Energy in China

China's rapid economic growth, coupled with urbanization, has spurred a tremendous increase in the demand for electricity, transportation fuels derived from oil, and natural gas for heating and power generation. Through our site visits and conversations, we were able to examine several aspects of this complex and incredibly important aspect of China’s economy.

Dramatic Rise in Demand

As in most sectors, China is becoming a giant in international energy markets. China has played a prominent role in the recent demand shock that spurred the rise of oil prices. The unprecedented and spike in world demand for crude in 2004 was driven by shortages of electricity in China that led many to revert to diesel-powered generators, pushing up prices for crude oil.

China’s oil consumption growth accounts for 41% of the world’s incremental growth in oil demand between 2002 and 2006. The rise of road and air travel will likely see the strong growth continue, even if there is a easing of the rate of economic growth. Roughly 1,000 cars are added to the Beijing vehicle fleet every day, and China overall accounted for roughly 11% of global vehicle sales in 2006. Growth in air travel also set to drive crude demand.

China's Approach to Oil

China is facing the same set of questions about energy that consumer nations confronted following the oil shocks of the 1970s. Today, however, climate change is a major item on the global policy agenda. The country’s institutions and policy elites were not prepared for the switch to becoming a net importer of oil in 1993 and the high-price environment that has emerged in recent years. The policymakers we spoke to are focused on reducing the energy-intensity of growth, and taking measures to pluck the low-hanging fruit in energy efficiency.

Today China produces roughly 5% of the world’s oil and consumes around 9% of it. Domestic production is growing, but domestic production will not significantly offset the need to import larger volumes of crude. Investment in domestic upstream projects is limited to Chinese firms. Abroad, Chinese national oil companies (NOCs) have embarked on a much-discussed quest for equity oil—oil that is “owned” by China through its NOC’s projects. NOCs are responsible for 181 upstream projects in 46 countries and service operations in 50 countries. Beijing is distrustful of the global oil market because it believes that the global price is pushed artificially higher by financial markets in which far more oil is traded daily in the form of derivatives than is physically delivered.

Equity oil comprises less than 15% of China’s total imports and less than 0.5% of global production. U.S.-based private firms produce roughly 35% of China’s total imports. Chinese NOCs are better staffed and funded than energy-related bureaus in the government, and thus have a great deal of influence over policy. While Chinese observers view the international oil majors as advantaged players, the industry is shifting based on the numerous advantages Chinese NOCs have in several parts of the world. The three NOCs—CNPC, Sinopec, and CNOOC—are competitive with each other, and thus cannot be seen as a single actor, as they are often portrayed. In 2007, PetroChina became the largest energy company by market capitalization, surpassing ExxonMobil and Gazprom .

Chinese NOCs in Africa

China’s role in the African oil and minerals sectors is a direct and logical outgrowth of its overarching concerns with energy security and supply diversification. Chinese NOCs have signed contracts for equity participation in 15 African nations. Total production by Chinese NOCs in Africa was 260,000 b/d in 2006, with Sudan and Algeria accounting for 96% of this. Other factors are also at play: The focus on Africa is, to some extent, a function of compatibility between light, sweet African crudes and China’s existing refining capacity. China has some comparative advantages in Africa resulting from a long history of goodwill and positive political and economic relations. Chinese government and company officials also view themselves as especially adept at operating in “sensitive” situations.

The Chinese policy of non-interference has led some international observers to accuse Chinese companies of complicity in human rights abuses and corruption in the African oil sector. But there are signs that the NOCs and government officials see engagement with international efforts to fight corruption and promote transparency in the oil sector as being within their self-interest. It also appears that Beijing was caught off-guard by the scrutiny it has received.

Electricity

By the end of 2005, China’s total installed power generation capacity reached approximately 508 GW. More than three quarters came from coal-fired facilities. By 2005, approximately 82% was from conventional thermal (includes gas, oil, coal), 16% from hydroelectric dams; and less than 3% from nuclear plants. Electricity demand is growing at an estimated 15 percent per year. Coal will continue to be the low-cost fuel of choice—China has installed an average of one 1,000 MW of coal-fired electricity generation per week since 2000.

Coal
China has the third largest coal reserves in the world. Coal dominates the fuel mix and will continue to do so for the foreseeable future. To keep electricity supply ahead of surging demand, China has been building coal-fired power plants at rapid pace—92 gigawatts in 2006 alone, equivalent to two large plants per week. Policymakers conveyed to the group that it would a monumental to achievement to bring coal down to 50% of all power generation capacity by 2030, from its current 75% share. The growth of coal has been robust in part because there have been some constraints on natural gas imports, namely delays in importing natural gas from Russia, increases in LNG terminal costs, and—most importantly—increases in gas prices. Power plants that had been built in anticipation of rapid supply growth closed due to a lack of supply and higher than expected prices: In 2005, 4 GW out of 11 GW of gas turbines were idle due to the lack of gas supply.

Although coal is and will remain king, Chinese officials are taking measures to improve the efficiency with which coal is consumed. Since mid-2006, small (less than 150MW) and inefficient coal-fired power plants have been closed at the behest of Beijing. All new coal-fired power plants are encouraged to be of at least 600 MW. To encourage pollution reduction, plants with desulfurization facilities will be allowed to charge an additional RMB0.01 (US$0.0013) per kWh. The government is also facing an internal debate on the merits of Coal-to-Liquids technology to produce transportation fuels, with one project being planned despite concerns about huge water needs for production and pollution.

NDRC has since mid-2006 been closing down small (less than 150MW) and inefficient coal-fired power plants (except those for co-generation). Despite the closure of these smaller, less efficient plants, the IEA projects that coal capacity will triple by 2030. The National Renewable Energy Law set a target 20 percent of the power generation capacity from renewables by 2020 (including 30 GW of wind power, 20 GW of biomass power and 300 GW of hydropower capacity). NDRC’s planning indicates there will be no growth in the share of non-hydro renewables between 2010 and 2020, which will be roughly 4%: the growth will come from hydroelectric power, which they plan to ramp up from 180 GW in 2010 to 300 GW in 2020.

Gas
Although the group did not visit a gas-fired plant, gas was at the center of many of our discussions in Beijing. Planned and potential pipeline projects to import gas from Central Asia, Russia, and Iran have been headline grabbers.

Emissions

This breakneck expansion is behind China's swift rise to the #1 or #2 spot among the world's largest emitters of C02, has contributed to China's infamously poor air quality and has proved significantly detrimental to public health.

To mitigate these impacts, China plans to diversify the generating fuel mix. Beijing has listed the expansion of nuclear power as a critical component in this effort and aims aims to have 40GW of nuclear generation in operation by 2020, an increase of over 30GW from current capacity. Currently, all of China's nuclear reactors are imported—primarily from France—but through this expansion, the central government also hopes to achieve self-sufficiency in nuclear reactor design and construction. Regardless of the fate of indigenous technology, nuclear fuel is likely to continue to be imported from abroad, from Central Asia and, increasingly, from Australia, with which China signed a supply agreement for 20,000 metric tones per year to begin in 2010.

There is some question as to whether China can meet its ambitious goals for nuclear expansion. In its World Energy Outlook 2007, the IEA suggests that China's targets are "ambitious given the current level of development, the long construction times and the current global bottlenecks in nuclear component manufacturing, which impose extended delays on delivery." IEA predicts China will fall far short of this target, reaching only 21GW of installed capacity by 2020.

Even if China does achieve its nuclear capacity goals, however, the impact on China's climate footprint and on air quality are likely to be small, because of the continued proliferation of coal-fired power plants. In this regard, investments in energy efficiency at all levels are likely to prove far more important than the expansion of China's nuclear power sector.