January 2006

Rising Oil prices have been a hot topic in 2005 and are expected to be a major issue in 2006 in China and worldwide. With energy shortages bringing entire shifts and productions to a halt, every company in China, Foreign Invested Enterprise or not, is effected by China's energy policies and rising oil prices.

China has identified energy as one of their important areas for change; however it is not only battling against rising demand, but also against energy inefficiency and increasing concern for environmental problems.

This calls for increased investments for power generation, transmission and the distribution infrastructure, and at the same time ways to reduce the high energy consumption. After all, China is the second largest energy consumer after the USA. Energy demand has doubled since 1980 and could even triple until 2020, representing nearly 25 percent of the world's energy demand increase.

In order to facilitate for the increased demand and the changes, large investments, including foreign, are necessary.

Thermal Power

Thermal power is the biggest source for power, particularly coal fired plants. Coal accounts for 67.7% of China's generated energy in 2005. Coal will also in the near future represent a large percentage of all energy produced, bearing in mind China's large coal reserve. However, coal is one of the main factors for air pollution and increased reports about accidents and poor safety in coal mines are a major concern. In November and December 2005 over 200 people were killed in two blasts in Heilongjiang Province and Heibei Province. Air pollution is becoming worse and worse in China, where it is estimated that only approximately 10% of coal-burning plants have proper sulfur reduction equipment.

Unlike coal, China has relatively small oil reserves. Messages from the government to reduce the use of oil stresses the fact that serious measures have to be found to avoid wasteful consumption. Currently oil accounts for 22.7% of national consumption, and is expected to have reached 130 million tons of imported crude oil in 2005. China has also plans for increasing their oil reserves.

As part of the efforts to reduce wasteful oil consumption, a guideline catalogue for industrial sectors was issued in January this year. It encourages for example the production of low emission, economical cars and cars using renewable energy like electricity and liquid petroleum gas. Generators exploiting oil to produce energy were listed as 'eliminated'.

Gas currently accounts for 2.6 percent of China's national consumption. China has around 1.2 percent of the world's total reserve. In 2006, the government plans to move from government price control to market orientated pricing for natural gas. This is to encourage investment in exploration. In order to use gas to reduce heavy reliance on coal and oil, projects of pipelines linking gas deposits in the West and energy consuming Provinces in the East and South are necessary. Currently the West - East Gas Pipeline, which's construction started in July 2002, is aimed to transport gas to the eastern regions of Shanghai. In addition, in December 2005 plans for a second natural gas pipeline, this time to the Guangdong Province, have been revealed.

However, the Government's new focus supported by a new law recently passed is to set policies and encourage renewable energy.

Renewable Energy

China has realized that renewable energy is not only a way to reduce the reliance on coal and oil, but also to start and tackle the problem of pollution.

One step to renewable energy policies is the participation at the Worldwide conferences for Renewable Energies.

At the conference 'renewable2004' in Bonn , China presented an action plan. China stated it would formulate a law for renewable energy and prepare a development plan. The National People's Congress reviewed and passed in February 2005 a new law, which has now been implemented in January 2006. The law defines responsibilities and obligations of the government, enterprises and users in the development and the use of renewable energies.

The follow up to the conference in 2004, was held in Beijing in November 2005. By hosting the 'Beijing International Renewable Energy Conference' (BIREC), China emphasized its intentions towards changes in their energy policies. The conference was attended by representatives of 78 countries.

Hydropower

Hydropower is the current biggest source of renewable energy, followed by biomass. End of December, Xinhua reported the start of the second largest hydroelectric power project had begun in the reaches of the Yangtze River. The entire project is expected to be completed in 2015, with landmarks in November 2007 at the turbulent Jinsha River and the first generating unit planned to be installed in June 2012. The project cost is estimated at 50.34 billion Yuan. Besides Power generation and water storage the project is also designed to prevent floods on the Jinsha River.

Wind Energy

The China Energy Conservation Investment Corporation (CEIC), which is one of the most renowned state owned enterprises for alternative energy developments, stated at the end of 2005 that it plans to invest a minimum of 20 billion Yuan into new projects across the country. New projects would include alternative energy sources like wind and biomass and garbage treatment. The new law that came to effect in January 2006, which orders the grid companies to charge electricity generated by renewable energies at a higher price than the coal fired plants, presents tremendous business opportunities to the CEIC, a spokesman said. The company is planning two wind farms in China's Heibei Province and Xianjiang Uygur Autonomous Region. This is in addition to one wind farm that has been completed in Xianjiang, with a capacity of 30 megawatt, and one that is due to be completed in June this year.

One of China's biggest wind power projects is planned for the Hexi corridor.

Solar

Solar energy is still a small percentage in the renewable energies. In December 2005 it was announced that an international center will be built in Lanzhou, the capital of China's northwest Gansu Province. It will receive funding from China and the United Nations, and it will be built by the Natural Energy Institute of Gansu and the UN Industrial Development Organization.

Furthermore, in January, giant Suntech said it would invest up to US$20 million over the next two years in research and development to explore new technologies, as the Chinese market booms. Suntech, the world's biggest solar energy company by market value, has budgeted US$10 million to increase conversion efficiency this year and next year, said the company chief executive officer Shi Zhengrong. The investment will be used to develop new technology solutions to increase the amount of electricity produced from each unit of solar energy.

Nuclear Energy

According to China Electricity yearbook, only 2 percent of the power generation in 2004 came from nuclear power. It is estimated that China has around 64,000 tons of uranium resources, about 1.8 percent of the world's total. China mines about 1,200 tons a year. There are 9 reactors online at present. Currently 2 additional nuclear plants are planned, one in the north eastern Province of Liaoning and the second one in the Shandong Province. Even with future plans to increase the production of nuclear plants, it is still expected that nuclear power will only make up a small percentage.

Energy Consumption and Inefficiency

Energy consumption and in particular inefficiency in China is a major concern. While the booming industry has often been blamed on china's electricity shortage, the growth of consumer appliances has also played an important role. Household consumption, the second largest consumer block, is currently still at a low level in comparison to other nations. Countries like the USA consume 10,950 kWh / year, France 5,290 kWh / year and Germany 3,600 kWh / year, whereas China still only lies at 630 kWh / year. In the 1980's there was little home appliances found in urban China. By now, each urban household on average has more than one TV, 133 units per 100 households, 96 percent have washing machines, 90 percent have refrigerators and 70 percent air conditioners. This shows that electrical appliances have also become an integral part of urban life. In rural households, nearly three quarter own a color TV, and 40 percent a washing machine.

Being aware of the increasing demand of appliances, China has introduced several energy efficiency programs for household appliances. The first set of standards were issued in 1989. They included a minimum energy efficiency standard, and since then the program, has been expanded. In order to make the information more accessible for the consumer and to raise awareness, an energy information label was launched in March 2005. It classifies appliances into five different categories in order to inform the consumers. These labels are expected to rank as a key factor influencing consumer's choices in the future. However, due to insufficient resources and in some areas unclear regulation mandates, enforcement of energy standards remain uneven.

Towards the year end of 2005, a statement was issued that the government departments in Beijing were found to be inefficient and plans revealed to install energy efficient systems, saving within 10 departments some 6 million Yuan in energy.

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