Rapid growth and skyrocketing energy consumption present China with unique energy challenges. Although the country will necessarily continue to rely on fossil fuels in the coming decades, the Chinese government has undertaken an unprecedented effort to forge a low-carbon development path by promoting energy efficiency and renewable energy.
Key Points:
- China’s export-driven economy consumes large amounts of energy and other resources. To meet this rising demand, the power sector has increased its capacity a staggering 12 percent per year in the past decade.
- Abundantly available within China, coal provides three-quarters of the country’s electricity and will remain the primary energy source for the foreseeable future.
- China’s rapid energy growth is unsustainable under the current economic structure. The government is working to create a new model of industrialization that will allow China to follow a low-carbon path of sustainable development.
- The Chinese government has made energy efficiency a major priority, implementing an ambitious target of decreasing energy intensity—energy used per unit of economic output—by 20 percent by 2010. An array of specific policy measures, backed by a newly strengthened Energy Conservation Law, will help China achieve this target.
- China is also working to promote the deployment of renewable and other low-carbon energy. It leads the world in installed solar hot water heating capacity and will soon be the world leader in wind power capacity. Nuclear power and carbon capture technology will also be important in the future, as China strives to balance economic development, resource constraints, and environmental sustainability.
Current State of Energy Development in China
1. Rising Energy Consumption
Rapid economic development and rising energy consumption in China have raised public concern in recent years. Since 1978, when China began to implement reforms and instituted a policy of opening to the outside world, the Chinese economy has witnessed sustained rapid growth and a consistent improvement of living standards. The government’s objective of quadrupling economic output in 20 years was achieved earlier than planned. In this context, the government put forward a new goal of quadrupling economic output again within 20 years and creating a universally well-off society. Many started to believe that China, in a comparatively short time, would reach levels of infrastructure and housing commensurate with levels in developed countries.
China faces the challenge of developing large-scale clean energy in the coming decades, in order to reduce the portion of new energy demand that is met by coal, and to begin replacing the existing coal-fired facilities. In the long term, China must seek new approaches for energy.
The Chinese economy successfully overcame the Asian financial crises of the late twentieth century and China has now adjusted its internal industrial structure. Industrialization and urbanization have been integrated, and urbanization has increased as redundant rural laborers moved to cities for industry and service jobs. In urban areas, buildings have been commercialized and cities have seen record-high real estate development due to improving living conditions and increasing mobility. It is estimated that new building area in rural and urban regions in China exceeds 2 billion square meters (21.5 billion square feet) annually. As middle-income families began to purchase automobiles, car sales have increased from 2.1 million in 2000 to 9.5 million in 2008.
Since China’s reform and opening, its economic policy has been based on an export-driven approach, and China has become one of the few countries that depend most heavily on exports. Following China’s accession to the WTO, in particular, the country has become an important base for export of industrial products. By 2008, China’s total trade volume reached (U.S.) $2.56 trillion, of which exports accounted for $1.43 trillion.
This increase is largely the result of globalization—large multi-national companies hunting for low processing costs. Cheap labor, preferential policies to attract foreign investment, and cheap land and resource inputs have supported the rapid development of the export-driven processing sector at the expense of environmental pollution and sometimes even at the expense of domestic development. For exports, the value of products that originated from external material and external material processing reached $675.1 billion in 2008, accounting for 47.26 percent of the total export value. Investment by foreign companies accounts for more than 55 percent of the total export value.
It is difficult to accurately calculate how much actual “energy” is exported—that is, the energy embodied in exported goods. At the lower end, estimates show that 20 percent of China’s total energy consumption has been used to produce export products. If the indirect energy consumption of supporting industries is accounted for, however, more than 40 percent of energy consumption is related to export production.
The manufacturing of end-use products is also expanding rapidly, which has resulted in infrastructure expansion. The construction of mines, roads, bridges, ports, and airports hit a historic high in 2008. As a result, China has witnessed rapid development of its raw materials sector and its heavy processing industry, which provide raw material for real estate and infrastructure. Steel production increased from 131 metric tons (Mt) in 2000 to 582 Mt in 2008, and cement production increased from 597 Mt in 2000 to 1,388 Mt in 2008. Because internal demand for these products is inherently high, recent growth in these industries has been higher than that of other manufacturing industries. As the consequent expansion of this type of industry leads to constant rises in raw material prices, the resource-oriented sector is becoming highly profitable.
But the raw materials and heavy processing industries are extremely energy intensive. Their expansion has caused rapid growth in energy consumption and expansion in energy production capacity, particularly during the past decade. Between 2000 and 2008, the average GDP growth rate per year in China reached 10 percent, while between 2000 and 2007, the primary energy consumption growth rate reached 9.7 percent. In 2007, primary commercial energy consumption amounted to 2580 Mt of coal, 340 Mt of crude oil, and 67.3 billion m3 of natural gas. Industrial energy consumption still uses more than 70 percent of the national total, and this sector’s electricity use accounts for three-quarters of total electricity consumption. The housing and transportation sectors, meanwhile, account for only a small share of total energy consumption.
2. Power Sector Growth
Power shortages have long plagued China’s economic development. To increase reliability, the Chinese government has taken various reform measures to accelerate development in the power industry, including adjusting electricity market prices to ensure a return on investment. Investment in the power industry has therefore become a hot spot. In the past decade, substantial institutional reforms and the competitive market have resulted in the diversification of construction investment and operations.
Power generation capacity growth has reached record levels in recent years. New electricity generation capacity in China exceeded 100 GW in both 2006 and 2007. In 2008, this figure was still close to 90 GW. Installed capacity more than doubled from 319 GW in the year 2000 to 792 GW in 2008, achieving an average annual growth rate of 12 percent. Actual electricity generation during this period increased nearly threefold from 1,368 TWh in 2000 to 3,433 TWh in 2008.
Comprehensive urban and rural power grid construction was also undertaken, in tandem with the rapid increase in generation capacity, significantly improving the electricity supply capacity for both urban and rural residents. For example, grid corporations in China have invested about 300 billion yuan1 in the transformation and strengthening of rural power grids, which achieved nearly 100 percent electric coverage for all rural villages, for the same electricity price as in urban areas.
Simultaneous with this expansion, efficiency in the power sector has also begun to improve. On the production side, China has already introduced and implemented supercritical and ultra-supercritical thermal power generation technology, and has become the world leader in the application of such high-efficiency power generation technology. High voltage transmission technology has also been widely deployed, improving transmission efficiency with a large number of long-distance EHV transmission lines.
However, since the pace of power development is far beyond what had been anticipated, the pressure to resolve power shortages forces the power structure to continue relying on coal. Supported by government policies, hydropower development has also maintained its important role in electricity generation, with the construction of large number of large-sized hydropower stations such as the Three Gorges Hydropower Station, as well as small and medium-sized stations. Installed hydropower capacity in China reached 170 GW as of the end of 2008, but its share in power generation capacity has been on a downward trajectory due to the rapid development of thermal power.
Large-scale construction of thermal power infrastructure has bolstered power equipment manufacturing in China, and thus the construction cost of thermal power has declined markedly. Per-kilowatt costs for large-scale thermal power have already been reduced to about 4,000 yuan and the duration of construction has been reduced to less than two years, while the construction periods for large-scale hydropower and nuclear power plants remain at five to ten years. Although the construction period for natural gas power plants is relatively short, most of the newly built gas-fired power plants face operational difficulties due to inadequate natural gas supplies. Thus coal-fired electricity became the first choice for meeting China’s rapidly growing power demand in the previous phase of development, and this expansion of coal-fired electricity became the primary driver of rising coal demand.
3. Coal-Dominated Energy Portfolio
China will likely continue to rely on domestic energy resources, which currently account for more than 90 percent of the primary energy supply. China’s coal resources are relatively abundant and widely distributed, and a majority of provinces have a long history of mining. Coal is a major source of energy not only for the industrial sector, but also for residential use. Reliance on coal is further solidified by high oil and gas prices, coupled with other constraints on oil and gas exploitation, which make it difficult to meet domestic primary energy demand using these fuels. Moreover, a coal-based energy supply and utilization system is in place which at one time accounted for more than 76 percent of the total primary energy supply. Despite the government’s efforts to reform and diversify the country’s energy structure, rapid demand growth has maintained China’s dependence on coal, the cheapest and most readily available bulk energy source.
The Chinese government has recognized that the cost of energy resources and detrimental effects on the environment and society caused by an export-driven economy are too large to be sustainable.
On the other end, coal extraction has also become an important part of the economy in many regions. In recent years the rise in international coal prices has driven a rise in Chinese coal prices, with some of the coal-rich provinces making significant progress in coal exploitation as a major sector of economic development. The increased investment in the coal sector in these provinces improved their coal supply capacity in a short time. From 2000 to 2007, China’s coal production capacity increased by an annual average of 230 million tons, and in 2008, China’s coal production reached 2.62 billion tons.
Views on coal production in China are diverse. Some believe that as long as there is demand, China could substantially increase its coal production capacity, potentially reaching 4–5 billion tons per year. Provinces rich in coal, such as Inner Mongolia, Ningxia, Shaanxi, and Guizhou, intend to expand coal production significantly. If the volume of coal resources is the only factor considered, implementation of these schemes is probable and would result in the increase of coal production capacity by several billion tons. For this reason, many believe it is difficult for China to change the coal-dominated energy structure.
But if constraints such as environmental preservation, water resources, land availability, and labor efficiency are taken into account, China’s coal production capacity is already too high and is unsustainable. Substantial increases in coal production will be increasingly difficult. Excessive coal consumption resulted in not only serious environmental pollution and ecological damage, but also high energy intensity and low energy efficiency in China. At present, half of China’s 2.6 billion tons of actual coal production still comes from a variety of small and medium-sized coal pits, which leads to poor production security, low efficiency, high labor intensity, and low output rates. With socio-economic development and labor security improvements, such out-of-date modes of production would certainly have been eliminated. However, China does not have coal resources that are suitable for large-scale, modern exploitation.
The destruction of water resources, land subsidence, and other environmental issues, as well as social issues derived from coal mining, are also serious problems. A large portion of China’s coal resources are located in the central and western regions, where the ecological environment is fragile and water resources are inadequate. Therefore, a substantial increase in coal production capacity may be constrained by a number of environmental factors. Simply relying on coal to increase energy supplies will be difficult.
Optimizing the energy structure by increasing the energy supply while reducing the share of coal has always been a major energy challenge for China. China faces the challenge of developing large-scale clean energy in the coming decades, in order to reduce the portion of new energy demand that is met by coal, and to begin replacing the existing coal-fired facilities. In the long term, China must seek new approaches for energy.
4. Expansion of Oil and Gas Production
China is constantly investing in domestic oil exploration. Proved reserves of oil and natural gas have increased consistently and extraction technologies have progressed rapidly. Domestic crude oil production in China has been increasing since 2000, averaging an annual growth of 2.38 percent between 2000 and 2008. In 2008, China’s domestic oil production reached 1.39 billion barrels, an increase of 3.2 percent from the previous year. As such, the growth of Chinese oil production was much higher than the world average, which stood at 1.2 percent.
Yet demand for transportation fuel and petrochemical feedstock has risen even faster than domestic supply growth, resulting in a continuing increase in oil imports. In 2008, China imported 180 million tons of crude oil and 38.85 million tons of other petroleum products, pushing its dependence on foreign oil above 50 percent.
Concerns about energy security and oil price volatility have thus become hot energy policy topics in China. China has actively encouraged its oil companies to carry out global oil and gas business deals and to increase overseas oil and gas exploration and development investment.
China can have a large impact on world oil markets because it is both a big oil consumer and a big producer. Chinese investment in the international oil industry increases global investment in oil and improves supply capacity. Because of Chinese investment in overseas oil and gas production—which has increased to more than one million barrels per day—global oil security has, to some extent, improved. Moreover, involvement in the oil and gas business in many parts of the world helped China gain entry into the international community and helped the country assume more international responsibility. Increased investment will also improve the competitiveness of Chinese oil companies and lessen the impact of price fluctuations. More broadly, Asia has become the world’s largest oil-consuming region. Asian countries, especially large developing ones, participate actively in the international oil and gas business and are likely to make positive contributions to the world’s oil and gas market.
Natural gas has actually been the fastest growing fossil fuel in China in recent years and natural gas production has increased at an average annual growth rate of 14.3 percent since 2000, reaching 69.3 billion cubic meters in 2007. However, the proportion of natural gas in China’s energy structure remains very low overall.
Efforts Toward Sustainable Energy Development in China
5. Sustainable Energy Development
In recent years, rapid energy supply growth has met the rising energy demands associated with industrialization and urbanization. However, export-driven industrial structures tend to overdevelop low value-added industries that rely on heavy investments in land, energy, and mineral resources, as well as a low-cost labor force. Thus export-driven sectors do not adequately support economic development and typically bring with them a range of social problems.
The Chinese government has recognized that the cost of energy resources and detrimental effects on the environment and society caused by an export-driven economy are too large to be sustainable. Simply relying on investment and export-led economic development has caused low overall input-output efficiency and low wages in China. This reliance, coupled with social allocation structures that favor a small number of people, hampers domestic demand growth and constraints further economic growth. Furthermore, populous countries like China cannot achieve so-called “white-collar industrialization” by transferring blue-collar labor to other countries and relying on cheap imported labor and low value-added products from other countries.
The energy growth inherent in China’s current model of industrialization is also too great to be sustainable in the long run. China’s per capita energy consumption is still far below that of developed countries—only one-third of that of the industrialized European countries and Japan, and one-sixth of that of United States—but domestic energy and other natural resources are not sufficient to support China’s large population along a high-energy consumption path.
Yet China should not aim to pursue a high-energy development path by importing large amounts of energy to make up for domestic shortfalls. The balance of the international energy market at present assumes limited energy consumption in most developing countries and abundant consumption in a small number of developed countries. It would be impossible to meet worldwide energy demand if developing countries consumed energy like developed countries.
Thus China must change its development approach and adopt a new model of industrialization. The Communist Party of China put forward the timely concept of scientific development, which focuses on enhancing social equity in order to harmonize development in urban and rural areas across different regions, and harmonize demand at home and abroad so that the rural areas and central-western regions can accelerate their development—resulting in a more equitable distribution of wealth. It would make sustainable development a fundamental and important national goal, resulting in a resource-conserving and environmentally-friendly society.
Developing a resource-saving society involves moving toward an energy-saving consumption pattern and lifestyle, and high efficiency and low energy consumption modes of production, so that China can achieve industrialization and an appropriate standard of living at significantly lower per capita energy consumption than the current level of industrialized countries. Making conservation a priority has become the most important energy strategy for China.
Conservation and environmental protection are not only major challenges for socio-economic development in China, but also necessities. Besides air, water, and solid waste pollution, addressing global warming has also been a key aspect of sustainable development in China. Low-carbon development is necessary, and the growth rate and quantity of greenhouse gas emissions must be reduced. China should begin to reduce emissions as soon as possible.
Optimizing the energy supply structure and developing clean and renewable energy are the main components of sustainable energy development in China. Even with a low-energy sustainable development model, China still needs to increase its energy supply, especially clean energy and non-fossil energy, to reduce its reliance on coal.
6. Progress in Energy Efficiency and Conservation
China has emphasized energy conservation since the 1980s but its main goal has been solving the energy shortage and balancing energy supply and demand. When the energy supply is sufficient, conservation is less likely to be taken seriously. In the past few decades, conservation relied on limiting the energy supply. It succeeded because the allocation of electricity, oil, and coal was controlled by the government. The average growth rate of energy consumption in the 1980s and 1990s was lower than half of the corresponding economic growth rate. Per GDP energy consumption fell by more than 50 percent.
China has made considerable achievements in enhancing energy conservation, largely due to the ambitious government efforts undertaken in the past few years.
Since the year 2000, the energy market in China has been fully developed, and the government no longer controls energy supply and allocation. Market supply of energy has been more adequate due to the rapid expansion of domestic energy supply capacity, in addition to imports. Even with a more readily available energy supply China has declared energy conservation to be a priority, working to establish a resource-conserving society to ensure long-term energy security and sustainable development. A number of explicit goals and programs aim to move China along this path.
6.1 Strong Energy Conservation Law
China is a government-led market economy, with the government playing important roles in industrial policy, central and local fiscal policy, and the allocation of land and natural resources. The participation of local governments is indispensable for a significant portion of local economic development efforts. Since both central and local governments view energy conservation targets as important socio-economic factors, the economic development evaluation system has been shifted to focus on indicators of economy, energy conservation, and environmental protection, rather than just GDP. This shift helps create positive incentives for sustainable development in China.
The Energy Conservation Law enacted in 1997 confirmed the importance and legal status of energy conservation. However, the law is more a principle rather than a specific set of obligations and responsibilities for government, business, and individuals. Moreover, the scope of energy conservation and the specific measures were not clearly stated, so the law lacked concrete force at the time of enactment. In October 2007, the National People’s Congress made significant modifications to the Energy Conservation Law, making this law one of few in the world requiring practical implementation to promote comprehensive energy conservation and providing the legal basis for long-term resource conservation in China.
The revised Energy Conservation Law clearly provides that:
“Conservation of resources is one of China’s basic national policies. The national energy development strategy is to implement both energy conservation and energy development simultaneously, while putting energy conservation first.… The State Council and local people’s governments above the county level should integrate energy conservation into the national/local economic and social development plan and the annual development plan, and should coordinate the preparation and implementation of specific annual and long-term energy conservation plans.… Energy conservation target obligation and assessment will be implemented by the state, and the completion of energy conservation goals will be used as appraisal factors for local governments and for all parties responsible.… The state implements industrial policies that are conducive to energy conservation and environmental protection, policies limiting the development of high energy-consuming and high polluting industries, and policies promoting the development of industries that conserve energy and protect the environment.”
The Energy Conservation Law also laid out energy conservation requirements for buildings, transportation, and public institutions. In addition, the law defined the energy conservation management system and criteria system, clarified economic policies for promoting conservation, and provided the central financing and local provincial financing to arrange special funds to support energy conservation.
A set of systems for promoting energy conservation was thus established in China through the development of national energy conservation targets, along with comprehensive assessment and accountability systems for these targets, strengthened by the revised Energy Conservation Law. The construction of such a system will be a long-term driving force in promoting energy conservation in China.
6.2 National quantitative targets
Even before the Energy Conservation Law was modified, the Eleventh Five-Year Plan for Economic and Social Development had already begun to establish ambitious energy efficiency targets. Most notably, the Plan set forth the explicit goal of decreasing per capita GDP energy consumption by 20 percent in this five-year period (2006–2010). At the same time, the Plan seeks to decrease SO2 and COD emissions by 10 percent in this five-year period in order to tackle air and water pollution. These goals were formally proposed by the Central Committee of the Communist Party of China to the National People’s Congress, and were approved by the latter. The State Council takes responsibility for implementation and formally reports to the National People’s Congress for progress and results.
Quantitative targets for energy conservation and emissions reduction have therefore become binding targets as part of the country’s economic and social development plan, and the Chinese government plans to implement a variety of policies and financial and economic mechanisms to achieve these goals. The Five-Year Plan is the first statement regarding sustainable development strategy with a quantitative goal, and energy-saving and emissions reduction targets are set as specific measures for achieving it.
6.3 Sub-national targets
Since the National People’s Congress passed the energy saving quantitative emissions reduction target in March 2006, the Chinese government began to hand down energy efficiency targets to each provincial government. Through dialogue and consultation, each provincial government is committed to a specific energy conservation goal. Most provinces adopted the target of a 20 percent decrease in GDP energy intensity, although some provinces set lower or higher targets (ranging from 12 percent to 25 percent) in accordance with each province’s specific energy consumption and economic development situation. The weighted average of all provincial energy conservation targets ensures the achievement of a 20 percent decline of GDP energy intensity. Provinces have also taken the appropriate measures to further distribute the provincial energy conservation targets to each city and county so that each has its own concrete quantitative targets for energy efficiency improvement and energy intensity reduction. Beyond these five-year goals, local governments are also required to implement the annual targets in accordance with their respective targets in order to ensure the achievement of five-year goal year by year.
In addition to geographically defined energy conservation goals and responsibilities, the Chinese government also signed protocols directly with the 1,000 largest energy-consuming enterprises to implement energy conservation goals. All companies whose annual energy consumption exceeds 180,000 tons of coal equivalent are required to develop their own energy conservation targets and to sign target responsibility agreements with the central government. Provincial and municipal governments will also sign target responsibility agreements with local companies, satisfying lower qualifications (for example, applying only to those companies with annual energy consumption over a few thousand tons of coal equivalent). It is estimated that the country has around 100,000 energy companies that must develop and meet energy conservation goals. These enterprises must audit their own energy consumption, develop specific energy conservation projects and implementation plans, and achieve their goals on schedule.
6.4 Implementation and Assessment
In order to implement energy conservation and emissions reduction targets, the State Council formulated a special “Implementation Plan for the Evaluation System for GDP Energy Intensity,” which went into effect on November 17, 2007. The evaluation, assessment, and punishment/reward systems have been established and improved, and government and corporate responsibilities have been strengthened. The 1,000 key enterprises are assessed on a separate track from the regional governments (municipal and provincial).
The assessment for each track includes two parts: first, whether annual energy saving targets have been achieved, including audits of the ratio of GDP to total energy consumption. These energy conservation targets are mandatory; if they are not completed, the assessment result will automatically be “incomplete.” The second part of the assessment involves evaluations of concrete energy conservation efforts by local governments and key enterprises. These assessments evaluate, for example, whether to develop the relevant laws and regulations for energy conservation and consumption reduction, whether to set up a special fund to support energy conservation, and whether to improve the energy statistics and service system.
To comply with these assessments, the provincial governments are required to submit an official report to the State Council, explaining whether the local energy conservation goals have met, and whether corresponding work has been carried out. The evaluation and assessment working group will be composed of the National Development and Reform Commission, together with a number of other departments. Through on-site verification and spot checks, these agencies will compile comprehensive evaluation reports. After approval by the State Council, the National Development and Reform Commission will make the evaluation and examination results available to the public by. According to regional territoriality principle, the evaluation and assessment of the 1,000 key energy-consuming enterprises is to be organized and implemented by provincial energy conservation directors, and the examination results will also be made available to the public by the National Development and Reform Commission after audit.
The “implementation plan” clearly specified incentives and punishment measures based on the results of these assessments. Whether the goal of energy conservation has been attained will be an important factor in a comprehensive appraisal of the leading government bodies and cadres. If the assessment reveals a failure, the leading cadres of the provincial People’s Government cannot take part in the annual awards or be granted honorary titles, and the proposed construction of new high energy-consuming projects in these regions will be suspended by the central government. Likewise, failing enterprises will be criticized publicly, will not be allowed to take part in the annual awards, and will not be granted exemptions for quality supervision. Their proposals for constructing new high energy-consuming projects, as well as increased industrial land use, will be suspended. For the wholly state-owned enterprises and state-holding enterprises, the attainment of energy conservation and consumption reductions will also become important indicators of performance and will directly affect their annual bonus income. Those provincial governments and key enterprises that failed the assessment will be given a limited period to improve; those that exceeded their targets will be rewarded.
In 2008 the first set of provincial government assessments were launched by working groups comprising a number of government agencies. The author and other experts from the Energy Research Institute took part in these working groups. The assessment results were openly published. The majority of the provinces succeeded in attaining their goals for 2007, and the seven provinces that failed to meet their goals had to submit to the State Council specific plans for how they will rectify their shortcomings. Interestingly, the working groups found that the item-by-item assessment—which made it a necessity for the local government to systematically review energy conservation policies and measures—resulted in an increased awareness of local governments regarding energy conservation and consumption reduction.
The majority of the 1,000 key enterprises, known as “the 1,000,” are also on track to meet their targets. The 1,000 as a whole have committed to achieving energy conservation to the order of 100 million tons of coal equivalent during the “Eleventh Five-Year” period. From the fourth quarter of 2006 onwards, energy audits and energy conservation planning was carried out on these groups, known as the “1,000.” In the first half of 2007, energy audits and energy conservation plans were completed for most of the “1,000.” The relevant authorities in the provincial government organized experts to assess the energy audit report, and those who did not meet the standards were required to address their shortcomings. In 2007, energy consumption per unit produced in the “1,000” decreased significantly, and energy intensity figures for the electricity, steel, cement, oil processing, non-ferrous metals, chemicals, and paper manufacturing industries decreased by 3 to 10.5 percent. In 2008, the National Development and Reform Commission published the assessment results of the “1,000” in 2007. Among the 953 enterprises that signed the “Energy Conservation Target Obligation,” 41 percent exceeded their obligations, 48 percent completed their obligations, 3 percent basically completed, and 8 percent failed. In 2007, the “1,000” achieved a total energy conservation sum of 38.2 million tons of coal equivalent.
6.5 Specific policy measures promoting energy conservation
The Chinese government has carried out a wide range of policy adjustments in order to achieve the energy conservation targets set up for the “Eleventh Five-Year” period.
In industrial development policy, there are limits on the development of energy-intensive industries, and the government has developed more stringent entry standards for technology in these industries. These policies effectively prevent both the deployment of inefficient technologies and the construction of energy-inefficient factories. In addition, development policies for the export industries have been adjusted. For energy-intensive, highly polluting, and resource exporting industries, the export tax rebate policy was eliminated and an export tax was introduced or raised. These actions have helped suppress the former trend of rising high-energy high-pollution product exports.
China has also begun to take advantage of consumer taxation to encourage energy conservation. For example, prices for high fuel-economy vehicles have decreased, while prices for low fuel-economy vehicles have increased. Starting in 2009, the government strengthened this price signal by substantially increasing the consumer tax rate for a range of refined oil products like gasoline and diesel, making the consumer tax an important component of the price.
A substantial investment increase was made in energy conservation as well. In 2006, central and local government funds for supporting energy conservation reached 1.72 billion yuan. Coupled with banking and corporate investments, energy conservation investment almost doubled from 2005 to 2006. In 2007, the central government budget for supporting energy conservation reached 12.5 billion yuan (thirteen times to that in 2006), including 9.0 billion yuan invested in key energy conservation projects. In 2008, this allowed 700 enterprises to launch projects that will conserve energy through technology upgrades. If these technology upgrades are successful, together the projects will create 30 million tons of energy conservation capacity. At the same time, local financial support for energy conservation and emissions reduction also started to increase, as many local governments have provided funds to the central government to support this type of project.
Some of this new funding from the central government comes in the form of a new program known as “Rewards Instead of Subsidies.” For key technological energy conservation renovation projects, this program gives enterprises a 200 to 250 yuan reward from the central budget for each one ton of coal equivalent saved. The rewards for key energy conservation projects added up to 7.5 billion yuan for 2008, and the projects incentivized by these rewards are expected to conserve 35 million tons of coal equivalent.
China has further strengthened the constitution and application of energy efficiency standards. In order to implement the revised “Energy Conservation Law,” 46 new standards were enacted in 2008, including 22 for energy consumption limits per unit produced, 11 for the end-use energy efficiency of relevant products, 5 for economical fuel use indicators in the transportation sector, and 8 basic standards for energy efficiency metering, computing, etc. China also announced fuel economy standards for automobiles, covering all varieties of vehicles, which are more stringent than those in the international community. All in all, China has established nearly 200 energy efficiency standards.
The central government has announced a new energy labeling system for end-use products as well. At present, major electricity consuming appliances such as air conditioners, refrigerators, and microwave ovens have adopted this energy labeling system. These standards and labels have played an effective role in curbing the excessive growth of energy-intensive industries and in guiding conservation-minded lifestyle and consumption patterns.
In order to accelerate the technological upgrade of key industries and improve energy efficiency in the “Eleventh Five-Year” period, the government has begun to eliminate outdated production capacity in high energy-consuming industries. In addition, it set special targets for the iron, steel, building materials, electricity, and chemical industries. By the end of 2007, the steel industry had eliminated 47 million tons of outdated iron smelting production capacity and 37 million tons of steel production capacity, and the cement industry had eliminated 52 million tons of outdated production capacity. The government not only improved the technical standards for energy intensity, but also gave subsidies to the enterprises that eliminated outdated production capacity in advance. In 2007 the central government provided 4 billion RMB in subsidies to accelerate the elimination of lagging production capacity.
From 2006 to the first half of 2008, a total of 25.87 million kilowatts of small units in the power industry have been shut down, accounting for half of the goal for the “Eleventh Five-Year Plan.” Calculations show that after shutting down these small thermal power units and producing this amount of power using high-efficiency large-scale generators, about 32.6 million tons of coal could be saved and 550,000 tons of sulfur dioxide emissions could be reduced annually.
6.6 Overall progress and remaining challenges
China has made considerable achievements in enhancing energy conservation, largely due to the ambitious government efforts undertaken in the past few years. Energy intensity of GDP has started to drop fast, reversing the trend of steady increase that lasted until 2005. In 2006 and 2007, China’s energy intensity per unit of GDP decreased by 1.33 percent and 3.66 percent respectively. It is estimated that in 2008, it will drop by 4.5 percent. The per-unit energy consumption of China’s main energy intensive products dropped considerably. For instance, the average share of coal in the power supply dropped more than 2 percent annually between 2005 and 2008. At present, the average thermal power generation efficiency in China is higher than that of the United States and higher than the world average. If this trend continues, it will be possible for China to achieve the target of reducing energy intensity by 20 percent in five years (by 2010). After 2010, the country will formulate new five-year and annual energy efficiency improvement targets and energy conservation actions, which will result in further reductions in the energy intensity of GDP.
China’s energy conservation target is aggressive. During the past 30 years, worldwide energy intensity on average dropped only by 1.2 percent per annum, while China’s challenging target is to achieve annual reduction of 4.4 percent. After three years’ effort, China understands that its energy conservation target is far beyond the scope of existing energy technology and traditional energy economics. China’s society must pursue new types of industrialization, scientific development perspectives, and sustainable development.
The world’s current patterns of economic development and globalization provide neither the mechanisms nor the conditions necessary for sustainable development and low carbon economies. The existing developed countries’ consumption pattern and production model cannot provide a model for China’s new type of industrialization. Even for countries with high energy efficiency, such as Japan and France, average energy consumption per capita is still three times higher than China. China needs to study and explore a new consumption pattern, including new urban development models, and change people’s consumption expectations and targets. Even with aggressive efficiency measures, the existing housing and transportation patterns in the United States or Europe will not be future development targets for China.
The appropriate targets have yet to be determined, however. Technological progress is not sufficient to significantly lower future per-capita energy consumption in China past the existing level of developed countries. The current market is leading society toward luxury consumption. People are expecting larger homes, bigger and faster cars, and long-distance travel. Developing ways to balance resource conservation, environmental protection, urbanization, and industrialization will be a long-term challenge for China.
7. Renewable Energy Promotion
China enacted the Renewable Energy Law in 2006. The law, which promotes renewable energy development in all aspects, states that China gives priority to the utilization of renewable energy, and that the government will promote the establishment and development of markets for renewable energy by establishing quantitative targets and relevant policy measures. The law prescribes medium- and long-term targets for the quantity of renewable energy supply at the national level, and similar targets for each province. According to this law, the Chinese government’s national targets require that renewable energy contribute 10 percent of the total primary energy by 2010, and 15 percent by 2020. Local governments, in turn, have developed their own programs and targets for renewable energy share.
As a measure to enforce this law, China has adopted a policy to promote grid-connected renewable energy, with preferential tariffs for renewable power generation, and a pricing scheme that shares the increased cost among all power users. Currently wind power enjoys a grid feed-in tariff 60 percent higher than that for coal-fueled power generation.
As a result of the above targets and preferential policy measures, renewable energy is expanding rapidly in China. Wind power companies are booming. Commissioned wind turbines reached 12GW in 2008, with a growth rate of more than 6GW per year. The annual increase in wind power capacity is likely to reach 10GW by 2010. The original target of 30GW of wind power development by 2020, established in the current national program, will certainly be exceeded. China will become the world leader in wind power capacity in the near future, with the potential for several hundred GW in the long run.
China also possesses the world’s largest hydroelectric power system, and at present considers hydroelectric power to be its most important source of renewable energy. More than 170GW of hydropower have been developed to date, among which 51GW are small hydro. By 2020, about 300GW of hydropower will be exploited, and in the longer term hydropower capacity may reach 400GW or more, with 70GW small hydro.
China is already the world’s biggest user and producer of solar water heating technology. More than 120 million square meters of solar heat collectors are currently in use, displacing about 20 million tons of coal. Other solar power generation technologies are also produced in China, including photovoltaic (PV) systems. China has become major producer and large-scale exporter of PV cells. The central government has invested 2 billion yuan to purchase PV power systems for remote and poor towns and villages to provide basic power access where the grid is not accessible. Solar power is also being used in many public buildings and facilities, including the Olympic village in Beijing.
The government also supports development of various biomass technologies. In rural areas, biogas is one of the renewable energy technologies supported and subsidized by the government. The existing set of biogas facilities provides 10 billion cubic meters of gaseous fuel for about 2,400 farm families. Yet there remain many barriers for biomass large scale business, including land availability constraints.
When hydropower is excluded from the tally, renewable energy production is still very low compared to traditional energy sources. The cost of renewable energy is often high and therefore uncompetitive with fossil fuel prices. At present, renewable energy can survive and expand only through preferential policies and government subsidies. Solar power generation, for instance, is too expensive to use for everyday purposes and is limited to the niche market. The expansion of renewable energy depends upon the further improvement of technology, to lower the cost. Nonetheless, China has high expectations for renewable energy in the future, especially solar energy.
8. Development of low carbon energy
Given that coal accounts for about 70 percent of China’s total primary energy, diversification is the best approach for China as it seeks to develop a low carbon energy future. All alternatives will be fully explored to decrease the share of carbon-intensive energy. The first goal is to develop low carbon energy to meet increasing demand, instead of using more coal. The next step will be to decrease coal usage, eventually replacing it completely.
The energy market in China is huge and expanding, with growing requirements for alternatives to substitute current carbon-intensive energy.
Nuclear power is likely to be one of the most important energy options for China in the future, and general societal opinion supports nuclear development. China is behind the rest of the world in terms of nuclear energy technology, with the first nuclear power station commissioned in 1992 and only about 9 GW in operation to date. But nuclear power has recently become a major focus of power development and domestic nuclear technology—including fast breeder and high temperature reactors—is actively being developed. The previous national plan was to commission 40 GW of nuclear power by 2020, but current trends point toward more than 70 GW by that year. The longer-term target will be 200–300GW or even more. International cooperation has been important in this process, as the advanced AP1000 third-generation nuclear power reactor from the United States is being introduced. Cooperation on nuclear technology with France, Russia, Canada, and other countries has also been established, and China has joined the international fusion technology collaboration of ITER. Sufficient attention is being paid to nuclear safety and security, including proliferation issues, throughout this process. With stable social conditions, the safety and security of nuclear power construction and operation will be ensured.
In addition to nuclear energy, the development of other cleaner fuels such as natural gas and coal bed methane is increasing as well. Since 2000, the average annual growth rate of natural gas production in China reached 14 percent and will continue to grow in the future. Cooperation on natural gas pipelines with China’s neighbors, including Central Asian countries and Russia, is being developed and improved upon. LNG projects with many countries around the world are under development, which will introduce cleaner fuel to China, change the country’s energy structure, and reduce carbon emissions.
9. Looking to the Future
As China continues its sustainable development effort, technological innovation is a key factor in improving energy efficiency and developing a low carbon economy. China attaches great importance to energy technology development and relevant international collaboration. Almost all of the existing clean energy generation and utilization technologies are being developed or are under demonstration in China. The energy market in China is huge and expanding, with growing requirements for alternatives to substitute current carbon-intensive energy. This creates great market potential for all the new and advanced energy technologies. Highly efficient end-use energy technology is extremely important, including extremely low energy consumption buildings and high-efficiency vehicles and transportation systems—including electric cars and cars running on alternative fuels. In addition, clean coal technology, advanced renewable energy technology, and the next generation of bio-ethanol will also make large contributions. There is much room for international collaboration in all of these endeavors. The advancement of energy technology, combined with a new low-carbon model for sustainable development, will determine China’s energy future.
1At the exchange rate of 8 RMB/USD, which held from 1994 to 2006, this amount is equivalent to $37.5 billion. At the current exchange rate of 6.82 RMB/USD, it is equivalent to $44 billion.
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