4. Case study – energy policy
4.1. China‟s energy Problem – the roots of the need for a better energy policy
4.1.3. China‟s energy production and supply
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
4.1.3. China‟s energy production and supply
Fossil primary energy Coal
Coal is China‟s most important energy resource. Not only has China an immense domestic coal reserve which according to estimates is either 118 billion tons, the third largest,244 or 188.6 billion tons, the second largest,245 and about 20% of all known coal reserves. Estimates for coal resources (the potentially accessible coal in the ground) are as high as 334.2, with an additional 686.9 billion tons that could potentially be exploited with advanced technology. Coal reserves are spread across China but mainly in the provinces of Shanxi, Inner Mongolia, Shaanxi and Ningxia, which account for two third of all proven reserves. Obstacles to the coal industry are the difficult circumstances of mining. Most of the reserves cannot be exploited by opencast mining. The average mining depth is expected to be 500 meters in 2010. One third of the proven reserves lie within 300 meters of the surface, about the half between 200 and 600 meters. And the remaining reserves are located at depths of as much as to 1000 meters.246 The world share of production reflects the highly developed coal mining sector. China‟s share in world production of coal rose from 18.7% (1973) to 46.2% (2006) and 47.2 in 2008.247 In 2005, 76.4% of its primary energy production came from coal.248
244 Andrews-Speed, "Energy Policy and Regulation in the People's Republic of China", 17.
245 Wang, "An imbalanced development of coal and electricity industries in China," 4961.
246 International Energy Agency, Cleaner Coal in China (Paris: OECD/IAE, 2009d), 37.
247 International Energy Agency, Key World Energy Statistic (Paris: International Energy Agency, 2007), 14, International Energy Agency, "Coal Information 2009".
248 Steinfeld, "Energy Policy", 140.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Table 16: Major hard coal producers [Mt]
2006 2007 2008e
PR of China 2320.2 2466.4 2761.4
United States 991.5 981.7 1006.6
India 428.2 454.4 489.5
Australia 299.7 323.8 325.4
Russia 310.4 217.9 247.1
Indonesia 195.8 230.2 246.2
South Africa 244.8 247.7 235.8
Kazakhstan 92 93.5 104.4
Poland 95.2 88.3 84.3
Colombia 65.6 69.9 78.6
Ukraine 61.4 58.7 59.3
Vietnam 38.9 42.5 39.9
Canada 29.9 32.8 32.2
DPR of Korea 27.2 23.9 28.6
Germany 23.8 24.2 19.1
Other 84.4 86 85.9
Total 5209 5441.9 5842.3
Source: IEA, Coal Information 2009249
The table highlights the importance of the coal industry for China‟s primary energy supply. In only one year between 2007 and 2008, the expansion of its coal production was equivalent to the world‟s fourth largest producing country Australia. In only two years between 2006 and 2008, the expansion amounted to more than 440 million tons a year, which is approximately the yearly production capacity of the world‟s second largest producing country India. Production will have to be expanded even further.
The IEA estimates a yearly average growth of 2.7% per year between 2007 and 2030 for Chinese coal demand and 2.5% for the production.250 This higher rate of demand indicates that China will become a major net coal importer.
249 International Energy Agency, "Coal Information 2009", 16.
250 International Energy Agency, World Energy Outlook 2009 (Paris: OECD/IEA, 2009b), 90.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Coal has always been the main source of energy in China. For a long time coal was the main energy resource for electricity, railroad transportation and heating.251 To date, its importance remains unchanged for the electric power sector.252 During the first stages of the development of the coal industries in the PRC, “the township and village-run mines emerged as the major force of coal production.”253 Coal shortages caused by the exploding demand for energy changed China‟s policy, allowing local government, collective and private-owned coal mines to establish new mines.254 The energy policy focused on promoting the growth of coal production.255 This policy shift has dramatically shifted the production structure. Although the output of central government owned mines (CGMs) increased from 344 million tons in 1980 to 1.03 billion tons in 2005, the percentage declined from 55% to 47%. The rest was produced by the mushrooming small mines, LGMs, and village, town, and private-owned mines (VTPMs). These mines are small in size but, with 20,000 legal and several tens of thousands of illegal mines, large in number. Wu (2003) estimates that by 1998, the total number of mines in China was as follows:
“In August 1998, there were 94 large state-owned coal companies, 2,500 local government-owned mines and 75,000 township and village-run small mines […]. By September 2000, however, about 30,000 small mines were forced to close their businesses due to environmental and safety concerns.”256
251 Thomson, "The Chinese Coal Industry: An Economic History", 1.
252 Steinfeld, "Energy Policy", 135.
253 Wu, "Deregulation and growth in China's energy sector: a review of recent development," 1417.
254 Bing Wang, "An imbalanced development of coal and electricity industries in China," ibid.Vol. 35, No. 10 (2007), 4961.
255 Yanrui Wu, "Deregulation and growth in China's energy sector: a review of recent development,"
ibid.Vol. 31, No. 13 (2003), 1417.
256 Ibid.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
It should be noted that illegal mines do not mean that private persons run these mines.
Township and village-operated mines can be illegal in that they lack permits from the central-government.
Table 17: Coal mine categories: number of mines and average production per mine, 1995 and 2005257
Coal for electricity plants is still the first choice for many municipalities. Due to the demand and the policy target for high economic growth, these conventional coal-fired power plants are built as fast as possible.258 The question of how the pollution can be reduced involves several aspects. The coal in China is of relatively poor quality and causes an above average pollution, which worsens the pollution problem. The lack of adequate technology to clean the exhaust gases and the high costs contribute considerably to the poor air quality. In 2001, it was estimated that only 5% of the coal burned in Beijing could be considered clean.259 Proposals to reduce these problems have no common denominator. “[S]ome rue the rapidly growing contribution of China‟s coal industry to global climate change, while other express alarm over the efforts of China‟s commercial entities to source cleaner liquid fuels from abroad.”260
257 International Energy Agency, "Cleaner Coal in China", 43.
258 Lester and Steinfeld, "China's Real Energy Crisis," 38.
259 Saich, "Governance and Politics of China", 295.
260 Lester and Steinfeld, "China's Real Energy Crisis," 38.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Oil
Crude oil domestic production in China is no longer large enough to meet the demand.
With a share in 2005 of 12.6% of all primary energy, oil remains at a very low percentage.
Table 18: Oil production, consumption and trade in China since 1971
Oil in China is important for China‟s transportation sector but only to a minor extent for its electricity production. The „oil-challenge‟ for China is mostly related to its foreign policy. Oil dependence has made China an active player in the world market, in particular in the Middle East, and has left little room for ethical considerations in its resource-based foreign policy.261 It is likely that external pressure from competing big players will continue to rise. In the past, China was a net oil export country. The rising demand was larger than the domestic enlargement of oil production. In the mid 1990s, China became a net oil importing country. This is reflected in a high level of import dependency which will surpass 50% in 2010. Estimates for 2030 are as high as 75%.262 Despite its low share in total primary energy supply, as far as the rest of the world is concerned, oil will become an even more significant component of China‟s energy policy.
261 David Zweig and Bi Jianhai, "China's Global Hunt for Energy," Foreign Affairs, Vol. 84, No. 5 (2005).
262 International Energy Agency, "Cleaner Coal in China", 78.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Natural Gas
In the 1990s, China discovered several large natural gas fields, which boosted proven reserves to 1.88 trillion cubic meters and about the same amount of unproven reserves.
Natural gas accounts for only 3% of its primary energy consumption but is seen as supplement to its energy mix. Because domestic production started from a very low level, most gas was imported. In April 2007, the 11th Five-Year Plan for Energy Development proposed improving the natural gas supply by means of better infrastructure such as stations for importing liquefied natural gas (LNG) and the exploration of Chinese offshore oil. The plan estimated an annual growth rate of 11-13% over the next 15 years, reaching a yearly consumption of 200 billion cubic meters of gas by 2020, of which 100bcm are expected to originate from domestic production.263
Nuclear
China has ambitious plans to develop its nuclear industry. Even with the plan to add an additional 40 GW capacity by 2020,264 the total amount of produced electricity by nuclear power plants will only account for 4% of total electricity production.265 Nuclear energy is not only considerably more expensive than coal, but numerous problems relating to it remain unsolved. Although it does not have the disadvantage of polluting emissions, the nuclear waste problem and complex security challenges are significant and have not yet been solved anywhere in the world. Although China has uranium reserves estimated at 48,800 tons, it depends heavily on uranium imports.
Domestic production reached 750 tons in 2007, but China‟s nuclear power plants‟
consumption was double that. The new plants‟ uranium fuel will mostly be imported from Kazakhstan, Australia, Canada and Niger.
263 Ibid., 81.
264 Steinfeld, "Energy Policy", 144.
265 Lester and Steinfeld, "China's Real Energy Crisis," 37.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Table 19: Nuclear power generation capacity in China
Source: IEA (2009) Hydropower
Water is today China‟s most important renewable energy. Although China, with 108 GW, has the world‟s highest installed capacity in hydro electricity,266 hydro power production accounts for only a fraction of the total energy production. It is estimated that only 25% of China‟s potential hydropower is exploited.267 China‟s Energy Research Institute estimates a feasible capacity of up to 400 GW.268 Experience from past mega-projects, notably the Three-Gorges Dam, has demonstrated the immense social costs inherent in such projects, mainly as a result of forced migration and resettlement programs,269 as well as huge environmental risks.270 Other renewable energies
As a result of falling prices in alternative energy production, in particular wind turbines, clean energy will doubtlessly play an important role in the future. China has an enormous potential to save energy by better insulating buildings and the use of solar energy for heating water. In recent years, several policies have been developed to promote renewable energy, notably the Renewable Energy Law implemented in
266 International Energy Agency, "Key World Energy Statistic", 19.
267 Wang, "An imbalanced development of coal and electricity industries in China," 4961.
268 International Energy Agency, "Cleaner Coal in China", 83.
269 Michael M. Cernea, "For a new economics of resettlement: a sociological critique of the compensation principle," International Social Science Journal, Vol. 55, No. 175 (2003), Paul K.
Gellert and Barbara D. Lynch, "Mega-projects as displacements," International Social Science Journal, Vol. 55, No. 1 (2003), Gørild Heggelund, "Resettlement Programmes and Environmental Capacity in the Three Gorges Dam Project," Development and Change, Vol. 37, No. 1 (2006), Jun Jing, "Rural Resettlement: Past Lessons for the Three Gorges Project," The China Journal, No. 38 (1997).
270 R. Fuggle and W.T. Smith, Experience with Dams in Water And Energy Resource Development in The People's Republic of China World Commission on Dams (WCD), 2000).
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
2005 to subsidize the industry with guaranteed feed-in tariffs for renewable energy power 271 and to lower VAT on small hydro power or wind energy (6% / 8.5% instead of 17%)272 or the promotion for eco-cities.273 Although China will play an important role in installing new wind and solar power capacity, the contribution of clean energy sources to the nation‟s energy demand will be marginal.
Table 20: Renewable energy targets in China's medium and long-term development plan274
Electricity
Electricity plays a critical role. In 2004, China used 43.4% of all of its primary energy to produce electricity, considerably above the world average.275 Coal is the single largest contributor to the production of electricity. Although available data are out of date and the electric generating capacity has nearly doubled, the relative share of power plant types has changed not dramatically. According to the National Bureau of Statistics of China, the electricity generated nearly doubled between 2002 and 2007 to 3,271 TWh. More than 80% of all electricity is produced by thermal power.276 Thermal power became even more important during this period. Between 2002 and 2006, the consumption of coal rose on average more by than 15%, whereas oil
271 International Energy Agency, "Cleaner Coal in China", 83.
272 OECD, "Eco-Innovation Policies in The People's Republic of China", 15(
273 Ibid., 26.
274 International Energy Agency, "Cleaner Coal in China", 87.
275 Zhang, Weili, Yumei and Yingxu, "External costs from electricity generation of China up to 2030 in energy and abatement scenarios," 4295.
276 International Energy Agency, Electricity Information 2009 (Paris: OECD/IEA, 2009e), 206, National Bureau of Statistics of China, China Statistical Yearbook 2008 2008), Paul A. Steenhof and Whitman Fulton, "Factors affecting electricity generation in China: Current situation and prospects,"
Technological Forecasting and Social Change, Vol. 74, No. 5 (2007).
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
22.2%) and gas (-42.6%) had a negative growth in 2006.277 The installed power generation capacity surpassed 2007 700 GW.278
Table 21: Fuel shares of generating capacity and output in China in 2002 Electric Generating Capacity Electricity Generated
Power Plant Type Amount Share Amount Share
Coal-Fire Power 252.1 GW 66.50% 1281 TWh 74.40%
Gas or Oil-Fired 12.1 GW 3.20% 61 TWh 3.60%
Large Hydropower 84.6 GW 22.30% 271 TWh 15.70%
Other Renewable 26.0 GW 6.90% 83 TWh 4.80%
Nuclear Power 3.7 GW 1.00% 25 TWh 1.50%
Total 378.5 GW 100.00% 1721 TWh 100.00%
Source: APERC279
Coal has the greatest share of capacity, by a wide margin. Total production reached three-quarters. Even if we take account of the full capacity of the Three-Gorges Dam, which will be completed in 2009 and will raise the hydropower capacity to 18.2 GW,280 hydropower‟s share of the total electricity generation remains low. The growth in China‟s electricity consumption is very impressive. For instance, to meet its additional need for electricity of 102 GW in 2007,281 China should have built more than five Three-Gorges Dams. The additional demand for electricity production capacity by 2030 is estimated at 1,326 GW, which accounts for 28% of the world‟s new installed capacity.282
277 OECD, China - Defining the Boundary Between the Market and the State OECD Reviews of Regulatory Reforms (Paris: OECD, 2009b), 244.
278 Ibid., 235.
279 APERC (Asia Pacific Energy Research Centre), Energy in China: Transportation, Electric Power, and Fuel Markets (Tokyo: Institute of Energy Economics, 2004), 54.
280 Hongliang Yang, Overview of the Chinese Electricity Industry and its Current Uses 2006), 5.
281 Steinfeld, "Energy Policy", 126.
282 International Energy Agency, "World Energy Outlook 2009", 102.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Table 22: China‟s power generation growth rates January 2003 – April 2009
Source: R. K. Morse (2009)283
It is clear that China needs other resources in addition to hydro. Most of the new projects are coal-fired power plants. They are not only built very quickly, but in their simplest (but dirtiest) form of pulverized coal power generation, at about 3.5 U.S.
cents per KWh, are also the cheapest of all alternatives.284 In order to optimize its cost structure and environmental footprint, newer coal fired power plants are much more efficient and need less coal for producing the same unit of electricity.
283 Richard K. Morse, A drop in Chinese electricity production, for now Program on Energy ans Sustainable Development, Stanford University, 2009).
284 Yang, "Overview of the Chinese Electricity Industry and its Current Uses", 38(
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Table 23: Average efficiencies of coal-fired power plants in China by age and unit size
Source: IEA (2009)285
After the founding of the PRC in 1949, the Communist Party considered electricity production to be an important policy and nationalized its production.286 The initial fast development of electricity production slowed down when China broke diplomatic ties with the Soviet Union in 1960. Russian technological assistance was discontinued and China was forced to build low-technology and small-sized power plants under central planning.287 Today‟s structure is a result of these events. The new reforms initiated in the late 1980s placed a strong emphasis on the development of the electricity sector. 288 For example, until 1985 ownership of generation was the central government‟s monopoly. Reforms allowed local governments, SOEs and to some extent even private investors to develop their own generating facilities.289 The liberalization continued in 2003 as the government announced its plan to develop regional wholesale power markets and an efficient exchange of power between regions.290 The fruits of the reform included a dramatic growth in the power sector where, for instance, between 2004-2006 generating-capacity grew by nearly one third.291 But the costs of this fast growth were immense. The coal-fired power plants are extremely dirty and produce vast amounts of health damaging emissions (SO2,
285 International Energy Agency, Energy Efficiency Indicators for Public Electricity Production from Fossil Fuels (Paris: OECD/IEA, 2008b), 51.
286 Zhang and Heller, "Reform of the Chinese Electric Power Market: Economics and Institutions", 9(
287 Zhang and Heller, "Reform of the Chinese electric power market: economics and institutions", 85.
288 Wu, "Deregulation and growth in China's energy sector: a review of recent development," 1417.
289 Xiaochun Zhang and John E. Parsons, Market Power and Electricity Market Reform in Northeast China MIT Center for Energy and Environmental Policy Research, 2008), 1.
290 Ibid., 2.
291 Lester and Steinfeld, "China's Real Energy Crisis," 35.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
NO2, and PM10) and cause a number of other external costs.292 However, emission free production such as the hydropower from the Three-Gorges Dam has social, political and environmental consequences that help to “create enormous challenges for a government bent on rapid economic development at any cost.”293