China faces energy shortages. There has been power rationing in Shanghai, Hubei, and elsewhere this year. “China has forecast a power shortfall of 10 gigawatts for the summer, about 1.4 percent of installed capacity” (Reuters). Concurrently while boosting capacity, the country is struggling to achieve its stated goal of a 20% increase in energy efficiency from 2005 through 2010.
Steps have been taken to ensure that China’s energy efficiency goals are reached, but ultimately, it appears the Chinese will fall short of realizing their goal. Still, in striving, the Chinese government may realize that placing price caps on energy producers can actually harm the environment. As a result, China may come to allow market forces to dictate energy pricing- to a point. By doing this, China could finally succeed in chasing inefficient factories to other countries.
In 2005, China drafted a plan to increase energy efficiency per unit of economic output 10% by 2010. “In 2006, the first year of the plan, the country’s reduction in energy intensity… was a mere 1.23%. For the first half of 2007, this figure was close to 3%… but that’s still short of the 4% reduction needed each year from 2006 to 2010 to achieve the goal” (Forbes).
“In 2005, China’s energy consumption per unit of GDP was… more than three times the level of the United States, more than five times that of Germany and eight times that of Japan” (Xinhua); specifically, “the energy intensity of China in 2005… was 35,766 British thermal units per U.S. dollar. In the U.S., the Btu/dollar ratio was 9,113. In the U.K. and Japan, the figures were even lower, 6,145 and 4,519 respectively” (Forbes).
Interestingly, unlike the US, which utilizes energy on a massive scale- about 7.794 kgoe/person as of 2003, China’s consumption per capital energy consumption is still only 1.1 kgoe/capita in 2003, which rose from 0.946 kgoe/capita in 2000, and 0.791/capita in 1990.
Also, “in 2005, China’s per capita commercial energy consumption was about 1.7 Mtce, only two thirds of the world average” (People’s Daily).
Since China currently uses such low amounts of energy per capita despite being vastly energy inefficient, it will be crucial for China to modernize its energy efficiency before more people become affluent and begin using larger amounts of electricity.
By starting from such a low base in per-capita energy usage, China has the potential to easily build state-of-the-art power transmission grids, to dictate strict regulations, and to build a culture based on energy conservation first, rather than reverse-engineering its energy regulations and energy consumption culture like other countries need to do.
kgoe– kilograms oil equivalent
mtce– metric tons carbon equivalent
China’s power generation capacity in 2002 of 356.6 GW was 9.6% of the world’s total power generation capacity, second only to the United States’ capacity of 979.6 GW. By 2005, China’s power generation capacity had risen to 508 GW (statistics from HERE). In 2006, China added over 114 GW of power generating capacity, and is continuing to expand generously.
If China is to satisfy its energy demands, it will need to increase energy efficiency. Otherwise, world energy prices, which recently saw oil rise to over $140/barrel, could check Chinese economic growth.
“Green” construction alone will not ameliorate China’s energy situation, since even construction of over 30 efficient nuclear power plants in the next 10-20 years will only add 60 GW of power. Wind and Solar electricity will account for much smaller increases in Chinese energy capacity at a little over 30 GW of power by 2020.
Considering China’s ambitious goal to improve energy efficiency, it appears the Government does realize the challenge. But what reprecussions might happen as the country struggles to meet this challenge?
Why Price Caps Harm the Environment
By putting price caps on how much energy can sell for and concurrently subsidising SinoPec and other energy companies, China encourages inefficient, polluting companies to remain in business or delay upgrading technologies. When subsidies and price caps are eliminated, prices rise and factory producers have to survive in a more Darwinistic competition model where the most efficient companies are rewarded for infrastructure investments.
Of course, too-low-set price controls sometimes encourage producers to produce less power. Or producers may decide to do things on the cheap and produce dirty coal instead of less environmentally destructive, but more expensive options (NYT discusses high-tech coal plants).
Results: Higher Quality Companies, Freer Energy?
It appears that regardless of its ultimate decision on price controls, China will maintain some sort of government intervention so its poor will be able to afford energy. Considering the widening GINI coefficient of wealth inequality in China, such supports will be necessary. And price assistance will be especially needed in rural regions, since urban income still outpaces rural income by at least 3.28:1.
Future government intervention, however, may be more in the form of direct subsidies to people rather than price caps on companies.
Freeing energy markets will allow the market to incentivize energy efficiency, and continue the trend of driving away inefficient industries. For China to most efficiently continue its energy capacity expansions in an era of high oil prices and expensive energy, it makes sense that the country will move to price liberalization. When might this happen? To take a wild guess, I’ll predict it’ll happen whenever oil hits $200/barrel. Barring war or shortages due to a major conflict such as a Iran-US war, I don’t see that happening until at least 2012, so the move toward Chinese energy price liberalization might take some time– but since China’s power demands are so great, said liberalization will eventually happen.
* Official figures on energy efficiency increases in the first half of 2008. (2.88%).
* Erica Downs of Brookings is even more pessimistic about China’s eventual move toward energy efficiency and modernization, arguing that “China’s new energy administration is unlikely to substantially improve energy governance.”
* China Daily had evidence of a perhaps laudable, but perhaps disturbingly only stop-gap fix for solving China’s energy efficiency and “green” problems. By ranking 60% of cadres’ career evaluations on energy efficiency and pollution solutions, China’s government pursues a bureaucratic incentivistic solution to what appears to be mostly a market problem.
* More reading on China’s progress toward greater environmental and energy efficiency care can be found at China Environmental Law.