China's Electricity Sector

Leo Lester,Mike Thomas

• Publisher: Palgrave Pivot
• Year: 2018
• ISBN:
  9789811081927
• Topic: Betriebswirtschaft
• Subtopic: Internationale Wirtschaft

This book provides a concise introduction to China's electricity sector, suitable for university students and business analysts. It is business focused, combining an introduction from an established regional electricity consultancy with five academic chapters covering governance, market stakeholders and reform, wind and solar power, environmental regulation, and developments in financing. It is written in an accessible but rigorous style for people with limited knowledge of the topic, with minimal jargon but full referencing throughout the academic chapters. Each academic chapter starts with a summary and three key points to guide the reader's understanding.

Part I

© The Author(s) 2018

Leo Lester and Mike Thomas (eds.)China’s Electricity Sectorhttps://doi.org/10.1007/978-981-10-8192-7_1

Begin Abstract

1. China’s Power Sector

Xinmin Hu¹

(1)

The Lantau Group, Kwai Fong, Hong Kong

Xinmin Hu

Abstract

China’s power sector has been the driving force for the country’s economic and social development but also a cause of environmental pressures. Additionally, institutional features may undermine sustainability: institutional boundaries lack clarity, there is no level playing field for industry participants, information disclosure is often limited, and enforcement of regulations is not always rigorous. The sector’s development has been uneven, with periods of rapid expansion against a backdrop of supply shortages and later growth slowdowns as overcapacity increases. While the legal framework behind the sector has expanded, institutional reform remains difficult given the tight relationships between party, state and industry. Tensions also abound within and between bureaucratic agencies. Despite its size and complexity, China has undergone many reforms and is poised for a low-carbon future.

Keywords

DevelopmentGeneration mixIndustrial structureInstitutional structurePolicy

End Abstract

An Industry of Miracles?

China’s electricity industry has been the powerhouse for China’s economic and social development. The electricity industry has been behind many of the country’s modern miracles yet it has also faced a series of challenges relating to efficiency and development, and has been closely linked to China’s environmental problems.

This book is an attempt to take stock of the world’s largest electricity industry. As we look back over the sector’s developmental history, assess the status quo and discuss its prospects for the future, we will take in both the miracles and the challenges. We will describe the constraints the sector must wrestle with. These include both hard constraints—such as resource location, abundance and consumption, environmental capacity and fragility, and industrial infrastructure—and soft constraints—such as the institutions, governance framework and cultures—that affect the industry’s efficiency, how resources are used and allocated, and the available pathways to reform.

China is the world’s second-largest country and has the world’s largest population. In 2014, it became the world’s largest economy by purchasing power; at 2016 exchange rates, China ranked second after the United States. The country’s electricity sector has a scale to match. At the end of 2016, total installed capacity was 1646 GW and generation had reached 6142 TWh, both the largest in the world. As is so often the case, big means complicated, which in turn means that major problems can arise from seemingly small events, while incremental improvements in efficiency can lead to large overall energy savings. It is a power system that attracts attention and deserves proper examination.

But in contrast, China’s endowment of traditional natural resources takes a more nuanced feel. True, the country has the world’s third-largest coal reserves, but when looked at on a per capita basis, China has 116 per cent of the world’s average for coal, 16 per cent for natural gas and just 8 per cent for oil (this despite being the world’s second-largest oil consumer). What is more, these natural resources tend to be located far from the major centres of consumption.

Figure 1.1 shows the distribution of electricity demand and energy resources. Also shown is the Hu Huanyong Line, which divides China in two. The eastern side of the Hu Huanyong Line has less than half of China’s land but nearly 94 per cent of the country’s population and more than 94 per cent of China’s Gross Domestic Product (GDP). Even within this eastern area, population and GDP are much more concentrated in the six provinces and three municipalities along the coast. For example, this coastal region consumes more than 48 per cent of China’s electricity. In contrast, coal and quality wind and solar resources are all largely located to the west of the Hu Huanyong Line, in the North, Northeast and Northwest (Three Norths); remaining untapped hydro resources are predominantly found in Yunnan, Sichuan and Tibet. The locations of these resources are typically at least a thousand kilometres away from the eastern coast. The implications of this are manifold and dramatic:

• The environmental capacity of the eastern coast is limited and is increasingly constraining further development.
• Efficient bulk transport of fuels and/or electricity is necessary and inevitable. This will require highly coordinated effort between various governments (both central and provincial), industrial sectors and power sector stakeholders.
• The development of transport infrastructure can have a critical impact on the interests and motivations of various stakeholders, giving rise to significant social, economic and environmental consequences.

Fig. 1.1

A China of two parts—the locations of resources and electricity demand are far apart; percentages for each province or group of provinces show the share of total national power demand (Data Source: China Energy Yearbook 2016 (data for 2015))

China’s electricity supply has been evolving alongside the country’s developing economic structures, energy technologies and policies. The generation mix has changed over the years, with coal’s dominance declining (though still remaining). The country’s industrial structure has also been far from stagnant: ownership structures have changed, market concentrations have gone up and down, and the balance between vertical integration and market specialisation has fluctuated. In terms of regulation, pricing and tariff-setting mechanisms have been slowly aligning more closely with underlying cost structures; efficiency and emission standards for power generation have been improving, and China now operates the largest fleet of ultra-supercritical coal-fired power plants and ultra-high voltage (UHV) transmission systems in the world.

Despite these apparent changes and improvements, concerns remain over the sustainability of the country’s appetite for energy, electricity and coal. Especially since 2003, the country’s model of development has been resource intensive: environmental emissions have been high, and fossil fuels and other natural and environmental resources have been depleted. China produces and consumes half of the world’s annual coal total and its use of hydropower has grown to the point where, in 2016, it was home to 30 per cent of the world’s total hydro generation (up from just 3 per cent in 1980).

Concerns have grown over the wider sustainability of China’s model of economic development as well. Critics have pointed to a number of potential bottlenecks or constraints that policymakers may now be trying to tackle in a more concerted manner than before.

• Institutional boundaries lack clarity. Mapping out exactly where government ends and companies begin is difficult not only because of state-owned enterprises but because of more widespread government and party involvement in both the country’s economy and in the business operation of individual enterprises. In the past, the government has been active in picking winners and losers across the power sector and its supply chain, directly incentivising both companies and chosen sectors such as coal producers, coal-fired generators and renewable developers. The result has been a cycle of over- and undersupply, as inconsistent planning and improper responses to market conditions (through such things as distorted pricing mechanisms) have stymied the efficient utilisation of capital or resources and undermined reform. China is not alone in developing policies to aid the development of particular industrial sectors, and institutional reform need not mean that governments or regulators are to be less involved in managing or regulating the power industry. Instead, institutional reform is usually framed to focus on the establishment of clearly defined policy frameworks for rule-making and rule-enforcing, clarifying the roles of government and enterprise, facilitating a level playing field and helping to improve economic efficiency.

• Not all companies face the same level playing field. Regardless of the intent of policies, not all companies are treated equally, and this reduces fair competition and distorts market signals. Much of this inequality is rooted in the involvement of government in the operation of industry (through direct ownership of state-owned enterprises, preferential finance and explicit regulatory frameworks). The inequality may also be felt in other ways, such as in the market rules governing power exchange trading, which differentiate between technologies (coal/thermal versus others), or through the rights of state-owned enterprises, local-government-owned players and private players (again differentiated between domestic and foreign). For example, while thermal generation and renewable power technologies are different in terms of cost and environmental impact, these differences should not serve as a basis to disqualify participation in markets or group them into different priorities; instead, externalities such as environmental impact should be internalised to a common competitive market accessible to all.

• Information disclosure remains limited. As market decisions are delegated to market players rather than central planners, it is crucial for the market to have access to relevant, accurate and timely data. Otherwise, market participants and potential market entrants will struggle to make informed decisions. In the absence of such information, it is hard for market participants and consumers to respond to changes in market conditions, be they to do with supply and demand or other system/commercial/policy events. Transparent information and operation also discourage rent-seeking behaviours, further improving economic efficiency. Transparency rules can also be extended to include sufficient consultation and grace periods for new policies and regulations.

• Stable policy frameworks will be critical to China’s low carbon transition. Last but not the least, robust, foreseeable and stable energy policies and regulatory regimes are critical to an efficient transition to a lower carbon and greener energy industry and to maintaining future energy supply security and reliability, as the transition involves redistribution or reallocation of huge interests, benefits and costs. The total assets, in 2015, of the energy supply industry ( coal, oil and gas, electricity and heat, processing of petroleum, coking and nuclear fuel) of Industrial Enterprises above Designated Size (those with an annual revenue from their core businesses of at least RMB 20 million) account for 23 per cent of the total assets from Industrial Enterprises above Designated Size. The enforcement of laws, regulations and rules must be strengthened, and the corresponding processes and procedures must be transparent.

As the complex engine behind China’s economic miracle, just as much for its size and importance within global energy systems or for the challenges that it has yet to fully overcome, China’s power sector is worthy of a closer look. This closer look is the subject of this book.

Intended primarily for university students and financial or business analysts seeking an introductory text to China’s power sector, this volume has been designed to be accessible to all, whatever the reader’s background, level of knowledge or specialisation. Despite China’s obvious size and growing importance, too often too little is known of how it actually works. Ten years ago, many in the international energy industry were still belatedly waking up to China’s coming of age; ten years on and for many, the opportunities and challenges in this largest of all markets remain obscure.

Helping companies and governments understand the intricacies of Asia Pacific’s energy markets has been the core business function of The Lantau Group since it was founded in Hong Kong in 2010. From the start, we have followed developments in China, helping clients grapple with complexities around investment decisions as t...