China’s Energy and Environmental Challenges

1. China’s Energy and Environmental Challenges Committee on International Relations Frederick Weston NARUC Winter Meetings 17 February 2008 Website: http://www.raponline.org

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 • We’ve 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 it’s 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. China’s 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 • That’s 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 China’s list of environmental concerns, but so far they rank below other pollutants • In area, China is comparable in size to the US • In 2006, China’s 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 pricing—higher 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 • There’s 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.