing on the domestic oil products, while usually, the national regulator adjusts local oil product prices to reflect the import price fluctuation. When crude prices dropped under $40/barrel, however, Beijing should stop adjusting the retail products accordingly.

The floor pricing setup allows refiners (of NOCs and other players) to arbitrage and benefits from the low crude prices. [Although part of the profits will be “taxed” by the local and national government. And China’s refineries face a long-term oversupplied issue.]  

Overall, Chinese NOCs could benefit and may still feel some pain from the international oil tumble. But its interest may be largely intact. The oil price matter is an unlikely stressor for them to cut back capital expenditure for non-upstream segments.

Currently, the three NOCs have all committed to investing in renewable and decarbonization technology to kick off internal energy transition. These plans are likely to stay regardless of the oil/gas price factor.  

  • CNPC: this year for the first time the largest Chinese NOC announced intention to chip in new energy, where offshore wind projects will be the future focus. Previously, CNPC has already conducted some pilot projects, and cooperations in H2 focused on refuelling infrastructure. A decade ago, the firm was also interested in the EV charging network, but the progress has been limited over the past years. 
  • Sinopec: compared to its peers, the firm has made the most significant step in H2 sector. In its 2020 annual work meeting, Sinopec reinstates the ambition to explore hydrogen market by expanding hydrogen refuelling network.
  • Cnooc: the firm made a return to offshore wind development last year, with its Shanghai-based affiliate holding some equity in an offshore wind project. This year the firm pledged to take bolder steps into the offshore renewable sector.