China: Energy Resources

Extend network

The grid system run by the State Grid Corporation of China (SGCC) and China Southern Power Grid Co (CSG) is highly sophisticated, using high-voltage DC (1000 kV) and AC (800 kV). The UHV grid is expected to reach 40,000 km by 2015, following CNY 500 billion (US$75 billion) of investment by the SGCC. By 2020, the capacity of the UHV network is expected to increase to 300 GW. Transmission and distribution losses are also targeted to fall to 5.7% by 2020, from 6.6% in 2010.

There were 11.5 million households without electricity in 2006. Since 2006, the major state-owned transmission corporations have been implementing an electrification programme called ‘Electricity for Every Household’ nation-wide. So far 520,000 households (1,650,000 people) have benefited from this programme.

Households without electricity mainly reside in rural areas where grid expansion is considered too technically and economically difficult, although such expansion would be considered desirable to promote social justice.

The government aims to merge State Power Corporation’s 12 regional grids into three large power grid networks, namely a northern and north-western grid operated by State Power Grid Company and a southern grid operated by the Southern Power Company by 2020. At present, China does not have a unified national electricity grid. Its current grid system is fragmented into six regional power grid clusters, all of which operate rather independently, and inter-regional interconnections are weak. There is a plan to build a unified and smart grid system nationwide by 2020, which should incorporate energy supplies from various sources, and large-scale smart grid construction is set to be included in the 12th Five-Year Plan.

Energy procedure

Chapter Two of the Renewable Energy Law defines the energy planning procedures at the national level as follows:

The energy administrative department of the State Council organises and coordinates the efforts of relevant departments to investigate renewable energy resources. It also works with relevant ministries to formulate standards and criteria.

Each relevant department investigates the possible sources of renewable energy. The data collected from the survey is submitted to the energy administrative department and is made public, except that data which needs to be kept confidential.

The energy administrative department sets the mid to long term aggregated and quantified goals for renewable energy development and then submits this data to the State Council for authorization. Once authorized, this data is made public.

The aggregate quantitative figures are examined against those for each province or region, from which the regional/provincial energy figures are published.

Based upon these quantified figures, the mid to long range plan for energy is formed and published once it is authorized. The state energy plan is the blueprint for provincial governments.

Regional, provincial and local issues can help to determine specific plans. For example, environmental quality concerns in Beijing encouraged the government to aim to reduce energy and water consumption, therefore the planning focus shifted to the relocation of some heavy energy consuming plants and the effective promotion of energy saving measures to energy intensive sectors. Such an approach is quite different from that in Shanghai, which chooses energy security as the priority for planning. In Beijing’s case, the initiative came from environmental pressure and the leadership of the municipal government played a key role. But in Shanghai’s case, suggestions from experts had more weight in determining that approach.

Energy debates

It is reported that about one-third of wind generation capacity is not connected to the grid as grid enterprises are reluctant to build grids connecting wind power plants to the main grid network, even though required to do so by the REL and by SERC executive order 25. In its audits of renewable electricity pricing and sales, the SERC reported that it is commonplace for grid enterprises to refuse or delay building or expanding grids to connect to renewable power plants. As a result, a significant amount of wind capacity, especially in the provinces of Hebei and Gansu, was wasted. Some renewable power plants (for example, wind power in Inner Mongolia Autonomous Region, Heilongjiang Province, and Jilin Province; and hydroelectric power plants in Qinghai Province and Jiangxi Province) have had to build connecting grids themselves or to share the costs. Through a concerted effort on the part of the government, the expected idle wind capacity in 2012 was 10%, compared to 25% in 2011.

In a speech to the National People's Congress on March 10th, 2013, State Councilor Ma Kai stated the government's aim to merge the NEA and the SERC, in an effort to restructure the administration of the energy sector. The new NEA's remit will also be expanded to include drafting and implementing national energy development strategies, plans and policy, and the Agency will remain under the control of the National Development and Reform Commission. The news has had a mixed reception, with some groups claiming more wide-ranging reform is necessary, and that the creation of “super-ministries” enshrines the place of vested interests in the sector and its governing bodies, whilst hampering structural reform and deregulation.

Energy sources

Total installed electricity capacity (2010): 962.2 GW Thermal: 73.5% Hydro-electric: 22.1% Wind: 3.2% Nuclear: 1.2%

Total installed electricity capacity (2011): 1,055 GW

Total Primary Energy Supply (2011): 2,762,377 ktoe

Total primary energy supply (2009): 2,257,101 ktoe Coal/Peat: 67.2% Crude Oil: 16.9% Biofuels & Waste: 9.0% Natural Gas: 3.3% Hydroelectric: 2.4% Nuclear: 0.8% Geothermal/Solar/Wind: 0.5% Oil Product Exports: -0.09% Electricity Exports: -0.04%

Total Electricity Generation (2011): 4,721.7 TWh

Total power generation (2009): 3,695.93 TWh Thermal power: 80.6% (2980.43 TWh) Hydropower: 16.7% (615.64 TWh) Nuclear power: 1.9% (70.13 TWh) Other: 0.8% (29.73 TWh)

Currently, China is both the  largest energy producer and the largest consumer of energy in the world, overtaking the United States in 2010.

China is rich in energy resources, particularly coal. In 2008, it became the largest producer and consumer of coal in the world, an important factor in world energy markets. In 2009, China consumed an estimated 3.5 billion short tons of coal, representing over 46% of the world total and a 180% increase since 2000. Coal consumption has been on the rise in China over the last decade. Coal production, also rising, was estimated at almost 3.4 billion short tons in 2009. China is also the fifth-largest producer and second largest consumer of oil.

Whilst growth rates in Chinese renewable energy capacity are the highest in the world, it remains a small proportion of China´s overall energy sector. From the end of 2005 to the end of 2007, renewable electricity capacity and generation, increased by 30.6% and 20.6% respectively, renewable electricity’s share of total capacity decreased by 1.37%, and its share of electricity generation decreased by 1.23%. This decrease was due mainly to the fact that hydroelectricity development was much slower than traditional fossil fuel electricity generation. This suggests that in spite of the rapid development of renewable power, China’s electricity generation still relies heavily on fossil fuel. Without significant changes, this trend is likely to persist and carbon emissions will continue to grow. In 2009, net generation was 3,446 Bkwh, 82% of which came from conventional thermal sources. Installed capacity increased by more than 10% between 2007 and 2008 and is expected to grow in the next decade to meet rising demand, particularly from demand centers in the East and South of the country. Furthermore, China added an estimated 29 GW of grid-connected renewable capacity, for a total of 263 GW, an increase of 12% compared with 2009. Renewable accounted for about 26% of China’s total installed electric capacity, 18% of generation and more than 9% of final energy consumption in 2010. China now leads in several indicators of market growth: in 2010, it was the top installer of wind turbines and solar thermal systems and was the top hydropower producer.

China is also actively promoting nuclear power as a clean and efficient source of electricity generation. Although nuclear capacity (around 11 GW) makes up only a small fraction of China’s installed generating capacity, many of the major developments taking place in the Chinese electricity sector recently, involve nuclear power. Following a review of the country's nuclear development plans after the Fukushima nuclear disaster in Japan, China's government now targets 58 GW of nuclear capacity by 2020, following a “steady development with safety” model, in stark contrast to the “positive development” model followed since 2004. Four approved new reactor units were postponed in 2011 following the Fukishima incident, with two (Fuqing 4 and Yangjiang 4) having been re-instated in late 2012.

In 2008, the total primary energy production reached 2600 million tonnes of coal equivalent (Mtce), or 1820 Mtoe. Of that total, coal accounted for 76.6%, oil for 10.4% and natural gas for 3.9%, while hydropower, nuclear power and others contributed 9.0%. China has become the world leader in renewable energy, now at 8% of total primary energy.

Regulatory roles

SERC inspects almost every aspect of the electricity market:

Market inspection: for example the rules that define the way of managing the auxiliary services, the trading of the generation permits, and rules of information disclosure for energy saving generation and allocation, etc.

Price inspection: for example the price for electricity transmitted across regions.

Security inspection: for example working environment safety.

Customer service inspection: for example handling customers’ complaints.

Permits for operation: for example the assessment to grant the permit for qualified generations or transmissions.

Competition

Electricity market In 2002, the vertical monopoly of the State Power Corporation was dismantled. Total assets were divided into eleven new corporations, including two grid operators, five independent power producers, and four auxiliary corporations. The two grid enterprises – the State Power Grid and the China South Power Grid – are still de facto state-owned monopolies in their own regions. Deregulation and other reforms have opened the electricity sector to foreign investment, although this has so far been limited. While the generation sector has some market competition, the transmission and distribution sectors are heavily state-controlled by the Southern Power Company and the State Power Grid Company.

Oil and gas market The Chinese government launched a fuel tax and reform of the country’s product pricing mechanism in December 2008. This was in order to tie retail oil product prices more closely to international crude oil markets, attract downstream investment, ensure profit margins for refiners, and reduce energy intensity caused by distortions in the market pricing. China is taking advantage of the economic recession to liberalize its pricing system and encourage more market responsiveness and fuel efficiency. The government also sets transportation charges, processing costs, and refining margins (5% when crude prices are below $80/bbl). Additionally, a consumption tax and value-added tax is added for gasoline and diesel fuels. These taxes are set to replace six transportation fees established by local authorities.

Energy efficiency

Over the 30 years from 1978 to 2008, the average annual growth rate of primary energy consumption in China was 5.5% and the average annual growth rate of GDP was 9.8%, so China achieved its goal of quadrupling GDP supported by a doubling of energy consumption. Since 2001, along with strong GDP growth, industrialisation, urbanisation and motorisation, energy consumption has grown rapidly.

China has one of the highest energy-intensity levels in the world, and the index of energy consumption is two to three times the world average; for some key Chinese products, the energy intensity is 40% higher than that of developed countries. There is thus still substantial potential in energy savings through eco-efficiency both in production and end-use.

China’s energy efficiency is therefore comparatively low. For example, in 2005, China’s energy intensity was 0.91 tonnes oil equivalent per thousand US$ GDP at 2000 prices compared with 0.32 for the world as a whole and 0.195 in OECD countries. Given its size and high energy intensity, any improvement in energy efficiency in China will affect world energy demand and in turn the world energy price.

Total energy consumption in 2008 was 2,257,101 ktoe, consisting of coal (67%), oil (17%), biomass/ fuels and waste (9%), hydroelectricity (2%), natural gas (3.5%), nuclear (1%) and other renewable (0.5%). However, its per capita primary energy consumption, at 2.43 tce (1.70 toe) in 2009, is far lower than many developed economies and below the world’s average.

China produced 3,695,928 GWh of electricity and consumed 3,064,244 GWh in 2009. The largest portion was consumed by the industry sector at 2,035,794 GWh, followed by the residential sector at 487,216 GWh, commercial and public services at 168,441 GWh, agriculture/forestry at 93,990 GWh, the transport sector at 32,590 GWh and others at 246,213 GWh.

According to the 2010 World Bank study, China is a top global greenhouse gas emitter, and its efforts to address climate change bring domestic and global benefits. China alone accounts for 80% of East Asia’s energy consumption and 85% of its CO2 emissions. If China adopted a sustainable energy growth path as proposed in the study, it could reduce its projected carbon emissions by 38% compared to the reference scenario in 2030. This could be achieved primarily through energy efficiency and a shift from coal to renewable energy (hydro, wind, biomass, and solar energy), and nuclear power. It would also reduce the country’s oil imports by 240 million tonnes oil equivalent (38%) by 2030.

The country has so far made remarkable progress on development of a low-carbon economy by voluntarily committing to reducing its carbon intensity per unit of GDP by 40-45% by 2020 compared to the 2005 level. China’s energy efficiency efforts reduced energy intensity by 30% from 1995–2004, and its target of a 20% reduction in energy intensity in the 11th Five-Year Plan (2005 to 2010) aimed to reduce annual CO2 emissions by 1.5 billion tonnes by 2010, relative to the “do-nothing” trajectory. To achieve higher energy efficiency, rebalancing the country’s economic structure towards a less energy-intensive economy is required. Studies suggest China would need to reduce energy intensity by 4.3% annually over the next two decades. The Chinese government has publicly recognized this challenge as China is at a stage of development where energy-intensive industries dominate the economy, driven by domestic and international markets.

As addressed in the country´s 12th Five Year Plan, market-based pricing reforms and price-setting mechanisms are fundamental to an efficient, sustainable and secure energy sector. An important element to achieve these objectives is to have energy prices that reflect production costs, environmental external costs, and resource scarcity. Although the speed and scale of rapid urbanization in China presents an unrivaled opportunity to build low-carbon cities, an integrated approach of compact urban design, public transport, clean vehicles, green buildings, distributed generation, and smart grids is needed. With rising incomes, it is also important to encourage a sustainable lifestyle, through intensified public education.

In total, energy consumption in China rose 3.9% in 2012, although energy consumption/ unit of GDP fell by 3.6%. Notable increases were seen in oil (6%) and natural gas (10.2%) usage, and total electricity usage also rose by 5.5%.

Industry

Export taxes for energy intensive products (up to 15%).

Central Gov-EE Measures: a. Top-1000-Enterprises Program (2006): 38.7 Mtce saved; b. EE Performance Evaluation (from 2008); c. Elimination of financial incentives for energy-intensive industries; d. Closure of highly polluted industries; e. Subsidies and grants to EE related projects; f. Stronger regulatory infrastructure.

Industrial EE standards, benchmarking, energy management and capacity building.

Green Securities policy to regulate capital-raising of energy-intensive companies.

Higher Energy costs.

Utilities

Retiring 50 GW of small and inefficient power plants (coal and oil) by 2010.

Expansion of heat supply from CHP (2006).

Promotion of ESCOs.

China Utility-based EE Finance Programme (CHUEE).

Transport

Vehicle fuel economy standards (in force from 2005).

Vehicle excise tax rates (in force from 2006).

Subsidies for new-energy vehicles.

Hong Kong: Tax incentives for Environmentally Friendly Commercial Vehicles  (in force from 2008).

“Drive one day less a month” Programme.

Railway System development: growth of 100,000km targeted by 2020.

Mass transit systems: Bus Rapid Transit (BRT).

Residential

Building Energy Conservation Project: energy conservation in new buildings, energy-saving renovation and RE use in buildings.

Building codes aimed at up to 65% reduction in consumption.

Mandatory standards and labels for appliances, lighting products etc.

Green Lighting Initiative.

Subsidies for high efficiency appliances.

Public

Public procurement focus on EE.

Strong institutional support.

Energy Conservation Law.

Capacity concerns

China is facing two severe challenges, energy shortage and increased need for environment protection. Both challenges are mainly rooted in the characteristics of China’s energy supply. China’s petroleum consumption has been sharply increasing, particularly since the new millennium, but China has only limited petroleum reserves. While coal is abundant, and is China’s major source of primary energy, its use causes severe environmental pollution. Therefore, in order to maintain fast and stable economic growth without severe environmental degradation, China has to find a sustainable policy for energy development and consumption.

The costs and policy implications of China’s growing energy dependency have been recognized. This growing reliance on the global market for its petroleum supply has also raised economic concerns and political tension for China’s energy security. China’s rising energy demand has increased global pressure to seek out new energy sources.

China’s electric power industry experienced a serious oversupply problem in the late 1990s, due largely to demand reduction from the closure of inefficient state-owned industrial units, which were major consumers. However, a shortage of electricity supply developed as a result of rapid economic expansion after 2001. Since that time, generation capacity increased steadily at an annual average rate of 10% from 2001 to 2004. Since 2004, the installed generation capacity has increased at an annual average rate of 100 GW, and China currently has the world's largest installed electricity capacity, as well as the world's largest installed wind and hydropower capacities. In 2009, annual power generation reached 3,734.7 TWh, compared to 3281.55 TWh in 2007.

China is steadily increasing its oil refining capacity to meet the robust demand growth in its coastal provinces. Installed crude refining capacity is estimated at over 9 million bbl/d.

Government agencies

U.S.-China Clean Energy Research Centre At the end of 2009, American and Chinese governments announced the U.S.-China Clean Energy Research Centre. The Protocol establishing the Centre was signed at ceremonies in Beijing by US Energy Secretary Steven Chu, Chinese Minister of Science and Technology Wan Gang, and Chinese National Energy Agency Administrator, Zhang Guobao. The U.S.-China Clean Energy Research Centre will facilitate joint research and development of clean energy technologies by teams of scientists and engineers from the United States and China, as well as serve as a clearinghouse for researchers in each country. Initial research priorities of the Centre will be:

building energy efficiency.

clean coal, including carbon capture and storage.

clean vehicles.

The Centre will be supported by public and private funding of at least $150 million over five years, split evenly between the two countries.

Energy regulation role

The SERC is considered to have limited authority, since the NDRC is an all-powerful department that regulates many industries. Given that jurisdiction over demand-side management and energy efficiency is split between SERC, NEA as the key energy regulator and NDRC as the primary regulatory authority, the SERC’s authority in this area is also limited.

Ownership

Electricity market The State-owned Assets Supervision and Administration Commission (SASAC, http://www.sasac.gov.cn/n2963340/index.html) is a special organization directly under the State Council. SASAC was established as the representative of the State to exercise ownership of state-owned enterprises (SOEs). The two monopoly state-owned grid companies and five state-owned power generation companies resulted from the 2002 power market reform, and they were formed as the current incarnation of the former State Power Corporation of China. The two grid companies are the State Power Grid and the China Southern Power Grid. The five power companies are commonly known as the Big Five (China Guodian Corporation, China Huaneng Group, China Datang Corporation, Huadian Corporation, and China Power Investment Corporation). Since the reform, China’s electricity generation sector is dominated by these five state-owned holding companies, and they generate about half of China’s electricity. Much of the remainder is generated by independent power producers (IPPs), often in partnership with the privately-listed arms of the state-owned companies.

Similar to the central SASAC, local SASACs were set up by provincial and city governments to exercise all powers of ownerships on SOEs under their jurisdictions. The central SASAC has no direct hierarchical authority over local SASACs because the authority of local SASAC derives from their local governments, while that of the central SASAC derives from the State Council. According to regulation, central SASAC can “provide guidance and supervision” to local SASACs. However, as there is no formal relationship between central and local SASACs, this influence only materializes if it is supported implicitly by the central government.

Oil and gas market China’s national oil companies (NOCs) wield a significant amount of influence in China’s oil sector. Between 1994 and 1998, the Chinese government reorganized most state-owned oil and gas assets into two vertically integrated firms: the China National Petroleum Corporation (CNPC, http://www.cnpc.com.cn/en/) and the China Petroleum and Chemical Corporation (Sinopec, http://english.sinopec.com/). These two conglomerates operate a range of local subsidiaries, and together dominate China’s upstream and downstream oil markets. CNPC remains the much larger and influential NOC and is the leading upstream player in China. CNPC, along with its publicly-listed arm PetroChina, account for roughly 60% and 80% of China’s total oil and gas output respectively, though the company’s current strategy is to integrate its sectors and capture more downstream market share. Sinopec, on the other hand, has traditionally focused on downstream activities such as refining and distribution with these sectors making up nearly 80% of the company’s revenues in recent years and is gradually seeking to acquire more upstream assets.

Additional state-owned oil firms have emerged in the competitive landscape in China over the last several years. The China National Offshore Oil Corporation (CNOOC, http://en.cnooc.com.cn/data/html/english/channel_1.html), which is responsible for offshore oil exploration and production, has seen its role expand as a result of growing attention to offshore zones. Also, the company has proven to be a growing competitor to CNPC and Sinopec by not only increasing its E&P expenditures in the South China Sea but also extending its reach into the downstream sector, particularly in the southern Guangdong Province, through its recent 300 billion Yuan investment plan. The Sinochem Corporation and CITIC Group have also expanded their presence in China’s oil sector, although their involvement in the oil sector remains dwarfed by CNPC, Sinopec, and CNOOC. The government intends to use the stimulus plan to enhance energy security and strengthen Chinese NOCs’ global position by offering various incentives to invest both upstream and downstream.

Whereas onshore oil production in China, where roughly 85% of oil production capacity is located, is mostly limited to CNPC and CNDOC, the two major upstream NOCs, international oil companies have been granted much more access to offshore oil prospects mainly trough PSC agreements.

Coal market China’s coal industry has traditionally been fragmented among large state-owned coal mines, local state-owned coal mines, and thousands of town and village coal mines. The top three state-owned coal companies produce less than 15% of the domestic coal. Shenhua Coal (http://www.shenhuagroup.com.cn/english/), the world’s largest coal company, holds 9% of the domestic market in China.

Degree of independence

Although it is not a ministry of the State Council, the SERC is delegated a leadership role by the State Council. It is a publicly funded department where government influence has significant impact upon decisions.

There are five commissioners who are appointed by the government. One is ‘Chairman of the Commission’. The other four are the deputies. Among the senior management group, there are: the Chief Inspector, Chief Engineer, and Chief Accountant. The eight people form the leadership group for the Commission, and there are nine departments, five associate units, six regional bureaus and eleven city-offices.

Wholesale and retail electricity prices are determined and capped by the NDRC which can limit the profit margin of generators. Also, the NDRC determines a plan price that coal companies should sell to power producers for a certain level of supplies. Typically, generators negotiate directly with coal companies for long-term contracts. In 2009, the agency allowed electricity producers and wholesale end-users such as industrial consumers to negotiate with each other directly. The latest power tariff changes were from June 2010 when the government raised rates for energy intensive industries by 50 to 100% in order to achieve energy efficiency goals for the year.

Energy debates

As a country member of the Asia Pacific Economic Cooperation (APEC), China is an active member of the Asia Pacific Energy Research Centre (APERC). The APERC was established in July 1996 in Tokyo, as an affiliate of the Institute of Energy Economics, Japan (IEEJ), pursuant to the Action Agenda adopted by the Asia- Pacific Economic Cooperation (APEC) Economic Leaders at the Osaka Summit in November 1995. The primary objective of APERC is to foster understanding amongst APEC economies of global, regional, and domestic energy demand and supply trends, energy infrastructure development, energy regulatory reform, and related policy issues in view of the regional prosperity. APERC advocates rational energy policy formulation and enhances capacity building in energy research in the region, following the APEC's Non-binding Energy Policy Principles for furthering energy security, economic growth and environmental quality.

The World Bank published a report based on its study on sustainable energy in East Asia and suggested that China has significant opportunities for energy efficiency while the country has been making progress.

Energy framework

In the 1980s, Chinese leaders acknowledged that industry was energy inefficient and an obstacle for economic development. Since then, the government has adopted the principle of “equal treatment to development and conservation with immediate emphasis on the latter”, making conservation of strategic importance to energy policy. Measures have been adopted to promote efficient energy use. The national energy law and regulation system consists of two parts: those adopted by NPC and those issued by the State Council and related ministries. Crucial energy laws include the Electricity Law (1995) and the Energy Conservation Law (1998).

The Energy Conservation Law aims to strengthen energy conservation, particularly for key energy-using entities, promote rational use of energy and energy conservation technology. This law regulates energy conservation activities and promotes energy-saving. It led to over 164 state energy savings standards which help to reduce carbon emissions. For instance, the new energy efficiency standard for room air conditioners is expected to yield cumulative carbon emission reductions of over 300 million tons by 2020, which is about the size of the European commitment under the Kyoto Protocol.

In 2004, the State Council approved the Medium and Long Term Energy Development Plan for 2004-2020, and NDRC launched the first China Medium and Long Term Energy Conservation Plan. In 2005, NPC adopted the Renewable Energy Law, which set out duties of the government, business and others in renewable energy development and utilization. It also included measures relating to mandatory grid connection, price regulation, differentiated pricing, special funds and tax reliefs, and set the goal of 15% of China’s energy from renewable sources by 2020.

In February 2005, the Renewable Energy Law (REL) was passed by the National People’s Congress. A number of supporting regulations and guidelines have been put into place to implement the law.

Article 4 of the REL requires that a goal for the amount of renewable energy in China’s energy portfolio be established. A series of administrative orders and guidelines, notably the Eleventh Five-Year Plan for Renewable Energy Development (EFYPRED) and the Mid- and Long-Term Plan for Renewable Energy Development (MLTPRED) were published to specify what the goal ought to be.

The goal for total RE capacity by 2010 was 300 million tce, of which 248.24 million tce was to come from renewable electricity. Hydroelectricity is counted as RE. In the 2010 and 2020 targets, hydroelectric represents 80% of all renewable capacity. The goal for non-hydro renewables is 1% of grid-connected electricity generation by 2010 and 3% by 2020. Electricity investors whose capacity exceeds 5000 MW shall get 3% from non-hydro renewable sources by 2010 and 8% by 2020 (MLTPRED). The REL set up guaranteed grid access and cross-subsidization to ensure that renewable electricity plants recover their operation costs. Article 14 stipulates that enterprises such as the State Power Grid and the China South Power Grid shall sign agreements, with approved renewable electricity generators, to purchase all their grid-connected electricity. The State Electricity Regulatory Commission’s (SERC) executive order No. 25, Rules for Grid Enterprises to Purchase all Renewable Electricity, 2007, detailed grid responsibility for purchasing all grid-connected renewable electricity.

The price at which grid operators purchase renewable electricity is not decided by the market but follows government-guided prices. For wind, the wholesale price is based on bid prices from a government-organized tendering process. For biomass, solar, and other renewable electricity, prices are set by the government based on a rule similar to the “rate of return” principle: that is, cost plus a reasonable return on capital. These prices are much higher than fossil fuel electricity. The purpose of guaranteed grid access at a government-set price is to ensure a market for renewable electricity which is still significantly higher cost than fossil fuel generation.

In return for ensuring access for renewable electricity, grid enterprises are allowed to recover the cost above purchasing conventional electricity through cross-subsidization. According to Article 20 of the REL and the “Renewable Electricity Pricing and Financing” published by the National Development and Reform Committee (NDRC) in 2006, grids may recover from customers (1) expenses for getting renewable electricity connected, and (2) the difference between purchasing renewable electricity and purchasing fossil fuel electricity of the same amount.

The REL also set up other economic incentives for RE. Article 25 encourages financial institutions to provide preferential loans. Article 26 states that the government shall provide tax benefits to eligible renewable projects. So far, neither SERC nor NDRC has published administrative orders to implement these measures. As a result, they have been used in an ad hoc and limited manner.

According to Administrative order No. 2001-198, issued by the Ministry of Finance (MOF) and the State Administration of Taxation in 2001, value-added tax for municipal solid waste for power generation is refunded. The value-added tax for wind power was reduced from 17% to 8.5%. As a result of the REL with feed-in tariffs, China’s installed wind capacity has doubled every year since 2005, and reached number one for “newly added capacity” in 2009.

In 2006, the State Council issued the Decision to Strengthen Energy Conservation. In the same year, NDRC set two goals in the 11th Five-Year Plan (2006-2010): to double per capita GDP of the country by 2010 (compared to 2000) and decrease the energy consumed per unit of GDP by 20%, targeting an annual savings rate of 4%. In line with this target, the government raised electricity prices for eight energy-intensive industries.

In June 2007, NDRC issued China’s National Climate Change Programme, the country’s first global warming policy initiative. This indicated the need to adopt measures, covering: GHG mitigation; adaptation; climate change science and technology; public awareness on climate change; and institutions and mechanisms. Concerning mitigation, the focus is on energy production and transformation, energy efficiency and conservation, industrial processes, agriculture, forestry and municipal waste. As to energy production and transformation, measures aim to strengthen the existing energy legal system, improve the national energy programme, implement the Renewable Energy Law, promote favourable conditions for renewable energy and GHG mitigation, stimulate energy price reform, optimize the energy mix, promote innovation and efficiency in generating technologies, renewable and non-renewable, including nuclear power. These policies are expected to have a major influence on the energy and utilities sectors. China is voluntarily committed to reducing its carbon intensity per unit of GDP by 40-35% by 2020 compared to the 2005 level. It has also announced plans to reduce its energy intensity levels by 31% from 2010 to 2020 and increase non-fossil fuel energy consumption to 15% of the energy mix in the same time period.

From June 2007, different tariffs (5-10%) were imposed on 142 export goods classified as energy intensive and polluting goods, and tax rebates were abolished for 553 so-called ”high energy-consumption, highly polluting, resource based” products. The government has also supported energy conservation projects, and requires financial institutions to back them. However, state-led initiatives to increase energy efficiency have not yet received wide support from local governments and industry.

China’s 12th Five-Year Plan (2011-2016) on National Economic and Social Development, targets economic growth, innovation, competitiveness and social developments. Economic growth in the main three sectors, namely the farming, industry and services, is the main objective. Specific emphasis is dedicated to Green development, environmental protection and energy conservation. The Plan includes binding global energy targets, with non-fossil fuel resources reaching 11.4% of primary energy consumption by 2015, energy intensity decreasing by 16% and CO2 emissions per unit of GDP decreasing by 17% by 2015. It also states that the country anticipates to increase the share of natural gas and other cleaner technologies in the country’s energy mix and close several smaller coal-fired plants that were less efficient and heavy pollutants. In January 2012, the government launched a pilot programme in seven provinces and cities to place an absolute cap on carbon emissions, a first for the country, in an effort to kick-start the development of a functioning carbon market in these areas, following unsuccessful “soft cap” programs in the past.

China ratified the UN Framework Convention on Climate Change (UNFCCC) on 5 January 1993 and the Kyoto Protocol on 30 August 2002.

In 2012, the government published a new Energy Policy White Paper, aiming to continue the development of energy supply and provision whilst addressing the need to balance growing consumption with sustainability. The white paper sets out a number of key policy goals, in support of the 12th Five-Year Plan. These include expanding international collaboration in energy and promoting technical and scientific development, as well as improving universal energy access and the broadening of institutional reforms in the energy sector. This will include the accelerated development of an improved legal framework for the sector, promoting market-oriented reforms, and improving administration of the sector, including simplifying administrative procedures and reducing direct government intervention, as well as establishing a comprehensive statistics, monitoring and forecasting agency for the sector.

Particular prominence was given to the continued development of new and renewable energy sources in the country, with specific policy goals for hydropower, solar, wind and biomass energy, as well as new nuclear development, with an increased focus on safety and sustainability. The white paper also sets out goals for increasing distributed generation in the country, aiming to construct 1,000 new distributed generation systems by 2015.

Reliance

Imports supplied only 18.3% of China’s oil consumption in 1995 but the import share reached 49.3% by 2007. As a result, China’s net imports of petroleum and products have more than doubled, from 75.8 million metric tonnes in 2000 to 183.9 million metric tonnes in 2007. As of 2009, net imports stood at 304.8 Mtoe, with crude oil alone accounting for 64.8% of the total and refined oil products a further 6.4%.

China emerged from being a net oil exporter in the early 1990’s, to become the world’s third-largest net importer of oil in 2008. The economy consumed an estimated 8.3 million bbl/d of oil in 2009,up nearly 500 million bbl/d from year earlier levels. During the same year, China produced an estimated 4.0 million bbl/d of total oil liquids, of which 96% was crude oil. China’s net imports reached about 4.3million bbl/d in 2009, making it the second-largest net oil importer in the world behind the U.S. With China's expectation of growing future dependence on oil imports and the need for diversification of energy supply sources, Chinese NOC’s have sought interests in E&P projects overseas. China’s overseas equity oil production grew significantly in the last decade from 140,000 bbl/d in 2000 to 900,000 bbl/d in 2008. Overseas equity oil production represented roughly 23% of China’s total oil production in 2008.

China’s production and demand of natural gas has risen substantially. In 2009, China produced 2,929 billion cubic feet (Bcf) of natural gas, up around 8% from 2008, while the country consumed 3,075 Bcf. In 2007, for the first time in almost two decades, the country became a net natural gas importer. Consumption for 2009 rose from 2008 levels by over 12% and the country imported over 140 Bcf of liquefied natural gas (LNG) to fill the gap. Although a majority of the gas consumption is dominated by industrial users (45% in 2007), the recent growth of gas consumption in the past few years stems from the power, utilities, and residential sectors. The Chinese government anticipates boosting the share of natural gas as part of total energy consumption to 10% by 2030 to alleviate high pollution from the country’s heavy coal use. As gas demand is expected to grow, China is expected to continue importing natural gas in the future via LNG and is considering a number of potential import pipelines from neighbouring countries to meet the anticipated shortfall.

China’s coal imports started growing after 2002 because imported coal prices, including transportation, became competitive with domestic production prices, and the coal industry began suffering from frequent bottlenecks in transmission to consumer markets. In 2009, China, typically a net coal exporter, became a net coal importer from countries such as Indonesia, Australia, Vietnam, and Russia. Net imports of coal in 2009 stood at 54,051 ktoe.

Role of the government

The National Development and Reform Commission (NDRC) is a department of China’s State Council, the highest organ of executive power in the county, and is the primary policy-making and regulatory authority in the energy sector, while four other ministries oversee various components of the country’s oil policy. Nonetheless, multiple departments have long been a key feature of the energy administration in China. Policies are determined at a national level; they come from many sources and organizational functions are scattered among departments - for example the National Development and Reform Commission (NDRC), the Commission of Economy, and the Office of the National Energy Leadership Group, are involved in the administration of energy. The NDRC includes roles relating to renewable energy and energy efficiency and there is a DRC in each Province to manage these policies.

Some other departments such as the Ministry of Water Resources - on rural programs such as rural hydropower and electrification - and the China Atomic Energy Authority, are also involved in policy making. Other departments which have input into the policy making and implementation processes are the National Land and Resources Ministry, Environmental Protection Bureau, National Statistical Bureau, and the State Electricity Regulatory Commission.

This multiplicity of departmental roles has made strategic coordination difficult, led to inconsistency and limited the availability and reliability of data. China's plan to create a "super ministry" to steer the energy sector, was put on hold in 2008 due to the difficulty of reaching a consensus between major energy firms and the existing energy agencies. Instead, the national parliament approved the establishment of the National Energy Administration (NEA) to act as the key energy regulator and the National Energy Committee (NEC) in early 2008. The NEA was officially launched in July 2008 and integrated the NDRC's functions on energy policy management, the functions of the National Energy Leading Group and the nuclear power management of the Commission of Science, Technology and Industry for National Defence. It is thus charged with approving new energy projects in China, setting domestic wholesale energy prices, and implementing the central government’s energy policies, among other duties. However, the NEA lacked real power to carry out many of its assigned tasks as responsibility for the energy sector remained dispersed among a number of departments.

In January 2010 a new National Energy Committee (NEC) was established to step up strategic decision-making, planning and coordination. The NEC is responsible for national energy development strategy, reviewing energy security and major energy issues as well as planning domestic energy development and international cooperation. The NEC committee has 21 members, consisting mainly of ministers from a wide range of ministries such as the Finance Ministry, the Commerce Ministry and the central bank.

The NEA undertakes the day to day work whilst the National Energy Committee provides the strategic oversight. The NEA has a wide range of responsibilities including :

formulating and implementing energy development plans and industrial policies;

promoting institutional reform in the energy sector;

administering energy sectors including coal, oil, natural gas, power (including nuclear power), new and renewable energy and energy conservation;

organizing and carrying out research and development;

approving, reviewing or examining asset investments of the energy sector, in accordance with the authority stipulated by the State Council;

energy forecasting and participating in emergency preparedness;

formulating and implementing national oil reserve plans and polices;

taking the lead in international energy cooperation;

participating in the formulation of environmental protection and climate change policies.

Regulatory framework

Energy laws and regulation have recently assumed a higher profile in China. For example, the Energy Conservation Law was issued in 1998, revised in 2007 and reissued in 2008. Similarly, the Renewable Energy Law of the People’s Republic of China was adopted at the 14th Meeting of the Standing Committee of the Tenth National People’s Congress in February 2005 and went into effect as of January 2006. One year after the Renewable Energy Law went into effect, China’s total renewable energy use reached 7.5% of total primary energy consumption.

The fourth session of the Standing Committee of the 11th National People’s Congress adopted the Economy Promotion Law of the People’s Republic of China on August 29, 2008, with effect from January 1, 2009. This law is closely correlated to the Renewable Energy Law, and aims to facilitate recycling, raise resource utilization efficiency, protect and improve the environment and realize sustainable development.

Regulatory barriers

The development of renewable electricity in China in the past few years is evidence of the government’s strong commitment to clean energy; the growth of renewable electricity generation capacity has been greatly boosted. However, in that there are many challenges. First, China’s new electricity generation capacity is still coming predominately from fossil fuels. As a result, renewable electricity capacity and generation considered as a share of total capacity and generation decreased. Second, grid enterprises are reluctant to build new grids connecting wind power plants to the main grid network, which reduces investors’ incentives to develop renewable electricity. Third, compared to their US counterparts, China’s renewable electricity plants are running at low efficiency.

Although the MLTPRED states that electricity investors who own capacity of 5000 MW and above shall get 3% of their total capacity from non-hydro renewable energy by 2010 and 8% by 2020, these goals are suggestive rather than mandatory.

Whilst the REL encourages electricity consumers to purchase from renewable electricity utilities, they have no obligation to offer their customers the choice of buying green electricity.

Energy regulator

The State Electricity Regulatory Commission (SERC) (http://www.serc.gov.cn) of the State Council was established in 2002 and is the regulatory body for the electricity sector. It has six key departments. It also has regional branches (Northeast, Northwest, Central China, East, North, and South China) and city offices Taiyuan (Shaanxi Province), Jinan (Shandong), Lanzhou (Gansu), Hangzhou (Zhejiang), Nanjing (Jiangsu), Fuzhou (Fujian), Zhengzhou (Henan), Changsha (Hunan), Chengdu (Sichuan), Kunming (Yunnan), Guiyang (Guizhou). The NDRC and NEA are also regulators in the energy sector. The government is currently planning to merge the SERC with the NEA, starting from 2013.

Renewable energy

RES in China are distributed unevenly, mostly in the regions where there are spectacular landscapes, or in the regions where there is high dependency on imported energy. Therefore the potential to develop renewable energy generated power plants varies considerably as well. According to the Long to Medium Programme for Renewable Energy Development, China has substantial potential for sustainable energy mainly from wind and solar.

Hydropower China is endowed with 500 GW of hydropower potential, more than any other economy, according to the World Watch Institute. In 2009, China was the world’s largest producer of hydroelectric power. In the same year, China generated 549 Bkwh of electricity from hydroelectric sources, representing 16% of its total generation. Also, installed generating capacity was around 197 GW in 2009, accounting for over a fifth of total installed capacity. The country added 16 GW during 2010 to reach an estimated 213 GW of total hydro capacity, a significant increase over the 117 GW in operation at the end of 2005. An additional 140 GW of capacity is planned for construction in China over the next five years. The government’s State Energy Bureau announced plans to increase hydro capacity to 380 GW by 2020. The largest power project under construction is the Three Gorges Dam along the Yangtze River, which will include 32 separate 700-MW generators, for a total of 22.5 GW. When fully completed, it will be the largest hydroelectric dam in the world. The Three Gorges project already has several units in operation as of 2009, and reached full capacity on the 4th July 2012.

Wind energy Wind is the second leading renewable source for power generation, and China leapfrogged the United States in 2010 to become the world’s largest wind producer, after almost doubling its capacity in both 2008 and 2009. Extensive regions of Northern and Western China hold particularly large potential for wind energy, specifically the provinces of Inner Mongolia, Xinjiang, Gansu, and Tibet. However, the windiest areas are sparsely populated regions where electricity demands are low. High voltage transmissions lines are needed to connect these areas with electricity consumers in rapidly growing eastern China. The lack of transmission infrastructure in this sector has thus left a significant amount of capacity inoperable. The country proposed a low-carbon development strategy, in which 15 GW of wind power capacity will be installed every year to reach 200 GW in 2020, up from 31 GW at the end of 2010, 20 GW each year to reach 400 GW in 2030, and land and offshore of 30 GW per annum, amounting to 1,000 GW in 2050.

During 2011 and 2012, China plans to install more than 30 GW of wind power capacity. Wind power capacity doubled for three consecutive years in 2008-10. The annual addition of installed wind power in 2008 was almost 6000 MW, the cumulative installed capacity by the end of 2008 was 12 GW, and the total production capacity by 2010 was 16 GW. Currently, six 10 GW class wind power stations are under construction in Jiuquan (Gansu), eastern Inner Mongolia, western Inner Mongolia, Hebei, Jilin and Hami (Xinjiang), as well as a 10 GW-class marine power base along the Jiangsu coast. With the Jiuquan wind power station, the wind power industry in China starts a new phase of large-scale development. The government has implemented a programme of wind power concession bidding and published the benchmark on-grid price of wind power, which has played a positive role in stabilising the main power market. It has also granted tax preferences on import and export duties, and value-added tax, as well as financial subsidies for the development of wind power. The National Renewable Energy Laboratory of the Chinese Academy of Meteorological Sciences estimates that China has a potential of 235 GW of generating capacity on mainland China, with larger potential offshore.

Solar energy Chinese solar power potential is estimated at 1,680 billion toe (equivalent to 19,536,000 TWh) per year. 1% of China’s continental area, with 15% transformation efficiency, could supply 29,304 TWh of solar energy. Solar photovoltaic (PV) cell production capacity was about 4 GW and PV module capacity was about 3 GW in 2008, and the cumulative capacity of installed PV power was 150 MW by the end of that year. Of that, 55% was in independent PV systems. Meanwhile, solar water heaters in China cover more than 125 million square metres (60% of the world’s total). China is expected to reach a capacity of 300 MW by 2010, and 1.8 GW by 2020. The country exported almost 95% of PV solar cells to other countries because the price remained too high to be competitive with other forms of energy within country.

Biomass The development and utilisation of biomass in China has also made great progress. Key areas are biogas, biomass power generation and liquid biofuels, but the major uses of biomass in China are for power generation and heat generation rather than for biofuel production. China’s installed capacity of biomass power generation rose about 25% in 2010 to 4 GW from a combination of sources including sugarcane, bagasse, solid biomass, organic waste and biogas liquid from livestock waste. The capacity is expected to reach 30 GW by 2030.

China had built more than 1600 large-scale digesters and more than 30 million household biogas digesters, the annual output of biogas was about 14 bcm and the annual output of biofuel was 1.65 Mt. China was Asia’s largest fuel ethanol producer at 2.1 billion litres in 2010; and the country produced 0.2 billion litres of biodiesel. In 2012, China’s capacity for bio-diesel production was estimated at 3,408 million litres/ year, unchanged from 2011, with actual biodiesel production estimated at 568 million litres. Other biomass energy applications in China are still in the initial development stages.

Geothermal China has installed capacity of geothermal generation at 9 GWth, the second largest in the world. It also has the largest actual annual energy production at 21 TWh. Geothermal capacity for electricity generation in 2012 stood at 24.2 MW, the eighteenth-largest in the world, however overall geothermal energy usage is forecast to rise to roughly 1.7% of the country's total consumption by 2015.