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Cleaning up China's energy supply

China's energy economy represents more than just a vast opportunity for the resource industries. The country's need for fuel is set to become one of the biggest geo-strategic issues of our times, writes Conal Walsh

EVEN at a cursory glance, China's energy map is remarkable. The world's fastest-growing large economy produces five times as much electricity as it did 20 years ago. It consumes twice as many barrels of oil today as it did at the start of this decade. And it is engaged in the biggest programme of power-station construction in history.

But the sheer size of China's energy economy, and the breathtaking speed with which it is developing, represents more than simply a large opportunity for the resource industries. Just as the government's obsession with securing future oil and gas supplies and safeguarding economic growth is driving Chinese diplomacy, so the rest of the world is increasingly desperate to persuade China to take responsibility for curbing its greenhouse-gas (GHG) emissions.

No issue will generate more debate at the Copenhagen summit on climate change than how China and its 1.33 billion people choose to consume energy in future. Little will be resolved at Copenhagen alone, however, because China's energy and environmental policies are still evolving. But the handling of the country's continued industrialisation will continue earnestly to engage the minds of both industry executives and international policymakers in the years to come.

The growth of China's power grid, for all of its enormity, has not been fast enough to match demand and according to government estimates $2 trillion of investment in electricity infrastructure will be needed by 2030 if the country is to achieve even a relatively modest capacity growth of 4% a year.

Hamstrung conservation efforts

Subsidised energy prices, poor management and a balkanised power sector have hamstrung efforts to conserve energy. So have occasionally limited finances and uncertainty on the part of policymakers about the forms of energy production and consumption that they want to encourage.

Extracting and transporting fuel in China is difficult and costly. The country is rich in energy resources, but many of these have not been developed and few are within easy reach of the country's population centres. China's north and northeast contain abundant coal, oil can be produced in the northeast, while the mountains and river networks of the southwest provide China's hydro-electric power. But the cities of the Guangzhou and Lower Yangtze regions are relatively far from these production centres and increasingly it makes economic sense to look abroad for alternative sources of energy.

The country is the most significant driver of upward pressure in the world oil price. Amid flagging demand from the US, the largest consumer of crude, China's refineries were processing record volumes of some 8m barrels a day (b/d) in the final quarter of 2009 – double the volumes of 10 years ago and around half of it imported.

In the past year alone, China has signed oil and gas deals in Venezuela, Brazil, Russia, Kazakhstan and Australia. Its efforts to diversify its energy supplies reflect not just a desire to achieve better financial value at home, but also a strategic interest in reducing its dependence on relatively unstable parts of the world, such as Sudan and Iran (see p8). It also reflects a growing desire, for environmental reasons, to reduce its dependence on coal, the dirtiest of the fossil fuels.

Coal, the most abundant energy source within China's borders, accounts for 80% of electricity generation (see Figure 1). In an attempt to rebalance its energy mix, China has closed thousands of coal mines in recent years to limit overproduction, as well as taking measures to encourage greater reliance on oil, gas, nuclear and renewable energy.

How successful have these strategically minded, environmentally conscious efforts been? At first sight, not very. China, it is generally agreed, overtook the US as the world's biggest emitter of GHGs in 2007. The country's carbon dioxide (CO2) emissions have grown at an average compound rate of nearly 10% a year this decade and, according to Chinese government figures, had already risen to 5bn tonnes – around 20% of the world's total – by 2004 (see Figure 2).

At the same time, a number of factors militate against the country's attempts to become more green. Despite high-profile efforts to encourage conservationist thinking – such as a tax on disposable chopsticks – changing lifestyles and rising incomes are encouraging China's growing middle classes to use more energy.

Nor has the recent global financial crisis helped. China's rapid recovery from the worst of the credit crunch was engineered in part by spending large amounts of public money on infrastructure projects, boosting energy-intensive industries such as steel and cement, and arguably slowing the country's efforts to wean itself off pollution. In the meantime, coal as a proportion of energy consumption has not fallen by more than a few percentage points since the beginning of the decade.

But these headline statistics mask considerable progress on the environmental front. E3G, an independent climate-change think-tank, published a report in September stating that deforestation, low-carbon transport, improvements in energy efficiency and investments in renewable power had put China on a considerably lower trajectory of emissions than would be expected under "business as usual" conditions. According to E3G, China's CO2 output is likely to be 40% higher in 2020 than it is today, because of expected economic growth. But the figure would be around 80% if China pursued the high-carbon development path of the past.

On this basis, China's promotion of renewables development and power-generation efficiencies – encapsulated in a national five-year economic growth plan – will not, say experts, require much tweaking to ensure compliance with any new requirements resulting from the UN climate summit in Copenhagen and its successor agreements.

China had no obligations to limit emissions under the 1997 Kyoto Protocol – the predecessor to Copenhagen – because Kyoto was conceived with developed countries in mind. This year, then, has seen the international community's first chance to extract formal undertakings from what is now its biggest emitter. Beijing has been reluctant to commit to legally binding targets, however, and has powerful arguments that it can deploy against US, European and Japanese negotiators.

Western countries, after all, still have a per capita carbon footprint several times larger than China's. The government argues that industrialised countries should foot the bill for the damage they have already caused, rather than countries that have only just begun to modernise. China also argues that much of its fuel usage – up to a third of it, if government estimates are to be believed – goes into producing export goods, which are consumed by overseas markets and for which foreign countries, therefore, bear at least partial responsibility.

Implicitly acknowledging the force of these arguments, developed countries have not demanded emissions cuts in absolute terms from China ahead of the Copenhagen summit. Instead, they merely lobbied for curbs, assisted by western assistance and cash, on the runaway growth of emissions.

These curbs should be achievable, given the obvious spare capacity that still exists for improvements in China's energy mix. It is investing heavily in its liquefied natural gas infrastructure, and developing the country's domestic gas production from a low base – gas still accounts for less than 4% of overall energy consumption.

Nuclear power, a much lower-carbon alternative, generates an even smaller percentage, but China is set to spend hundreds of billions of dollars in growing its nuclear capacity. The government has declared its ambitions to increase its use of nuclear power to 4% of total energy consumption by 2020 and to 16% by 2030, building around 40 nuclear reactors in the process. It is already the world's most significant user of hydropower and aims to lead technological developments in other renewable energies.

There may be numerous reasons behind China's greening, besides the environmental benefits. One is a strategic desire to dominate the high-growth renewables industry in the future. The country is certainly keen, too, to graduate to the status of a fully fledged world power and appears increasingly persuaded that it needs to show responsibility in world affairs if it is to gain respect. As such, China has been pursuing détente with the US, Europe and Japan on a range of economic and security issues, as well as on the environment.

But China also has pressing environmental needs of its own. Its corner of the world is by no means immune to the floods, droughts and changes of temperature contained in the gloomiest forecasts of climate change. It also faces the noxious and more immediate side-effects of smokestack development. In 2007, a Chinese government research project conducted jointly with the World Bank calculated that 0.75 million people in China die prematurely every year as a result of diseases caused by air pollution.

Diversifying China's energy supplies, in other words, could pay social as well as diplomatic and financial dividends. The government is hoping renewable and nuclear energy, and even oil and gas, could spare millions of ordinary Chinese the grievous air pollution that the country's coal-fired economy creates.

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