The true extent of China's energy crisis

Shujie Yao and Dan Luo say nation must rely on coal for now, which is bad news for the environment

PUBLISHED : Wednesday, 03 October, 2012, 12:00am
UPDATED : Wednesday, 03 October, 2012, 1:42am

When it comes to the sheer volume of investment in clean energy, China has no peers. Barely a month passes without the media reporting the latest government pledge to develop non-fossil-fuel sources or another ambitious renewable energy target. While commendable, these promises risk masking the true extent of China's future energy crisis - and its gloomy implications for global carbon emissions.

If China maintains close to its current gross domestic product growth rate, its energy demand will reach 5 billion tonnes of coal equivalent by 2020, far beyond previous estimates of 3.6 billion tonnes. That means, by 2020, China will need to consume 3 billion tonnes of coal and 640 million tonnes of oil each year. China's current annual oil production is steady at 200 million tonnes per year - an indication of the gulf that exists between supply and demand.

A dependence on oil imports will have huge implications for its foreign policy; diplomacy across the Middle East, Africa, Central Asia and Latin America will continue to be governed by its appetite for crude.

Amid growing urgency, the National Energy Administration has published its goal for renewable energy to supply 9.5 per cent of the country's total energy needs by the end of 2015. The government also wants to increase the share of non-fossil-fuel energy to 15 per cent of its total energy consumption by 2020 and 30 per cent by 2050. These are ambitious targets; a combination of insufficient infrastructure, immature technology and current pricing mechanisms are likely to render them unattainable.

The distribution of hydropower and wind resources in China is unbalanced. Large hydropower projects have been criticised for their damage to biodiversity, water quality and cultural heritage. And due to the intermittent nature of wind power, grid companies are reluctant to spend money to link up more wind farms.

Last month, the Chinese government ordered its electricity distributors to source up to 15 per cent of their power from renewable energy, including wind power. The target is again unrealistic. Current tariffs set by the government are too low to warrant investment by struggling wind power developers in the additional networks required to transmit electricity from the north and west to densely populated urban areas in the south and east.

China's solar industry has also faltered. Overcapacity has prompted a sharp fall in the price of solar panels and US anti-dumping duties, coupled with the euro-zone crisis, have cut overseas demand.

Nuclear energy offers China by far the most attractive renewable energy solution. Despite limited uranium reserves, it is regarded as a quasi-domestic resource and can be purchased relatively cheaply on the international market. Fuel costs account for only 5 per cent of a nuclear power plant's operating costs, compared to 40-60 per cent for coal and gas plants. Unlike in Japan, the Chinese public appears willing to accept nuclear power and local governments view it as a means to minimise electricity shortfalls, increase tax revenue and create jobs.

Yet the nuclear power industry is not developing fast enough to meet energy demand. It is being held back by a lack of technological expertise and established processes for the treatment of nuclear waste.

Energy pricing mechanisms are still heavily weighted towards coal use, offering little incentive to power companies to diversify. The average on-grid electricity price in China for wind power is 0.617 yuan (HK$0.75) per kilowatt-hour, while solar power and nuclear power cost 0.4 yuan per kWh and 0.436 yuan per kWh respectively. It is easy to see why coal - with a price of 0.346 yuan per kWh - will continue to be the primary energy resource in China for the foreseeable future.

This is grim news for the rest of the world, as any attempts to cut carbon emissions play out in the knowledge that, as reported by the Economist Intelligence Unit, China's coal consumption is expected to rise 35 per cent and carbon emissions by 43 per cent between 2010 and 2020. China will soon account for half the coal burned on the planet.

Realistically, China has no choice but to rely on coal in the short-to-medium term. In order to mitigate the serious environmental consequences, the government must lead the world in the deployment of advanced-coal technologies, such as coal gasification, liquefaction and carbon capture and storage. Moreover, it must match its huge investment in clean technologies with structural policy changes, such as new fiscal and tax measures, to ensure renewable energy can compete on a level playing field with traditional fossil resources.

Failure to do so will result in the continuation of an unsustainable path of development, one that affects both China's long-term health and that of the rest of the world.

Shujie Yao is professor of economics and Chinese sustainable development, and head of the school of contemporary Chinese studies at the University of Nottingham, where Dan Luo is a lecturer in business and finance