As 2022 begins, our China Climate and Sustainability team looked at the regional energy market and summarized the key questions that will shape the development of gas and power markets in in this region. These questions will also guide our research agenda for the year.

1. How will COVID-19 and the real estate market affect economic growth?
2. Will power rationing reoccur with fuel supply disruptions?
3. Where is China's national emissions trading scheme heading?
4. How will market reforms proceed amid high LNG procurement costs?
5. Will Chinese gas buyers continue the LNG term contract shopping spree or risk supply shortages and price volatility from the spot market?
6. How will the price liberalization effort impact energy bills for power users amid volatile energy prices?
7. How will power spot market reforms progress in 2022?
8. What are the new "rules of the game" for renewable new builds in the post-grid parity era?
9. Who will pay for energy storage as China's power market undergoes reforms?
10. Will the Power of Siberia 2 pipeline project reach a new agreement this year?

Robust economic rebound drove China's real GDP growth and power demand to reach 10-year highs at 8.1% and 10.3%, respectively, in 2021. However, economic growth has moderated every quarter last year, and the government has set the economic growth stabilization as the key national theme for 2022. This year, the main uncertainty on economic growth stems from COVID-19, the real estate market, and the government's countermeasures to sustain growth. Economic growth will impact not only total energy demand but also the energy mix as energy policies are adjusted to balance economic growth, supply security, and sustainability. Even with expected lower power demand growth, the risks in coal import shortfall, hydropower weakness, and generation capacity inadequacy may once again lead to power rationing, although more likely on a regional basis, rather than nationwide, especially in the winter and summer peak load seasons.

In 2022, more energy transition related policies are expected, and together with how they are implemented, will set the framework for energy market development in the next several years and beyond. In particular, renewables auctions will be launched at the provincial level with new rules to complement mega base buildout to boost renewable development without subsidy. Energy storage is recognized as a key flexible power source to balance China's power system. To meet the ambitious capacity targets set for 2025, more clarity may emerge on payment details to spur on investment. China's national emissions trading scheme, after trading commencement in July 2021, will keep evolving in multiple aspects, including tightening of allowance allocation, industry coverage, and reopen of the Chinese Certified Emissions Reduction (CCER) market.

Market reform will continue to be a main focus area in China's gas and power markets in 2022. The recently released new power pricing mechanism will redefine the calculation of energy users' electricity cost. Spot power market piloting will further expand not only geographically but also the length of non-stop operation, although complexity will increase especially when inter-provincial spot market implements. In the gas market, recent LNG spot price volatility may impact the pace of market reform. More third-party access on long-term basis to midstream infrastructure may help third parties accommodate term LNG contracts and reduce their reliance on the spot market. On gas price reform, the high gas import price environment increases the pressure to reflect supply costs in domestic prices to maintain supply security. However, the government may continue to intervene to manage the magnitude of price increases to avoid market disruption.

How China procures gas imports to meet growing demand remains a key question this year. High spot LNG prices have pushed Chinese gas importers back to term contracts, both LNG and pipeline gas, with over 29 million metric tons per annum of LNG contracts signed since the beginning of 2021 and a 10 Bcm/y of Russian pipeline import contract signed in 2022. Even with the announced new deals, China's growing gas demand means that the supply and demand gap still remains high, surpassing 25 Bcm by 2025.

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Learn more about our coverage of the Asia Pacific gas and power market through our Asia-Pacific Regional Integrated Service.

Lara Dong is a Senior Director covering Greater China power and renewable market at IHS Markit.

Jenny Yang is a Senior Director covering Greater China gas market at IHS Markit.

Posted on 25 February 2022

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.