Whither Chinese energy policy?

Whither Chinese energy policy?

Barret, Christophe

WHITHER CHINESE ENERGY POLICY?

Mainly due to a lack of generating capacity, electricity’s share of total final energy consumption is less than 11 percent in China. In fact, the nation has just 152 watts of installed generation capacity per capita. As a consequence, annual electricity consumption per capita averages 700 or so kilowatt-hours (kwh), less than 7 percent of the 11,000 kwh per capita enjoyed in the United States.

Under a most-likely scenario, however, electricity’s role in the Chinese economy will grow dramatically over the next two decades. Assuming the continuation of the central government’s current economic reform program, DRI forecast electricity demand to grow by an annual average of 6.3 percent between 1993 and 2015, reaching a total of 3,500 terawatt-hours (TWh) by 2015. To meet this level of demand, DRI forecast that China will have to add 110 gigawatts (GW) of new capacity between 1995 and 2000, pushing capacity to 300 GW by the end of the century. After that, China will have to add 30 GW per year, leading to total capacity of around 750 GW by 2015. (See Table 1.) (Table 1 omitted)

Conflicting Policies

Such a large expansion represents considerable investment (estimated at $90 billion to reach the goal of 300 GW by 2000). To achieve that, the government plans to have a quarter of the investment financed through foreign funding.

Current policy, however, is not encouraging for private power developers. In December 1993, the central government limited the rate of return (ROR) of power projects to 12-to-15 percent and canceled a power deal in Shandong province because the ROR was considered too high. The cancellation demonstrates the contradiction between two policy goals: developing foreign funding for domestic energy sources and fighting inflation. It also shows the difference between the priorities of the central government, which slowed its liberalization of energy prices in 1994 to fight inflation, and the provinces, which have a strong need for foreign-financed power.

To achieve its capacity addition needs, China is likely to compromise with foreign investors. A new formula may appear that allows ROR to range between 15 percent and 20 percent depending on the performance of new plants. Under the new system, negotiations would specify the annual number of hours for which the project receives the initial ROR of 12 percent. This benchmark is generally set at 5,500 hours, which translates into a relatively low availability of 63 percent for baseload production. (Chinese-equipped plants run at about 60 percent.) Most international independent units must operate at least 7,000 hours (80 percent availability) to satisfy standard power purchase agreements, suggesting that foreign-supplied plants would be able to obtain a higher effective ROR than official government policy indicates.

DRI believes that over the long term China will move toward adjusting its policies to allow its electricity requirements to be satisfied by a combination of national and foreign investment. So, despite recent setbacks, utilities and independent power producers should continue to monitor the situation closely.

Alternative Scenarios

Meanwhile, because of the short- and mid-term uncertainties about the direction of policy in China, DRI analyzed the impact of two alternative scenarios. The first assumes that the central government redirects its economic growth initiatives toward China’s heartland and away from the coast. In recent years the coastal provinces have been the prime beneficiaries of the economic reform program. The resulting income gap between inland income gap between inland and coastal provinces has led to some social unrest and prompted some of the inland population to migrate toward the coast. To counter this, the government could attempt to boost growth in the interior. A mixture of direct state investment, incentives for private investment, fiscal measures, and elimination of special coastal economic zones could achieve this effect.

The impact on energy and electricity markets of this scenario would not be significant in national terms, but it would cause a fairly significant dislocation of growth potential away from coastal provinces like Guangdong Zhejiang, and Shanghai and toward inner provinces like Shanxi, Guizhou, and Hunan.

The second alternative scenario assumes that concerns about inflation in China’s overheating economy lead the government to delay its energy price liberalization program, under which essentially most energy prices are to be freed over the next two years.

DRI found that the impact of such a policy shift would vary dramatically among provinces depending on their levels of electricity demand and installed capacity. Nationwide, however, it would be a significant disincentive to project investment, thereby slowing capacity growth and extending the power shortages that China has experienced for the past few years. For example, in Guangdong, which would be hit hardest by this change in policy, electricity demand could be more than 20 percent below the reference scenario in the early years of the next century.

Christophe Barret (in Hong Kong) and Andrew Slaughter (in Paris) are economists with DRI/McGraw-Hill’s Global Energy Group.

Copyright Edison Electric Institute Jul/Aug 1995

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