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China's Energy Policies: Major Contradictions and Future Strategic Transformation


By Shi Yaodong, Research Team on "China's Medium and Long Term Energy Development Strategy" of DRC

Research Report, No.190, 2013 (Total 4439)

Over the past 30 years, China's energy system has witnessed a marked progress and is now experiencing a crucial period of transformation for its future development. In the meanwhile, the rapid development of China's energy system has played a vital supportive role in sustaining the economic growth and increasing per capita income. From 1980 to 2009, China's per capita GDP growth rate tripled energy consumption growth rate over the same period. At present, China's energy system is facing three challenges, namely, supply security, economic efficiency and rapid increase of greenhouse gas emissions. If relevant measures were not taken promptly, none of the three challenges could be addressed.

In comparison with the energy sector, market-oriented reform in other sectors is pushing forward in advance. Due to special reform in energy system and the energy market distinct from the commodity market, policymakers need to establish a comprehensive energy policy system framework targeting at facilitating China's energy system development and transformation so as to guide energy system transformation in a more secure, clean and efficient manner.

Looking into 2020 to 2030, China will enter the late stage of industrialization as a whole and industrial structure adjustment and upgrading and in-depth urbanization will bring about marked changes in domestic energy consumption structure. Critical factors such as a secure, green and economic development pattern will constitute basic starting points and major constraints on China's energy policies and even on various economic policies. For China's modern energy system, how to supply stable, safe, clean and efficient energy to sustain a rapid economic growth and swift urbanization has become a serious challenge.

As the largest energy system in the world, China's energy industry will face many new challenges and opportunities at the same time in the coming 10 to 20 years. Specifically speaking, the third industrialization based on deep integration of renewable energy and intelligent communications technology will significantly change the driving forces for economic growth in China and the breadth and depth of the economic link between China and the world. The reindustrialization, digital manufacturing and manufacturing industry insourcing based on a new round of technological revolution might re-boost industrial energy consumption; the large-scale development and widespread use of massive budget non-conventional natural gas in the United States and other countries will trigger off a marked change in global energy supply and consumption pattern as well global energy geo-political pattern correspondingly. Since there is a possibility of the establishment of a new binding global multilateral carbon reduction mechanism, China will be put under greater pressure to reduce carbon emissions as the world's largest carbon emitter.

As the saying goes, time and tide wait for no man. China's energy system is bound to make a comprehensive and profound strategic transformation in a secure, green and efficient fashion. The earlier it carries out transformation, the more China will seize the initiative to develop its energy industry.

I. Since Reform and Opening up, China's Energy Policies Have Undergone Three Major Stages.

To adapt to the need of China's rapid economic growth, further market-oriented reform and changes in energy supply and demand, China has constantly adjusted and improved its energy policies since the 1980s. Generally speaking, China's energy policies have experienced three important stages. During the first ten years in the 1980s, China's energy policies focused on addressing issues related to the shortage of energy supply and rigid price mechanism. During the second ten years in the 1990s, issues related to mixed up functions between government and enterprise and monopolized operation were tackled. In the 21st century, policies in the first ten years aimed at giving full play to policies on demand side management, optimizing energy structure and deepening market-oriented reform. All in a word, the constant adjustment and improvement of China's energy policies over the past 30 years played a vital supportive role in sustaining an economic growth for more than 30 years. In the meanwhile, China's energy policies faced many difficulties and challenges.

1. Stage 1: From 1978 to the late 1980s

(1) Macro background

During the first ten years in the 1980s, China initiated its economic system reform, inducing marked changes in economic management systems and market operation mechanisms, including reform of investment system, pilot price reform and the duel system with the coexistence of planned price and market price. In the meantime, there was a tendency towards business organization centralization and decentralization. On the one hand, local state-owned enterprises and township and village enterprises emerged in multitude, but on the other hand sectoral corporations such as China National Coal Corporation were established in succession. It is worth mentioning that long-term energy short supply greatly curbed stable macroeconomic operation.

(2) Energy policies

Energy policies were aimed at addressing issues related to the shortage of energy supply and rigid price mechanism. To that end, the Chinese government implemented the dual coal price system, pushed through electricity price reform, encouraged local governments to operate small coal mines, raise funds for power generation and attract foreign investment and proposed the concept of giving priority to energy conservation. Meanwhile, industrial management patterns underwent several changes. For instance, the Ministry of Energy was founded, the Ministry of Coal Industry, the Ministry of Petroleum Industry and the Ministry of Nuclear Industry were first dissolved and then restored and followed by the establishment of China National Coal Corporation, China National Petroleum Corporation and China National Nuclear Corporation.

(3) Overall evaluation

The efforts made by the Chinese government in relaxing control over market access in the fields of coal and electricity alleviated the shortage of energy supply to a certain extent; the adjustment to energy policies mainly centered around power centralization and decentralization between local governments and central government as well as the relation between planned price and market price. Consequently, reform of rigid energy pricing mechanism broadened experience for deepening reform of energy price, investment and finance and taxation. Nevertheless, there were fundamental contradictions to be resolved, including inadequate energy price reform, imperfect criteria for market assess, absence of policies on energy efficiency, imperfect policies on energy resources, finance and taxation and innovations and failure to break up market monopoly.

2. Stage 2: 1990s

(1) Macro background

The Chinese government set the targets of market economy system and market-oriented reform entered a substantive stage; separation of government administration from enterprise management became the focus of system reform in various fields, price reform was gradually deepened and price mechanism reinforced its fundamental role in optimizing resource allocation; state-owned enterprises completed strategic regrouping and state-owned enterprises coexisted with foreign-funded enterprises and private enterprises; a wave of international industrial transfer swept over the eastern coastal areas and consequently it stimulated and increased local demand on energy resources.

(2) Energy polices

Efforts focused on tackling issues related to mixed functions between government and enterprise as well as monopolized operation. To that end, the Chinese government pushed through reform of separation of government administration from enterprise management in the industries of coal, electricity and oil and energy enterprises no longer shouldered the function for administrative management; energy management system launched initial reform and the oil industry completed large-scale restructuring; energy market reform was deepened and both energy resource exploitation and energy conservation were emphasized; the Chinese government accelerated energy legal stytem construction and enacted the Coal Industry Law of the People's Republic of China and the Electric Power Law of the People's Republic of China in 1996 and the Energy Conservation Law of the People's Republic of China in 1997; and new energy development entered an initial stage.

(3) Overall evaluation

China's energy policies shifted the focus from single target of focusing on increasing energy supply capacity to diversified targets of introducing market competition mechanism, optimizing energy structure and improving efficiency of energy resources allocation. Unified price mechanism served as a fundamental mechanism for promoting the development of the energy industry and legal and standardized energy policy formulation and implementation achieved positive results. Nevertheless, China's energy policies were still involved in administrative intervention in energy investment and price setting; energy demand management policies, incentive competition policies and energy technology policies required improvement and there was a lack of incentive policies for promoting renewable energy development.

The article was published in China Development Review, No 1, 2014.

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