Power in China:  What does the future hold?

This article appeared in the Birmingham Post and was written by Guy Lougher, Competition Partner, China Desk (Birmingham) and Mark Raymont, Senior Associate, International Construction & Energy (Hong Kong), Pinsent Masons.

The energy sector in China reflects the country’s transformation in to a major economic power house. The massive growth in its economy has been matched by a huge increase in the demand for power. However, the country's energy infrastructure has struggled to keep pace with these changes and this has led to a mismatch between supply and demand, with businesses throughout the country suffering significant disruption due to power cuts and planned outages. Whilst some steps have been taken to address the energy imbalance, how in the long term does the Chinese government propose to tackle this problem and what implications does this have for the future of the power industry in China?

Short Term Solutions 

The  first step of the Government to resolve China's short term energy problems was to commission over 30 major new electric power projects. By mid 2004, China had 400,000 Mega Watts (MW) of installed power generating capacity. The level is likely to exceed 680,000 MW by 2010 and around 1 million MW by 2020.

This appears to have had the desired effect with China's National Development and Reform Commission (NDRC)  recently reporting that the power supply gap should be eased towards the end of 2006. Whilst the current situation has improved, it is only necessary to look at NDRC's future predictions to see that considerable long term challenges remain. In particular, power consumption is expected to exceed 3 million Giga Watt hours (GWh) by 2010 and increase to over 4.5 million GWh by 2020.

Furthermore, most electricity in China will continue to be generated from fossil fuels (mainly coal) and hydro (which alone currently provides c.18% of China's energy needs). Quite apart from the environmental issues that arise in relation to the use of fossil fuels, China's huge demand for fuel has focussed political minds on the issue of energy security. As a result, China is actively exploring and promoting alternative sources of electricity.

Long Term Targets 

In recent years, the Chinese Government has focussed on a number of initiatives designed to diversify its energy generation and to address environmental issues.  This has included the passing of the recent Renewables Law to encourage the development of renewable energy sources (principally wind power), the continued development of the hydropower sector and the huge increase in its investment in the nuclear industry.

Renewables in China 

The Chinese Government  has devised a comprehensive renewable energy strategy designed to make power generation from renewable energy sources as economically competitive as coal-fired power generation. In 2003, renewable energy consumption accounted for only 3 per cent of China's total energy consumption. The Renewables Law seeks to increase the proportion to 10 per cent by 2020, representing a significant rise particularly given the rapid and continuing increase in China's overall power consumption. Since a substantial part of the target is to be achieved by the increased use of wind and solar power, the target appears to be very ambitious. At present, installed wind capacity of China constitutes only 0.14 per cent of the nation's total generated energy. In order to achieve its targets, the Chinese Government has embarked upon an ambitious programme of investment. For example, last year NDRC approved  a package of wind concession projects totalling a $400 million investment in new wind energy technologies to supplement the approval of two earlier batches of wind projects.

Furthermore, in order to assist the Chinese Government in implementing its strategy the World Bank has recently approved a loan of US$87 million to China for the financing of the Renewable Energy Scale-up Program for China (CRESP). This is to be supplemented by a grant of US$40.22 million from the Global Environment Facility (GEF). The programme's objective is to expand renewable electricity supply in China efficiently, cost effectively and on a large scale.

Hydropower 

By the end of 2005, Hydropower capacity had reached 116,520 MW and over 250,000 MW of capacity was under construction. This includes a number of major projects such as the Three Gorges Dam and the Yellow River project. 

Nuclear Power 

Despite the costs, nuclear power generation capacity is being promoted extensively involving over the next 20 years a huge multi-billion US Dollar investment by the Chinese Government. In 2004, China's total installed capacity for nuclear power generation had already increased to 8,700MW .  

China's power industry faces many long-term challenges not least the difficult task of keeping up with the almost insatiable energy demands of the runaway economy. The Government is acutely aware that one of the main drivers to continued growth is an efficient and economic power infrastructure which is capable of reliably servicing its industrial needs.  However, the growth required in the power sector to meet these challenges must be combined with effective solutions to (a) the environmental impact of increased generation including the problems of pollution in China's major industrial heartlands; (b) the challenge of procuring long term and secure sources of oil and gas; and (c) the pressing need to reduce its dependence on coal.

Some steps have undoubtedly been taken to address these issues. Nevertheless, power outages and blackouts remain a feature of industrial life in China and it remains to be seen whether the measures that have been introduced will be sufficient to secure the long-term reliability and cost-effectiveness of the Chinese power sector.

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