IEA (2019), Gas Market Liberalisation Reform, IEA, Paris https://www.iea.org/reports/gas-market-liberalisation-reform
In this report
The central goal of this report is to allow policy makers in China to benefit from international experiences to effectively promote the current liberalisation, the success of which will also greatly influence the global industrial development of gas.
This report is the result of a project involving relevant Chinese, European, and United States institutions under the overall oversight of the International Energy Agency.
Global natural gas supply and consumption are growing rapidly, and this trend is expected to continue for decades. A new round of liberalisation reforms is also emerging globally, with more and more gas being priced by gas indices. The People’s Republic of China’s (“China”) ongoing natural gas market liberalisation reform has attracted global attention. A successful reform will not only benefit China’s gas industry but also global natural gas development.
This report examines the key insights into successful gas liberalisation elsewhere and explores the implications and lessons learned for application in China. In terms of market-oriented liberalisation reforms, there are many lessons to be learned from Europe and the United States’ experiences that can help reduce the costs of trial-and-error efforts in the ongoing reform in China.
China has been undergoing a gas liberalisation reform over the past few years, and it has already made significant progress, including some price deregulation, third party access (TPA), and an ongoing approach to unbundling infrastructure. The core objective of the natural gas market reform is to increase competition among natural gas suppliers and consumers in the market, thus ensuring that resource allocation is more efficient. China has also established pilot gas exchange centres aimed at instituting a market price index.
As a fully market-oriented system has yet to be established in China, the natural gas price is still heavily subject to the regulated city-gate price. Upstream competition remains limited, and the interconnections of the infrastructure system (pipeline and liquefied natural gas (LNG) terminals) also impede full TPA. The complexity of the local pipeline systems remains another challenge to the gas reform. Similar to the gas liberalisation reforms in the United States and the United Kingdom, long-term contracts and other reallocations of benefits will also need to be managed during the transition to an open market.
The opening of natural gas markets has unfolded at different rates in different countries, and countries have different market fundamentals – from being self-sufficient to net-importing countries and from mature to growing markets. However, such processes have all proceeded from the same common objective to foster competition and market liquidity to the benefit of end users. China can learn from the experiences of other countries, especially in the development of policy tools that to overcome obstacles that may impede the establishment of a fair and functioning market.
Proper market design will help to more quickly establish a fair and effective market. China’s current gas market conditions and scale are unique and there is no ready-made experience that can be directly copied. That said, the physical United States-based trading centre and the virtual Europe-based trading centre frame works have been successfully developed and may offer important lessons that can be applied to China’s reform efforts. For instance, formulating several provincial-level virtual centres could be a “low-hanging fruit” for the ongoing grid unbundling reform. The successful design of the market structure and market arrangements is as important as the establishment of an independent natural gas pipeline network company.
Piloting local market centres should be encouraged. This is a situation in which it would be important to “cross the river by feeling the stones” in order to further market-oriented liberalisation reforms. By initially piloting market centres in major consumption or supply provinces, China can learn valuable lessons that can be applied for developing market centres across the country and forming an internationally acceptable, market-oriented price index. As demonstrated by international markets, the pace of development is likely to be uneven across sectors and regions.
The separation of regulated gas transportation and commercial sales activities is a precondition to TPA to natural gas pipelines and LNG terminals. China is currently undertaking the ownership unbundling of this infrastructure, which can pave the way to fair TPA with the utilisation of proper policy tools.
Defining distinct “shipper” and pipeline transportation service roles enables the fair and efficient use of pipeline infrastructure and increases market participation. Anchor shippers could help solve existing long-term contract problems and also help to accelerate the construction of new pipelines. Shippers should be licensed and directly supervised by the regulator.
Establishing capacity allocation mechanisms (CAMs) and congestion management procedures (CMPs) is important. Moreover, certain open-season capacity should be allocated to newcomers to the market to foster competition. CAMs are needed to define the rules of primary access. A secondary capacity market can also be introduced to optimise the use of the transmission system capacity and with a view to granting system users the right to freely trade gas transmission capacities. Tariff-setting rules, standard contracts, gas specifications, and dispatching arrangements will need to be developed. CMPs also need to be introduced to manage not only physical capacity issues but also contractual congestion whenever a shipper does not use the capacity it booked in the network.
Creating a simple and clear pipeline tariff will help to encourage more new-entrant shippers. A mix of US and European Union methods in China may be more suitable, such as the tariff set by the distance based for the trunk line and the single tariff for the local regional market. A tariff review mechanism and the related regulatory guidelines will also need to be established.
Pipeline interconnections are important for facilitating TPA. Considering the current situation, the rapid development of China’s natural gas pipelines and improvements in their interconnections will help to accelerate TPA.
Transparency and the availability of data are essential for building confidence among market players. This represents a critical factor in preventing discrimination among shippers, encouraging access and competition, and ensuring the efficient operation of the market.
The experiences of the United States and the European Union with information transparency can provide useful lessons for China. In the process of unbundling, for example, a significant level of information disclosure from the pipeline operators will be required.
Price deregulation should aim at the establishment of a transparent price index. The establishment of gas hubs (or exchanges) is key to the establishment of transparent price signals and the development of price indices has a widespread influence throughout the market. As hub liquidity matures, financial instruments may be developed, and additional participants may be attracted to the market, benefitting both sellers and buyers. The derived futures products are the next step after the successful establishment of a spot market.
It is essential for China to establish an open gas market with a competitive upstream gas supply. Making better acreage blocks available and data available to non state-owned players in the future will be helpful for facilitating upstream competition, and establishing a mechanism for trading existing gas resources will help accelerate additional production more quickly. Shale gas, biogas, coalbed methane, and hydrogen are all potential diversified resources that can encourage a more competitive upstream supply.
Research is needed on how to leverage the role of international companies in the upstream sector to provide more upstream competition for the natural gas market. LNG will also play an important role in diversifying the upstream sector in the short term, especially if the TPA to terminals proceeds smoothly.
An alternative approach could be based on mandatory gas release programmes, where the incumbent is forced to resell a share of its supply to competitors bilaterally or via auctions. Auctions would be the preferred mechanism in order to increase market transparency. Upstream competition could be achieved before the opening of the upstream sector. The direct involvement of downstream users, such as large industrial users, could also help promote market liberalisation reform by increasing the number and activity of market players.
The independence of the regulator is necessary for a key factor of any successful market. The government is the main driving force behind the market changes in the process of promoting natural gas market liberalisation. Any progress towards natural gas market liberalisation is also largely dependent on execution, for which the role of the regulator is, again, crucial.
The requirements for regulatory capacity will increase along with the liberalisation of China’s natural gas industry. The upgrading of regulatory capabilities will help protect the market rules, enhance market transparency, and ensure the objectivity of China's natural gas market price signals.
Successful management of the transition process effectively is critical to the overall reform process. The market may be better able to handle price deregulation by step changes. Any changes whether drastic or not, should be developed and signalled to the market well in advance. The transition process must consider how to develop appropriate mechanisms to deal with long-term contracts and cement the reform results. Given that liberalisation and hub development are lengthy processes, policy makers must be tenacious and resolute in order to enact reforms successfully.
International co operation is not only useful for learning lessons from other jurisdictions but also for developing a more transparent and open policy-making process to enhance the confidence of international investors. This will encourage foreign companies to supply more natural gas to China and play a more active role in the market. This is itself an important goal of the market-oriented reform.