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April 18, 2005

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Energy and Power in China

Angie Austin

Executive Summary

China’s rising demand for energy goods and services is putting pressure on global energy markets. According to the International Energy Agency, China will account for 20 percent of world incremental energy demand and for half of the increase in coal use over the next three decades.

Some prominent international commentary has painted this emerging situation in classic ‘resource security’ terms. The main suggestion has been that China’s gargantuan energy consumption in coming decades will position it as a rival to other major energy importers and that the consequent rivalry will have a destabilising effect on international security, either globally or at least in key oil producing regions, like the Middle East.

This paper starts from a different vantage point. It suggests that the most important international impact of China’s growing energy use may not be strategic in classic ‘hard security’ terms that emphasise great power rivalry. The paper suggests that the most important international impacts of China’s energy use in the coming decade will lie in the changing patterns of domestic energy use, and the efficiency of China’s power sector – especially the generation, pricing and transmission of electric power. The paper contends that it is difficult to understand China’s external energy demand (or its global impact) without understanding the Chinese domestic power market.

The domestic regulatory framework for China’s power sector may be a more urgent and important subject for foreign policy specialists than China’s growing oil imports from the Middle East. The efficiency of China’s industrial sector is also an issue, as industrial processes in China continue to require large amounts of fuel relative to output. For example, energy consumption per unit of GDP of China is five times greater than in the US and twelve times greater than in Japan.

For 25 years China’s government has been promoting new approaches to energy efficiency and more recently to environmental protection. International actors can help China in this field in various ways, but most directly through investment in energy-efficient technologies, including development of Chinese specialist expertise. The goal of promoting energy efficiency in China is about reducing future demand.

The paper draws on a variety of specialist studies, on industry structure, the benefits of competition-enhancing regulatory change, energy demand and supply forecasts, and the link between macro-economic conditions and energy consumption. The paper condenses the main findings from such studies to make them more accessible to foreign policy analysts who may be less familiar with the micro-economics issues they address.

The key policy finding is that further regulatory change in China’s domestic energy market is necessary as the current arrangements create inefficient outcomes, which will have very real consequences for energy market operation. In particular, the current energy regulatory system is characterised by:

Price signals that have negligible effect on consumer behaviour and investment;
Weak institutional capacity; and
Limited transmission capacity.

Further reform of pricing practices and regulation is needed to establish a link between price, consumption, and investment. The integration of electricity markets and increased competition in other sectors of the Energy sector could promote greater efficiency and provide greater reliability and cost effective supply.

The USA, EU and Britain have – following the lead of China itself – all recognised that domestic regulation of China’s energy use and power industries constitute a ‘global good’. They have all instituted bilateral programs for promoting more efficient energy use by China. But the EU and Britain have only recently introduced such a program with China, nearly a full decade after the United States. The policy question is whether the EU and Britain can and should prioritise and devote more resources to this program. This paper contends that the answer is self evident as the need is urgent.

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