Policy is the muscle behind natural gas vehicles in China

When they vote with their wallets, ordinary Chinese car buyers go for flash: Lamborghinis, BMWs and hulking SUVs.

In government buildings around the country, however, officials are focused on the big picture: air pollution, energy security and economic growth.

And they've concluded that China, the world's largest auto market, should deploy many more natural gas vehicles.

"Certainly we see a trend in China that is far stronger than anything else we're seeing in the world in terms of shifting to natural gas as a primary fuel for transportation," said Nicholas Sonntag, an executive vice president at Westport Innovations Inc., which participates in a joint venture to market natural gas vehicles in China. "When the government of China says, 'We're going to do something,' they don't wait."

Sonntag clarified that it is not "Joe on the street" that will drive the NGV market but rather local governments switching their taxi, police car, trash truck and other fleets to gas.

"We expect natural gas vehicles to grow rapidly in the coming years in China, albeit off of a small base," wrote Graham Cunningham, head of Asia oil and gas research for Citigroup, in a report this month. "While the economic incentive to switch to CNG/LNG in China is not as strong as in North America, due to higher gas prices, we see stronger government support."

If cheap shale gas is driving NGVs in the American market, experts believe, then Chinese growth will reflect a more diverse set of policy goals.

NGVs made their first large-scale appearance in China roughly a decade ago, with cities such as Beijing, Chengdu and Hong Kong converting buses and taxis as a quick fix to reduce air pollution, said Vance Wagner, co-lead of the China team at the International Council on Clean Transportation.

Since then, he said, the interest in natural gas has percolated upward -- to the national government -- and become part of China's larger strategy on its environment and economy.

Natural gas was specifically mentioned in China's last five-year plan, and a Natural Gas Utilization Policy was issued last summer. The country's 2015 goal is to use natural gas for 8 percent of its energy. One stated goal is to reduce oil dependency, and Beijing has proffered a rough target for how much natural gas to use in transportation.

Wagner emphasized, however, that many of China's national policies can be considered technology-neutral. China's fuel-economy standards set an acceptable pollution level from cars but don't tell the market how to meet it, he said.

Beijing sets broad guidance, Wagner said, but local governments and private industry have been the ones to implement the natural gas plan as they see fit. Officials see NGVs as a quick way to curry favor with Beijing and the public.

"We are definitely seeing the cities carry the baton," he said. "At the local level, this is being driven almost exclusively by the enormous pressure on local-level government officials to make rapid improvements on local air quality."

At the same time, other aspects of the Chinese market would seem decidedly foreign to Americans. Natural gas prices are tightly regulated, with preference given to some sectors -- city residents and NGVs, for example -- over others.

Moving to the top of the market

According to the Citi report, China had roughly 1.48 million NGVs on its roads last year, a 48 percent gain on 2011. At least nine provinces or municipalities have launched plans for buying NGVs or building refueling infrastructure. Beijing doesn't have such a strategy, but it plans to add 3,155 LNG buses to its transit fleet this year.

The aggressive growth has China on a path to become the world's largest NGV market, according to Lux Research, a firm that researches advanced technologies. By 2015, Lux said, China could see annual sales of 540,000 vehicles; India would sit at second place with about 250,000.

China's move on NGVs also reflects its expectation that it will be able to drill its own shale gas eventually, experts said. Today, Chinese gas supplies come from a patchwork of conventional, coal-bed methane and imported LNG sources.

But in the longer term, said Sonntag of Westport, China will likely seek that other benefit of natural gas: energy security.

"They like to have, as anybody does, as much control over their economic development as they can," he said.

Asked whether China's NGV boom holds any lessons for the United States, Sonntag said it comes down to the countries' different appetites for risk.

He said Western countries tend to proceed slowly on issues like hydraulic fracturing, while Chinese authorities often act first and manage the impacts later.

"The Chinese are not as cautious, and the government is much stronger in their messaging," he said. "There's certainly value in having a government that can make a decision and implement it quickly. The disadvantage is you have environmental and social impacts that aren't necessarily what people want or aren't necessarily well-understood."

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