Section III China’s Energy Revolution and Transition
I. Energy Revolution Needed in China
After 30-plus years of breakneck economic growth at the cost of massive consumption of various energy resources and mineral resources and excessive conversion of cultivated land for industrial development, transportation and construction, China is now plagued by increasingly severe environmental pollution. A myriad of environmental and ecological problems have mounted up, including air, water and solid waste pollution, soil erosion, heavy metal pollution, persistent organic pollutants, excessive pesticides and fertilizers, grassland degradation, among others. In January 2013, the suffocating smog that smothered large swathes of the northern China, including Beijing, lasted for almost a month. More than half of the Chinese mainland was shrouded in the air pollution for days and people suffered through the most dangerous winter to breathe. The victims were not limited to the residents close to the source of pollution, or the citizens who had to seek new sources of water because of contaminated drinking water, or some people living nearby the chemical plants. Everyone was a victim. Restoration and management of ecological environment suddenly became the top public concern, prompting the government to make the fight against environmental pollution a top priority for ecological conservation. Under tremendous pressure, the central and local governments hastened to study countermeasures and improve environment within a time limit. All relevant research institutions were mobilized to study the root causes for the large-scale and sudden outbreak of the smog. The causes vary from place to place, but the key source of pollution has all been the intensive and concentrated fossil energy consumption, especially the huge coal consumption, including the emissions from fuel combustion, such as automobile exhaust. To reduce smog and improve the air, water and soil quality, we must change the traditional coal-based energy structure that has led to continuous growth in consumption of energy and fossil fuels.
Following more than thirty years of rapid growth, China’s economy began to face increasingly serious challenges from the early 2010s. With China’s accession to the WTO in 2001, the production capacity of general consumer goods that saturated in the 1990s got unleashed to the global market on a large scale. As the world’s factory, China became a magnet for global investment by virtue of the organized workforce with hundreds of millions of workers, great social stability, the Chinese government’s long-term support and favorable polices, and local governments’ preferential policies to attract business and investment. It quickly changed the geographical layout of the world’s manufacturing industry. The effect of China’s entry into the world’s manufacturing and processing market far outshone that of the thriving four Asian tigers. It didn’t take long for China to become the world’s largest commodity exporter. Then, the financial crisis that emerged in the US in 2017 and spread to Europe put a brake on the expansion of the global market and even led to the market shrink. As a major driver of China’s economic growth, export took a sudden and heavy blow and became a negative factor in economic growth. Despite the recovery later, it’s been difficult to stabilize and it’s still fluctuating between positive and negative factors. Since 2008, the Chinese government has taken measures to stimulate domestic investment on a large scale. The central and local governments earmarked dozens of trillions of yuan to encourage investment, stimulate domestic demand and speed up infrastructure development. All localities vied with each other to develop industrial parks and the real estate market surged to a new high. Owing to the economic stimulus, Chinese economy maintained a relatively high growth rate in the context of the general recession and downturn in the world economy. China’s economic growth rate dropped to 9.63% in 2008 from the previous over 10% (a staggering 14.16% in 2007), before rising to above 10% in 2010. However, such economic growth momentum was difficult to sustain. From above 10% in 2011, the growth rate kept declining to below 8% in 2012, before falling to below 7% in 2015.
As China’s economic growth dropped from higher than 10% to 7%, it sparked off an intense debate about what a GDP growth rate China should or could maintain in the future. Some economists were inclined to the highest possible economic growth rate and continuous economic stimulus to increase investment and maintain the large-scale construction, including coal, electricity, oil and gas supply facilities, so as to be prepared for the fairly rapid growth of the energy demands. On the other hand, there’s a more prevailing view that China’s economic growth rate has gone beyond the reasonable range and the high growth driven by export, investment, infrastructure, and real estate won’t be able to sustain. It’s advisable that China should reasonably downgrade its growth estimates, curb inefficient investment, consider more about fairness in social distribution, environmental and ecological conservation, and other aspects uncovered by GDP growth, relieve social pressure, and create driving forces for sustainable growth, among others. More and more real economic changes further prompted the reflections on whether the previous high-growth model could last. Should we keep stimulating the existent drivers of economic growth and continue with the development model? Or should we conduct dramatic economic restructuring toward a new path for comprehensive, balanced and sustainable development? This is a major strategic choice for China to make. Since the 18th CPC National Congress, the Central Committee with Comrade Xi Jinping at the core has made a major strategic judgement that China’s economy has entered a “new normal” stage. China’s economic growth may slow down, but it’s time for China to stay cool and consider about major economic restructuring and new development philosophies.
The Copenhagen Accord struck at the U.N. Climate Change Conference 2009 opened up a new chapter in global cooperation on climate change. Given that China has become the world’s largest GHG (greenhouse gas) emitter since 2006 and developing countries produced more GHG than their industrialized peers, China must get more involved in the international action to reduce GHG emissions. Different from The Kyoto Protocol under which developed countries assumed binding commitments to reduce greenhouse gas emissions and developing countries took actions of their own accord, The Copenhagen Accord stresses international cooperation on climate change and has made it the responsibility and obligation of all countries to control and reduce GHG emissions accordingly. Since the national conditions vary from country to country, the principle of common but differentiated responsibilities still applies, but China has begun to play a central role in international climate change negotiations. China’s energy industry has felt the increasingly urgent need to fit into the global transition toward a green and low-carbon economy. It’s no longer possible to stick to the coal-based fossil energy development model.
There has been a popular concern and a bitter debate among the energy community in China about the development path and strategies for the energy industry in China. In the early 1980s, the then newly established China Energy Research Society conducted a comprehensive research on energy strategies and policies. As China’s economy roared ahead since the introduction of the reform and opening up policy in 1978, the energy supply struggled to catch up due to the inheritance of management system for the planned economy, limited investment channels and backward technologies. China Energy Research Society devised a strategy to double the energy supply to meet the needs for quadruple economic growth, which facilitated the development of energy production capacity. China had largely overcome the bottleneck in energy investment and significantly eased the energy shortage by the end of the twentieth century. Following the massive oil imports, China’s energy industry began to shift toward globalization from almost complete reliance on domestic resources. In the meanwhile, China’s energy research community got more involved in the international exchanges and gained more understanding of various methodologies for energy strategy research from industrialized countries. As we follow the global trend of energy technological development more closely, low carbon began to be included as one of the targets for China’s energy strategies and policies. As the only institute on comprehensive energy policy research, the Energy Research Institute (ERI) of the National Development and Reform Commission (NDRC) has been committed to the study of energy development strategies since the 1990s. In the early twenty-first century, the ERI issued the China’s Energy Development Scenario Report 2020 and made it the main targets of energy development strategy to further improve energy efficiency, adjust the energy structure and change the coal-based energy development model. This has attracted the attention of various communities as an important research finding based on a systematic study on the energy development strategy of China. The research on medium- and long-term energy strategy was later organized by the Office of National Energy Leading Group (ONELG) which convened scores of energy companies and research institutes for in-depth analysis into the development of energy industry. However, the necessity for the energy restructuring and low-carbon economy wasn’t well accepted at the time when the coal industry was booming since 2005. The debate focused on whether China should prioritize energy conservation, guide and curb the energy consumption effectively, and attach importance to energy restructuring and change of coal-based energy development model. From 2008 to 2010, Chinese Academy of Engineering (CAE) researched into the medium- and long-term energy strategies for China (2030-2050) and specified the goal of sustainable energy development out of a conviction that China could achieve the long-term socioeconomic development goals with a limited growth of energy supply by guiding rational energy consumption and enhancing energy-saving policies to boost technological progress. The CAE research found that China could control the total energy consumption under 5.5 billion tons of coal equivalent by 2050. There is ample room for the reduction of coal consumption and huge potential for the growth in the consumption of natural gas, nuclear power, hydropower, wind power, solar energy, and other renewable energy resources. China should shift from the coal-based energy structure to a diversified energy structure supported by five pillars of coal, oil, natural gas, nuclear, and renewable energy. These research findings laid a solid foundation for the ensuing planning and strategy formulation for energy development in China.
Since the 2010s, new driving forces and economic restructuring have become increasingly essential for the economic growth in China. Against the backdrop, China begins to explore new philosophies and ideas for economic development, since the original energy development model no longer applies.
The changing trend in global energy development catalyzes China to take the energy development strategies more seriously. Boasting remarkable progress in low-carbon economy and increasing proportion of renewable energy, Europe plays an exemplary role for China. As the shale revolution in the US delivered a blow to the energy development in China, many Chinese have begun to think about the possibility of a similar revolution. Owing to the great advances in industrialization over the past years, the energy equipment manufacturing capacity and energy production capacity have improved markedly, while the domestic energy demands have changed, featuring a significant drop in the growth rate of energy consumption. The previous market for full, complementary and non-competitive growth of various energy resources has developed into the market where various energy resources have to vie for finite growth space. The focus of energy restructuring has shifted from the secondary distribution in the market to the competition or replacement for stock energy. The oil price surge and plunge in the global market weigh heavily on China’s investment in high-cost oil and gas projects and coal-to-oil projects. As it becomes increasingly urgent to fight against environmental pollution and climate change, it’s been hard to strip the dominant position of the traditional energy in the industry, particularly the coal. The large-scale use of clean and low-carbon energy in the market, such as renewable energy, nuclear power and natural gas, has placed the traditional energy under pressure, but still less competitive. Does China need to open up more space for green and low-carbon development?Assuming sufficient energy supply capacity, does China need to continue to prioritize energy conservation? This has become a realistic problem for China. There’s a view that energy conservation would be less important in case of sufficient supply. If so, does the country need to continue with the transition toward green and low-carbon economy? How to facilitate the transition? This has put various communities at loggerheads. Some hold the view that China could take its time over energy restructuring and the energy revolution is not a must.
Whether China needs an energy revolution and what kind of energy revolution China needs have become a pressing issue facing China’s energy development.
At the sixth meeting of the Central Leading Group on Financial and Economic Affairs (currently Central Financial and Economic Affairs Commission) in June 2014, it’s reaffirmed to seek a “revolution in energy production and consumption” in China based on a study of energy security strategies. President Xi Jinping, also the head of the Leading Group, presided over the meeting and stated the contents and direction for China’s energy revolution. It will serve as a basic guiding ideology for China’s energy development strategies and policies for a long time to come.
Xi puts energy consumption at the forefront of the energy revolution, which is of great significance to China’s energy development. The energy strategies have all along focused on securing supply, while the energy development has all along aimed to meet the current and future energy demands, with little regard to the rationality of such demand. As the predicted demands are usually higher, it attracts more investment in energy supply. This has been common in the research reports of the International Energy Agency. The revolution in energy consumption has made it clear to curb unreasonable energy consumption, representing a change to the previous energy development’s goal of meeting demands. China must embark on a way of rational energy consumption, instead of inheriting the developed countries’ energy-intensive model. As a developing country, China still lags behind the developed countries, not to mention the ones with high energy consumption, in terms of per capita energy consumption. China cannot follow the energy consumption models of other countries like US and Canada, because of our large population and finite resources, and more importantly, the challenge of global climate change. The development of green and low-carbon energy requires more than technological progress to improve the energy conversion and utilization efficiency of various energy-consuming facilities. It requires preventing energy waste and cultivating economical consumption patterns and behaviors. China’s energy consumption policies are characterized by their emphasis on universal energy services, energy infrastructure and supply capacity to provide common services for the vast majority of Chinese, not a minority or a few of Chinese. As such, it’s important to promote conservation and oppose wasteful and luxury energy consumption. In a bid to adhere to the strategy of “Conservation First” for a long time, China should attach high importance to energy conservation regardless of sufficient or insufficient energy supply capacity. The public awareness of conservation should be enhanced to encourage citizens to avoid waste and minimize environmental impacts. While making rational consumption a key goal of China’s energy development strategies, it’s important to maximize technology efficiency and economic benefits. In the process of urbanization, China must give priority to energy conservation in terms of industrial structure, infrastructure development, housing construction, transportation mode, just to name a few. The revolution in energy consumption has also raised specific requirements for setting a goal for the total energy consumption cap and making the goal a binding development goal for the whole society of China. The Thirteenth Five-Year Plan (2016-2020) of China has outlined the energy consumption cap.
The energy supply revolution proposed by Xi Jinping emphasized the need to set up a diversified energy supply system, with a view to changing the coal-based energy structure. In particular, it means to focus on the development of non-coal energy and build an energy supply system driven by multiple wheels of coal, oil, gas, nuclear, new energy, and renewable energy. Energy restructuring has been made the top priority of energy supply and development strategies. As coal accounted for two-thirds of total energy consumption of China in the past, it’s unlikely to shift toward an energy consumption structure dominated by oil and natural gas in the near future. There will be a transitional period for the shift of dominance from coal to non-fossil energy. The transition to low-carbon energy may take dozens of years. There will be a diversified development process to reduce the coal consumption, increase the natural gas and oil consumption, and accelerate the development of nuclear power, renewable energy and other non-fossil energy, before ushering the energy supply system into a new era based on the non-fossil energy or even complete low-carbon and carbon-free energy.
Xi Jinping also pointed out that the energy technological revolution should be oriented toward a green and low-carbon future. For a future of green energy, the overriding task is to address the existing problems with the production, conversion and consumption of energy and environmental protection. In the upcoming decades, the overall coal consumption in China will keep declining but still remain at a high level. Therefore, it constitutes an important part of energy technological innovation and development to improve the utilization efficiency of coal and other fossil fuels while minimizing the pollutant emissions and environmental damages from coal-based production and consumption. To achieve the ultimate goal of low-carbon future, we must act from now on to increase the proportion of low-carbon energy consumption. The research and development of energy technologies should focus on the development of highly efficient, intelligent and low-carbon energy consumption system, including various highly efficient industrial energy-saving technologies, advanced, highly efficient and low-carbon energy technologies in buildings, vehicles and transportation systems, among others. Meanwhile, the research and development of energy technologies should facilitate the R&D of the supply system of low-carbon energy, including nuclear power and a host of renewable energy, and other new energy, as well as related technological innovations, like energy storage, hydrogen energy, nuclear fusion, just to name a few.
China’s energy system revolution should create better conditions for the success of revolution in energy consumption, supply and technology through the reform of the energy management system. The ongoing energy system reform has been a key part of the economic structural reform in China. Since the beginning of China’s exploration for a shift from the overly rigid planned economy toward a more flexible market economy in the 1980s, the reform in the energy sector has never stopped. Driven by the central task of economic development and the reform and opening-up policy, China has become a large testing ground for a myriad of reforms. During the period of the planned economy, China set up the Ministry of Coal Industry, Ministry of Petroleum Industry and Ministry of Power Industry. Back then, the energy industry was a centralized production department, while mines and power plants were workshops to hit the goal for production. Today, the wide-ranging reforms in the energy sector have fostered a cluster of energy corporates consisting of large state-owned enterprises (SOEs) directly managed by the central governments, SOEs administered by local government, joint ventures, and private enterprises. The central SOEs are the backbone of China’s energy business, boasting commanding lead in production technology and capital strength. Most SOEs are listed on the market and have been constantly adapting to the competitions in domestic and foreign markets. The national regulation on the energy price has also gone through various reforms. Currently, the power prices on the grid and sales price to the grid are regulated by the government. Meanwhile, the price of oil products is regulated in line with the changes of international price. The national regulation on price aims to maintain a reasonable and stable energy price and provide long-lasting protective and preferential policies for the residents’ need for electricity, heating and cooking. The future reforms in the energy sector should take into account how to make the regulation system better serve and promote the revolution in energy consumption and supply.
II. Energy Transition Well Underway
The world energy system has undergone a few major transitions. Coal replaced fuelwood in the era of steam engine and oil become the mainstream energy by the middle twentieth century, before the post-oil era characterized by the coexistence of oil and natural gas. These transitions were made possible by the technological progress that created conditions for mass exploitation of new energy that is more efficient, cleaner, easier-to-use, and capable of serving more purposes.
Global climate change, the driver of the energy transitions, is caused by the CO2 emissions from the consumption of fossil energy. As such, the mankind has to abandon the use of fossil energy and bring about the painful transition to low-carbon energy. It puts China’s huge energy system established after decades of efforts, particularly the coal-based energy production and consumption system, under unprecedented pressure.
The energy consumption in China experienced “a golden decade”of breakneck growth from around 2002 to 2012, registering an average annual growth rate of 8%. It’s once predicted that the energy consumption would keep rising, though at a lower growth rate, and that the prospect would be promising. The coal industry predicted a rise of the coal consumption to 4.8 billion tons from the 3.5 billion tons at the time. Accordingly, China’s relevant government departments formulated plans of developing new coal and thermal power bases on a large scale in central and western China, with a view to comprehensively promoting the investment and development of these areas. Encouraged by the high-speed growth of power consumption in previous years, the electricity companies felt the need for more power generation equipment. As the newly developed nuclear power and renewable energy power generation struggled to meet the increasing demands for power consumption, China still needed to build a great many large coal-fired power plants. Despite a growing voice for low-carbon energy because of climate change, China had to rely on the traditional fossil energy, including coal, to meet its immediate demands. Such excessively optimistic views took a battering in the energy consumption market after 2013.
In 2008, due to the global financial crisis, China’s energy consumption growth rate tumbled to 2.9% from 8.7% in the previous year. However, it began to rebound in the following year, rising to 7.3% in 2010 and 2011, before dropping to 3.9% in 2012. It didn’t get enough attention at the time, in the expectation that the world economy would bottom out, China would continue with its growth and the energy consumption growth rate would rebound again. However, the reality turned out to be a far cry from the expectation. China’s economic growth rate decreased by more than one percentage point from 7.9% in 2012 to 6.7% in 2016, but the energy consumption growth rate has declined all the way to a record low level of 0.9% in 2015, followed by a minor increase in 2016 to 1.4%. In terms of power consumption, the growth rate slipped to 5.6% in 2012 from the highest level of 10% and hit an all-time low of 0.5% in 2015. The total coal consumption began to fall in 2014, dropping by 2.9%, 3.7% and 4.7% respectively in 2014, 2015 and 2016, with a cumulative decline of 11%. In the meanwhile, the coal production decreased from about 4 billion tons in 2013 to 3.41 billion tons in 2016.
The slump in the energy consumption growth rate, particularly the total coal consumption, was way beyond expectation. Due to the misjudgment on the development trend of the energy consumption, the investment in energy production capacity continued to increase, leading to serious oversupply of coal and electricity in China. The coal price plummeted between 2014 and 2015 by about 60%. The annual operating hours of thermal power plants had fallen sharply for several consecutive years, from more than 5,000 hours in 2013 to 4,165 hours in 2016, far short of the reasonable operating hours. However, the power generation capacity maintained a high growth rate. In addition to the rapid growth of hydropower, wind power and solar power generation, coal-fired power plants also sustained massive growth, further exacerbating the oversupply of electricity. The excessive growth of power generation capacity, especially the continuous development of coal-fired thermal power, is due to the belated policy adjustments caused by the failure of predicting major changes in energy consumption. For another, since the power to approve the investment in power projects was handed down to local governments from the National Energy Administration, there was a loss of control over the projects. A large number of thermal power construction projects were launched regardless of the overall market changes.
The excess production capacity of the coal-fired power plants resulted in fierce competition for the power market and exerted undue pressure on making the best use of nuclear power, hydropower and other renewable energy power generation equipment. In many places, wind, solar, and hydroelectric power grids are incompatible, wasting millions kilowatt hours of electricity every year. In response to the mass construction of thermal power plants, the National Energy Administration had to set new goals to control the total amount of thermal power projects and suspend large investment projects in wind power and solar power in the areas with massive surplus of power generation capacity.
Opinion is divided as to the future growth of China’s energy consumption. However, the majority view holds that China’s energy consumption will enter a period of slower growth and the previous high-speed growth will be hard to come by.
A research report on how China can achieve peak carbon emissions in advance has been completed recently by a group of renowned experts from the Energy Research Institute (ERI) of the National Development and Reform Commission (NDRC), Tsinghua University, Chinese Academy of Social Sciences (CASS), and Renmin University of China. According to the report, China’s energy consumption will enter a long period of slower growth. As China is undergoing major economic transformation, the economic growth must shift its reliance on increasing the production capacity of general manufacturing industry alone toward improving the added value of per unit products and services. All driving forces of energy-intensive production of raw materials have peaked and infrastructure development and housing construction will be scaled down gradually. China’s energy-intensive raw material industry has saturated and the demand for basic raw materials like steel and cement has begun to fall. There’s little space for the increase of industrial production and capacity, while the industrial energy consumption will peak soon. The energy-saving technologies in buildings and transportations could effectively curb the growth rate of the related energy consumption and contribute to a sustained low growth rate of energy consumption in China. The report notes that by 2050, the per capita GDP in China could rise from the current USD 8,000 to over USD 25,000, but the energy consumption growth could be controlled to 25% at most compared with the current level, with an average annual growth rate of less than 1%.
The report suggests that the total coal consumption will continue to decline, owing to China’s strengthened efforts to reduce air pollution. The development of noon-fossil energy will meet the rising demand for energy and replace coal to a certain degree. The further expansion of natural gas supply will further reduce the coal consumption. In this way, China should be able to reach the peak of carbon emissions by 2025.
Following the peak of carbon emissions, the technological advances and their large-scale applications in energy conservation and non-fossil energy can continue to reduce the carbon emissions dramatically. However, the substantial reduction in carbon emissions is still a huge challenge for China’s energy system. China may need to significantly shorten the service life of coal-fired facilities and from now on, focus on the reduction of investment in coal-related energy and the accelerated development of non-fossil energy. Experts forecast that the oil consumption will reach a peak followed by a decline, as electric vehicles will become the mainstream in the period between 2025 and 2030. The natural gas is likely to be the last fossil energy source to withdraw from the market, but the next twenty years will see a sustained increase in the natural gas consumption. The nuclear power, a potentially important low-carbon energy source, may reach 400 million kilowatts in 2050, as opposed to 450 million kilowatts of hydropower and over one billion kilowatts of wind power and solar power to be generated by then. The actual numbers may be much higher. Currently, China boasts the world’s largest installed capacity of hydropower, wind power and solar power, as well as the largest installed capacity of nuclear power under construction. China is confident for a green and low-carbon energy transition through constant efforts.
The following chapters will be dedicated to elaborating on China’s development in terms of energy conservation, renewable energy, coal, oil and gas, and electricity, as well as the discussion about reforms and changes in China’s energy management system.