Evaluation of China's Energy Strategy Options

Abstract

China faces a challenge similar to that it did two decades ago—it aims to quadruple GDP before 2020 while only doubling energy use to meet energy security, social welfare, and environmental imperatives. At the same time, the country seeks to shift towards cleaner fuels. Current trends, however, run contrary to these goals. Energy use has grown faster than GDP over the past three years, and over two thirds of the increment in primary energy supply has been coal. Meanwhile, oil use is rising rapidly, with nearly all new demand fulfilled with increasingly expensive imports.

In 2004, the Development Research Center concluded a study exploring options for a national energy strategy: China National Energy Strategy and Policy 2020 (NESP). As decision makers consider how to proceed, an outside, comparative perspective may be useful for evaluating the range of policy options. To that end, this report builds on the recommendations of the NESP and provides ideas about how China’s government might connect high level policy goals—energy security, economic growth, equity, and improved well-being—with specific changes in energy investment, supply, and efficiency.

This report prioritizes energy policy goals, reviews the role of the state in achieving them, and provides specific recommendations for key energy subsectors. We reaffirm that energy efficiency is central to meeting objectives of equitable development, economic growth, and energy supply security. As China moves to improve overall energy efficiency and move to a more-sustainable energy supply mix, the government can play three key roles:

• Finance of socially and environmentally preferable energy options through investment incentives and low-cost loans;
• Advocacy of sustainable energy development through education and by example, e.g., through government procurement programs;
• Regulation of the boundaries of market activities, for example setting incentives through price signals, laws, and enforced financial penalties.

This report provides specific recommendations in these areas that are oriented toward improving efficiency and driving energy elasticity of GDP back down to an average of 0.3, helping maintain balance between supply and demand, and encouraging transition to cleaner energy supplies.

Three main themes arise in our discussion of how China can move from principles to action, i.e., increased investment in energy efficiency in conjunction with energy exploration, infrastructure and environmental protection, restructured incentives to favor production and consumption of cleaner energy, and strengthened institutions for governing the nation’s energy system. The financial, policy, and institutional mechanisms elaborated in this report will help China maintain efficient and equitable development of the expanding energy sector.

Institutional strengthening is especially important. China’s energy policy and regulatory institutions must change to effectively implement the policies discussed in the NESP and in this report. While economic liberalization and deregulation helped improve productivity, earlier gains in efficiency have slowed, and expansion of new energy sources is not keeping pace with conventional forms. The influence of strong state-owned energy supply companies, recent gaps between supply and demand for electricity and coal, and concern about oil have naturally focused attention on supplies of fossil fuel and conventional electricity generation technologies. However, China must focus on efficiency, since simply increasing supply will undermine future development, and on long-term expansion of alternatives. Changes in policy and administration must ensure that efficiency and sustainability are given priority in daily operations, not just high-level strategy.

Recent media reports indicate that China is moving in this direction, and is establishing an energy coordination task force and a State Energy Office. International experience with institutional restructuring suggests that structural sources of autonomous authority are required for effective governance. These structural sources can include budgetary independence from industry and other ministries, sufficient numbers of expert personnel, and the bureaucratic authority to propose and enforce legislation. Because efficiency is a public good with distributed benefits, the government must lead where the market fails to provide incentives for an energy system that meets social goals.

The policy goals outlined in the NESP are most likely to be achieved if China moves even further its institutional restructuring to establish a new Ministry of Energy (MOE). A new MOE with a clear mandate and adequate authority would be well positioned to resolve conflicts among diverse actors in the energy sector. An autonomous MOE would be well positioned to counter the vested interests of large state-owned energy supply companies with strong support for public priorities, and would be better able than current institutions to move China towards an equitable and sustainable energy future.