Energy issue is of strategic importance affecting China's overall economic and social development that needs systematic planning and far–sighted consideration. In recent two years, DRC has been undertaking a major research project on the strategies for China's mid and long term energy development that evolves over 70 experts from several Chinese and foreign organizations including Shell and Tsinghua University. The research has focused on the situation in the global and Chinese supply of and demands for energy; objectives, principles, and road map of China's future energy development; the controversial energy technologies such as coal chemical, nuclear power, and electric vehicles; key energy consuming areas such as urbanization and transport; energy security and major energy policies. Based on the findings of this research, basic views have been produced as follows.

I. Energy area is now in a period of historical adjustment and revolution and significant changes are taking place in energy technology, energy market and energy related geo-politics.

Firstly, the revolution of energy technology is advancing rapidly. The global innovation of energy technology has stepped into a highly dynamic period featured with multi-point breakthroughs, accelerated application and far-reaching impacts. On the supply side, renewable energy, unconventional gas and oil have seen a phase of large scale application. On the demand side, electric cars and the transforming links of smart power grids are being channeled to market. New breakthroughs in the development of flammable ice and carbon capture and storage (CCS) would hopefully be achieved. Innovation has been prioritized with reinforced efforts in major countries based on their resource endowment, technical capabilities and demand potentials. Technological revolution in energy is triggering industrial revolution and will produce profound impact on structure of energy supply, mode of production and utilization, industrial organization and regional structure, leading the globe into a new round of industrial revolution.

Secondly, significant changes have taken place in the pattern of energy supply and demand. The exploration and exploitation of unconventional gas and oil have driven the increase in the petroleum reserves. The panics of shortage stirred up by the 'peak oil theory' have basically vanished. There has been currently a trend that the global center of oil and gas consumption is moving to the east while that of production to the west. In the period of 2010-2030, the newly increased oil demand of China and India is expected to account for more than half of the world total increase. It is anticipated that Latin America would be a new center of oil production while the United States is seeking to be a pricing center for oil and gas. The oil supply side has presented a new development pattern of multi-polarity involving the traditional oil producing areas, Latin America and even the North Polar Regions.

Thirdly, the energy related geo-politics is increasingly complex. The United States has seen substantial progress in its efforts to make America energy independent, leading to even more complex and volatile energy geo-politics globally. While it will never give up its oil interests in the Middle East, the United States is more tough and radical in pushing the democratization process in the Middle East disregarding the constraint of oil issue, resulting in a more unstable international energy market. The rise in the risk of international energy transit lines has posed challenges to China that is thumbing a lift of international energy transit security, making it exposed to the geo-political risks in its surrounding areas, the Middle East and Africa. The shale gas revolution has led to the increase in the supply of LNG on European market and the low priced coal from the United States. Whereas, with the declining share of its natural gas in Europe, Russia has to export its natural gas to East Asia, causing far-reaching impact on the geo-politics on the Euro-Asia continent.

II. The next 20 years constitute a period of opportunity for China to realize a revolution of energy production and utilization.

Firstly, the global energy demand is bond to grow continuously and the imbalance between supply and demand will not be fundamentally changed. Based on a model analysis, even though the world has made tremendous efforts to push forward green transformation, the global primary energy demand will reach 1.59 billion tons and 17.7 billion tons of standard oil equivalent by 2020 and 2030 respectively, up by 20.4% and 34.1% over 2010. Emerging economies have composed the main forces driving up the international energy demand. For the period of 2010-2030, the energy demand increments of China and India would take up 33% and 29% respectively of the world's total. In a global perspective, although the development of unconventional oil and gas in North America has improved the regional energy supply to some extent, with countries in South Asia, ASEAN and Middle East stepping up their industrialization process, global energy demand will continue to grow. Therefore, the tight global supply compared with demand will not see a fundamental change.

Secondly, as the Chinese economy is shifting from its high growth to the mid-high, the growth rate of energy demand in China might drop significantly. In the next 20 years, if correct energy strategies and policies were adopted, economic restructuring and industrial upgrading were accelerated while low carbon transportation and green buildings were developed, the energy demand would be controlled at around 5 billion tons and 6 billion tons of standard coal equivalent by 2020 and 2030 respectively. From 2010 to 2020, China's energy demand would grow by 4.8% annually, and grow by less than 1.5% in the period of 2020-2030, which would be significantly lower than the average annual growth of 8.4% in 2000-2010.

Thirdly, China's energy self-sufficiency has generally maintained at a fairly high level, but the dependence on oil and natural gas import has kept climbing while the environmental pressures stemmed from energy exploitation and utilization have continued to increase. If the rapid growth of oil consumption were not controlled, China's oil consumption would exceed 600 million tons by 2020 and 800 million tons by 2030. Furthermore, the dependence on oil import would reach around 75% by 2030 and that of natural gas would also rise speedily, leading to severe challenges to China's energy security. Energy exploitation and utilization have brought about more environmental pressures, with CO2 emission rising steadily. If no control measures were taken, it would pose major challenges to China's socioeconomic development, jeopardizing the well-being of the people in China and in the world. In addition, the use of fossil fuels is the prime emitter of PM2.5, NOX, SO2 and other air pollutants. If the consumption of fossil energy were not controlled, the emission intensity were not cut and the current trend were not contained, the air pollution would reach an unbearable level.

III. Build a safe, green and highly efficient energy system focusing on transforming the mode of energy development.

In light of major adjustment and reform of the global energy sector and China's efforts to accelerate the transformation of its economic development mode, China’s energy strategy should focus on promoting the transformation of the mode of energy development in order to shape a safe, green and highly efficient energy system initially by 2020, with it fledging up by 2030. Approaches to realize these strategic objectives are categorized into the following six areas: ensuring energy security, prioritizing energy conservation, optimizing energy structure, targeting low emissions, technology driven development, and institutional innovation.

1. Ensuring energy security. Firstly, while stressing the reliance on domestic resources, the development of new energy and natural gas should be intensified to avoid rapid decline in energy self-sufficiency. A certain reserve-production ratio for oil should be maintained to stabilize the domestic production, and coal-to-liquids and coal chemical process should be developed moderately. Secondly, overseas resources should be utilized safely and effectively. The strategic targets to control the reliance on oil and natural gas import should be clearly identified. The oil import markets should be diversified at accelerated speed to reduce the reliance on oil import from the Mideast and that on oil shipping through Malacca Strait, so as to guarantee the security and safety of oil and gas import. Oil companies from oil-producing countries and multinational oil companies should be encouraged to invest in China focusing on the mid-and-downstream businesses, while Chinese enterprises should be encouraged to invest overseas in the upstream businesses and mid ones such as oil refining. Thirdly, the capabilities of strategic oil reserve and emergency response should be strengthened. Efforts should be made to establish a multi-level petroleum reserve system involving national, business and social organizations with the participation of various enterprises encouraged. And at the same time, the establishment of the trading center for oil futures should be sped up. The storage ratio of natural gas should be enhanced and the safe and stable operations of power system and its shipping routes ensured.

2. Prioritizing energy conservation. Firstly, aggregate control over the consumption of coal, oil and other major fossil energy should be implemented. Hard efforts should be made to keep the coal consumption within the limit of 3 billion tons of standard coal equivalent (or 4.5 billion tons of raw coal), reaching the peak by 2020. Meanwhile, the oil consumption should be limited at 550 million tons by 2020 and around 650 million tons by 2030. Secondly, obligatory targets for energy conservation should be formulated and energy efficiency should be further enhanced to achieve China's objectives of catching up, approaching and reaching the advanced international level by 2015, 2020 and 2030 respectively. Great efforts should be made to lower the energy intensity per unit of GDP by 35% between 2010 and 2020, and to achieve further cut by 30% between 2020 and 2030. Thirdly, targets must be set to pursue a path of green and low carbon industrialization and urbanization. In this process, for example, a fairly aggressive strategy of sustainable transport development should be implemented.

3. Optimizing energy structure. The structure of energy production, conversion, and utilization should be optimized and the reform of energy supply system should be promoted.

Firstly, great efforts should be made to optimize the structure of energy supply. The development of non-fossil energy should be accelerated to ensure that the non-fossil energy will account for 15% of the total energy consumption by 2020, and to increase this share to 25% by 2030. The exploration and exploitation of unconventional natural gas should be intensified to raise the proportion of natural gas in the overall energy production and consumption with the aim of natural gas consumption reaching around 350 billion m3 by 2020 and about 650 billion m3 by 2030, and its proportion accounting for about 10% of the total energy consumption by 2020 and 15% by 2030. The proportion of coal in energy consumption should be decreased substantially to about 60% by 2020, and further to below 50% by 2030. A diversified energy supply structure with reasonably shared coal, oil, gas, nuclear and renewable energy should be formed preliminarily by 2030.

Secondly, the structure of energy utilization should be optimised. Both the energy and chemical sectors should be considered comprehensively, with oil mainly used to produce production and transport fuels, and coal primarily used to generate electricity. The efficient and clean use of coal should be promoted. Coal chemical industry should be developed mainly on the poly-generation technology model with the projects such as coal–to-liquids and coal-to- methanol developed appropriately.

Thirdly, the structure of energy conversion should be optimised. The thinking should be explicit that 'large power plants and large power grids' and a distributed power generation system should be stressed on equally, aiming to form a safe, reliable, efficient, smart and green power system. On one hand, large bases of coal, nuclear power, hydropower and renewable energy should be constructed in a positive way. The policy of "the simultaneous development of power transmission and coal transport with current stress on power transmission" should be defined to optimize the means of energy transport. Based on safety and reliability, ultra-high voltage (UHV) power transmission should be developed actively to enhance the transmission efficiency. Smart power grids with clear structure, explicit functions and appropriate matching should be built to improve the absorption capacity of the power grids for renewable energy, realize the user side response and to improve the utilization efficiency of power grids. On the other hand, more attention should be paid to the distributed energy system to accelerate the development of distributed generation of the wind power and solar power, as well as the natural gas based combined cooling, heating and power (CCHP) system.

4. Targeting low emissions

Firstly, the practice of reducing CO₂ emission intensity should be gradually shifted to the reduction of total CO₂ emission. This goal should be achieved in three phases: CO₂ emission per GDP unit in 2015 should be reduced by 17% in 2015 over 2010; After 2015 a total CO₂ emission target should be set to correspond to the controlled total energy consumption; CO₂ emission is expected to reach its peak around 2030, while a target for CO₂ emission reduction should be established.

Secondly, the development of low-carbon energy and low-carbon technologies should be accelerated to increase carbon productivity significantly. Hard work should be done to achieve the target to control the CO₂ emission from energy use of China at approximately 10 billion tons in 2030 with the per capita emission at 7 tons, equivalent to the per capita emission of Europeans at the time.

Thirdly, pollutant discharge should be reduced. The discharge of gaseous pollutants, waste water contaminants and waste residue should be reduced by promoting the end-of-pipe treatment, development of circular economy, headstream control and enhanced regulation and supervision.

5. Technology driven development. China's strategy for energy technology should combine "catching up" with "overtaking".

Firstly, an energy technology roadmap should be drawn up in accordance with China's national conditions and the path of development of global energy technologies. The national strategy for innovation of energy technology should be implemented by moving gradually from the "following" innovation driven by present demand to the dual role of demand pulling and technology pushing so as to give play to the leading role of technology.

Secondly, support to the R&D on the strategic frontier technologies and applied technologies should be intensified. On the supply side, priorities should be given to the technologies of exploring and developing unconventional oil and gas, petroleum substitutions (such as coal-to-liquids), IGCC (integrated gasification combined cycle power generation), wind and solar power, bio-fuels, and third and fourth generation of nuclear power. On the demand side, prioritized support should be given to electric vehicles, distributed energy system and Combined Heating and Power (CHP) technology. In energy transmission and conversion, support should be focussed on smart power grids, energy storage technology, hydrogen energy, carbon capture and storage (CCS) technology.

Thirdly, the organisational forms should be innovated. A public research and development platform should be built. Support and guidance should be given in establishing a market-based innovation alliance for energy industry and building innovation chains, aiming to foster a synergy mechanism which shares benefits and risks and promotes joint innovation.

6. Institutional innovation. It is important to allow market play a decisive role in resource allocation and the restrictions on market access and regulations on pricing in competitive business should be relaxed. Government should play a more active role in intensifying market supervision in naturally monopolized sectors, maintaining market order, and boosting investment in energy conservation and technology innovations.

IV．Proactively respond to the energy challenges in the process of urbanisation and promote a green and low-carbon development.

The development of urbanization may consume large amount of energy resources. 66% of the total global energy consumption was accounted for by cities and towns in 2010. By 2030, China's urbanization rate is expected to reach 65%, with a newly resided urban population of around 300 million, which account for 20% of the global growth in urban populations. The per capita energy consumption in urban areas is three folds over the figure in rural China. According to the statistics, one percentage point rise in urbanisation may result correspondingly in an additional energy consumption of 60 million tons in the coal equivalent. Based on China’s national conditions, it is now necessary to identify a sustainable, green, and low-carbon approach to urbanisation. Compact city modes, energy efficient buildings, highly efficient energy systems and sustainable transport would form the pillars for green and low-carbon urbanization.

Firstly, compact cities should be developed. Analyses indicate that, compared to the sprawl-typed urbanization, the compact urbanization could save 73,350 square kilometers of land, and reduce the energy consumption by 10%, while increase the per capita GDP by 20%, thus resulting in pronounced comprehensive benefits. In urban planning, therefore, city boundaries should not be allowed to sprawl. It is necessary to create a rail-based high speed transport system to connect metropolitan areas in an urban network. Low-carbon city planning and sophisticated city layout should be extended to increase the mixed land use.

Secondly, the per capita construction area should be restricted and energy conservative green buildings encouraged. The current urban per capita construction area in China is 31.6 m², while in the US, Japan and Germany, the figure is 61.8m², 42.9m² and 36.6m² respectively. It is impossible for China to follow the housing model of the United States, and it would be more suited to adopt such models as in Japan and Europe, with the per capita construction area restricted to around 40m². The 75% energy conservation standard should be promoted in the first-tier and second-tier cities, before gradually extending this standard to more cities as the major efforts to develop green buildings. The supervision and regulation on energy conservative constructions should be intensified, and a mandatory identification marking regime of energy efficiency on new buildings should be established.

Thirdly, the urban energy systems should be optimized. The natural gas-based combined cooling, heating and power (CCHP) in distributed type should be developed. The use of solar energy, wind energy and geothermal energy in nearby areas should be encouraged, while requiring proportional utilization of renewable energy in the public buildings. The advanced cogeneration units should be extended in the northern cities, in order to improve the central heating efficiency and pipe network capacity, while efforts should be made to practice the heating measurement on a household basis. While centralized heating is not suitable for use in the Yangtze River areas, the highly efficient, energy saving and comfortable decentralized heating and air-conditioning technologies should be developed. The comprehensive city energy planning should be formulated so that the diversified energy forms could be optimized in a coordinated plan.

Fourthly, a more radical energy strategy for transportation should be implemented. An energy strategy for transport plays a decisive role in terms of oil security and city environmental protection. An analysis shows that, if the transportation energy conservation is carried forward in pursuing optimized transport structure, upgrated technology and strengthened management, the total transport energy consumption in 2020 and 2030 could be dropped by 20.5% and 39.3% respectively, compared to the baseline scenario. The vigorous development of public transport in conjunction with the restriction on private cars could reduce the fuel consumption of urban passenger transport by 17.9%. The improvement in oil efficiency, the development of alternative fuels, in conjunction with advancement of electric vehicles and diesel engine could reduce the oil consumption of private cars by 57%. And the energy consumption of goods transportation could be reduced by 16% through optimized transportation mode, developed third-party logistics, improved management and information systems.

V. Promote the energy transformation through accelerating the institutional reform on energy.

The key of implementing the energy strategy and the transformation of energy development mode lies on reform. In order to promote the revolution of energy production and consumption, the market should play a decisive role in the resource allocation, while the government should play an improved role in the market supervision, energy conservation and environmental protection.

Firstly, restrictions on market access should be relaxed and the fair competition promoted. First, in the oil and gas industries, companies with all types of ownership should be encouraged to engage in exploration and exploitation of unconventional gas and oil resources, while shale oil should be regarded as an independent mineral type being managed through registration of mining rights. Restrictions on market access should be relaxed in terms of the storage and transport (mainly regional pipe networks), processing and sales of oil and gas. Restrictions on the import of crude oil, refined oil products and natural gas should be removed. In the power industry, the routine market mode of the single buyer and single seller should be broken, encouraging large users to buy electricity directly so as to create a market competition between multiple buyers and sellers on both power generation and sales sides. While relaxing the restrictions on market access, the supervision on the quality of products and services should be strengthened, so as to allow the market players to compete based on the same standards and at the same levels. Secondly, the competitive links and the naturally monopolized links should be separated gradually. The competitive businesses should be liberalized, while the supervision on the naturally monopolized links should be intensified. An in-depth research should be conducted on the effective management institutions and operational mode of oil and gas pipe networks, and efforts should be made to explore the necessity and mechanism of separating power transmission from distribution.

Secondly, the mechanism of energy price formation should be reformed. The core of the pricing reform is the mechanism of price formation, rather than only the price adjustment. The grid purchase price should be formed through market competition or decided between power generators and large users on a contract basis. The prices for power transmission and distribution should be regulated by government, to form the independent prices which directly reflect the cost and efficiency of grid companies. Accelerated efforts should be made to establish a rule which can honestly reflect the real cost of grid companies. The power prices for residents and small and medium businesses should continue to be guided by the government, introducing the peak and valley as well as spot prices. In reforming the mechanism of price formation for refined oil products, the government departments concerned should no longer set the prices directly. Instead, they should switch to interference through temporary measures whenever relatively large fluctuations in oil prices occur. Reform on the mechanism of natural gas pricing should be carried forward. The government should strengthen its supervision on transmission cost, while the wellhead and selling prices should shift gradually to be decided by the market.

Thirdly, the policies for mining rights and resource taxation should be improved. The moderate increase in the standards for levying exploration funds should be allowed to encourage the risk exploration. The levying of resource tax on a rate at price basis should be expanded gradually from oil and gas sector to coal mining. At the same time, the possible establishment of special gain levy system for gas and coal should be explored and the resource premiums should be returned to the state. It is necessary to determine rationally the proportional distribution of resource profits between resource owners and developers, between the central and local authorities, so as to coordinate the interest relationships among the different parties concerned.

Fourthly, an effective long-term mechanism for energy conservation should be established. A market-based mechanism of price formation should be created at an accelerated speed. The policies for the differential power and gas prices should be improved, while the peak and valley electricity prices should be extended nationwide. A green taxation system should be established gradually which is featured mainly with environmental taxes, consumer taxes (such as consumer tax for refined oil products), etc. While improving the system on energy efficiency evaluation and approval of fixed asset investment projects, the existing energy efficiency standards of products should be revised and raised substantially. The introduction of the energy efficiency standards regimes led by "top-runners" should be accelerated. Energy conservation targets should be set in particular to the focused industries, and ensure that the relevant responsibility systems are in place in these industries. The guidance and services in energy conservation provided to small and medium enterprises should be strengthened. Renewable energy quota system should be implemented to urge the power generators and grid companies to fulfill their designated tasks and responsibilities.

Fifthly, the policies for carbon emission should be improved. Currently, priorities should be given to implementing a carbon trading system based on market pricing. After the evaluation on the effects of the implementation, research should be conducted on the necessity, forms and range of levying carbon tax.

Note: Mr. Li Wei is the President of Development Research Center of the State Council (DRC).