Engineering in China June 1, 1998 Volume 28 Issue 2 The Bridge, Volume 28, Number 2 - Summer 1998 The Chinese Energy Outlook Monday, June 1, 1998 Author: Richard Balzhiser Balancing the need for energy with the economic, social, and health costs of increased usage will be paramount for a nation soon to become the world's largest energy consumer. Late last year, the U.S. and Chinese Academies of Sciences and Engineering agreed to jointly examine the two countries' energy futures. It was the intent of the leadership of the four academies to assure that relevant science and technology are developed and deployed as rapidly as possible to better manage energy resources and sustained economic growth. In addition to examining the current state of affairs, the study is looking forward to the likely energy situation in 2020. The governments of our two countries have a great deal of interest in our work, having themselves developed scenarios to characterize in some detail the evolution of the energy sector over the next 25 years. Organizations such as the International Energy Agency, the World Bank, the World Energy Council, and a variety of public and private institutions around the world also have focused their attention on this and related issues. The study committee, comprised of members of the four academies and several outside specialists, is analyzing various energy trajectories and scenarios. In the process, we will try to balance the opportunities present with the challenges and constraints facing each nation. Technological innovation and creative institutional response are our tools for addressing these challenges and constraints. A key feature of our final report will be to identify the main similarities and differences between the energy future in each country, with an eye to developing joint-research and other collaborative initiatives to further our mutual goals. This article focuses on what we have learned so far about China's energy situation and plans for further development in this sector. The joint committee has met twice, in Beijing in mid-January and in Berkeley in mid-May. For several of the U.S. participants, the Beijing meeting was our first exposure to China. It was hard not to be impressed with both the magnitude of contrasts and the rapid pace of change in that city. Twenty-first century high rise buildings dwarf traditional dwellings. Multilane highways ring Beijing, where cars, trucks, and buses travel alongside two lanes of 2- and 3-wheel pedaled vehicles carrying people, coal, and chickens. But the pace of progress is remarkable; I've never seen a city with as many construction cranes. Our Chinese hosts said that 25 percent of the world's concrete is currently being used in China. Given the construction activity in Beijing and its surroundings, along with the monstrous Three Gorges Dam project on the Yangtze, I'm inclined to agree. The Role of Coal Although China's urban population is staggering, officially it is only 29 percent of the nation's total of 1.2 billion. Many Chinese citizens heat and cook with coal and firewood, as did many rural families in the United States 50 years ago, and almost 20 percent of the population lives in areas with no access to the electricity grid. China today is experiencing migration to urban areas on a scale unprecedented in human history. The strain on resources is correspondingly large. Coal is the cooking and heating fuel for many urban dwellers, though this is a situation the government would like to reverse. A goal of the current 5-year plan is to provide natural-gas access to 70 percent of urban households by the turn of the century. Given the pace of urbanization, developing adequate gas resources and bringing them to this market will be no small feat. The use of coal in homes, industry, and power plants produces significant amounts of pollution, which in turn creates economic, environmental, and health problems on a large scale. Like Americans who lived with these problems in the 1930s and 1940s, when I grew up, the Chinese are intent on balancing their growing need for energy with the economic, health, and social costs of increased energy use. Resources earmarked to address environmental and health concerns are limited, and only recently has there been information that quantifies the harmful impacts of China's extensive use of coal - in both human and economic terms. Finding a satisfactory balance of priorities will be paramount for a nation that will soon become the largest energy consumer in the world. China, though a large country, lacks the resource richness and diversity of the United States; this is particularly true of its energy resources. China is currently the world's second-largest energy consumer, though on a per-capita basis, energy use is about one-tenth that of the United States (Energy Information Administration, 1997). In some areas, such as the use of gasoline and electric power, the per-capita differences are even more extreme. China is currently the world's second-largest emitter of carbon (Energy Information Administration, 1998) and, by most estimates, the nation's total carbon emissions will likely surpass those of the United States by 2015. Yet, for all the attention given to the growth of carbon emissions from China, scant attention has been paid to the recent impressive increases in Chinese energy efficiency. During China's eighth 5-year plan (1991-1995), official statistics placed average GDP growth at 12 percent. The rate of growth of energy demand was half the rate of growth of GDP over the same period (i.e., energy elasticity in China was 0.5, an enviable achievement anywhere, but particularly so for a developing country). Much of the efficiency gains on the demand side can be attributed to the rapid development of non-state-owned enterprises and the rise of the service sector, in which energy intensity is comparatively low. On the supply side, government policies encouraged the rapid growth of electric power sector, whose generating capacity increased by 403.8 TWh, or 59.6 percent, during the plan. Such an increase in energy supply did not come cheaply, however. Over the lifetime of the plan, investments in state-owned energy enterprises accounted for 25.7 percent of total fixed assets in China (State Economic and Trade Commission, 1997), much of this for electric power generation. Despite this impressive feat, energy efficiency remains one of the areas in which China might make a further significant impact. A 1997 World Bank study (International Bank for Reconstruction and Development, 1997a) estimated that if China raised energy efficiency to levels comparable to countries in the Organization for Economic Cooperation and Development, its energy savings would be 250 million tons coal equivalent, or one-sixth current consumption. Industrial boilers, coal power plants, and the cement and steel industries are among those areas with the highest potential for energy savings. The Energy Conservation Law, which went into effect on January 1 this year, further emphasizes the need to increase energy efficiency. It remains to be seen how the new law will be implemented. The industrial sector, which consumes 65 percent of China's energy, is a rich target for efficiency enhancements. The building materials, iron and steel, and chemicals industries have been singled out in this regard. Equipment such as boilers and pumps has also been targeted by the Chinese government, and several large-scale efficiency projects are under way with international participation. An additional problem throughout China is that 80 percent of power plants are sized below 100 MW and thus suffer from both lower efficiency and higher costs to reduce pollution (International Bank for Reconstruction and Development, 1997a). I now would like to briefly review the current status of several specific energy sources in China. There are a variety of excellent collections of data on the Chinese energy sector. I have cited several in this paper, and they are listed in the references. A particularly useful source is the China Energy Databook (Lawrence Berkeley National Laboratory and State Planning Commission of China, 1996). Coal currently provides about 75 percent of China's total energy, but how that coal is used may surprise many. Unlike in the United States, where 90 percent of coal is used to generate electric power - accounting for 53 percent of electric power supply - China's industrial sector consumes over 42 percent of coal production and electric power 32 percent. Other significant uses for coal are in coking operations, residential and commercial buildings, and residential use. In the time frame of our study, the fraction of coal use in total energy production will remain constant or even rise slightly (Energy Information Administration, 1997). Chinese coal mines employ a stunning 8.1 million workers and, in 1997, produced 1,387 million metric tons of coal, 97 percent of which was mined underground (State Economic and Trade Commission, 1997). The U.S. coal industry, by contrast, employs 95,000 miners and produced almost 1,100 MMT, 62 percent of which was surface mined. The heavy social burden of Chinese mining, which employs 85 times more people than U.S. coal mining, is abundantly clear. Coal Quality a "Major Obstacle" To further complicate China's coal dependency, reserves are located in the northern and western sections of the country, far from population centers and areas of energy demand, which are predominantly in the south and east. This situation necessitates railroad transport of raw coal or use of mine-mouth power plants and high-voltage wires. Significant investment will be required in both these infrastructure components to meet China's growing power needs. Coal quality, particularly with regard to high sulfur and ash content, is also a major obstacle. Total oil resources in China are estimated at 94 billion tons, 14 billion tons of which are recoverable (Hu, 1998). In 1993, China became a net oil importer and, in 1996, became a net crude oil importer. By 2000, China will be forced to import 20 percent of its oil, a share that will increase to 40 percent by 2020. This fact has had a profound impact on China's concept of energy security and has prompted the development of several key energy policies: diversification of imported oil products and sources; examination of the feasibility of a petroleum-reserve system; and an aggressive oil-substitution R&D program - including use of natural gas as a transport fuel, coal liquefaction, coal-water slurry, and biomass liquefaction. China's petroleum industry has only recently been open to foreign participation, though ongoing structural changes designed to separate government and industry functions might lead to greater openness. By 1997, the China National Petroleum Corporation (CNPC), which produces approximately 90 percent of China's crude, had signed over $1 billion worth of contracts with foreign companies, and exploration by these firms has increased the amount of proven onshore reserves by 37 million tons. Additional investment money on the order of $5 billion is available to China through foreign-credit instruments. Overseas, CNPC has signed contracts in Sudan, Kazakhstan, Venezuela, Peru, and Iraq. Dependence on Imports In recent years, natural-gas development has centered around on-shore reserves in northwest and central China, and on the continental shelf. In 1996, gas production reached 20.2 billion cubic meters (BCM), and plans are in place to increase gas usage to 120 BCM by 2020 (Hu, 1998). Significant amounts of infrastructure development will be required to transport natural gas to market. Several large pipeline projects are under way or in the planning phase, some of which are transnational in scope (notably, involving Russia and Kazakhstan). As is the case for oil, China is dependent on imported natural gas: 25 percent of total estimated gas use in 2020 (120 million cubic meters) will be from imported sources. Overall, natural gas will only contribute about 6 to 10 percent of China's total energy needs in this time frame. This modest projection is in stark contrast to the expected rapid growth of natural-gas usage in the United States. Hydropower plays an important role in China's energy future. Economically exploitable hydro resources have been estimated at 379 GW. During the period of the eighth 5-year plan, China fell short of its goal of 29 GW increased hydropower capacity, adding only 12 GW. The ninth 5-year plan calls for an additional 3 GW per year to be brought on-line; the Three Gorges project alone will add over 18 GW when completed in the first decade of the next century. Other large and many minihydro projects will aid China's electrification efforts, though the capital costs of these plants are extremely high. Other renewable energy sources are receiving a great deal of attention for specialized applications. Overall, though, they are not expected to make a significant contribution to China's energy supply by 2020. I mention them here because of their relative importance to the country and due to the potential for foreign participation in this area. Solar power's higher costs lessen its attractiveness for China, but solar might become a longer-range contributor in the areas of passive solar heating, water heaters, cookers, and, eventually, solar thermal power plants. China has abundant biomass resources and is the world's largest consumer of biogas. Small-scale gasifiers using forestry waste will likely be of significance to rural areas, and China's extensive experience in gasifiers in the fertilizer industry may have far-reaching implications for energy supply. China is rich in wind resources, with total exploitable resources estimated at 253 GW. By 1996, China had wind turbines with a total capacity of 160 MW. There are ambitious plans for both small, off-grid turbines domestically manufactured - mostly for agricultural purposes - as well as larger imported turbines for use on the grid. China is also developing geothermal resources - primarily in Tibet and western Yunan - and exploring options for tidal and ocean energy in the south and east. The connection of the 300 MW pressurized-water Qinshan Nuclear Power Plant to the national power grid in 1991 marked the beginning of an ambitious nuclear-power development strategy in China. In 1994, two 900 MW units at Daya Bay came on-line. By the turn of the century, an additional 6.4 GW of nuclear power will be under construction (Zhao, 1998). Though nuclear power currently provides less than 1 percent of China's electricity, China places high importance on the development of an indigenous nuclear industry and has set goals of developing 20-23 GW of nuclear power by 2010 and 40-50 GW by 2020, enough to satisfy slightly less than 5 percent of total electricity demand. The role of nuclear in contributing to a diversified and secure energy-supply structure may explain why China values so highly the development of its commercial nuclear power industry over less-expensive options utilizing coal and natural gas. Because of its potentially limited domestic resource base of low- to moderate-grade uranium, China would like to be able to close the fuel cycle and breed with plutonium. Readers will likely have noticed my strong bias that all roads - in China and the United States - are likely to lead eventually to the use of electricity for more and more purposes, whether lighting, refrigeration, space conditioning, or motive power. One of electricity's greatest but most unappreciated values is its ability to provide energy services to the consumer with great efficiency and convenience. I believe this is a message we have heard from our counterparts at the Chinese Academies. This sense of priority is also manifest in a number of official Chinese policies and projects, not least of which is the expansion and eventual interconnection of China's five regional electric power-grid systems. Dependence on coal will continue in China well into the next century. Therefore, it is coal technologies (e.g., fluidized-bed combustion and coal integrated-gasification combined cycle plants) and the emissions control systems that accompany them that will truly shape China's energy future. Solar photovoltaics would also complement an extensive, developed grid electric system or a less developed one where small electric "islands" or distributed generation is used. Solar technology would serve megacities and rural areas equally well. China is eager to explore many of these options with U.S. firms. Though it accounts only for a small percentage of current electricity-generating capacity, nuclear power is a key component of China's energy strategy. With the signing of the October 1997 Clinton-Jiang accord, U.S. companies have the opportunity to bid for projects in what is estimated to be a $60-billion market for commercial nuclear energy. They will be competing with Russian, French, and Canadian firms, which have already signed deals with China. Outside participation in China's nuclear industry - particularly by the United States, with its advanced safety designs - will help China avoid many of the pitfalls we and others have experienced. I see this sharing of past experience as a means of minimizing, or avoiding altogether, problems in China. It also helps preserve the nuclear-power option for the United States, if and when we decide to increase our reliance on the technology. Natural gas, which can replace some of the most destructive current applications of direct coal burning in cities, plays a strategic role in China's energy strategy. Like nuclear power, the development of a large natural-gas industry in China offers foreign firms a significant market opportunity, though in the time frame to 2020 it will not play as central a role as will coal. Prolonging Oil and Gas Reserves I believe that electrification is the central concept that China must keep in mind as it decides on infrastructure priorities. Electrification can contribute to the complementary goals of increased access to commercial energy and diminished social and environmental cost. Some quality work has been done on electric-power choices for China, specifically on what effects different regulatory regimes would have on the development of additional power capacity. Battelle Memorial Institute's recent report (1998) on China's electric power options presents valuable analysis of least-cost power-generation modeling. The United States has already demonstrated the ability to prolong appreciably its oil and gas reserves with better exploration and drilling technology. (This has not been without its downside: The low fuel prices we have enjoyed have slowed interest in fuel-efficient vehicles.) The unique characteristics of Chinese oil and gas resources, on- and off-shore, will demand both the adaptation of existing technologies such as horizontal drilling, 3D- and 4D-seismic imaging, and the development of new technologies to bring resources to market in a commercially viable manner. Institutional innovation is also required, and much can be gained through increased international collaboration. China's desire to create a larger market for the economical development and delivery of natural gas and coal-bed methane (CBM) is a case in point. Only recently was a tax incentive put in place to make it attractive for firms to undertake systematic analyses of seismic data with the intention of developing CBM. Another example of the need for institutional innovation, and one which has received considerable scrutiny with the current reorganization of the Chinese government, is the policy and regulatory climate for the development of China's electric-power plants. Current policies, which place limits on foreign investment, might not serve China's best long-term interests, particularly if one considers China's abundance of smaller power-generation facilities. In the area of transportation, the U.S. example of bigger, heavier vehicles moving at higher speeds on more congested roads somehow seems a poor signal to send to the rest of the world, no matter how we rationalize it. China is now building transportation infrastructure that will influence the country's intensity of energy use and environmental quality for many decades. The enormity of China's population argues for the adaptation of European and Japanese technologies for public transportation and vehicles, rather than the U.S. model. Hybrid Vehicles an "Attractive Option" Electrification also has an important potential role in developing clean, efficient vehicles. Electrified vehicles, or more likely hybrid vehicles using clean-running, small internal combustion engines or fuel cells with sufficient on-board battery capability to assure acceleration for passing or power for climbing, offer attractive options for both the United States and China. Liquid fuels, where cost effective, will likely power more traditional vehicles for some time. The implications of an increasing appetite for petroleum products are well known, and there is a significant opportunity to diversify the supply of transport fuels. Options include the production of clean transportation fuels from coal and natural gas. Coal gasification, for example, which converts coal to synthesis gas, is likely to be a key technology. Clean fuels will also remain an important factor for hybrid vehicles. World Bank estimates of a 3 to 8 percent annual loss in China GDP due to environmental degradation are sobering (International Bank for Reconstruction and Development, 1997a). Even more disturbing are estimates that the total annual losses due to the combined factors of natural resource degradation, pollution, and deforestation will add up to 18.8 percent of China's total national income (American Academy of Arts and Sciences, 1998). No matter which estimate one uses, the unavoidable fact remains that as the Chinese economy and population grow, so too will the impact on a fragile ecosystem. China has laid out its environmental goals in an ambitious Agenda 21 document. Without extensive foreign participation, many of these goals will go unrealized. The energy sector is a major contributor to China's environmental problems, but is one that can be shaped through the proper use of incentives and regulation. Indoor air pollution ranks high on China's list of problems to address in the immediate future. With 90 percent of the population still relying heavily on solid fuels - coal in cities, wood products in rural areas - respiratory disorders are a leading cause of death. Urban air pollution and indoor air pollution are estimated to result in 300,000 deaths and the additional loss of 7.4 million work-years per year (International Bank for Reconstruction and Development, 1997b). These numbers are on the rise and will have a devastating effect in the 2020 time frame if left unchecked. Based on its information gathering and analyses to date, the joint U.S.-China committee has developed some potential initiatives that might facilitate cooperation between the United States and China in developing an economically and environmentally sound energy future. The committee must now examine each in terms of payoff and available resources. Clearly, clean-coal technologies are an area where some of the greatest impact can be made, as is efficiency of both energy supply and demand. Committee recommendations will likely be developed for nuclear power, natural gas, and renewable energy options. Cross cutting these specific technology issues will be the concern for sustainability and the goal of decreased environmental impact and degradation. The committee's report will enter the formal National Research Council peer-review process in the fall and be published early in 1999. Briefings and presentations to our respective national governments will follow the official release of the report. In summary, my impressions of our work on this broad set of issues are shaped by recognition of enormity of the task facing China. The people with whom we have had contact are the nation's best and brightest. They are motivated and eager to work with us. China aspires to a top-tier global leadership role, and, in fact, is already the model for many developing countries. A guiding principle for China is to use what it has as responsibly as it can and seek better ways to fill the nation's growing needs. The politics are pragmatic, but what do you expect from a country led by an engineer? References American Academy of Arts and Sciences (AAAS). 1998. The Economic Costs of China's Environmental Degradation. Cambridge, Mass.: AAAS. Energy Information Administration. 1997. China: An Energy Sector Overview. Washington, D.C.: U.S. Department of Energy. Energy Information Administration. 1998. China Country Analysis Brief. U.S. Department of Energy. Available at http://www.eia.doe.gov/emeu/cabs/china.html. Hu, J. 1998. Fossil fuel in China. Paper presented to the joint U.S.-China NRC committee. Research Institute of Petroleum Exploration and Development, China National Petroleum Corporation. January. International Bank for Reconstruction and Development. 1997a. China 2020: Development Challenges in the Next Century. Washington, D.C.: The World Bank. International Bank for Reconstruction and Development. 1997b. Clear Water, Blue Skies: China's Environment in the New Century. Washington, D.C.: The World Bank. Lawrence Berkeley National Laboratory and State Planning Commission of China. 1996. China Energy Databook. J. E. Sinton, ed. Berkeley: University of California at Berkeley. Battelle Memorial Institute. 1998. China's Electric Power Options: An Analysis of Economic and Environmental Costs. Advanced International Studies Unit. Washington, D.C.: Battelle Memorial Institute. State Economic and Trade Commission. 1997. China Energy Annual Review. Q. Wang, ed. Department of Resources Conservation and Comprehensive Utilization, People's Republic of China. Zhao, R. 1998. Nuclear power development in China. Paper delivered to the joint U.S.-China NRC committee. China National Nuclear Corporation. May. About the Author:Richard Balzhiser is a member of the National Academy of Engineering and president emeritus of the Electric Power Research Institute. He co-chairs the National Research Council Committee on the Energy Futures of China and the United States.