by Sadiq Zaidi
1. For the last 3 decades, the People’s Republic of China (PRC) has experienced the fastest economic growth in the world. A 10-fold increase in the gross domestic product (GDP) accompanied by rapid urbanization, has placed greater demands on urban energy services. The urban population is projected to increase by 50 percent over the next 2 decades. Energy consumption has more than tripled over the past 3 decades and is expected to double over the next 2 decades. The remarkable growth and rapid urbanization have led to twin energy challenges in China- environmental sustainability and energy security. A large-scale deployment of energy efficiency and low-carbon technologies can simultaneously provide energy security and stabilize Green House Gas (GHG) emissions and significantly improve the local, regional, and global environment without compromising economic growth. To fully realize the huge energy efficiency potentials would require the removal of fossil-fuel subsidies and incorporation of environmental externalities into energy pricing as well as a concerted strategy to tackle market failures and barriers with effective regulations, financial incentives, institutional reforms, and financing mechanisms.
2. China has achieved a remarkable economic growth and development even during the last 10 years while the rest of the world was suffering from various crises. Its GDP grew by an average of 9.9 percent per year during the period 1999-2009. To achieve these economic growth rates, energy consumption in China has been increasing at the rate of about 10% per year. During the last 5 years, total energy consumption has exceeded the combined amount of energy consumption over the previous 20 years. With the projected economic growth, a continued high consumption of energy is unavoidable. Without significant gains in energy efficiency, continued economic growth at these rates will require energy use on a massive scale, especially coal, which is China’s predominant fuel and accounts for about 70% of total primary energy consumption. China is already the world’s second largest energy consumer and the largest emitter of energy-related CO2. China must take steps to change its economic growth model and increase substantially the energy efficiency of Chinese industries and increase public awareness of energy efficiency benefits. Among other things, China should find new forms of economic development model that moves the country away from being the “World’s Production Factory” and institute measures to improve overall the national energy efficiency in all segments of consumer base. China also must avoid unnecessary waste, foster a sustainable economic development, and encourage renewable energy sources to reduce China’s reliance on fossil fuel.
3. The China’s energy elasticity of demand i.e., the ratio of energy consumption to GDP is 1.2 to 1. In other words, a 1% increase in GDP generates a 1.2% increase in energy demand. By comparison, the energy elasticity is estimated at 0.8 to 1 in the United States of America; 0.95 to 1 in Japan; and 1.4 to 1 in Thailand. China should aim to reduce the energy elasticity below 1% by 2015 by promoting greater energy efficiency, energy conservation measures, and efficiency improvements. Also, the energy intensity in China is much higher than other industrialized countries. For example, to achieve a $1.0 million increase in China’s GDP, the country requires about 150 to 160 tons of oil equivalents (TOE) of energy, whereas in Japan it is 92.2 TOE. Recognizing these problems, China had set a domestic energy intensity reduction target of 20% per unit of GDP from 2005-2010 and a non-fossil fuel target of 15% of primary energy by 2020. With the concerted government efforts, the country achieved an impressive cumulative reduction in energy intensity totaling 19.1% over the 11th Five Year Plan (FYP 2005-2010). The new 12th Five Year Plan (2011-2015) sets an additional 16% domestic energy intensity reduction target. The energy intensity target is a real challenge to achieve during a continuing era of industry-led growth. However, these targets indicate Chinese recognition that efficient use of its natural resources is critical not only for its own sustainable development but also that of the world.
4. The inefficiencies in the energy sector are imposing increasing burden on the Government budget. Allocation of Government funds as subsidy to the energy sector diverts public funds away from social sectors which are conducive for poverty reduction and fostering economic growth in rural poor. Continuous allocation of public resources to the energy sector crowds out public investments to other sectors of the economy. The Government may find soon that it does not have the resources to continuously inject subsidy funds into the energy sector.
5. Ensuring a stable supply of electricity is essential for Chinese economy and for its population at large. The goal of the Government is to ensure a self sustaining, efficient, and competitive energy sector that can provide the required quantity and quality of energy supply at least cost to domestic consumers and to all economic sectors. To achieve this, a competitive sector structure must be enhanced and market regulation strengthened to ensure investor confidence and consumer protection. Also, some fundamental elements of market-driven systems are needed to restore viability in the sector and to make it self-sustaining.
6. The challenges in the energy sector are enormous. Among the most pressing are the substantial increase in energy imports and the resulting high foreign exchange cost; and distortion in the domestic pricing structure requiring unsustainable energy subsidies and the resultant macroeconomic imbalances. The subsidies have resulted in the abuse of energy utilization and waste by all categories of consumers, provided disincentive for instituting energy conservation and efficiency improvement programs in the industrial sector, and are the root cause for the lack of public desire to save energy. There is substantial room for reducing the energy sector subsidy that will make funds available to the government for undertaking the urgently needed development of new energy projects and other economic and social development program in the country.
7. The strategic direction for a sustainable energy path over the next two decades, policy tools and financing mechanisms of maintaining economic growth, mitigating climate change, and improving energy security would require a paradigm shift to a new low-carbon development model. China needs to transform the energy sector toward much higher energy efficiency and more widespread deployment of low-carbon technologies. In addition, the government will need energy-pricing reforms that no longer encourage the use of fossil fuels, put in place regulations and incentives that improve energy efficiency and support low-carbon technologies. The government also will need to ramp up research and development for new technologies to leapfrog to the clean energy revolution.
Sadiq Zaidi is an International Energy Consultant with over 40 years of private and public sector experience in the fields of energy and the environment in emerging markets. Prior to joining Renaissance Energy Consultants he was Head of Energy Sector Operations for South and Southeast Asia at the Asian Development Bank (ADB), where he worked for over 20 years.