Three Reform Strategies Behind Xi’s Energy Revolution

Angela Fan

Chinese President Xi Jinping announced in mid-June that officials in his administration will push forward an “energy revolution,” focused on reducing energy consumption, increasing energy supply, and improving energy efficiency. While the announcement was short on implementing details, the three reform strategies outlined in his speech provide the underpinning to China’s future policy direction and market movements, and provide guidance for foreign companies seeking new opportunities in these markets. 

Reducing energy consumption

Reducing China’s energy consumption is a key part of Xi’s energy plan, given concerns about energy security and China’s high level of energy use.  According to the Economic Observer, China's energy consumption per unit of GDP was 2.5 times the world average in 2013. It was 2.9 times higher than US consumption and 4.5 times higher than that of Japan.

This priority has also appeared in other high-level speeches and policies. For example, two days after Xi’s speech, China’s National Energy Administration announced 12 key tasks that aim to help China implement energy-saving policies and build up energy-saving consumption values. Main tasks include:

  • Quickly drafting of the energy planning section of the 13th Five-Year Plan, combining it with China’s National Energy Development Strategy Action Plan (2014 – 20) and China’s Energy Security Strategy;
  • Speeding up the drafting of the 2030 Revolution of Energy Production and Consumption Strategy;
  • Implementing the Action Plan for Atmospheric Pollution Prevention and the Work Plan of Atmospheric Pollution Prevention for Energy Industry;
  • Drafting an action plan on building new cities using green energy and promoting energy-saving lifestyles;
  • Promoting new energy innovation and technology;
  • Managing and revising energy efficiency standards; and
  • Promoting energy project coordination with Russia, Central Asia, and other regions through senior-level visits, large-scale projects and bilateral platforms.

These tasks focus in particular on developing shale gas and offshore oil resources, increasing production volume for old oil wells, and strengthening oil and gas reserves, energy security, and emergency capacity.

One of the most significant efforts in reducing energy consumption is the government’s recent drive to increase the number of electric cars on China’s roads. Just this month, five national agencies, including the Ministry of Finance and the National Development and Reform Commission (NDRC), jointly released the Implementation Plans on New-Energy Vehicle (NEV) Purchase for Government Agencies and Public Institutions. NEVs include pure electric cars, plug-in hybrids, and fuel-cell vehicles.  According to the plans, government agencies must increase their purchases of NEVs over time, proportional to regular automobiles. Thresholds are higher in heavily polluted areas in and around Beijing, Shanghai, and Guangzhou. Subsidies will be offered to government and public agencies for the purchases of vehicles that cost less than $29,000. According to the plans, China will also promote the establishment of NEV infrastructure like charging stations.

Increasing and broadening China’s energy mix

Xi’s speech also called for China to increase its energy supply and broaden its energy mix beyond coal. According to the Chinese media, coal still accounted for 70 percent of China’s total energy use at the end of 2013. To reform the current energy supply structure, industry experts say that China needs to progressively build a fossil fuel-based multi-energy resource system, including clean coal, oil, gas, nuclear, new energy and renewable energy.

Since 2013, central government agencies have increased the number of policies released to accelerate energy reforms. In early 2014, the National Energy Administration issued the 2014 Energy Work Guidance. This document called for “steadily pushing forward” approvals for the construction of nuclear power stations in coastal areas, which were halted during the Fukushima nuclear accident in 2012. According to official news sources, on July 3, NDRC Vice Chair Wu Xinxiong committed to accelerating approval procedures for nuclear power stations during a research trip in Anhui.

According to Wu Yuetao, a senior researcher at the China Center for International Economic Exchanges, strengthening international cooperation is also key to maintaining energy supplies from multiple sources. Wu’s comments imply that China’s proportion of imported natural gas and coal will continue to grow in the future. Many industry experts believe that new business opportunities are likely to emerge in the areas of shale gas, offshore oil and gas, and the development of old oil wells. However, since bringing more clean energy into the Chinese market will keep prices down for domestic coal, local governments will likely resist this move. They are heavily dependent on revenue from coal companies, and lower coal prices will directly affect regional revenue collection.

Increasing energy efficiency

Energy efficiency is a third important piece of China’s energy priorities—a policy that includes not only boosting efficiency of existing energy producers and users but also closing down inefficient facilities. Eliminating small power plants is an important strategy in optimizing power infrastructure and increasing energy efficiency, according to Chinese commentators. In late May, the National Energy Administration told each province how many power plants to eliminate in a notice called the 2014 Elimination Production Capacity for [the] Power Industry. Shortly after this notice was released, provincial-level NDRCs successively published implementation plans on their official websites. At the same time, the central government has made plans for actively developing large-scale power plants and combined heat and power stations to replace the small power stations slated to close.

In addition to eliminating small-scale power plants, local governments in eastern China will likely crack down on the development of coal power to control increasing air pollution. As Prime Minister Li Keqiang pointed out at a State Council Executive meeting on June 26, some industrial bases must be moved inland, and new coal power plants would be prohibited in the Beijing-Tianjin-Hebei region. Instead, large-scale coal power plants in central and western China will play a more significant role in power production and transmission.

China’s second strategy to improve energy efficiency is the establishment of a market-oriented energy pricing mechanism. Currently, China’s energy inefficiency is largely caused by government control of energy pricing and SOE monopolies. To increase competition and decrease the power of SOE monopolies, future reform policies will likely invite more private companies into the sector, through the bidding process for power transmission, distribution, and sales.

On April 23, the State Council introduced 80 pilot projects to attract private investment to national infrastructure projects. Many of these projects are in the energy sector, including hydropower, wind power, photovoltaic power, oil and gas pipelines, energy storage facilities, the modern coal chemical industry, and the petrochemical industry. The State Council said that these projects will be put into public tendering to attract private capital through joint venture, sole proprietorship, or franchise mode. As the next step, the government will release more projects from other sectors, such as oil and gas exploration and water conservancy.

Carbon-trading schemes are also being used by the central government to actively promote market-based energy pricing structures. In February 2014, the NDRC reported its progress on promoting carbon trading in selected pilot cities. In the report, the NDRC decided to further promote carbon trading system to nationwide. As of July 12, Hebei was the sixth city in China to open a carbon emissions trading market after Shenzhen, Shanghai, Beijing, Guangdong, and Tianjin.