China’s Energy Outlook

On Tuesday, 12 March, Dr. Han Wenke, the Director General of China’s Energy Research Institute (ERI), part of the National Development and Reform Commission of the People’s Republic of China, and Dr. Yang Yufeng, a senior researcher for ERI, discussed China’s short and long-term energy outlook at the Center for Strategic and International Studies (CSIS) in Washington, DC.

It was a unique opportunity to hear from the “horse’s mouth” China’s predictions on the future energy landscape and their thoughts on reducing greenhouse gas emissions.  From their study, a number of conclusions were drawn:

Conclusion 1: Deceleration and Transformation

China is now experiencing an economic transformation which will greatly affect China’s energy supply and demand situation.  Energy demand of both China and the rest of the world will be on the decline due to China’s decelerating economic growth and the global economic downturn. China’s energy demand will fall by two percentage points while the growth rate of global energy demand will drop to 1-2%. As a result, the supply of coal and electricity in China will be relatively secure.

Conclusion 2: Facing Serious Challenges

China is heavily dependent on coal, and their energy economy is characterized by industrialization and urbanization.  Coal, as one of the basic energy sources, is increasingly losing its dominant position however and as it continues to decline, issues regarding their oil security will become more apparent.  China predicts that the momentum of upsurge in natural gas import with years will persist in the coming years.  Institutional and structural problems involving the implementation of natural gas still plague the Chinese power industry.

Dr. Yufeng notes.  “On the long term, China still faces serious issues in the market.”

Conclusion 3: Global Market–Separated

In the next five years, under the influence of decelerating growth of global energy demand and the shale gas revolution, the energy supply of the world as a whole will be separated; consequently, supply situations in three major energy markets in the world, conventionally referred as North America, Europe and the Asia-Pacific region, will be further separated. The new world energy order is being formed, will be featured by
oversupply in North America, a near balance of supply and demand in Europe and undersupply in the Asia-Pacific region.

Conclusion 4: Oil Security—Shifting to Asia

Oil security remains the key to global energy security, and the key region regarding oil security will be shifted to the Asia-Pacific region, where prices of coal, oil and natural gas will far exceed those of North America for a long time in the foreseeable future as well as those of Europe.

Therefore, oil and gas exporters from OPEC and non-OPEC countries will attach greater importance to the Asia-Pacific market.

OPEC has limited potential for actual production increase in the coming years, and Saudi Arabia’s production is still the most flexible.  Unstable global geo-political, economic and financial situations however, require all countries to attach greater importance to their Strategic Petroleum Reserves.  Oil security is still the core of global energy security.

Conclusion 5: Technology and Low-carbon Economy

A low-carbon economy is the ultimate goal for the development of energy technology. However, two major technologies of utmost significance in global energy security and climate change issues, namely the electric vehicle (substitute for oil) and CCS technology (intended for reducing greenhouse gas emissions) will hardly see further improvements due to the high cost and many other factors.

On the subject of electric cars, the technology has not yet become cost-effective to implement on a large scale within China, but as development continues, China believes it can be implemented quite easily in the future.

CCS is a very important technology, Dr. Yufeng notes, however it faces serious roadblocks in China:

• For coal-fired power plants, application of CCS technology will add the cost by 40 to 80%.
• CCS installation in an IGCC power plant will add the cost by 40 to 60%.
• CCS installation in a conventional supercritical coal fired power plant will add power generation cost by 60 to 80%.
• CCS installation in a conventional power plant will reduce generating efficiency by 20 to 30%.

Conclusion 6: Shale Gas Revolution—Different Influences on USA and China
In the United States, thanks to the shale gas “revolution,” natural gas can be used as a viable alternative to coal in power generation plants.  In China, this is not the case due to a number of reasons including infrastructure and the huge price gap between gas and coal.

For China, the reduction of greenhouse gas emissions is still a major challenge.

Conclusion 7: Global Energy Governance Reform
The global energy governance structure is in urgent need for reform and should embody new features like “multipolar, diversified target.” China cannot join the IEA, but needs to proactively participate in the global energy governance and ensure its voice is heard on important matters.

Conclusion 8: Oil Price—Financial Factors
Global oil price is determined by supply/demand fundamentals in the long term, while short term fluctuations usually result from the non-fundamentals such as financial factors. Since 2008, financial factors have frequently been the major cause of world oil price fluctuation. The international community should contain the over-financial for oil price under the framework of global energy governance.

Conclusion 9: China and the Developed Countries—Different Concerns
Under the future framework of global energy governance, China is more concerned with how to secure energy supply, reduce carbon emissions, decrease the total energy consumption and solve local pollution, etc.

Speaking about energy security, Dr. Yufeng notes that within developing countries, it’s mainly an issue of securing supply whereas for developed countries, it’s more about demand.

Conclusion 10: Higher Cost in China than in the Developed Countries
Unlike the developed countries that have managed to solve environmental pollution and ecological damage and have been enjoying a more secure energy supply environment, China and other developing countries must pay higher costs in their efforts to address the issues of energy security and climate change. China must address climate change, but also must pay for a seriously polluted local environment and deteriorating ecosystem.

Strategy Adjustments – The Plan Going Forward

Demand-oriented Energy Management System.
It is advisable that China’s current energy management system move from “supply-oriented” to “demand-oriented” and that total production and consumption be controlled on an objective basis. Economic development mode is expected to be transformed by virtue of energy consumption control. The following must be accomplished to achieve this:

1. Internal government functions should be reformed and management of energy demand should be underlined.
2. Energy demand management should be reinforced, starting from controlling local total energy consumption.
3. The goal of controlling total energy consumption can be achieved by increasing non-fossil energy supply.

Strengthen International Cooperation and Increase More Energy Sources.
China is currently working on a number of international cooperative projects and initiatives such as the Sino-Kazakhstan Natural Gas Pipeline, Sino-American Cooperation on Shale Gas, Sino-Russian Negotiation on Natural Gas, Sino-Danish Renewable Energy Development Program.

Ease the situation between energy supply and demand by energy imports.
China should abandon the idea of ensuring energy supply for southeast coastal regions primarily through the transportation of coal from the North to the South and from the West to the East and by ultra-high voltage transmission, which comes at a high cost. Instead, China should lean on the international coal market to increase imports to balance supply and demand of the East and the West, so as to reduce the pressure on transportation and to protect the environment.

• Coal consumption by the twelve coastal provinces accounts for 52% of the national total while coal import of these provinces makes up 75% of the national total. Coal consumption and import of the seven provinces in the southeast coastal area account for 23% and 67% respectively in the national total;
• Coal consumption in 2015 is estimated to reach 3.8 billion tons; while coal consumption by the southeast coastal area is predicted to reach 880 million tons with an increase of 300 million tons.
• Problems in domestic coal transportation can be mitigated through coal imports for the coal consumption increase, which also helps assert China’s role in the international coal market and preserve the ecosystem and environment of the West.

Make the transition to low-carbon energy sources.
The energy-intensive development model should be replaced by one driven by scientific and technological innovation; diverse, more clean and low-carbon energy should be greatly used in order to replace the coal, which is heavily and widely used on various purposes. As the result, a more harmony relation can be formed between ecosystem, environment, and energy.

Dr. Yufeng notes that developing a low-carbon economy can also solve local environmental issues as well, which is an important factor.

Capacity building — strengthen independent analysis and international communication.
It is advisable to set up database, develop energy analysis model system based on China’s own real and available data and scientific methodology, finish the analysis works on energy situations and write reports on energy outlook independently instead of relying heavily on external data, rigid and inflexible models and limited and one-sided views.

To accomplish this, deep collaboration with international community on data transparency and modeling works will be required.

Finally, Dr. Yufeng notes that China must actively participate in global energy governance at the G20, IEA, IEF, or perhaps even start a new organization.

For the full presentation produced by CSIS, please watch: