Click here for search results

China and Energy








China is the second largest producer of electricity in the world, and its power demand growth is also among the world’s highest. With rapid economic growth continuing to drive energy demand, China faces supply reliability concerns across the energy sector. These concerns are particularly acute for power and oil. The key priorities and challenges facing China’s energy sector in the medium-term are:

anchor link Ensuring Energy Supply Reliability to Meet Demand Growth
anchor link Managing the Environmental Impact of Coal
anchor link Reducing Environmental Damage by Increasing the Proportion of Gas and Renewables in the Energy Mix
anchor link Increasing the Efficiency of Energy Use Including Heating Services

Ensuring Energy Supply Reliability to Meet Demand Growth

With rapid economic growth continuing to drive energy demand growth, China faces supply reliability concerns across the energy sector. These concerns are particularly acute for power and oil.

Ensuring power supply reliability. China is the second largest producer of electricity in the world and its power demand growth is also among the world’s highest. By the end of 2000, China’s total installed capacity reached about 320GW and was expected to grow to about 400GW by 2005, about 500GW in 2010 and between 850GW and 950GW in 2020. But electricity consumption has jumped by much higher rates annually than are implicit in the above 2000-2005 estimate with power shortages first affecting the provinces responsible for the country’s export boom (Guangdong, Fujian, Zhejiang, Jiangsu, and Shanghai) along the eastern sea-board. In 2004, 19 out of 31 provinces had to ration electricity. The reliability of the power supply system, particularly, the transmission grid has also become an issue. The government forecasts a power shortage of 10 to 15 percent in the key manufacturing areas estimating that about $108 billion of new generation capacity will be needed in the coming five years to close the gap.

Despite progress in power sector reform, the sector has suffered from systemic problems such as a piecemeal approach to restructuring, slow development of a regulatory framework leading to inefficiencies and abuses of monopoly/monopsony power, mismatch between loan maturities and economic lives of power projects, inadequate wholesale electricity and transmission pricing regimes, and low efficiency of electricity supply and use.

To guide the evolution of the sector, the Government of China (GoC) released a comprehensive reform program for the power sector in April 2002 whose ultimate objective is to provide customers the best service at the lowest possible cost through continued break-up of the monopolistic industry structure and gradual expansion of competition to improve sector efficiency.

Managing the security of oil supply. China’s oil consumption accounted for nearly a quarter of primary energy in 2002. With a growing passenger vehicle fleet, greater inland freight transportation, and the high growth rate of industrial output, oil consumption is expected to retain this share of primary energy till 2010 even as China’s total primary energy consumption will more than double between 2000 and 2020. In 1993, China became a net importer of oil. And the proportion of imports in oil consumption has risen from 7.3 percent in 1995 to 31 percent in 2000. The government estimates that oil imports will account for 60 percent of total oil consumption by 2020. The government is responding to the vulnerability to oil price volatility and supply risk through a mix of measures including the development of a strategic oil reserve, acquisition of upstream oil assets, and fuel efficiency standards for vehicles. The government has sought the World Bank’s advice in developing a coherent and comprehensive policy response to the question of oil supply security under the wider rubric of a policy report on long term energy security.

Back to top

Managing the Environmental Impact of Coal

China is the second largest energy consumer in the world and most of its energy consumption is coal, 67 percent of primary energy consumption in 2002. This dominance of coal is not expected to fall significantly even as China’s energy demand grows. The Development Research Center of the State Council estimates that coal will account for 66 percent of primary energy consumption in 2010. Coal-based power generation will account for 65 to 70 percent of total generation for the next decades. Industry is the other major consumer of coal.

While China’s coal resources are deemed sufficient for its needs in the coming two decades, the environmental cost of coal use is already beginning to take its toll, particularly through SO2 and NOx emissions which are the leading causes of acid rain. In 2002, about 34 percent (or 6.6 million tons) of China’s SO2 emissions were released from power plants. Acid rain falls on an estimated 30 percent of China’s land mass and can become a threat to agricultural output. China’s CO2 emissions, second only to the United States, are also a threat to the global environment. A combination of clean-coal technologies at the input, processing and output stages of the power generation process, the enforcement of emission control regulation, and sector policies (such as pricing) have the potential to mitigate the environmental impact of coal use. Significant reductions in environmental impact in the long-term will require a major effort.

The Bank's recent ESMAP-supported analytical work on China's coal sector found that coal mining is in desperate need of restructuring and modernization. Overall, coal is far behind China's power and oil/gas sub-sectors in economic efficiency, modern management, and technology. There are more than 30,000 coal mines in the country, most of them small mines producing a third of the country's coal even after widespread mine closures. The small mines are a major source of the sector's problems including lack of safety (some two-thirds of the reported 6,000 coal mining fatalities per year occur in small coal mines), environmental damage (small mines are the least equipped to address the environmental impacts of coal – only a small fraction of small mines wash their raw coal), and sub-optimal exploitation or, at worst, waste of resources. At the same time, small-scale mining is a sensitive issue that needs to be addressed in the wider context of the economic and social priorities of the town and village governments which most often operate them.

As GoC prepares to develop a new coal mining law and its regulations, GoC has approached the Bank for assistance. The Bank has a strong commitment to mitigating the environmental impact of energy sector operations. The Bank Group's management approach to the development of the extractive industries in client countries (as part of its response to the Extractive Industries Review) supports the closure of uneconomic and environmentally unsound coal mining, and new investments that improve coal quality, production efficiencies, and reduction in local/global pollution. In the past decade, the Bank has developed expertise and experience/lessons in reforming the coal sector in Eastern European countries. Based on GoC's interest and the Bank's own corporate commitments, the Bank could play a significant role in reforming China's coal sector in terms of optimum exploitation of resources, best practices in handling environmental issues, and mitigating the social impact of the restructuring of mining operations.

Back to top

Reducing Environmental Damage by Increasing the Proportion of Gas and Renewables in the Energy Mix

China’s gas consumption is low at 2.7 percent of primary energy in 2002. But gas is beginning to gain momentum and substantial growth is expected with the share of gas in final consumption anticipated to more than double during the next decade.

Renewables accounted for less than 10 percent of China’s primary energy consumption in 2002. With respect to renewable sources of electricity, China is one of the most well-endowed countries in the world estimated to include 160GW of wind power, over 75GW of commercially exploitable small hydropower, about 125GW of biomass energy, 6.7GW of known geothermal energy and high levels of insolation in many parts of the country. Analyses indicate that the greatest potential for displacing coal by renewable energy is in the power sector. Even so, renewable sources accounted for only 7.8% of primary energy in 2002 with large hydropower plants as the dominant source.

Recognizing this potential, the government seeks to begin use of the resources which are economically feasible. With extensive World Bank and GEF support in the development of a renewable energy strategy, the government has decided to adopt a policy aimed at building demand by mandating electricity suppliers to meet some of their needs from renewable resources, often known as a mandated market policy. The policy is to be implemented through the enactment of a Renewable Energy Promotion Law (REPL) which has been ratified by the People’s Assembly in February, 2005. In addition to the development of the law, regulations need to be introduced. Rather than introduce a law that requires all provinces to comply immediately, the government intends to try out the approach in four provinces (Fujian, Inner Mongolia, Jiangsu, and Zhejiang) which have all volunteered to participate as pilot provinces. These provinces have agreed to adopt the law and to take the actions necessary to comply with it over the period 2005-2008 with the support of the Bank through the China Renewable Energy Scale-up Project (CRESP).

Back to top

Increasing Efficiency of Energy Use Including Heating Services

The energy consumed to produce every one thousand dollars of GDP (or energy intensity) reduced from 2.49 tons of oil equivalent in 1980 to 0.84 by 2002. The reduction of waste since 1980 has been significant but it means that the easier gains have already been made. In an increasingly market-based economy, government-mandated programs are unlikely to succeed and stronger regulatory oversight will be needed. Despite the progress so far, a greater energy efficiency challenge lies in the future as China currently has a comparatively low per capita energy consumption level (1.1 tce per person in 2001 compared to 6.16 for South Korea, 6.2 for Japan, and 12.04 for the United States). Energy intensity reductions will be heavily influenced by the speed at which China’s major energy-consuming industries move closer to international efficiency standards. Economic growth, rising incomes and the spread of a modern, technology-based way of life mean that energy efficiency needs to remain a major priority for energy policy.

Efficiency in the heating sector. Roughly half of China’s population lives in northern regions where temperatures fall below 5oC for over 90 days every year. China currently consumes about 180 million tons of raw coal per year for space heating in urban residential and commercial buildings in its cold and severe cold regions. During winter, emissions from coal-fired central heating facilities are the primary cause of the serious air pollution that is prevalent in northern Chinese cities, and are a major public health concern of the Government. And energy use per unit floor area is at least double that of buildings in similar cold climates in Western Europe or North America, yet far lower levels of comfort are achieved. Due to its major cost advantage, and shortages of alternatives, coal is expected to remain the dominant fuel for central heating systems for the foreseeable future. To address these problems, it is critical to drastically improve the efficiency of coal-fired heating systems in residential buildings.

China’s urban residential building stock is expected to more than double in the next 20 years. The Government estimates that energy use per unit floor area in new residential buildings can be cut in half, compared with the existing building stock, if compliance with the current energy code is ensured. But China’s construction boom is already overwhelming efforts to enforce the country’s new building energy codes. The housing development industry in general has little incentive to adopt energy-efficient building designs, materials and practices. Similarly, the central heating sector currently provides no incentives for consumers to respond to market-based energy costs. The heating systems are based on Soviet technologies that do not allow consumers to control their heating. Heat metering is non-existent. Billing is based on a flat per square meter price. Chinese leadership has made it clear that urban heating sector reform must proceed.

Back to top

Permanent URL for this page:


Of Interest - China

Connecting East Asia