[footnotes removed]
While the purpose of The Future of Coal report is to examine the role of coal under carbon emissions restraints, it also offers analysis of China’s energy sector.
Issued on March 14, 2007, The Future of Coal: An Interdisciplinary MIT Study is part of a series of Massachusetts Institute of Technology (MIT) reports on meeting energy demand without increasing greenhouse gas emissions. Research in China, from 2002 to 2005, included interviews with government officials, academics and commercial experts, as well as power plant case-studies. Shell provided partial support for the research in China.
The report provides research on a number of energy issues in China including: coal production and consumption; carbon sequestration projects; environmental regulation and energy efficiency targets; government and corporate oversight; natural gas and nuclear power trends; and the agglomeration of interests that affect the sector
Globally, coal is an abundant and relatively inexpensive power source, costing $1-2 per million British thermal units (Btu) compared to $6-12 per million for natural gas and oil. China has immense coal reserves. The low cost and security of supply are significant incentives for the continued use of coal power in China.
China produced 2.23 billion tonnes of coal in 2005. The second largest producer, the United States, had an output of 1.13 billion tonnes.Virtually all of China’s production is consumed domestically and demand is expanding rapidly. Eighty percent of electricity generation in the country is coal-fired.
It is estimated that over the next 25 years, China will be responsible for more than half of the global growth in coal supply and demand. Every week, China constructs the equivalent of two, 500 megawatt, coal-fired power plants and a capacity comparable to the entire power grid of Great Britain each year.
Carbon sequestration is the process of removing carbon dioxide from the atmosphere including the capture and artificial storage of CO2. The report lists a number of active sequestration projects in China including: an enhanced oil recovery program by the Research Institute of Petroleum Exploration & Development (RIPED) division of China National Petroleum Corporation (CNPC), a Shell pilot project, a Dow Chemical project, and a Canadian-Chinese enhanced coal bed methane recovery (ECBM) project in the Quinshui basin.The report notes China has been forecasted as the world’s largest CO2 emitter by 2030 and may expand sequestration efforts as a result.
The State Environmental Protection Agency (SEPA) is responsible for national environmental policy. Local agents are appointed by regional officials focused on local economic growth and environmental bureaus are funded in part by local fees.
National sulfur emissions are capped by 1998 and 2000 amendments to the Law on the Prevention and Control of Atmospheric Pollution and require coal plants to employ desulfurization systems. However, only a fraction of coal-fired plants have these systems in place.
The Chinese government recently announced a target of increasing energy efficiency by 20 percent over the next five years.This is likely a central government response to concerns over China’s increasing energy demands and dependencies.
According to the report, China’s national energy bureaucracy is “highly fragmented and poorly coordinated,” with limited control over infrastructure planning, pricing, and state enterprise oversight. The national oil and power companies, that comprise the state enterprises in the sector, shape related regulation and events. Stakeholders of these organizations include: state-appointed executives, domestic and foreign board members, domestic and foreign shareholders, and global financiers. Corporate governance and policy is also disjointed.
Physical and technological infrastructure issues are generally resolved by sub-state stakeholders. The combination of ad hoc energy-related decisions made by local industrial and government actors, and based on local economic concerns, direct the energy sector as a whole. China does not have a coherent national energy strategy.
Officially, the Chinese government exerts control over the five major state-owned national energy corporations who operate domestic power plants. Under this model, new plants receive central government approval from the Energy Bureau of the National Development and Reform Commission and are built to standards on technology, fuel, operations and emissions.
In fact, a quarter of the generating capacity in place in early 2005 was built without Energy Bureau approval. The financing, service terms, and construction standards of these plants are not centrally recorded. Within the corporations, subsidiary plants report performance and submit earnings to parent companies, but operate at arms-length and in some cases, off-the-books.
Plants are financed primarily by the municipal branches of state-owned banks and municipally-owned development corporations. Local government involvement and investment encourages plant production regardless of standards and central approval. For example, local firms and officials will divide the capacity of a single plant into multiple filings to avoid central government oversight.
The generation of electricity by individual manufacturers accounts for an estimated ten percent of national consumption. Diesel-fired generators are predominantly used. China is now the largest market for these generators.Fuel is expensive and often produced from imported crude, but enterprises are choosing in large numbers to generate their own power. Increasing global production demands and power-intensive manufacturing processes are two reasons for this trend.
China’s vast energy demands and decentralized energy governance results in the use of multiple energy sources. Non-coal fossil fuels dominate global supply and China plans to build more nuclear power plants in the next 15 years than any other country (to account for four percent of national generating capacity). Strategic costs and benefits emerge from the use of each source. Coal avoids global oil and gas markets, but has a greater environmental impact. Coastal consumers have expressed preference for cleaner solutions. In addition, Chinese coal reserves are largely located inland while coastal regions consume the most energy, separating local economic interests. Nevertheless, coal will continue to be the dominate source of generation.
A trend among wealthier coastal regions is investment in the infrastructure and use of liquefied natural gas (LNG). State energy companies and local governments share an interest in global trade that utilizes oil and gas port facilities, terminals, and pipelines. These investments allow for, but are dependent on, the acquisition of oil and gas.
The report suggests the group with the largest influence over the energy sector as a whole is executing commercial strategies at the fastest rate. This group is comprised of the state petroleum corporations, state power companies and coastal government decision-makers, all participating in the supply of petroleum and gas. Their speed derives from: commercial sophistication; links to global partners; and access to global supplies, government infrastructure, and consumers. The group has no incentive to pursue large-scale coal projects. State petroleum firms view coal as a commercial substitute and competitor; energy companies are cautious to hand over control to the mining industry; and local government actors have few coal constituents.
The dominance of local government control over energy decisions means coastal actors, with substantial investment resources, can opt for dependence on foreign oil and gas over domestic but distant coal. Illustrating this point, Shanghai is expanding its LNG infrastructure while banning new coal-fired plants.
China’s increasing global economic integration blurs boundaries between state and non-state, public and private, foreign and domestic. State energy companies are listed on exchanges, have foreign corporate directors and are guided by international finance.
The report only makes one China-specific finding. It purports that China lacks the ability to immediately or effectively adopt and enforce a significant carbon emission reduction policy. However, analysis within the report suggests participation in corporate energy strategy and representation in energy transactions affect sector developments as a whole.
