CHINAS POWER SECTOR: GRAPPLING WITH THE GLOBAL FOOTPRINT

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CHINAS POWER SECTOR GRAPPLING WITH THE GLOBAL
FOOTPRINT

• 62ND ANNUAL MEETING
• ENERGY BAR ASSOCIATION
• WASHINGTON, D.C.
• MAY 1, 2008

ROBERT W. GEE PRESIDENT GEE STRATEGIES GROUP LLC
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Overview

• Chinas economic juggernaut and its significance
  for escalating energy demand
• Challenges in achieving sustainable development
• Major highlights of Chinas current energy
  strategy
• Efforts to reform government oversight of energy
  industry and to introduce measures to liberalize
  power sector
• Issues regarding carbon/greenhouse gas (GHG)
  mitigation

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Chinas Economic growth Driving Energy Demand

• Chinas economy ? has grown an average of 10
  percent per year over last 25 years
• China consumes
• Half of the worlds cement
• Quarter of all steel
• Two-fifths of all copper
• China is a prodigious consumer of petroleum
• Second largest oil consumer in the world third
  largest oil importer
• Accounts for nearly one-third of global oil
  growth in the last decade, adding demand
  equivalent to one medium size country per year

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One illustration of this economic expansion

• In 2005 alone, Shanghai completed towers with
  more space for living and working than there was
  in all the office buildings in New York City.
• Shanghai has 4,000 skyscrapers, double the number
  in New York, with plans to build 1,000 more by
  the end of the decade.
• Every three years, China adds building capacity
  equal to that of the entire United States

Source New York Times, China Builds Its Dreams,
and Some Fear a Bubble, October 18, 2005
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Major Challenges to Energy Sector

• Imbalance of energy supply and demand with
  increasing dependence on foreign supply
• Irrational energy portfolio with over-reliance on
  coal
• Lack of adequate transmission infrastructure has
  hampered west (resource) to east (market) power
  delivery
• Underdeveloped rail transportation system has
  impeded coal carriage
• Power sector unfailingly subject to boom/bust
  cycles from shortages to surpluses, and
  vice-versa

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Energy Demand

• Since 1980, Chinas energy demand has grown 4.3
  percent annually
• Chinas energy intensity (energy consumption per
  unit of GDP)
• Historically, had been low, but in most recent
  years has reversed
• Today, to produce 1 million of GDP requires
• 2.5 times energy of US
• 5 times that of EU
• 9 times that of Japan
• Reasons
• Low proportion of high value-added products
• Higher proportion of industries with high energy
  intensity in GDP (driven by countrys
  macroeconomic goal of promoting investment in
  heavy industry)
• Low energy efficiency Chinas industrial
  processes consume 20 to 40 percent more energy
  than those of OECD countries
• But Chinas per capita energy consumption still
  low
• Was 39 percent (oil), 5 percent (natural gas),
  and 37 percent (electricity) of world average
  (2006)
• Eight, 2 and 15 percent of United States per
  capita consumption (2006)

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Chinas Primary Energy Resource Portfolio
(composite of most recent 3 years)
Natural Gas 2.6
Oil 19.3
Nuclear 2.0
Wind 0.1
Hydro 14
Coal 69
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Chinas Coal Dependence

• Principal indigenous fuel resource, mostly low
  grade
• One-third originates from locally-owned
  village-and town mines
• Small mines are inefficient and have world record
  fatality rates
• Consumes over 2.2 billion metric tons/year
• one-third of the worlds total and twice that of
  U.S.
• More than that of the US, India, and Russia
  combined
• Makes up 69 percent of Chinas primary energy
  consumption, and 55 percent of power generation
  requirements (2006)
• Each week, China builds one additional,
  coal-fired 1 GW power plant
• Annually, rate of growth equals total installed
  thermal generation of the United Kingdom ( 74
  GW)
• Consumption projected to increase from 22.7
  quadrillion Btu per year (2004) to 55.9
  quadrillion by 2030 averaging 3.5 percent
  growth annually
• Became a net importer of coal in January 2007

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Environmental Impact of Chinas Coal Dependence

• China is home to 5 of the 10 most polluted cities
  in the world
• Power sector emissions responsible for 44 percent
  of SO2, 80 percent of NOx, and 22 percent of CO2
• International Energy Agency China will surpass
  U.S. in greenhouse gas emissions by 2010
• Netherlands Environmental Assessment Agency
  this already occurred in 2006 through reliance on
  coal and cement production

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Chinas Current Energy Policy

• In 11th Five-year Plan (2006-2010), elevated
  objective of sustainable development and energy
  efficiency
• Greater emphasis on environmental stewardship w/
  economic growth
• Energy Demand Goals
• Doubling year 2000 per capita GDP by year 2010,
  while reducing energy intensity per unit of GDP
  by 20 percent over 5 years, equating to 4 per
  cent reduction per year
• Goal fell short first 2 years -- realized 1.23
  percent reduction in 2006 and 3.27 percent in
  2007
• December 2007 Energy Policy White Paper
• Continues to urge goal of energy conservation
• Urges expansion of energy supply capacity, with
  continued emphasis on development of domestic
  resources for energy security purposes

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Chinas Current Energy Policy (Cont.)

• Accelerate energy exploration and production
• Increase the reserve and production capacity of
  domestic energy resources
• Cooperate in energy resources development
  worldwide (Go Out strategy of National Oil
  Companies)
• Optimize the energy resource mix
• Develop hydroelectric power (e.g., Three Gorges
  Dam)
• Promote the development of nuclear power
  additional 27 GW by 2020
• Signed recent agreement w/Westinghouse to
  construct 4 AP1000 nuclear plants
• Increase natural gas use from 3 percent currently
  to over 7 percent by 2025 (including LNG)
• Renewable Energy Law (enacted January 2006)
  mandates 10 percent of all of Chinas energy to
  come from renewable sources by 2020
• Includes wind, solar, water, biomass, geothermal,
  and ocean
• Mandates sale of all output to national grid
  company, at prices established by authorities
• Includes penalties for noncomplying purchaser

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Power Sector Reforms

• Reorganized State Power Corporations generation
  assets into five national generation companies
  created independent power producers that were
  still primarily state-owned
• Formed two grid corporations, established four
  auxiliary groups for construction, maintenance
  and design
• Created limited experiments to simulate power
  pooling and bidding in organized markets
  results were unsuccessful and not replicated
  elsewhere
• Tariff reforms -- ongoing but still problematic
  
• Lack of full cost pass through for higher coal
  costs
• Pressure to keep regulated prices low owing to
  inflationary fears, and maintenance of social
  stability
• Foreign investors in independent power projects,
  some lured by oversized return expectations,
  have disinvested (AEP, Sithe, Alstom, Siemens,
  Alliant Energy)

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Regulatory Reforms

• Over several years, government reorganizations
  were implemented to reform the
• decision-making process
• But progress is still hampered by
• interagency infighting over jurisdiction
• Battles between market-oriented officials and
  state-enterprise supporters
• Lack of transparency in decision-making processes
  
• In 2002, State Electricity Regulatory Commission
  (SERC) formed
• But still not a independent regulator
• Tariff jurisdiction still shared with National
  Development and Reform Commission (NDRC)
• NDRC still responsible for energy policy
• In March 2008, National Energy Commission created
  to develop national energy strategies
• But administration and oversight still resides in
  Energy Bureau of NDRC
• Possible prelude to creation of Energy Ministry
  to consolidate decision making authority which is
  now diffuse
• Continued discussion of enacting new Energy Law,
  but not likely this year

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Chinas Greenhouse Gas Mitigation Strategy The
900 Pound Global Gorilla

• As non-Annex I developing country under Kyoto
  Protocol, China is exempted from obligations to
  reduce GHG
• In June 2007, China announced National Climate
  Change Program
• Rejected caps on carbon emissions
• Emphasized renewable and clean energy deployment,
  greater research development, population
  control, and raising public awareness
• Looked toward leadership of developed world to
  reduce global intensity of carbon
• US ability to influence Chinas acceptance of
  carbon controls is limited until it also adopts
  regulation of carbon emissions
• China seeks technology for carbon emission
  mitigation, but disfavors reliance on commercial
  technology transfer
• Uses analogy of medicine for public health (e.g.,
  polio vaccine)
• Wants technology transferred as a public good
  

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Final Thoughts

• Coal use will continue to dominate Chinas
  resource mix in its power sector and general
  economy
• Market equilibrium between energy supply and
  demand will increasingly be frustrated by
  continued controls on energy commodity costs and
  delivered power prices
• No significant regulatory reform envisioned at
  this time
• Any control of Chinas future carbon emissions
  will be postponed for years
• For more, see Chinas Power Sector Global
  Economic and Environmental Implications, 28
  ENERGY LAW JOURNAL 421 (2007) by Robert W. Gee,
  Songbin Zhu, and Xiaolin Li (http//eba-net.org/do
  cs/elj282/Chinas_Power_Sector.pdf)

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Robert W. Gee President Gee Strategies Group
LLC 7609 Brittany Parc Court Falls Church, VA
22304 U.S.A. 703.593.0116 703.698.2033
(fax) rwgee_at_geestrategies.com www.geestrategies.co
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