Chinas Energy and Environmental Challenges

1
Chinas Energy and Environmental Challenges

• Committee on International Relations
• Frederick Weston
• NARUC Winter Meetings
• 17 February 2008

2
Who We Are

• RAP is a non-profit organization, formed in 1992
  by experienced utility regulators, that provides
  research, analysis, and educational assistance to
  public officials on electric utility regulation.
• Our aim is to assist governments to develop and
  implement economically and environmentally
  sustain energy policies
• Weve been working in China since 1999, funded by
  the Energy Foundation, the World Bank, and the
  Asian Development Bank
• We advise central and provincial governmental
  officials on the economic and environmental
  regulation of the electric sector, market
  structure and reform, energy efficiency, clean
  energy resources, pricing, etc.

3
Background

• To begin with the obvious Conditions in China
  are very different than conditions here
• China is a developing country, but its very
  different than most developing countries
• Energy growth and the related environmental
  problems are staggering
• Economic growth of 10/year
• Growth in electricity demand 15/year
• Increases in energy intensity since 2002, after
  two decades of improvements

4
Chinas Energy Growth

• GDP Rising at 9.6 percent
• Energy Rising at 11

• Electricity Rising at 15.5
• Oil up 18 in 2004 (1/3 US)

• 2020 Goal 4X GDP, 2X Energy, Urbanization
  nearly 2X

Source International Energy Outlook, 2004
5
Health Impacts

• Air pollution levels exceed WHO standards
• China has 16 of the 20 most air polluted cities
  globally

Every year
400,000 premature deaths 75,155,000 asthma
attacks
Source World Bank World Health Organization
6
New Generation Capacity

• In 2005 and 2006, China added approximately 100
  GW per year of new electric generation capacity,
  well over 90 of which was coal-fired
• Thats almost two Californias per year or more
  than three New Englands
• Note
• In the US, 98 of coal use goes to producing
  electricity
• Whereas, in China, only 50 is for electricity
• The other half is for industry and residential
  heating and cooking

7
Development Targets

• By 2020
• Quadruple 2000 GDP (4 x 1.08 trillion)
• Double energy consumption (which, without care,
  could easily be tripled)
• Increase per capita GDP from 850 in 2000 to
  3000 (real 2000) in 2020
• Attain Three Transcendences
• 1. Sustainable development
• 2. Peaceful rise as a great power
• 3. Be governed by the rule of law create a
  harmonious socialist society
• By 2010
• Reduce energy intensity (Btus/GDP) by 20 below
  2005 levels
• Reduce absolute emissions by 10 below 2005
  levels
• The country has already fallen seriously behind
  in meeting these targets

8
Policy Emphases

• GHGs are on Chinas list of environmental
  concerns, but so far they rank below other
  pollutants
• In area, China is comparable in size to the US
• In 2006, Chinas SO2 emissions total
  approximately 26 million tons, of which half came
  from the power sector
• The 11th Five-Year Plan calls for a 62 reduction
  by 2010
• US SO2 emissions totaled 9.4 mn ton in 2006, of
  which 70 came from the power sector
• The Chinese have put a high priority on energy
  efficiency and environmental protection, but the
  challenges they face are enormous
• A related problem the performance of
  governmental officials is most often measured in
  terms of economic growth

9
Power Sector Reform

• China is committed to power sector reform even
  though it is likely to make matters worse
• The necessary conditions for reform (system
  operations infrastructure, open entry, many
  independent suppliers, adequate market and
  regulatory oversight, etc.) are a long way off
• The most significant issues can be addressed
  faster and with less risk through other means
• For example, reform of dispatch rules
• Typically, markets are not designed to deliver
  energy efficiency and environmental protection
• The same is true in China

10
Innovative Policies

• While power sector reform has slowed, in part
  because of the California crisis and in larger
  part because of significant shortages in the past
  several years, the Chinese have adopted several
  policies that reflect important advances
• The energy efficiency power plant (EPP)energy
  efficiency aggregated to perform like a
  conventional power plant
• In the US, a number of states ostensibly treat
  energy efficiency as a resource, but system
  remains biased toward supply-side resources
  (e.g., capacity markets, socialized funding of
  regional transmission investments)
• China differential pricinghigher electric
  prices for the less efficient users
• No equivalent in the US. One approach that we
  might take would be to set energy efficiency
  standards for industrial production, e.g.,
  kWh/tons of steel, with fees or penalties for
  failure to meet specified goals
• China environmental dispatch, based on CEM data
• Early equivalent steps in the US pricing
  emissions (SO2, CO2) through trading programs,
  but no taxes or other means yet to reorder
  dispatch or investment preferences
• China closure of small, inefficient power plants
• No similar policy in the US, but, if there were,
  our approach might be phased-in and escalating
  energy efficiency standards for power plants,
  with fees or penalties for failure to comply.

11
Efficiency Power Plant

• An Energy Efficiency Power (EPP) is a bundled set
  of energy efficiency programs designed to deliver
  the energy and capacity equivalent of a large
  conventional power plant (CPP)
• An EPP can meet the same energy needs as a CPP,
  but. . .
• A CPP
• Burns 340 grams/kWh of coal or more
• Emits 4 grams SO2/kWh and similar amounts of NOX
• Costs between 35 and 40 fen/kWh
• Whereas an EPP
• Burns no fuel,
• Emits no pollution
• Costs about 15 fen/kWh

12
Energy Efficiency Power Plants

• Jiangsu
• Save 17,000 MW in 10 years
• 1/4 the cost of a coal-fired power plant
  (average cost US 1.6 cents/kWh)

• Shanghai
• Saves 198 MW in 2 years
• Saves US 69 million
• Average cost US 1.6 cents/kWh

Source Asian Development Bank
13
Emissions Policies

• National goal for reducing SO2 emissions
• Not yet mandatory. Pilot trading schemes
• Pollution levy
• Fee per metric tonne of pollutant (SO2 and NOX)
  emitted
• Has the effect of linking emissions to output
  (e.g., lbs/MWh in the electric sector), thereby
  rewarding thermal efficiency improvements
• Theres no move yet to impose a carbon
  cap-and-trade program in China

14
To Sum Up Current Electric Sector Policies

• Regulatory reform
• Preference for competitive markets
• State Electricity Regulatory Commission
• National Development and Reform Commission
• Expected creation of a Ministry of Energy
• Pricing policies
• Time-of-use rates
• Differential pricing
• Pollution levies
• Environmental dispatch
• Demand-Side Management
• Load curtailments
• EPPs
• Least-Cost Planning
• Called Scientific Energy Planning

15
New Efforts

• The Chinese are engaged on the big issues. SERC
  and NDRC are considering
• How can China better integrate energy policy with
  environmental policy, and
• How can the power sector be better structured and
  managed to address climate change?
• These are questions that all policy-makers should
  be asking
• In March, RAP and EF are taking a team of six US
  regulators to China for ten days to engage on
  precisely these issues.