Is China’s energy policy emerging at last?

Over the last ten years I have made myself unpopular in China by frequently, possibly too frequently, stating that China does not appear to have an energy policy, or at least does not appear to have a coherent energy policy. But I have tried to remember to use the word ‘appear’, because the processes of government in China are often quite opaque, and one has to assume and sometimes one does indeed hope that there is more coherence behind the scenes than appears in published documents.


In the first column I wrote for Global Entrepreneur, exactly two years ago I said that the symptoms of a lack of effective and coherent policy have been particularly evident in China over previous last three years (2003-2005): energy consumption rising faster than GDP; shortages of supply of electricity and oil products; tension over pricing between the coal and power industries and between oil refiners and consumers; companies exporting oil products at times of domestic shortage; a surge of investment in power generation capacity, much of it without approval; a continuing lack of a transparent and effective instruments to encourage the use of natural gas rather than coal; a singular paucity of foreign direct investment in the energy sector, despite the official policy to welcome it.


The question today is whether or not the government has indeed made substantial progress towards formulating a coherent and effective energy policy. As somebody who is not a member of government, I have to base my analysis of China’s energy policy on the evidence available to the public. This takes two forms: published documents and policy actions.


The years 2004 and 2007 were notable for the publication of important documents by the central government. 2004 saw the release of the Development Research Centre’s ‘Overview of the National Energy Strategy’ and of the National Development and Reform Commission’s ‘Medium and Long Term Energy Conservation Plan’. Through these two documents China’s government made a clear statement that energy had risen up the policy agenda and that energy conservation and energy efficiency were to form the central plank of its new energy policy.


There followed a number of more detailed notices which established programmes to promote energy conservation, such as the 1000-enterprise programme which targeted the energy intensive industries and the establishment of new methods to evaluate the performance of local government officials in the field of energy. A number of radical steps have been taken to constrain the output of and the performance of the energy intensive industries. Small and efficient plants have been closed, incentives  for excessive production and export have been removed, and new regulations introduced to restrain the wasteful construction of public buildings. As a result of these and other measures, the trend of rising national energy intensity was at last reversed in 2007.


All of this is good news and is an important step towards bringing some order to China’s energy sector. But it is only a start.


The year 2007 saw the publication of five documents which between them should have revealed a considerable amount of detail about the government’s energy policy:

  • The 11th Five-Year Plan on Energy Development (April 2007)
  • China’s National Climate Change Programme (June 2007)
  • A revised Energy Conservation Law (October 2007)
  • A draft Energy Law (December 2007)
  • A White Paper entitled ‘China’s Energy Conditions and Policies’ (December 2007)


Including the two mentioned documents of 2004, these seven high-level policy papers amount to some 100,000 words or more, surely more than enough for the government to set out its new energy policy.


This then leads us to the question of what one should, as a private party, expect from an energy policy in any country. For me the expectations are few, but they are quite demanding. The government needs to do five things:

  1. Establish and rank the overall priorities for the energy sector in a way which is consistent with national strategic priorities, and justify how trade-offs will be addressed given that there is bound to be conflicts between priorities;
  2. Set specific objectives relating to the production, transformation and use of energy and, again, decide how to deal with conflicts between different objectives;
  3. Define the instruments which will be used to achieve these objectives;
  4. Establish organisations within and outside government to deliver or assist in  delivering the objectives;
  5. Lay out a timetable.


Space constraints prevent me from presenting a  systematic analysis of each of these points here, so I will look at the first and the third.


As I wrote two years ago, four main concerns lie behind energy policy in any country. Security of supply – keeping the lights on and the trains rolling. Social equity – providing cheap energy to the poor, and, very often, to almost everybody. Economic efficiency – promoting the efficient production and allocation of energy. Environmental protection – encouraging the use of clean energy. Every government has to rank these priorities in order to make energy policy, and every government will face the need to trade-off one priority against another. In China, for example, energy security concerns will push the government to enhance the use of  coal; and yet this will necessarily increase environmental damage unless a very large amount of money is spent on clean coal technology. This in turn would make energy prohibitively expensive, at least in the short term.


It is still not clear to me how the Chinese government ranks these four key priorities. On the one hand it stresses the need for energy efficiency and security of supply, yet on the other hand it continues to use energy prices as an instrument of macro-economic control of inflation and to address social equity concerns.


This lack of clarity is also present in the manner in which the policy documents address the choice of instruments. Nearly all of these documents state that market instruments are to be developed, for example: competition between energy suppliers, energy end-user prices to reflect the full costs of production, energy taxes to protect the environment, and fiscal incentives for energy efficiency. But such pronouncements are not new. Indeed they have been around for ten years or more. If we look at what is actually happening, it is clear that the government of today prefers administrative instruments and that such an approach can indeed be successful, at least in the short-term.


I am far from saying that market instruments must be introduced. But it is very confusing for all parties in the energy sector if most official documents state that market instruments will play an important role, but without saying what sort of instruments and when they will be introduced. My guess is that a strong debate continues within government between those who want to introduce them sooner, and those who either want to delay or do not want to introduce them at all.


Such an internal debate is quite understandable and indeed quite necessary. But at some point the government needs to make some decisions in favour or against certain market instruments, to lay out more clearly how it plans to move forward in introducing new instruments, and to explain how it will seek to manage coherence across the full range of energy policy instruments.


So, just looking at the first and third items on my list, it is clear that at present the published documents and the ongoing policy actions do not amount to a coherent energy policy. Now, as a reader you are fully justified in asking me which country does indeed have a coherent energy policy. The answer is, probably, none or very few. But most governments are now working hard to develop one, and seeking to reach conclusive decisions on difficult issues such as fuel pricing, renewable energy and nuclear power.


China’s government may or may not be making progress more slowly than other governments, but the problem is that as the world’s largest user of coal and the world’s second largest energy user, the way it manages its energy sector is of truly global concern. The whole world is waiting for a coherent energy policy to emerge. Even within China, all parties would benefit from greater clarity and direction on the part of government.

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