CHINA

Energy Profile
China possesses abundant energy resources. However, the per capita share of these resources
and the volume of high quality supplies are on the low side. Due to Chinas economic reform and
market liberalization, the development of its energy industry has been rapid, with its energy
production and consumption substantially growing.
I.

Energy Endowment
Chinas resources of traditional fossil fuels comprise mainly of coal. High quality fossil fuels

like oil and natural gas are low and insufficient in comparison to coal. The total amount of oil and gas
resources is at great variance to the economic and social development of the Chinese.
In comparison to other countries rich in resources, Chinas main fossil fuels can be
characterized as abundant. However, its reserve-production ratio (RPR) is quite low; and supply
sustainability of resources is insufficient. Although China has the worlds third most abundant
remaining reserves of coal, the huge quantities being extracted means that the RPR is only 35 years,
equivalent to 29.7% of the world average. The RPR of oil is 21.4% of the world average and natural
gas 49.5%. In addition, given Chinas large population, its per capita share of fossil fuel resources is
lower than the world average.

Nonetheless, China is believed to have a huge potential to develop renewable energy

resources. Available to it are hydropower resources, the highest in the world, and an annual utilizable
biomass resources.

II.

Energy Production

Since its implementation of its reform programme, the Chinese energy industry has seen rapid
development to coincide with the economic and social growth of the country. Its energy production
capacity in 2010 was four times than that in 1980. At an annual growth of 5.3%, China is the worlds
top energy-producing country as the result of its insistence on guaranteeing its energy supply by
domestic resources. In effect, its energy self-sufficiency rate has for a long time been maintained at a
high level of 85% and above.

The energy production and supply framework has been based on coal and centered in
electricity, accompanied by the development of oil, natural gas, new energy and renewable energy.

a. Coal Production
Coal, which accounts for 76.6% of Chinas total production in 2010 is the basic energy
resource. The country is in fact with high concentrations of production areas, such as the provinces

of Shanxi, Inner Mongolia, Shaanxi and Henan. China has been the worlds top coal-producing
country.
b. Oil Production
Also, 9.8% of Chinas energy production is sourced from crude oil. In fact, China is the
worlds fifth largest oil-producing country, after Russia, Saudi Arabia, the USA and Iran. Given
resource constraints, Chinas annual oil production is almost at peak levels, with limited future
growth. To this day, Chinas oil production is shifting to the western regions and offshore. Years of
exploration and extraction have aged and limited the yield of the major oilfields such as Daqing and
Liaohe in the east. The western regions and offshore oilfields are now the focus of Chinas oil
exploration and development believed to be the key in ensuring the stability of Chinas oil
production.
c. Natural Gas Production
Natural gas, meanwhile, comprise 4.2% of the total energy production and production of such
is entering a very rapid development stage with a high production growth rate! In 2010, the total
natural gas production of China accounted for around 3% of the worlds natural gas production.
Consequently, China is the world seventh largest natural gas-producing country after the USA,
Russia, Canada, Iran, Qatar and Norway. Chinas natural gas-producing regions are concentrated in
the eight key areas of Sichuan-Chongqing, the Tarim Basin, Ordos, the Qaidam Basin, the Songliao
Plain, East China Sea, Bohai Bay and the Ying-Qiong Basin.
China is also rich in alternative natural gas resources like coal seam gas or CSG, and shale gas.
However, the developments of these alternatives are still at the initial stage. Exploration and use of
CSG and shale gas can potentially increase the countrys energy supply and reduce the environmental
pollution. In fact, through technological advancements in exploration techniques, these alternative
natural gases are set to become important in the future of natural gas supply in China.
d. Electricity Production
The implementation of Chinas reform programme led to the rapid development in its
installed generation capacity. At the end of 2010, China has become the worlds second largest
electricity producer.
Thermal power is responsible for the bulk of Chinas electricity production. This is electricity
helped produced by coal. Also, China is the worlds biggest producer of hydropower. Nuclear power

and wind power are slowly developing while solar power generation is entering the large-scale
development stage. Primary power sources like hydropower, nuclear power, wind power and so on
took up 9.4% of the countrys total energy production per year.
Chinas electricity production is very different in structure from that in the rest of the world, in
particular some developed countries. In developed countries, the greater part of their electricity is
generated by natural gas and nuclear power. In China, the overwhelming part of its electricity is
generated by coal. The share of coal-fired electricity in the total electricity produced in China is
higher than the world average by almost 40%.
III.

Energy Consumption

Chinas rapid economic and social growth has meant a sustained growth in energy demands.
In 2010, for example, Chinas total primary energy consumption reached 3.25 billion tonnes of
standard coal which is 5.4 times the 1980 level. Indeed, China has become the worlds biggest
consumer of energy.
Chinas energy resource endowments and its energy policy of meeting demands by domestic
supplies have dictated the domination by coal of Chinas long-term primary energy consumption
structure. Compared to developed countries, Chinas use of coal is on the high side, whereas the use
of oil, gas and clean energy is rather low.

However, since the implementation of its economic reform, Chinas primary energy
consumption structure has on the whole been moving towards consuming more high quality energy
resources. It is likely that with the continuous development of Chinas new energy, it is predicted that
the ratio of coal in the countrys energy consumption structure will continue to fall.

At the same time, given the high growth of the transport sector and the rise in the living
standards of Chinese citizens, the shares of oil and natural gas in end-use energy consumption saw a
considerable increase. End-use electricity continued its rapid growth, accounting for almost 20%.
In 2010 Chinas end-use energy consumption totalled 2.28 billion tonnes of standard coal. The
ratios of coal, oil, natural gas, electricity and thermal power were 44.0%, 25.5%, 4.8%, 21.3% and
4.4% respectively.
IV.

Price of Electricity and Government Involvement

China has the cheapest electricity in the entire world. While Germany and Denmark have been
leading the rank of countries with the most expensive electricity rates in the world, China is found at
the very bottom, with electricity costing only 8 cents per kwH. In comparison to Germanys 35 cents
per kwH and Denmarks 41 cents per kwH in 2011. The driving force behind the changes in Chinas
electricity rates is their government, because of the high level of intervention and subsidy they have
had since the Peoples Republic opened its doors to the rest of the world.
V.

How to Get Into Business

Prior to 1994, electricity supply was managed by electric power bureaus of the provincial

governments. Currently, utilities are managed by corporations outside of the government

administration structure. To end the State Power Corporation's (SPC) monopoly of the power
industry, China's State Council dismantled the corporation in December 2002 and set up 11 smaller
companies. SPC had owned 46% of the country's electrical generation assets and 90% of the
electrical supply assets. The smaller companies include two electric power grid operators, five electric
power generation companies and four relevant business companies. Each of the five electric power

generation companies owns less than 20% (32 GW of electricity generation capacity) of China's
market share for electric power generation. Ongoing reforms aim to separate power plants from
power-supply networks, privatize a significant amount of state-owned property, encourage
competition, and revamp pricing mechanisms.
At present, unlike many industrial and consumer industries where private and foreign-invested
companies have a large share though, Chinas power sector is dominated by big, bureaucratic stateowned or controlled companies. The central government-owned power companies, of five major
generators, and two nuclear power generators, comprise of 50% of the countrys energy industry.
The local government owned power companies and private and foreign IPPS comprise 40% and
10% respectively.
On the matter of foreign ownership of electricity companies, minimal restrictions are imposed
by the government. Investment projects are classified by the industry sector in the Catalogue of
Industries for Guiding Foreign Investment (Catalogue) as "encouraged", "restricted" or "prohibited".
The Catalogue classification affects both the investment approval process and the permissible level
of foreign equity holding. However, majority Chinese equity is required in some restricted industry
sectors, while in other restricted sectors, wholly foreign-owned enterprises are prohibited. Generally,
foreign-owned domestic enterprises/projects must be approved by MOFCOM, subject to the
requirements and limitations provided in the Catalogue, (which may restrict or prohibit certain
acquisitions conducted by foreign companies). If the interests to be acquired belong to a state-owned
enterprise, State-owned Assets Supervision and Administration Commission (SASAC) approval must
be obtained. In addition, if the acquisition causes a change of the approved shareholders/investors of
the target electric power enterprise/project, corresponding variation approval for the change of
shareholders/investors must be obtained from the competent development and reform
commissions.
VI.

Turning Points/Thresholds/Goldilocks Conditions

The growth and development of Chinas energy industry has been described as rapid in the
immediately preceding decades. In order to fully understand the current status of the Chinas energy,
the turning points and Goldilocks conditions must be discussed.
When the Peoples Republic opened itself up to the world in the late 1970s, the Chinese power
industry became the focus of both domestic and international discussions because the country was

seen as the engine room of industrial momentum by the Chinese government. At this point in
history, cheap and available resources were prioritized because electricity was almost completely
subsidized by the government. After 1949, Chinese authorities pursued rapid economic development
through investment in a massive heavy industry sector. The government fed state-owned enterprises
with inputs at below-market rates, including electricity. To ensure a supply of cheap electricity, the
government employed price controls at every stage of the power supply chain: the price of coal sold
to power providers, the price of power sold into the grids and the price that grids charge end-users.
This however led to imbalances in Chinas infrastructure in the early 2000s, with wide parts of
the country suffering from frequent local black-outs. Beset by chronic inefficiencies and shortages in
the country's power sector, the Chinese government has long seen the need to make electricity
privately owned instead and simply let the market set end-user electricity prices. Its plans for reform
have been hindered, however, by fears of economic disruption and social unrest that would result
from higher electricity prices in an economy that had grown accustomed to cheap power. Of course
this would be the difficulty that will arise especially when the problem of reforming Chinas power
sector lies in the structure of the sector itself, which is a relic of Chinas planned economy. Thus,
rising coal prices in the 2000s strained power suppliers and promised a large gap between the likely
market rate of electricity and the rates fixed by the government, making reform unacceptably risky
for the Chinese government. But low coal prices over the past year have expanded the profit margins
of power suppliers and shrunk the gap between currently fixed power prices and a market rate of
electricity pegged to coal. In essence, a window has opened for the government to attempt market
reforms in the power sector.
Liberalizing electricity prices essentially, letting them climb to market rates means the
removal of an implicit industrial subsidy as old as the People's Republic of China itself. Because the
price of electricity has historically been fixed below market rates, costs to electricity consumers are
likely to go up over the long run. Liberalization will provoke resistance from state-owned enterprises
and entrenched interests that do not want to lose what had been a longstanding power subsidy. Thus
China has been trying to go by its reform program slowly but surely.
In the opening and reform period, which started in 1978, China began to transition away from
a planned economy. In its place was a temporary hybrid structure: the dual-track pricing system, in
which a certain quantity of goods were sold to the state at planned rates to continue supplying stateowned firms with cheap raw materials, while the excess could be sold at market prices. Reflecting the

government's continued desire to keep power cheap, coal remained on the dual-track pricing system
long after the prices for most key industrial inputs had been liberalized.
Although the dual-track prices did not amount to full marketization, dual-track coal rates
increasingly exposed the power supply to the market and led to higher input prices. Starting in the
1990s, the price and quantity of "planned coal" became subject to contract negotiations between coal
producers and power producers at annual conferences hosted by the NDRC. The commission
capped contract prices below market rates, but the negotiations gave producers more of a say in the
price. Between the 1990s and the mid-2000s, the NDRC gradually reduced its role in determining
rates.
In order to even out load peaks and valleys in the supply of electricity, the highly fragmented
grid system had to be developed, and as a result, two of the worlds five longest HVDC transmission
lines were located in China. Since 2005, China found the need to operate the system more costeffectively and to attract clean technologies for power generation. This necessity grew largely from
international criticism regarding Chinas energy mix, with its heavy reliance on coal as main source
for electricity generation, was joined by rising concerns of the populace over heavy CO2 and particle
pollution measures. It was further necessitated by the advancements in science in finding alternative
sources of energy that would be more sustainable in the long run, which was particularly helpful for
China as a country that heavily relies on its industry. Thus, since 2005, the Chinese government has
intensified its efforts to privatize parts of the sector. Whereas the transmission and distribution of
electricity remained under state control, the power generation market was partly opened to private
and foreign investors. This was considered as the partial liberalization of coal prices, the first time
this was ever done in China, which is 80% reliant on its coal industry.
In April 1996, an Electric Power Law was implemented, a major event in China's electric
power industry. The law set out to promote the development of the electric power industry, to
protect legal rights of investors, managers and consumers, and to regulate generation, distribution
and consumption. Sustainable development became a key phrase. The Renewable Energy Law was
enacted in order to adjust Chinas coal centered energy structure and promote the utilization of
renewable energy to realize sustainable development from the supply side.
In 2012, China implemented a new electricity pricing system, multi-tiered with different price
brackets depending on the users of the electricity. This resulted from the falling demand and
oversupply brought both Chinese and international coal prices down, a trend that has continued to

this day (with the exception of a brief rally at the end of 2013). The price drop has reduced a major
obstacle on Chinese government action both upstream and downstream along the power supply
chain. The sharp fall in coal prices diminished the gap between the prices of market coal and planned
coal and led the State Council to finally abolish the dual-track pricing system for the commodity and
fully liberalize its market. The low price of coal reversed the longtime trend of high input prices that
had strained the power supply chain and stymied reform attempts. Even as end-user prices remained
fixed in 2013, China's five state-owned power generation companies collectively reported profits of
$12 billion, primarily as a result of falling coal prices. In Shenzhen, the cushion provided by
expanded profit margins has given the NDRC the leeway to experiment with the transmission tariffs
charged by China Southern Power Grid without worrying about sending the company into the red.
This pilot initiative will take pressure off Shenzhen power consumers in the short term and harvest
usage data that will be valuable in planning further reform.
Over the decade up to 2013, renewable energy sources such as wind, biomass and solar power
capacities have been developed at an incredible pace. Consumption of renewables in China ranged at
about 43 million TOE by the end of 2013. Also, with a newly installed wind capacity of about 16
GW in 2013, Chinas wind park displayed the largest growth pattern worldwide.
Apart from renewable energy sources, China has put a focus on the development of nuclear
power over the past years. The investment structure of the electricity sector in China suggests a shift
of investments from thermal and wind power towards nuclear and hydropower projects by the end
of 2013. Overall investments in the sector had reached around 760 billion yuan in 2013, with around
390 billion being directed into grid development projects. As of 2015, Chinas wind power capacity is
now bigger than the United Kingdoms total electricity supply. Wind energy is China's third-largest
power source behind coal and hydropower, and ahead of nuclear, while its top five turbine
manufacturers - Goldwind, Guodian United Power, Envision, Ming Yang and Sewind - led the
market with a combined 12.4GW, or 60 per cent of total installed capacity.

Energy Law (August 28, 2015)

Atty. M. Dimalanta
Presented By:
Ala, Joanne
Beleno, Iriz
Evardone, Philip

Puno, Renato Santiago

Sales, Steffi