The 4th Energy Policy Roundtable 2012 Report

Hisashi Yoshikawa
Professor, UTokyo Policy Alternatives Research Institute (PARI) / Graduate School of Public Policy (GraSPP), the University of Tokyo

Oct. 11, 2012

日本語ページへ
The 4th Energy Policy Roundtable 2012 Program
Energy Policy Roundtable 2012

Energy in China: Its Outlook and Policy

The 4th Energy Policy Roundtable was held on October 11th. Based on discussions in the energy policy roundtable seminars in the first half of 2012, this time, we focused on China, which is increasing its presence in the world. Drawing on a comparative review of the 12th Five Year Plan, which has just started, and the 11th Five Year Plan's results, in particular, on China's energy supply-demand structure and its energy policy, we discussed the challenges in China's energy policy and the foreseeable direction it may be heading, as well as its future relationships with other Asian countries, especially with Japan. Professor Li Zhidong at Nagaoka University of Technology, an expert on China's energy situation and its energy policy, based in Japan, gave a keynote speech on comprehensive energy policy trends in China and its approach toward transforming into a low-carbon society. This was followed by a panel discussion with experts and researchers specializing mainly in the field of energy, public administration, and analytical studies on Chinese industries with a primary focus on the energy sector.

Keynote Speaker: Prof. Li Zhidong

First, the keynote speech by Prof. Li is summarized as follows.

We cannot speak about the current energy policies in China without taking into account that this nation has started taking a full-fledged approach to building a low-carbon society.

To begin with, why is China aiming to become a low-carbon society? In order to achieve sustainable growth, China has decided to move away as much as possible from its current energy demand-supply structure that relies mainly on fossil fuels, of which a large proportion is coal and thus responsible for the increase in CO2 emissions. This perceptional change motivated China to seek further economic development by building a low-carbon society. This shift of priorities was reflected in the resolution passed by the National People's Congress of the People's Republic of China, which has driven the government to develop new strategies to drive both its foreign and domestic energy policies accordingly.

In the global community, China's key interest in negotiations on climate change is to aim at firmly securing its CO2 emissions quota, allowing it opportunities to continue growing economically while claiming the need to adhere to “the principle of Common but Differentiated Responsibility (CBDR).” Regardless of whether such international strategies prove to be fruitful, Beijing is now strategically geared toward realizing a low-carbon society domestically by setting the following three objectives as core challenges to succeed in this new endeavor: 1) prevent global warming; 2) secure a stable supply of energy； and 3) develop related technologies and industries. As domestic countermeasures against global warming, China intends to promote further energy savings and, at the same time, minimize the amount of CO2 emitted from its energy system, for example by utilizing nuclear power. In conjunction with these efforts, advancement in research and development of technologies such as Carbon Capture and Storage (CCS) and forestation is also high on its long-term agenda. Among these various initiatives, China is particularly keen on conserving energy and restructuring its energy portfolio. For the latter, attempts are being made to lessen the dependence on CO2 by lowering the ratio of coal consumed as its primary energy source.

Now, let's us look at what China is intending to achieve strategically through each of these three key objectives:

1. For the prevention of global warming, China has declared in its voluntary action plan, submitted to the United Nations in January 2010, that by 2020, it is committed to reducing its CO2 emissions per unit of GDP by 40-50% from 2005 levels, increasing the ratio of non-fossil energy utilization from 7.5% (2005) to 15% (2020), and expanding forested land by 40 million hectares.
2. Regarding the restructuring of its energy portfolio, its target has been set at building an industrial structure that ensures a stable supply and higher efficiency.
3. And through industrial and technological development, it aims at shifting from a “market giant” to a “robust industrial power.” What this means is that it seeks to become a “low-carbon” player in a wide range of industrial fields by advancing its Carbon Capture and Storage (CCS)　technology, generating more renewable energy and reducing carbon emissions in related fields such as the automotive industry, while promoting, through this pursuit, further growth of all these industries at the same time.

To meet these strategic objectives, the policymakers have set specific binding targets to drive the ongoing efforts in energy saving and reduction of CO2 emissions and hammered out a series of concrete measures aligned with these efforts to control global greenhouse gas (GHG) emissions as the overall goal that must be achieved for the eventual realization of a low-carbon society, which includes more rigorous enforcement of the censure system, preparation to enter into the emissions quota transactions market, introduction of a simplified taxation system and rationalization of the energy price system. Moreover, as a long-term approach to support these initiatives, China is also working toward creating various economic incentives to encourage the building of a low-carbon society by leveraging its legislative, taxation and subsidy systems, among others.

Before we begin examining the 12th Five Year Plan, let us take a look at some of the notable achievements made with respect to the key energy-related policies set forth in the preceding five-year period. In the 11th Five Year Plan, China, for the first time, had set binding targets, such as, on the amount of energy to be conserved and the rate of non-fossil fuels to be used. Hydrogen, fuel cells, and next-generation automobiles were specified as high-priority technological areas that needed to be bolstered as quickly as possible, and large investments were made in various forms including special regulatory measures and subsidies to propel the research and development of these prioritized areas intensively. These investments were allocated to selected local governments and 1,000 leading enterprises to which a guilt-by-association system was implemented, so that if they failed to achieve the expected targets, the parent companies of these enterprises and the municipalities where these enterprises were headquartered would be held accountable for the underperformance (such as, by restricting the freedom of establishing new business locations, applying stricter rules for permitting career advancement, etc.). Thanks to these hardline measures that proved to be effective, by the end of the preceding five-year period, China had succeeded in reducing slightly over 19% in energy consumption per GDP against the targeted 20% reduction from the 2005 level, and in increasing the percentage of non-fossil fuels used among the total consumption of primary energy sources to 8.3%, which turned out to be, in fact, higher than the targeted 8.1%. Through these diligent efforts, China has also been able to narrow its technological gap with industrialized nations, such as, by rapidly improving the efficiency of its coal-fired thermal power stations. In terms of energy security, China's aggressive acquisitions of stakes in foreign oilfield projects during these five years have led its rate of interest in net petroleum imports to increase to over 30%.

These numerous notable achievements during the period of the 11th Five Year Plan are attributable to the proactive introduction of various technologies already proven to be effective in industrialized nations that had been carried out with a long-term vision to enhance the general technological level of domestic industries by exposing them to these foreign practices even though they may have been relatively basic and not that competitive compared to the latest global standards. But because of this avid interest in absorbing foreign technologies and practices, budding Chinese players have begun to emerge, for example, in fuel cell and automotive industries.

Despite the promising developments, some challenges were carried over in the agenda for the current 12th Five Year Plan. Due to the delay in enacting the necessary domestic legislation, effective economic incentives remain inadequate. The energy pricing system must be liberalized further. Energy conservation initiatives have been bearing fruit but the efforts to reduce CO2 emissions still have a lot of room for improvement and the approach taken to curb coal consumption needs to be strengthened. Another issue of growing concern is the increase of net energy imports. Regarding petroleum, China became a net importer in 1994 and is now the second largest importer in the world, surpassing Japan. As for natural gas, the building of pipelines and other infrastructure required for the supply of LNG is progressing steadily along with the rapid increase of domestic demand. Although China was originally a self-sufficient producer of coal, it became a net importer of this resource as well in 2009, making the country a net importer in every type of fossil fuel since then. As a result, in the foreseeable future, the overall cost increase in energy import may become a heavy drag on China's economic growth.

In light of the various issues described above, the following energy policies have been set forth in the 12th Five Year Plan: (i) decrease the percentage of fossil fuels in proportion to total energy use (8.1% as of 2010) to 11.4% by 2015, and 15% by 2020; (ii) continue driving the energy-saving initiatives; and (iii) reduce CO2 emissions per GDP for 17% from 2010 levels. As regards the target set in (iii), China has committed in the voluntary action plan submitted to the UN to reducing CO2 emissions per GDP by 40-50% from 2005 levels. According to this ambitious target, China should be able to achieve reductions of 47% from 2005 levels by 2020.

The new five-year plan set for each energy source and the background leading to such prospects are as described below:

• Coal: Limit both the total production and consumption to 3.9 billion tons by 2015. For reference, China produced 3.9 billion tons in 2009 and 3.4 billion tons in 2011.
• Petroleum: Securing a stable supply is the biggest challenge. Shift the weight of policy from importing crude oil to expanding the capacity of refineries. At the same time, promote the research and development of next-generation eco-cars, and curb total consumption strategically from the demand side.
• Natural gas: Due to the increase of environmental awareness and other factors, demand is expected to grow largely and the current market size may double by 2015. Although domestic reserves of unconventional resources such as shale gas do exist, do not necessarily develop these internal sources if they can be stably imported.
• Nuclear power generation: Currently, 15 plants are in operation and generating a total of 13 million kilowatts. Twenty-six plants are being constructed with an expected gross output of 29 million kilowatts. Since April 2012, all the greenfield projects have been frozen. After 3/11 heightened the crisis awareness of Chinese government leaders, Beijing demanded all nuclear power stations to be thoroughly inspected to ensure safety as the first and foremost priority, and began reexamining future development plans. According to the conclusion of this exhaustive inspection process reached and disclosed this May, China confirmed the safety of all its nuclear facilities, including the ones that are under construction, while admitting, nonetheless, the need to further ramp up disaster prevention measures. As a matter of fact, the re-examination of future development plans is still ongoing with deliberations conducted from various angles, including the need for nuclear plants, and methods of building more reliable safety measures and more effective responsive measures to minimize adverse impacts, should any critical incidents occur.
• Renewable energy: The production capacity in 2010 totaled 240 million kilowatts. The target is to increase the capacity to 390 million kilowatts by 2015, and 630 million kilowatts by 2020, by bolstering the development of core infrastructure, which are large-scaled hydro, wind and solar power generating systems. Cost-competitiveness is still an issue. In China, the cost for generating renewable energy is tacked onto the electricity price like in Germany. But the good news is that the renewable power generating cost is on the decline, and if this downward trend continues, solar power, for instance, is expected to reach price parity, more or less, with coal-fired thermal power by around 2015.

Now that we have looked mainly at the supply side of the latest energy situation, let us move on to see what is happening in the demand side. With the objective of reducing CO2 emissions per unit of GDP, separate local targets have been set for different regions. In other words, China is applying “the principle of CBDR” domestically as well. This means that Beijing has set the toughest reduction target for Guangdong Province since it is the most industrialized region, and the lowest hurdle for Tibet, which is the most underdeveloped among all provinces. Likewise, for internal implementation of the emission quota trading system, pilot programs have been launched in seven designated zones with an eye to developing a nationwide emission quota transaction market by 2020.

Although China, as described above, faces various obstacles, the past achievements and ongoing efforts in energy-related issues underline its national determination to realize a low-carbon society. Since energy is a global issue, there are still many opportunities left for China and Japan to collaborate in support of this common cause. Among them, fields such as technology and system design are relatively low-hedged areas where the two countries can develop mutually beneficial cooperation. For example, China is still behind in peripheral technologies such as system networking and inverters. Japan's advanced know-how on system design such as that for energy conservation, can be of great help to China. Moreover, in terms of energy security, these two nations are both major net importers of fossil fuels and share common interests in many aspects that can be improved through concerted efforts, not to mention the recent price hike of these fuels sold to the Asian market, as one emergent issue in particular where the negotiators representing both countries can coordinate to reinforce each other's bargaining power. In addition, in the long term, China and Japan can possibly collaborate to secure natural gas and develop nuclear energy, especially in terms of security. Building a regional multilateral mechanism that functions somewhat like an Asian version of the International Energy Agency (IEA) may be another area where the two can work together as co-leaders, as in Asia we still don't have an arena where we can discuss energy issues.

From left, Mr. Nobuo Tanaka (Global Associate for Energy Security and Sustainability at the Institute of Energy, Economics, Japan (IEEJ) / the former Executive Director of the International Energy Agency (IEA)), Mr. Nobuhiro Horii (Associate Professor, Department of Industrial and Business System, Faculty of Economics, Kyusyu University), Prof. Hideaki Shiroyama (Director of UTokyo Policy Alternatives Research Institute (PARI), Vice Dean / Professor, Graduate School of Public Policy (GrasPP), the University of Tokyo)

Based on the keynote speech outlined above, the panel discussion that followed turned out be a lively one, thanks to the panelists who actively debated and exchanged opinions on diverse themes. The overall flow of this discussion and the main points raised in each theme are as follows:

1. Government regulations and market functions

One panelist was interested in how government regulations and market functions are correlated to the endeavor to realize a low-carbon society, and how they can serve and be leveraged as the mechanism to facilitate this endeavor. In relation to this query, the panelists exchanged views about the current progress in the actions to liberalize the energy prices and reform the subsidy programs about where the existing system stands today. In order to achieve the goals of the five-year plan, one panelist stated that the Chinese leadership will likely do whatever it takes to achieve the committed objectives, including the authorization of stringent restrictions that are not aligned with market principles, as evident from the rigorous enforcement of the censure system and implementation of the guilt-by-association system. Yet, it is also true that the types of energy whose price is determined by market price indicators are expanding at the same time.

Regarding the relationship between government regulations and market function, the panelists have come to share a common recognition on the following points:

• The landscape is undergoing dramatic changes as the application of market functions is spreading widely and policies that leverage economic incentives are increasing.
• In some areas economic benefits based on market principles are given priority over political objectives.
• Nevertheless, there are still no areas where actions are implemented or determined solely based on market principles. Government policies are always weighed in.
• Market principles are used wherever applicable to push the policies forward in an interactive process.

Regarding the progress in energy price liberalization, natural gas was taken as an example to explain the current status. The domestic price of natural gas was suppressed to about half the price of imported gas. As a result, overconsumption occurred. To remedy this situation, the government has set a restriction to make natural gas an energy source that can be consumed only by gaining prior permission from the authorities. This example evidently suggests the need to allow the price to be freely determined based on the balance between demand and supply, and even though the use of market rules is increasing in many aspects, China still needs to work harder on price liberalization and subsidy system reform in some areas.

2. The 12th Five Year Plan and its significance

One of the main energy—related agendas set forth in the current five-year plan deals with decreasing the percentage of coal use among all energy sources. The use of coal once rose when China was experiencing rapid economic growth. It then dropped and went up again and now it is back on the decline. It seems that, behind the national trend of trying to break away from using coal, there seems to be a change in economic interests based on the market. While many of the objectives set in the 11th Five Year Plan have been achieved, one outcome that is especially significant was the 19.1% improvement in energy efficiency vis--vis per GDP growth. In the 12th Five Year Plan, the target of this initiative is set to 16%. The fact that the reduction of C02 emissions and some other objectives have been overachieved, and that it essentially required to introduce associated equipments nationwide. This reminds us that technology in China is advancing day by day. In the current five-year plan, new objectives have been set in regards to promoting the use of more non-fossil fuels and reducing the emissions of nitrogen oxide (NOx).

The new targets set in the current five-year plan for long-term energy-related objectives carried over from the previous five years include the reduction of the percentage of coal used as the primary energy source from 68% to 63%. From an economic viewpoint, coal-fired thermal power is no longer considered an inexpensive source of energy, and is becoming less and less important for heavy users. In fact, 43% of coal-fired thermal power stations have fallen into the red in 2010, and this figure alone signifies that coal-fired thermal power has lost its place in the market as a competitive source of energy. When looking at the supply side of the picture, China is now the world's largest importer of coal. The policymakers in Beijing seem to think that coal should be flexibly procured from both the domestic and international markets depending on the price. The general concept is therefore to use the import channel when it is more economical to buy from elsewhere, and keep the coal available in domestic fields as reserves for use in case of emergency. In the past, coal was supplied to thermal power stations at a comparatively cheap price. But now that the government-controlled price guiding system has been abolished, the coal price is often determined by the market. Due to this change in the pricing policy, more and more coalmines in China are beginning to run their business in a “normal” manner, such as, by intensification, improvement of safety, and increasing the efficiency and productivity to create more available capacity.

By 2020, the total amount of power supply required in all of China using every energy source available is expected to expand to almost double the amount supplied in 2010. It is foreseeable that in the coming years, the share of coal-fired thermal power will continue to drop, while the use rate of renewable energy such as hydraulic and solar power will increase, and the sources of energy supply will become more diversified.

3. Nuclear power

It is believed that China is judging nuclear power generation as essential, not only due to its significant value as a key energy source, but also from the standpoint of national security. One panelist referred to the likelihood of Beijing maintaining the reprocessing program as a policy option by keeping plutonium in reserve for the time being until the time is ripe to use it for power generation purposes.

As far as the economic efficiency of nuclear power generation is concerned, the considerable drop in cost has increased its competitiveness and attractiveness as a base-load power source. However, it seems unlikely that nuclear power capacity will expand that rapidly before 2020, due to the constraints in the availability of plant constructors, as most of them are tied up with their backorders, which keep piling up. The economic efficiency of nuclear power generation in China is affected by the following cost-related circumstances:

• The back-end cost used for calculation, such as, the wholesale price is not included in the calculation of nuclear power generating costs;
• The land cost for securing vast sites for plant construction is probably not as high as in Japan;
• High performance (90% or higher operating rate) can be expected from nuclear power plants;
• An increasing number of equipment and components required for nuclear power generation are being manufactured domestically;
• As a result, the total amount of investment required for building a nuclear power plant is getting lower.

From a legislative standpoint, some say that the nuclear energy bill has already been drafted, but it seems to be pending. There are also some documents that mention 2015 being set as the deadline for completing the intermediate process of back-end preparation for legislation.

4. Long-term challenges in building a low-carbon society

It seems quite likely that China will be able to reduce its CO2 emissions per unit of GDP by 40-45% by the given deadline, as targeted in the 12th Five Year Plan. One of the panelists suggested that a bigger challenge may lay ahead, meaning after the current five-year period, and warned that we should not overlook the potential risk that, for China to be able to achieve the 450PPM scenario, it has to reach a CO2 emissions peak sometime around 2015. Since there is a limit to what China or any nation can do to save energy, we should pay attention to the close relationship between CO2 emissions and economic growth, and regard the reduction of CO2 emissions as the most important element to take into account when attempting to predict China's future economic growth. The important question when we think of COs emissions is: How can we expect China to grow its economy, should it fail to develop groundbreaking technologies such as CCS within the targeted timeframe? In the current five-year plan, China is expecting to maintain its economic growth rate at 7%. According to IEA's forecast, China's economic growth might gradually slow down to 5%, when considering its constraints on resource environment, labor force, water, and aging population. If this forecast proves to be correct, the CO2 emissions peak in this country may come earlier than expected. If China moves in this direction, the industrialized nations will have to accelerate their own efforts in reducing CO2 emissions. In light of such scenario, nuclear power is an option that cannot be eliminated from Japan's energy portfolio.

5. Cooperation between Japan and China

In energy-related issues, Japan and China must work hand-in-hand as two major energy consumers both located in Asia. If, for example, a conflict　breaks out in the Middle East, the energy demand of these two countries will be at stake, as they both rely heavily on crude oil imported from this region. The energy price will also become a very important common issue to both, especially under the unique trading environment that requires them to pay a premium for their share of crude oil, known to many as the “Asia premium.” To cope with such critical situation, there is a need for both Japan and China to establish a channel to communicate about their energy policies. One opinion raised in the panel discussion touched on the possibility of such crisis serving as a good opportunity for both nations to advance their talks, for example, on joint development of energy resources. Although time and effort may be needed for mutual confidence building, there is high future potential in seeing China, with its ample funds and Japan, with its rich technologies, building a complimentary relationship that can actually work.

Another recognition was also shared that on the assumption that the energy self-sufficiency rate of the United States will rise, and consequently lower American interests in the Middle East and other key oil exporters, Japan and China will sooner or later have to face an increase in cost burden for securing the safety of the long-distance sea lanes between the Middle East and Asia, and such change in international environment may also serve as a new trigger for the two nations to realize the need to foster Sino-Japanese cooperation.

6. Multilateral cooperation in Asia

In general, the decrease of US energy imports is seen as a favorable trend for China, now that it has become the world's largest energy consumer. A panelist also shared the view that, as energy demand in China and Asia as a whole is on the rise, the time may have come for Asian nations including Japan to recognize regional energy security as a common interest and begin deepening their multilateral talks on encouraging each other's cooperation to this end. From the standpoint of energy security, the IEA has so far contributed to the concerted efforts of maintaining it in the global arena. However, its important role of calling on oil producers to release their reserves at times of supply disruption is no longer as effective as before, as the influence of IEA member states is declining and becoming insufficient to send an effective signal to the global energy market. In addition, the development of power grids spread across national borders is also in progress in Asia, and is setting the trend to consider cross-border energy security by region. The increasing importance of electrical power security is posing an unavoidable question to Asian nations regarding how they should perceive this common issue with a regional frame of mind.

Prime Minister Wen Jiabon provides us with some clues in his speech. Wen seemed to imply that the G20 could be leveraged as a channel to discuss multilateral interests in energy-related issues. In the same speech, he also mentioned binding rules. An opinion from one of the panelists viewed that, if China finds it difficult to participate in existing international frameworks such as the Organization for Economic Co-operation and Development (OECD) and the IEA, it seems reasonable for Beijing to leverage the G20 as such a channel and while doing so, involve the IEA and other relevant international organizations.

In East Asia, summit meetings between Japanese, Chinese and South Korean leaders have already been established as a routine channel for trilateral dialogue. Although this channel is still not adequately activated, the leaders of these three nations have already exchanged their thoughts on the safety of nuclear power in the past summit meetings, and such occasions may be able to be utilized.

7. Human resources development

Human resources development, especially in the nuclear power domain, was brought up in the panel discussion as an important issue from the standpoint of safety assurance. The question is how to ensure safety even if the development of nuclear power generation is promoted. It is not easy to nurture the required types of personnel in an isolated incubating environment that is completely separated from the plant sites and R&D centers where on-the-job training can normally be provided. One view discussed by the panelists suggested that this might perhaps be one area where Japan could and should cooperate with China, since it already has rich on-site experience and past achievements in related studies. China, on the other hand, has already publicly disclosed its plan leading up to 2020 on how it intends to validate the safety of its nuclear power programs, and an informed source revealed in the panel discussion explained that the Chinese government is also aware that the development of qualified human resources is a key challenge in meeting this objective on safety validation.

Moderator: Prof. Hisashi Yoshikawa (Professor, UTokyo Policy Alternatives Research Institute (PARI) / Graduate School of Public Policy (GraSPP), the University of Tokyo)

Back to Top