Speech of Li Wei, minister of the Development Research Center of the State Council (DRC), at Caijing magazine's annual meeting for 2015, on Nov 27, 2014.

Good morning to you all. I'd like to express my thanks to the organizers for inviting me to this annual meeting of Caijing magazine, where I'll be speaking on energy reforms and setting up a safe, green, and efficient energy system.

Energy is the material foundation and force behind the economy in modern society and what the big powers all compete for, so energy issues matter to national security and overall economic and social development. There was a meeting of the Central Leading Group on Financial and Economic Affairs, this past June, with President Xi Jinping presiding, to discuss energy security strategies and arrangements for energy production, consumption, technology and system reforms and how to increase international cooperation. Also, back in April, Premier Li Keqiang held the new national energy committee's first meeting where they discussed strategic issues and major energy development projects. And, the State Council recently published its Energy Development Strategy Action Plan (2014-2020). All of these concern just where China's energy development and reforms are headed.

The Development Research Center of the State Council (DRC), as a Central government think tank, has given a lot of attention to energy issues and conducted research on China's mid-to-long term energy strategy, with the Royal Dutch Shell Co, since 2011. And it did an in-depth study of China's and the world’s energy supply and demands, and China’s goals, principles, strategies, and methods for energy development and energy reforms.

So, I'd like to say something about energy reform based on the DRC's research:

First, We're seeing a big change in energy in the world.

Energy technology is evolving rapidly. Energy technology innovation is active and the application of innovative technology is accelerating, with many breakthroughs and a far-reaching effect. In the area of supply, renewable energy and unconventional oil and gas are in wide use, and in demand, the electric vehicles and smart grids are being introduced, with combustible ice and carbon capture and storage expected to see new breakthroughs. The developed countries are speeding up their energy transformation and reforms based on their resources, technologies, and demand potential. Germany says clearly that it wants to be the first country to shift to the new energy, with 60 percent of energy consumption and 80 percent of power coming from renewable energy by 2050. Energy technology reforms have become an important part of the new industrial revolution and will shape global competition and industrial patterns.

Global energy supplies and demand change dramatically. The shale oil gas revolution is increasing oil reserves and the panic caused by peak oil is disappearing and, the center of oil gas consumption is moving eastward, to East and South Asia, and the production center westward to Africa and America.

Energy's geopolitical situation is becoming more complex. The United States has made substantial progress in its energy independence, making the global energy situation more complicated and changeable. Some big powers have been playing a leading role in energy security transportation system, so China will confront new challenges. The shale oil gas revolution and Ukraine conflict could very possibly cause a change in the international energy flow with the Middle East and Russia exporting oil and gas to the East Asia, with a further effect on the politics of Eurasia. Of course, there are more sensitive spots than Ukraine that may cause energy unrest, so its influence on the world is hard to predict.

Second, China's energy supply-and-demand and external constraints will change significantly.

The demand for energy will increase globally. Our calculations show primary demand, in 2020, will grow 20 percent and, in 2030, by 34 percent, over 2010, in spite of the huge effort made in a green transformation worldwide. Emerging economies are the major force behind growing international energy demand. Recently, the international oil price dropped drastically with West Texas Intermediate (WTI) and Brent crude falling below $80 a barrel, which was caused not only by declining demand for international crude but by an oversupply of oil gas. This was also a normal price correction over the previous high. If we look at the situation from a global and long-term perspective, as South Asia, ASEAN, the Middle East and Africa accelerate industrialization the demand for energy will continue to grow while the tight international energy supply and demand situation is unchanged.

China's economy is in a transitional period from high-speed growth to middle-speed growth while the force and internal structure of the growth are changing significantly. With a correct energy strategy, China will see energy growth decline greatly. The calculation is that China will hold energy demand to 5-billion tons of standard coal in 2020 and 6 million tons in 2030, with annual energy growth up by 4.5 percent from 2010-2020, and 1.5 percent from 2020-2030, much lower than the 8.4 percent of annual demand growth from 2000-2010. In fact, because the growth and GDP proportion of tertiary industries both exceeded those of secondary industries from 2013 to the first three quarters of 2014, heavy chemicals growth slowed, with energy demand growth falling to around 4 percent and remaining stable.

As for external energy development conditions, resource and environment constraints are pressing. China has become the biggest oil importer in the world, since the fourth quarter of 2013, and its petroleum trade dependence was as high as 58 percent, in 2013 and that figure will exceed 70 percent in 2030, if the country doesn't control it. This high degree of foreign-trade dependence is rarely seen in the big powers, for example the US, where foreign-oil dependence peaked at 66 percent and it has fallen below 50 percent. Also, China's ability to put up with air pollution has reached a critical point. China and the US reached a climate change agreement, on Nov 12, and China will see peak carbon emissions around 2030 and do its best to reach that even earlier. This is the upper limit of pollution in energy development and use, with resource and environmental constraints pushing an energy production and consumption transformation.

Third, China needs a green, safe, and efficient energy system through an energy revolution.

The central government has proposed a strategic energy revolution in response to domestic and international changes in the economy, technology, society and politics. This strategy fits the trend of economic and social development at home and abroad and deals with public concerns. In addition, it is in compliance with basic energy development principle and trends and is China's general plan for tackling its pressing problems in energy. This energy revolution, as a strategy, will last a long time while it moves forward in steps. We think it could come in three phases, as follows: first, the overall arrangements and early success, mainly during the 13th Five-Year Plan (2016-2020), with the major task being strategic research and a general plan for an energy revolution that is expected to complete as soon as possible. This revolution should be a major part of energy planning in the 13th Five-Year Plan and should be reflected in the national economic and social development plan. In addition, the country needs a greater effort to halt coal consumption and pollution at their peak, with large-scale, commercialized development of renewable energy and shale gas, greater energy efficiency and energy security and technological innovation, during the 13th Five-Year Plan; second, problem solving and breakthroughs, mainly from 2020 to 2030, where the main task is to halt total carbon emissions at a peak, before 2030, and to hold energy consumption to 6-billion tons of standard coal, in 2030. In addition, the country will bring energy efficiency up to international standards and overall consumption to close to global standards. It will also try to build a multiple structure with coal, oil, gas, nuclear energy and renewable energy, and increase oil and natural gas reserves to as much as those of developed countries. Energy technology innovation will improve and be a key factor in energy development; the third phase concerns enhancement, mainly from 2030 to 2050, with the focus on renewable energy as the major source of new energy supplies, replacing fossil energy such as coal and oil. Local pollution and carbon emissions need to fall with resource and environmental constraints in energy development generally eliminated. China's energy technology innovation will be active and among the world's top to promote economic growth and public well-being. China hopes to complete its energy revolution by the 100th anniversary of the People's Republic of China.

Fourth, China will accomplish this energy revolution through systemic reforms.

A fundamental guarantee of energy production, consumption, and technological progress is in economic reforms with the market playing a decisive role. It will push all sides to join the energy revolution. In this, China first needs to relax market access controls and make competition fair and encourage all types of enterprises to get involved in the exploration and development of unconventional oil and gas, relax market access controls on oil and gas storage and transportation, processing, sales, and export restrictions on crude oil, petroleum products, and natural gas. China can also implement direct purchase and open sales for major customers, and develop a market with many buyers and sellers competing. And, while relaxing restrictions, it needs to increase supervision of product and service quality and make sure the all parties complete at the same level. China also needs to separate competition from natural monopoly by letting the competitive part be free and increasing supervision of the monopolistic part. There needs to be more research on oil gas pipe network management and operations and on the necessity of separating transmission, distribution grid, and operation. Second, China needs energy pricing reforms rather than a simple price adjustment. Power generators and big consumers can reach an agreement on feed-in tariff with a contract, while the government regulates transmission-distribution costs and establishes pricing rules that reflect the true cost of the grid. Residences and small and medium-sized businesses consider time-of-use prices and real-time prices. China will help build a pricing system where the petroleum market decides distribution, so that some government departments don't set the price for petroleum products directly but develop temporary measures when oil price fluctuates sharply. The country will reform the natural gas pricing and increase supervision of gas transmission and distribution costs while the market decides the wellhead and sale price. Third, China needs long-term energy conservation and emissions reductions by increasing product efficiency. It needs to accelerate "pacemaker" energy efficiency standards, in addition to a green tax system mainly covering the environment and consumption. Meanwhile, it will improve its carbon emissions policy by focusing on carbon trading where the market sets the price. By assessing the implementation effect, China can examine the necessity and methods of levying a carbon tax. Fourth, China needs to change the government's function and increase the rule of law in energy area and needs to work on energy strategies, planning, policies and standards and to streamline administration and delegate power, cancel administrative exams and approvals, or transfer the power to local government, increase energy monitoring and efficiency, and maintain a fair, competitive market order. In all of this, it needs the rule of law and a combination of reform with legislation. It should also amend the Electric Power Law and Coal Law, come up with an Oil and Gas Law, and an Energy Law.

Fifth, China needs to pay greater attention to six strategic short-to-mid-term measures for energy revolution:

(1) Controlling quantity and reforming energy consumption. China needs to change the old way of thinking about energy supply without limits and develop an energy-saving production and sustainable consumption method with quantity limits. By controlling total consumption of fossil fuel, such as coal and oil, China can halt total coal consumption at its peak in 2020, at no more than 3-billion tons of standard coal (or 4.2 billion tons of raw coal). It can also limit oil consumption to 550 million tons in 2020 and around 650 million tons in 2030. China will also set energy conservation goals, increase energy efficiency, and try to make energy consumption per unit of GDP, in 2020, at least 35 percent less than for 2010, and down 30 percent in 2030, from the 2020 level.

(2) China needs optimal energy production and use, and a production revolution. It really needs to improve its energy supply by developing non-fossil energy sources that account for 15 percent of total energy consumption by 2020, and 20 percent or higher by 2030. It will do more in unconventional gas exploration and raise its proportion to 10 percent of the total by 2020 and 15 percent by 2030. Coal use out of total energy consumed can drop significantly to around 60 percent by 2020, and below 50 percent in 2030. China will set up a diverse energy structure with coal, oil, gas, nuclear power, and renewable energy. China needs optimal energy use taking energy and chemical engineering into consideration. Oil should be mainly used for automobiles and coal mainly for electricity, in an efficient, clean way. The coal chemical industry can focus on poly-generation and develop coal-to-liquid and coal-to gas. China also needs a better energy transformation structure, with equal attention given to big electricity networks and a distributed electrical power system for a safe, reliable, efficient, green, and smart power system.

(3) Implementing the energy technology strategies that places equal emphasis on catching-up and leapfrogging to push the energy technology revolution. China needs to find an energy technology development path based on its own conditions and global trends and more effort in R&D on cutting-edge and applied technology. It also needs to increase R&D and applications of unconventional oil and gas, coal gasification, and new thermal power, wind power, photovoltaic power, biomass energy, 3rd and 4th generation nuclear power, electric vehicles, distributed energy sources, smart grids, stored energy, hydrogen energy, and carbon capture and storage. And it needs organizational innovation and public R&D sites for collaborative innovation.

(4) China needs to increase cooperation with the rest of the world to assure energy security, while widening its petroleum sources and transportation channels to reduce its dependence on the Middle East and the Strait of Malacca. It also needs to attract oil producers and transnational oil companies to invest in business in China in the middle and lower reaches of the business. Chinese companies, at the same time, can invest in businesses abroad, such as refining and chemicals and it can improve its oil reserves and emergency capacity, with various enterprises getting involved. It will speed up the construction of an oil futures trading center as well.

(5) China needs to develop low-carbon energy and lessen ecological and environmental destruction from resource exploitation as energy consumption grows, through better project management, a circular economy, prevention at the source, and strengthened supervision. This can also help reduce the amount of waste gas, waste water and waste residue. To reach its total emissions reduction goal, China can: work hard to cut carbon emissions per-unit of GDP by 17 percent by 2015, from 2010, and put controls on total carbon emissions, and hit its carbon emissions peak around 2030 and reduce per capita carbon emission to the level of Europe.

(6) China will deal with energy problems in urbanization and make urbanization green and low-carbon. Cities need to be compact, with clear boundaries and rail transit forms networks. The government needs to work on low-carbon urban and regional planning and detailed city layouts to keep the per capita floor area at around 40 square meters. It also needs to put efforts in increasing building energy efficiency and in implementing the energy efficiency standards of 75 percent in first and second tier cities. China should develop distributed energy sources that use solar, wind, or geothermal energy, for an improved urban energy system. It can develop public transport and control the use of private cars, while improving fuel energy and alternative fuel. An optimal freight transport system, optimal third-party logistics management and access to information are all important.

Ladies and gentlemen, the DRC has been involved in Chinese think tank reforms, in accordance with the 18th Party Central Committee's decisions and we'd like to increase exchanges and cooperation with all of society and do research on major economic and social development issues and provide better suggestions to the central government's policy-makers.

Thank you!

Author: Li Wei, DRC minister

Source: China Economic Times, Nov 28, 2014