CHINA

Energy Profile

China possesses abundant energy resources. However, the per capita

share of these resources and the volume of high quality supplies are on the

low side. Due to China’s economic reform and market liberalization, the

development of its energy industry has been rapid, with its energy

production and consumption substantially growing.

I. Energy Endowment

China’s resources of traditional fossil fuels comprise mainly of coal.

High quality fossil fuels like oil and natural gas are low and insufficient in

comparison to coal. The total amount of oil and gas resources is at great

variance to the economic and social development of the Chinese.

In comparison to other countries rich in resources, China’s main fossil

fuels can be characterized as abundant. However, its reserve-production

ratio (RPR) is quite low; and supply sustainability of resources is insufficient.

Although China has the world’s third most abundant remaining reserves of

coal, the huge quantities being extracted means that the RPR is only 35

years, equivalent to 29.7% of the world average. The RPR of oil is 21.4% of

the world average and natural gas 49.5%. In addition, given China’s large

population, its per capita share of fossil fuel resources is lower than the

world average.

Nonetheless, China is believed to have a huge potential to develop

renewable energy resources. Available to it are hydropower resources, the

highest in the world, and an annual utilizable biomass resources.

II. Energy Production

Since its implementation of its reform programme, the Chinese energy

industry has seen rapid development to coincide with the economic and

social growth of the country. Its energy production capacity in 2010 was

four times than that in 1980. At an annual growth of 5.3%, China is the

world’s top energy-producing country as the result of its insistence on

guaranteeing its energy supply by domestic resources. In effect, its energy

self-sufficiency rate has for a long time been maintained at a high level of

85% and above.

The energy production and supply framework has been based on coal

and centered in electricity, accompanied by the development of oil, natural

gas, new energy and renewable energy.

a. Coal Production

Coal, which accounts for 76.6% of China’s total production in 2010 is

the basic energy resource. The country is in fact with high concentrations of

production areas, such as the provinces of Shanxi, Inner Mongolia, Shaanxi

and Henan. China has been the world’s top coal-producing country.

b. Oil Production

Also, 9.8% of China’s energy production is sourced from crude oil. In

fact, China is the world’s fifth largest oil-producing country, after Russia,

Saudi Arabia, the USA and Iran. Given resource constraints, China’s annual

oil production is almost at peak levels, with limited future growth. To this

day, China’s oil production is shifting to the western regions and offshore.

Years of exploration and extraction have aged and limited the yield of the

major oilfields such as Daqing and Liaohe in the east. The western regions

and offshore oilfields are now the focus of China’s oil exploration and

development – believed to be the key in ensuring the stability of China’s oil

production.

c. Natural Gas Production

Natural gas, meanwhile, comprise 4.2% of the total energy production

and production of such is entering a very rapid development stage with a

high production growth rate! In 2010, the total natural gas production of

China accounted for around 3% of the world’s natural gas production.

Consequently, China is the worl’d seventh largest natural gas-producing

country after the USA, Russia, Canada, Iran, Qatar and Norway. China’s

natural gas-producing regions are concentrated in the eight key areas of

Sichuan-Chongqing, the Tarim Basin, Ordos, the Qaidam Basin, the Songliao

Plain, East China Sea, Bohai Bay and the Ying-Qiong Basin.

China is also rich in alternative natural gas resources like coal seam

gas or CSG, and shale gas. However, the developments of these alternatives

are still at the initial stage. Exploration and use of CSG and shale gas can

potentially increase the country’s energy supply and reduce the

environmental pollution. In fact, through technological advancements in

exploration techniques, these alternative natural gases are set to become

important in the future of natural gas supply in China.

d. Electricity Production

The implementation of China’s reform programme led to the rapid

development in its installed generation capacity. At the end of 2010, China

has become the world’s second largest electricity producer.

Thermal power is responsible for the bulk of China’s electricity

production. This is electricity helped produced by coal. Also, China is the

world’s biggest producer of hydropower. Nuclear power and wind power are

slowly developing while solar power generation is entering the large-scale

development stage. Primary power sources like hydropower, nuclear power,

wind power and so on took up 9.4% of the country’s total energy production

per year.

China’s electricity production is very different in structure from that in

the rest of the world, in particular some developed countries. In developed

countries, the greater part of their electricity is generated by natural gas

and nuclear power. In China, the overwhelming part of its electricity is

generated by coal. The share of coal-fired electricity in the total electricity

produced in China is higher than the world average by almost 40%.

III. Energy Consumption

China’s rapid economic and social growth has meant a sustained

growth in energy demands. In 2010, for example, China’s total primary

energy consumption reached 3.25 billion tonnes of standard coal – which is

5.4 times the 1980 level. Indeed, China has become the world’s biggest

consumer of energy.

China’s energy resource endowments and its energy policy of meeting

demands by domestic supplies have dictated the domination by coal of

China’s long-term primary energy consumption structure. Compared to

developed countries, China’s use of coal is on the high side, whereas the use

of oil, gas and clean energy is rather low.

However, since the implementation of its economic reform, China’s

primary energy consumption structure has on the whole been moving

towards consuming more high quality energy resources. It is likely that with

the continuous development of China’s new energy, it is predicted that the

ratio of coal in the country’s energy consumption structure will continue to

fall.

At the same time, given the high growth of the transport sector and the

rise in the living standards of Chinese citizens, the shares of oil and natural

gas in end-use energy consumption saw a considerable increase. End-use

electricity continued its rapid growth, accounting for almost 20%.

In 2010 China’s end-use energy consumption totalled 2.28 billion

tonnes of standard coal. The ratios of coal, oil, natural gas, electricity and

thermal power were 44.0%, 25.5%, 4.8%, 21.3% and 4.4% respectively.

IV. Price of Electricity and Government Involvement

China has the cheapest electricity in the entire world. While Germany

and Denmark have been leading the rank of countries with the most

expensive electricity rates in the world, China is found at the very bottom,

with electricity costing only 8 cents per kwH. In comparison to Germany’s

35 cents per kwH and Denmark’s 41 cents per kwH in 2011. The driving

force behind the changes in China’s electricity rates is their government,

because of the high level of intervention and subsidy they have had since the

People’s Republic opened its doors to the rest of the world.

V. How to Get Into Business

Prior to 1994, electricity supply was managed by electric power

bureaus of the provincial governments. Currently, utilities are managed by

corporations outside of the government administration structure. To end the

State Power Corporation's (SPC) monopoly of the power industry, China's

State Council dismantled the corporation in December 2002 and set up 11

smaller companies. SPC had owned 46% of the country's electrical

generation assets and 90% of the electrical supply assets. The smaller

companies include two electric power grid operators, five electric power

generation companies and four relevant business companies. Each of the

five electric power generation companies owns less than 20% (32 GW of

electricity generation capacity) of China's market share for electric power

generation. Ongoing reforms aim to separate power plants from power-

supply networks, privatize a significant amount of state-owned property,

encourage competition, and revamp pricing mechanisms.

At present, unlike many industrial and consumer industries where

private and foreign-invested companies have a large share though, China’s

power sector is dominated by big, bureaucratic state-owned or controlled

companies. The central government-owned power companies, of five major

generators, and two nuclear power generators, comprise of 50% of the

country’s energy industry. The local government owned power companies

and private and foreign IPPS comprise 40% and 10% respectively.

On the matter of foreign ownership of electricity companies, minimal

restrictions are imposed by the government. Investment projects are

classified by the industry sector in the Catalogue of Industries for Guiding

Foreign Investment (Catalogue) as "encouraged", "restricted" or

"prohibited". The Catalogue classification affects both the investment

approval process and the permissible level of foreign equity holding.

However, majority Chinese equity is required in some restricted industry

sectors, while in other restricted sectors, wholly foreign-owned enterprises

are prohibited. Generally, foreign-owned domestic enterprises/projects must

be approved by MOFCOM, subject to the requirements and limitations

provided in the Catalogue, (which may restrict or prohibit certain

acquisitions conducted by foreign companies). If the interests to be acquired

belong to a state-owned enterprise, State-owned Assets Supervision and

Administration Commission (SASAC) approval must be obtained. In addition,

if the acquisition causes a change of the approved shareholders/investors of

the target electric power enterprise/project, corresponding variation

approval for the change of shareholders/investors must be obtained from the

competent development and reform commissions.

VI. Turning Points/Thresholds/Goldilocks Conditions

The growth and development of China’s energy industry has been

described as rapid in the immediately preceding decades. In order to fully

understand the current status of the China’s energy, the turning points and

Goldilocks conditions must be discussed.

When the People’s Republic opened itself up to the world in the late

1970s, the Chinese power industry became the focus of both domestic and

international discussions because the country was seen as the engine room

of industrial momentum by the Chinese government. At this point in history,

cheap and available resources were prioritized because electricity was

almost completely subsidized by the government. After 1949, Chinese

authorities pursued rapid economic development through investment in a

massive heavy industry sector. The government fed state-owned enterprises

with inputs at below-market rates, including electricity. To ensure a supply

of cheap electricity, the government employed price controls at every stage

of the power supply chain: the price of coal sold to power providers, the

price of power sold into the grids and the price that grids charge end-users.

This however led to imbalances in China’s infrastructure in the early

2000s, with wide parts of the country suffering from frequent local black-

outs. Beset by chronic inefficiencies and shortages in the country's power

sector, the Chinese government has long seen the need to make electricity

privately owned instead and simply let the market set end-user electricity

prices. Its plans for reform have been hindered, however, by fears of

economic disruption and social unrest that would result from higher

electricity prices in an economy that had grown accustomed to cheap power.

Of course this would be the difficulty that will arise especially when the

problem of reforming China’s power sector lies in the structure of the sector

itself, which is a relic of China’s planned economy. Thus, rising coal prices in

the 2000s strained power suppliers and promised a large gap between the

likely market rate of electricity and the rates fixed by the government,

making reform unacceptably risky for the Chinese government. But low coal

prices over the past year have expanded the profit margins of power

suppliers and shrunk the gap between currently fixed power prices and a

market rate of electricity pegged to coal. In essence, a window has opened

for the government to attempt market reforms in the power sector.

Liberalizing electricity prices — essentially, letting them climb to

market rates — means the removal of an implicit industrial subsidy as old as

the People's Republic of China itself. Because the price of electricity has

historically been fixed below market rates, costs to electricity consumers are

likely to go up over the long run. Liberalization will provoke resistance from

state-owned enterprises and entrenched interests that do not want to lose

what had been a longstanding power subsidy. Thus China has been trying to

go by its reform program slowly but surely.

In the opening and reform period, which started in 1978, China began

to transition away from a planned economy. In its place was a temporary

hybrid structure: the dual-track pricing system, in which a certain quantity

of goods were sold to the state at planned rates to continue supplying state-

owned firms with cheap raw materials, while the excess could be sold at

market prices. Reflecting the government's continued desire to keep power

cheap, coal remained on the dual-track pricing system long after the prices

for most key industrial inputs had been liberalized.

Although the dual-track prices did not amount to full marketization,

dual-track coal rates increasingly exposed the power supply to the market

and led to higher input prices. Starting in the 1990s, the price and quantity

of "planned coal" became subject to contract negotiations between coal

producers and power producers at annual conferences hosted by the NDRC.

The commission capped contract prices below market rates, but the

negotiations gave producers more of a say in the price. Between the 1990s

and the mid-2000s, the NDRC gradually reduced its role in determining

rates.

In order to even out load peaks and valleys in the supply of electricity,

the highly fragmented grid system had to be developed, and as a result, two

of the world’s five longest HVDC transmission lines were located in China.

Since 2005, China found the need to operate the system more cost-

effectively and to attract clean technologies for power generation. This

necessity grew largely from international criticism regarding China’s energy

mix, with its heavy reliance on coal as main source for electricity generation,

was joined by rising concerns of the populace over heavy CO2 and particle

pollution measures. It was further necessitated by the advancements in

science in finding alternative sources of energy that would be more

sustainable in the long run, which was particularly helpful for China as a

country that heavily relies on its industry. Thus, since 2005, the Chinese

government has intensified its efforts to privatize parts of the sector.

Whereas the transmission and distribution of electricity remained under

state control, the power generation market was partly opened to private and

foreign investors. This was considered as the partial liberalization of coal

prices, the first time this was ever done in China, which is 80% reliant on its

coal industry.

In April 1996, an Electric Power Law was implemented, a major event

in China's electric power industry. The law set out to promote the

development of the electric power industry, to protect legal rights of

investors, managers and consumers, and to regulate generation, distribution

and consumption. Sustainable development became a key phrase. The

Renewable Energy Law was enacted in order to adjust China’s coal centered

energy structure and promote the utilization of renewable energy to realize

sustainable development from the supply side.

In 2012, China implemented a new electricity pricing system, multi-

tiered with different price brackets depending on the users of the electricity.

This resulted from the falling demand and oversupply brought both Chinese

and international coal prices down, a trend that has continued to this day

(with the exception of a brief rally at the end of 2013). The price drop has

reduced a major obstacle on Chinese government action both upstream and

downstream along the power supply chain. The sharp fall in coal prices

diminished the gap between the prices of market coal and planned coal and

led the State Council to finally abolish the dual-track pricing system for the

commodity and fully liberalize its market. The low price of coal reversed the

longtime trend of high input prices that had strained the power supply chain

and stymied reform attempts. Even as end-user prices remained fixed in

2013, China's five state-owned power generation companies collectively

reported profits of $12 billion, primarily as a result of falling coal prices. In

Shenzhen, the cushion provided by expanded profit margins has given the

NDRC the leeway to experiment with the transmission tariffs charged by

China Southern Power Grid without worrying about sending the company

into the red. This pilot initiative will take pressure off Shenzhen power

consumers in the short term and harvest usage data that will be valuable in

planning further reform.

Over the decade up to 2013, renewable energy sources such as wind,

biomass and solar power capacities have been developed at an incredible

pace. Consumption of renewables in China ranged at about 43 million TOE

by the end of 2013. Also, with a newly installed wind capacity of about 16

GW in 2013, China’s wind park displayed the largest growth pattern

worldwide.

Apart from renewable energy sources, China has put a focus on the

development of nuclear power over the past years. The investment structure

of the electricity sector in China suggests a shift of investments from

thermal and wind power towards nuclear and hydropower projects by the

end of 2013. Overall investments in the sector had reached around 760

billion yuan in 2013, with around 390 billion being directed into grid

development projects. As of 2015, China’s wind power capacity is now

bigger than the United Kingdom’s total electricity supply. Wind energy is

China's third-largest power source behind coal and hydropower, and ahead

of nuclear, while its top five turbine manufacturers - Goldwind, Guodian

United Power, Envision, Ming Yang and Sewind - led the market with a

combined 12.4GW, or 60 per cent of total installed capacity.

Energy Law (August 28, 2015)

Atty. M. Dimalanta

Presented By:

Ala, Joanne Puno, Renato SantiagoBeleno, Iriz Sales, SteffiEvardone, Philip