China Market Intelligence

China's Energy Mix in 2008

As China's demand for energy soars, investment in the country's energy sector will remain strong in 2008. Beijing's desire to create a more diversified and sustainable energy supply mix is accelerating investment in nuclear and alternative energy, even as investors finance numerous fossil fuel projects. Power shortages in southern and eastern China earlier this year, however, demonstrated that China's energy sector still faces serious administrative, transport, and cost challenges.

Keeping pace with growth

In China, now the world's second-largest consumer of energy, the annual growth rate of electricity demand has exceeded the annual gross domestic product (GDP) growth rate since 2000, according to UBS AG. This trend will continue in 2008, although growth in consumption for the year is projected to slow, partly due to winter power shortages. The China Electricity Council estimates power demand growth of 12.5 percent in 2008, compared to 14.4 percent in 2007. Production capacity of several energy resources is being dramatically ramped up to meet this growth in demand.

Coal

Massive investment in coal has also been unable to prevent increased reliance on outside coal supplies. China possesses the second-largest coal reserves in the world, but distribution difficulties make imports a more attractive alternative for much of China. In recent years, China has shrunk from its historical role as coal exporter, exporting slightly more than 2 million tons of coal in 2007 in contrast to 90 million tons in 2001. Some experts believe that China may become a net importer in 2008.

Oil

Oil constituted 20.3 percent of China's total energy consumption in 2006, a level the National Development and Reform Commission (NDRC) predicts will remain roughly constant through 2010. The International Energy Agency initially estimated China's 2008 oil demand growth at 430,000 barrels per day (bpd), up 5.8 percent from 2006, for a total of 7.9 million bpd. China met 46 percent of its total oil demand with imports in 2007, and this number is expected to rise to 47 percent in 2008.

In 2008, China will bring four new refineries into operation: China National Petroleum Corp. (Sinopec) in Qingdao, Shandong, and Quanzhou, Fujian; China National Offshore Oil Corp. (CNOOC) in Huizhou, Guangdong; and PetroChina Co., Ltd. in Dushanzi, Xinjiang. Overall, China's refineries will supply an additional 400,000 bpd of fuel, more than double last year's increase, according to a Reuters survey. China plans to expand its refining capacity by about one-third by 2010.

Natural gas

China's production of natural gas rose 23.1 percent last year to 69.3 billion cubic meters, and output may reach 76 billion cubic meters this year. Major projects are also under way in 2008 to ensure gas reaches markets on China's coast. Most notably, earlier this year China launched its second west-to-east natural gas transmission pipeline, which will mainly carry natural gas from Turkmenistan and China's Xinjiang Uygur Autonomous Region to the Yangzi and Pearl River deltas upon completion in 2010. Natural gas will still account for less than 4 percent of China's electricity production in 2008, however, and is projected to reach only 5.2 percent in 2020—a level far below US and global averages, both of which exceed 20 percent.

Nuclear

Although underdeveloped relative to other energy sources, nuclear power in China is growing far faster than originally planned. Senior officials have recently stated that China's nuclear power-generating capacity is expected to reach 60 gigawatts by 2020, a higher projection than earlier government estimates of 40 gigawatts. China has 11 nuclear power reactors in commercial operation, six under construction, and several more to start construction soon. All existing and planned reactors are located along China's coast. The world's first third-generation reactor technology plant is also now under construction in Sanmen, Zhejiang.

Renewable energy

China has clearly indicated its intent to dramatically increase the role of renewable energy in its primary energy mix, with a goal of 10 percent in 2010 and 15 percent by 2020. Chief players are hydropower and wind, with biomass and solar also playing a role. Many of these projects are small, however, and China faces numerous challenges to alternative energy development.

Plentiful supply of energy challenges

Accelerated energy demand in recent years has placed considerable strain on China's power production and supply capacity. In addition to long-standing concerns about energy consumption growth exceeding GDP growth, international energy security, and broader environmental impacts, challenges such as domestic transport, pricing, and administration have now come under closer scrutiny.

Although China possesses plentiful coal reserves and abundant hydropower resources, transporting power generated from these resources from north-central and southwestern China to the coastal industrial belt presents a major structural challenge. During peak demand periods, limited coal transport capacity contributes to shortages, as was dramatically demonstrated during this year's severe winter weather. Energy, passenger, and freight needs have stimulated a phase of massive rail investment.

Distortions caused by energy pricing mechanisms also help feed seasonal bottlenecks. Electricity prices are currently set by NDRC, which has kept prices low for residential consumers (industrial prices are reportedly on par with global averages, although payment opt-outs and defaults are common) even as market prices rise dramatically: In February, domestic oil prices rose 37.5 percent and coal 18.5 percent year on year. Power generators and refineries buying at market prices and selling at government-set prices are facing lower margins, and refineries receive substantial government subsidies to remain in operation. To meet this gap, a new ¥10 billion ($1.4 billion) reserve was recently announced to subsidize refiners, which claim to be losing more than ¥2,000 ($282) per barrel of gasoline at current prices. Likewise, late last year gasoline subsidies became available to some individuals, such as taxi drivers, to offset rising prices. The draft Energy Law stipulates a market-adjusted pricing mechanism but provides no details on transitioning toward that mechanism or implementing it.

A complex energy policy structure that disperses authority across numerous agencies with often competing institutional interests further complicates the government's attempts to address these practical problems. Recognizing China's need to streamline energy policy, the Draft Energy Law called for a single energy department to steer China's energy policy. Likewise, the government restructuring plan announced during the National People's Congress in March folded several energy agencies into a consolidated National Energy Commission under the NDRC. Specifics on its administrative power and structure may be unclear for some time to come, however.

China's Renewable Energy Plan

The National Development and Reform Commission (NDRC) recently released China's 11th Five-Year Plan (FYP, 2006-10) on Renewable Energy Development. US companies could benefit from some of the FYP's goals—such as granting tax preferences for renewable energy-related projects and increasing technology and equipment exports to China.

The FYP, which is a revision of the Renewable Energy Mid and Long-Term Development Plan issued last August, says that China achieved some progress in hydropower, solar energy, and biofuels during the last FYP (2001-05) period but that problems remain with technology development and market safeguard mechanisms. Unlike the development plan, the FYP emphasizes China's firm resolution to develop renewable energy through targets and policy measures.

Goals

According to the FYP, by 2010 China's renewable energy sector should

Account for 10 percent (equivalent to 300 million tons of coal annually) of overall energy consumption;
Generate electricity in remote areas and provide additional clean fuels for rural areas; and
Have a preliminary technology innovation system, strong research and development (R&D) ability, and various means of technology innovation, including domestic innovation; innovation based on imported technology; and participation in joint technology projects outside China.

Policy measures

To achieve these goals, NDRC recommends several regulatory measures and policies, including

Enforcing the Renewable Energy Law, which took effect in January 2006, and tasking local governments with creating relevant regulations and policies;
Creating regulatory measures and instruction manuals for specialized funds for renewable energy development;
Providing preferential tax treatment to enterprises involved in renewable energy exploration, utilization, R&D, and equipment production;
Supporting renewable energy R&D, pilot projects, exploration, and use in rural areas;
Nurturing a sustainable market for renewable energy exploration and use through tax, fiscal, and price measures; requirements that give renewable energy a share of the energy market; government-invested projects; and franchise projects;
Accelerating renewable energy technology and industrial system construction; and
Making renewable energy development a key priority in the national science and technology development strategy.

—The US-China Business Council

This article is adapted from news reports that first appeared in China Market Intelligence, the US-China Business Council's (USCBC) weekly members-only newsletter. To find out more about the benefits USCBC member companies receive, please visit www.uschina.org/benefits.html.

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	E-Mail \| Print \| License China Market Intelligence China's Energy Mix in 2008 As China's demand for energy soars, investment in the country's energy sector will remain strong in 2008. Beijing's desire to create a more diversified and sustainable energy supply mix is accelerating investment in nuclear and alternative energy, even as investors finance numerous fossil fuel projects. Power shortages in southern and eastern China earlier this year, however, demonstrated that China's energy sector still faces serious administrative, transport, and cost challenges. Keeping pace with growth In China, now the world's second-largest consumer of energy, the annual growth rate of electricity demand has exceeded the annual gross domestic product (GDP) growth rate since 2000, according to UBS AG. This trend will continue in 2008, although growth in consumption for the year is projected to slow, partly due to winter power shortages. The China Electricity Council estimates power demand growth of 12.5 percent in 2008, compared to 14.4 percent in 2007. Production capacity of several energy resources is being dramatically ramped up to meet this growth in demand. Coal Massive investment in coal has also been unable to prevent increased reliance on outside coal supplies. China possesses the second-largest coal reserves in the world, but distribution difficulties make imports a more attractive alternative for much of China. In recent years, China has shrunk from its historical role as coal exporter, exporting slightly more than 2 million tons of coal in 2007 in contrast to 90 million tons in 2001. Some experts believe that China may become a net importer in 2008. Massive investment in coal has also been unable to prevent increased reliance on outside coal supplies. China possesses the second-largest coal reserves in the world, but distribution difficulties make imports a more attractive alternative for much of China. In recent years, China has shrunk from its historical role as coal exporter, exporting slightly more than 2 million tons of coal in 2007 in contrast to 90 million tons in 2001. Some experts believe that China may become a net importer in 2008. Oil Oil constituted 20.3 percent of China's total energy consumption in 2006, a level the National Development and Reform Commission (NDRC) predicts will remain roughly constant through 2010. The International Energy Agency initially estimated China's 2008 oil demand growth at 430,000 barrels per day (bpd), up 5.8 percent from 2006, for a total of 7.9 million bpd. China met 46 percent of its total oil demand with imports in 2007, and this number is expected to rise to 47 percent in 2008. In 2008, China will bring four new refineries into operation: China National Petroleum Corp. (Sinopec) in Qingdao, Shandong, and Quanzhou, Fujian; China National Offshore Oil Corp. (CNOOC) in Huizhou, Guangdong; and PetroChina Co., Ltd. in Dushanzi, Xinjiang. Overall, China's refineries will supply an additional 400,000 bpd of fuel, more than double last year's increase, according to a Reuters survey. China plans to expand its refining capacity by about one-third by 2010. Natural gas China's production of natural gas rose 23.1 percent last year to 69.3 billion cubic meters, and output may reach 76 billion cubic meters this year. Major projects are also under way in 2008 to ensure gas reaches markets on China's coast. Most notably, earlier this year China launched its second west-to-east natural gas transmission pipeline, which will mainly carry natural gas from Turkmenistan and China's Xinjiang Uygur Autonomous Region to the Yangzi and Pearl River deltas upon completion in 2010. Natural gas will still account for less than 4 percent of China's electricity production in 2008, however, and is projected to reach only 5.2 percent in 2020—a level far below US and global averages, both of which exceed 20 percent. Nuclear Although underdeveloped relative to other energy sources, nuclear power in China is growing far faster than originally planned. Senior officials have recently stated that China's nuclear power-generating capacity is expected to reach 60 gigawatts by 2020, a higher projection than earlier government estimates of 40 gigawatts. China has 11 nuclear power reactors in commercial operation, six under construction, and several more to start construction soon. All existing and planned reactors are located along China's coast. The world's first third-generation reactor technology plant is also now under construction in Sanmen, Zhejiang. Renewable energy China has clearly indicated its intent to dramatically increase the role of renewable energy in its primary energy mix, with a goal of 10 percent in 2010 and 15 percent by 2020. Chief players are hydropower and wind, with biomass and solar also playing a role. Many of these projects are small, however, and China faces numerous challenges to alternative energy development. Plentiful supply of energy challenges Accelerated energy demand in recent years has placed considerable strain on China's power production and supply capacity. In addition to long-standing concerns about energy consumption growth exceeding GDP growth, international energy security, and broader environmental impacts, challenges such as domestic transport, pricing, and administration have now come under closer scrutiny. Although China possesses plentiful coal reserves and abundant hydropower resources, transporting power generated from these resources from north-central and southwestern China to the coastal industrial belt presents a major structural challenge. During peak demand periods, limited coal transport capacity contributes to shortages, as was dramatically demonstrated during this year's severe winter weather. Energy, passenger, and freight needs have stimulated a phase of massive rail investment. Distortions caused by energy pricing mechanisms also help feed seasonal bottlenecks. Electricity prices are currently set by NDRC, which has kept prices low for residential consumers (industrial prices are reportedly on par with global averages, although payment opt-outs and defaults are common) even as market prices rise dramatically: In February, domestic oil prices rose 37.5 percent and coal 18.5 percent year on year. Power generators and refineries buying at market prices and selling at government-set prices are facing lower margins, and refineries receive substantial government subsidies to remain in operation. To meet this gap, a new ¥10 billion ($1.4 billion) reserve was recently announced to subsidize refiners, which claim to be losing more than ¥2,000 ($282) per barrel of gasoline at current prices. Likewise, late last year gasoline subsidies became available to some individuals, such as taxi drivers, to offset rising prices. The draft Energy Law stipulates a market-adjusted pricing mechanism but provides no details on transitioning toward that mechanism or implementing it. A complex energy policy structure that disperses authority across numerous agencies with often competing institutional interests further complicates the government's attempts to address these practical problems. Recognizing China's need to streamline energy policy, the Draft Energy Law called for a single energy department to steer China's energy policy. Likewise, the government restructuring plan announced during the National People's Congress in March folded several energy agencies into a consolidated National Energy Commission under the NDRC. Specifics on its administrative power and structure may be unclear for some time to come, however. China's Renewable Energy Plan The National Development and Reform Commission (NDRC) recently released China's 11th Five-Year Plan (FYP, 2006-10) on Renewable Energy Development. US companies could benefit from some of the FYP's goals—such as granting tax preferences for renewable energy-related projects and increasing technology and equipment exports to China. The FYP, which is a revision of the Renewable Energy Mid and Long-Term Development Plan issued last August, says that China achieved some progress in hydropower, solar energy, and biofuels during the last FYP (2001-05) period but that problems remain with technology development and market safeguard mechanisms. Unlike the development plan, the FYP emphasizes China's firm resolution to develop renewable energy through targets and policy measures. Goals According to the FYP, by 2010 China's renewable energy sector should Account for 10 percent (equivalent to 300 million tons of coal annually) of overall energy consumption; Generate electricity in remote areas and provide additional clean fuels for rural areas; and Have a preliminary technology innovation system, strong research and development (R&D) ability, and various means of technology innovation, including domestic innovation; innovation based on imported technology; and participation in joint technology projects outside China. Policy measures To achieve these goals, NDRC recommends several regulatory measures and policies, including Enforcing the Renewable Energy Law, which took effect in January 2006, and tasking local governments with creating relevant regulations and policies; Creating regulatory measures and instruction manuals for specialized funds for renewable energy development; Providing preferential tax treatment to enterprises involved in renewable energy exploration, utilization, R&D, and equipment production; Supporting renewable energy R&D, pilot projects, exploration, and use in rural areas; Nurturing a sustainable market for renewable energy exploration and use through tax, fiscal, and price measures; requirements that give renewable energy a share of the energy market; government-invested projects; and franchise projects; Accelerating renewable energy technology and industrial system construction; and Making renewable energy development a key priority in the national science and technology development strategy. —The US-China Business Council This article is adapted from news reports that first appeared in China Market Intelligence, the US-China Business Council's (USCBC) weekly members-only newsletter. To find out more about the benefits USCBC member companies receive, please visit www.uschina.org/benefits.html. Further Reading A Market Solution Cleantech Boom ... or Bust? Green Energy Invites Investment Electricity Woes Power Politics Click here for copyright permissions Copyright 2008 US-China Business Council Top of Page Table of Contents
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