Energy Efficiency in China:  Glorious History, Uncertain Future

Mark D. LevineLawrence Berkeley National

LaboratoryMDLevine@lbl.gov

American Physical Society Energy WorkshopBerkeley, CA

March 1, 2008

Part I: Glorious HistoryIn three Acts

Part II: Energy Crisis in China: 2001 to present

repeat of much earlier “inglorious history”??

Part III: The Future:What might happen? What is to be done to end the

crisis?

3

Executive Summary (Part I)

• Things were bad in energy (for 3 decades)• Deng Xiaoping came to power

—A group of academics suggested a new approach to energy

—Deng listened!

• Things were much better (for 2 decades)• The market became king

—Energy went off track again

• There are solutions—The Chinese government and Communist party are

responding, somewhat in the manner of Deng

4

Part I: China’s Energy History in Three Acts

“Soviet Style” Energy Policy (1949-

1980)

Deng’s Initial Reforms (1981-1992)

Transition Period (1993 to 2001)

5

“Soviet Style” Energy Policy (1949-1979)

• Single objective was rapid energy supply growth

• Energy prices greatly subsidized

• Central allocation system provided energy primarily to heavy industry

• No attention to environment

• Result: one of the world’s least efficient (and fastest growing) energy systems

Energy Output and GDP, 1950-1980

Source: NBS

0

100

200

300

400

500

600

700

1950 1955 1960 1965 1970 1975 1980

Mt coal equivalent

0

100

200

300

400

500

600

700

Hydroelectricity

Natural Gas

Oil

Coal

GDP

GDP (billion 1980 RMB)

6

Deng’s Initial Reforms (1980-1992)

• Key meetings among more than 100 academic energy experts in 1979 and 1980 stated:— China energy policy in crisis

— need for radical reform

— major changes identified: (1) energy price reform, and

(2) serious attention to energy efficiency

• Government quickly implemented reforms in Sixth Five-Year Plan (1981-1985)

0

0.25

0.5

0.75

1950 1955 1960 1965 1970 1975 1980 1985 1990

tce/thousand 1995 yuan GDP

Energy Intensity of China's Economy, 1952-1992

Source: NBS

7

Energy-conservation policies & measures in Phase II

• Energy Management—factory energy consumption

quotas—factory energy conservation

monitoring—efficient technology promotion—close inefficient facilities—controls on oil use

• Financial Incentives—low interest rates for efficiency

project loans—reduced taxes on efficient

product purchases —incentives to develop new

efficient products—monetary awards to efficient

enterprises

• R D & D– funded strategic technology

development

– funded demonstration projects

• Information Services– national information network

– national, local, and sectoral efficiency technical service centers

• Education & Training– national, local, and sectoral

efficiency training centers

– Energy Conservation Week

– school curricula

8

Energy efficiency investment is stable, but declining as share of total investment

0

100

200

300

1981 1986 1991 1996

Investment (billion 1995 yuan)

0%

5%

10%

15%

Share of Total Investment

Energy Supply Investment

Energy Efficiency Investment

Efficiency Share of Total Energy Investment

Estimated Efficiency Share, 1996-1998

Energy Supply and Energy Efficiency Investment, 1981-1998

N.B. Only partial data on energy efficiency investments after 1995 are available. These partial data informed the estimates presented here of efficiency's shares of total energy sector investment for 1996-1998. All investment data are for state-owned units only.

Source: NBS, SPC

9

0

5001,000

1,5002,000

2,5003,000

3,5004,000

4,500

1952 1957 1962 1967 1972 1977 1982 1987 1992 1997

Primary Energy Use (Mtce)

Consumption at 1977 Intensity, Reported GDP

Consumption at 1977 Intensity, Adjusted GDP

Actual Consumption

Investment in energy efficiency and other policies greatly reduced China’s energy

intensity (1980-2000)

Energy Use, Actual and Projected at 1977 Intensity, 1952-1999

Source: NBS

10

Transition Period (1993 to 2001) and After

Rapid movement towards market-based system…

—Dramatic energy price reforms (raised all energy prices to consumers)

—Enterprise reforms increased price sensitivity

…but past successes in improving energy efficiency were based on mechanisms that were disappearing…

—Elimination of energy quotas

—Low incentives for monitoring in industry

—Difficulty in continuing energy efficiency loan subsidies

—New tax code (1994) eliminated tax breaks for efficiency

11

Take-off of consumer goods highlights the need for efficiency standards

0

5

10

15

1980 1985 1990 1995

Output (millions)

Air Conditioners

Refrigerators

Motor Vehicles

Production of Consumer Durables, 1980-1999

Source: NBS

Part II: Energy Crisis in China: 2001 to present

repeat of much earlier “inglorious history”??

13

Executive Summary (Part II)

• China faces a serious new energy crisis — Most Chinese see the energy shortage as the crisis— The real crisis is in energy policy (just as in 1979)

• A key issue: how can investment be attracted to energy efficiency and how can government policy spur such investment?

• A failure to rein in energy demand growth will have serious impacts— The environmental consequences of energy policy

failure are truly frightening— Rapid energy growth portends economic consequences

of equal concern

14

Current Energy Crisis

• Energy demand growing very, very fast• In 2004, widespread power shortage (24 of 31

provinces)• Soaring coal prices• Transportation bottlenecks for coal• Significant economic losses• “Surge” in oil imports especially as oil is used in

place of coal

15

Since 2001, energy use has grown much faster than GDP, reversing patterns from 1980 to 2000

90

100

110

120

130

140

150

160

170

2001 2002 2003 2004 2005

2001 = 100GDP

Actual Energy

Energy Target

Source: NBS, China Statistical Yearbook, various years; China Statistical Abstract 2005; growth estimates extrapolated from mid-year production data for 2005.

Annual energy-related carbon dioxide emissions, 1980-2006

-

1,000

2,000

3,000

4,000

5,000

6,000

1980 1985 1990 1995 2000 2005million tonnes carbon dioxide

USA

PRC

Source: US annual emissions amounts reported by US EIA in the 2006 Annual Energy Review and 2007 Flash Estimate; China emissions are derived from revised total energy consumption data published in the 2007 China Statistical Yearbook using revised 1996 IPCC carbon emission coefficients by LBNL.

Annual energy-related carbon emissions, 1950-2006

-

5,000

10,000

15,000

20,000

25,000

30,000

1950 1960 1970 1980 1990 2000

million tons carbon dioxide

other global emissions

USA

PRC

Source: Historical 1950-2003 US and global emissions data from Oak Ridge National Laboratory, Carbon Dioxide Information Analysis Center; 2004-2006 US data from BP via Global Carbon Project. China 1950-2006 emissions data are derived from revised total energy consumption data published in the 2007 China Statistical Yearbook using revised 1996 IPCC carbon coefficients by LBNL.

Figure 6: Historical and Forecast China Carbon Emissions (WEO), 1990-2030

-

2,000

4,000

6,000

8,000

10,000

12,000

1990 2000 2010 2020 2030

Mt CO2

WEO 1994

WEO 1995

WEO 1996

WEO 1998

WEO 2000

WEO 2002

WEO 2004

WEO 2006

WEO 2007

Historical (LBNL)

WEO 2007

WEO 2002

WEO 1998

Figure 8: Historical and Forecast China Carbon Emissions (8, 9, 10), 1990-2030

0

3,000

6,000

9,000

1990 2000 2010 2020 2030

Mt CO2 ERI (2005)

RNECSPC (2004)

Tsinghua (1999)

Historical (LBNL)

Figure 3: Global, Chinese, and American Per-capita Energy-Related CO2 Emissions, 1950-2004

0

5

10

15

20

25

1950 1956 1962 1968 1974 1980 1986 1992 1998 2004

tonnes CO2/person

USA

global average

PRC

Source: China emissions are derived from revised total energy consumption data published in the 2007 China Statistical Yearbook using revised 1996 IPCC carbon emission coefficients by LBNL; China population data from NBS and US Census (for 1950-51); global and American emissions data from Oak Ridge National Laboratory, Carbon Dioxide Information Analysis Center; global and American population data from US Census.

Cumulative Energy-Related CO2 Emissions, 1950-2006

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

19501955196019651970 197519801985199019952000 2005

Mt CO2

PRC

USA

Source: Historical 1800-1980 US emissions data from Oak Ridge National Laboratory, Carbon Dioxide Information Analysis Center; 1980-2006 US data from US EIA 2006 AER. China 1902-1949 emissions data from Oak Ridge National Laboratory, Carbon Dioxide Information Analysis Center; 1950-2006 emissions data are derived from revised total energy consumption data published in the 2007 China Statistical Yearbook using revised 1996 IPCC carbon coefficients by LBNL. Pre-1902 China emissions data unavailable, but generally considered to be negligible.

22

Growth in heavy industry has been extraordinary in past five years:

industrial efficiency especially critical

• Consumes >60% of energy

• Technical complexity: many different types of processes

• Extraordinary growth in past five years

• Existence of many old, legacy industrial facilities

_______________________________________________________________

23

Cement Production Worldwide: 2004

41%

Italy 2%

Brazil 2%

Spain 2%

Japan 3%

South Korea 2%

United States 5%(includes Puerto Rico)

India 6%

Sources: U.S. Geological Survey, 2005. Mineral Commodity Summaries: Cement; Cui, Y., 2006

China 44 %

Rest of World 32%

US: 99 Mt (2004)

Russia 2%

24

China is the world leader in the production of many industrial commodities

China's Crude Steel Production1990-2004

0

50

100

150

200

250

300

1990 1992 1994 1996 1998 2000 2002 2004

Million Metric Tons

Recycled Steel (Electric Arc Furnace)Primary Steel (Open Hearth Furnace)Primary Steel (Basic Oxygen Furnace)

China's Cement Production1990-2004

0

200

400

600

800

1000

1200

1990 1992 1994 1996 1998 2000 2002 2004

Million Metric Tons

Rotary Kilns

Shaft Kilns

25

Industry Major DriversIndustry Production Revision (million ton) 2000 2005 2010

Glass previous 9.1 9.6 10.1Glass revised 9.1 17.5 27.5Ethylene previous 4.7 7.7 12.0Ethylene revised 4.7 7.6 13.0Ammonia previous 33.6 36.0 38.0Ammonia revised 33.6 46.0 38.0Paper previous 30.5 40.0 50.0Paper revised 30.5 52.6 68.0Cement previous 597.0 680.0 790.7Cement revised 597.0 1050.0 1310.0Aluminium previous 3.0 4.0 4.6Aluminium revised 3.0 7.7 11.2Iron and Steel previous 128.5 250.0 300.0Iron and Steel revised 128.5 349.4 440.0

26

Energy intensities within industrial sub-sectors are actually declining

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1995 1996 1997 1998 1999 2000 2001 2002 2003

kgce/RMB (2000)

smelting & rolling of ferrous metals

non-metal min prod petroleum, coke, & nuke

raw chemicals & ch prsmelt & roll n-f m

paper coal

electricity

textiles

Part III: The FutureWhat might happen? What is to

be done to end the crisis?

28

Executive Summary (Part III)

• Things could get worse —Very unlikely, but they could continue on the

present path for some time

• Things could get better—There is some chance!!

29

China’s National Energy Strategy

“Energy development and efficiency have equal role (emphasis on efficiency)”

• But supply investment at RMB 424 billion ($ 50B) while energy conservation investment at RMB 23 billion ($3B) in 2003 !!

30

Energy Investment

• Energy supply investment is ~18 times energy efficiency

investment

• Energy efficiency investment needs to increase from

$3B to $25B per year (avg over next decade)

_______________________________________________________________

China’s government now recognizes the urgency of energy efficiency

• The reform period (1980-2000) showed that energy efficiency was essential to achieve economic goals (Deng Xiaoping)

• The current leadership recognizes the same imperative (Plenary of the Communist Party, Nov, 2005)—Premier Wen Jiabao:

“Energy use per unit of GDP must be reduced by 20% from 2005 to 2010”

• Statement reiterated by the National Peoples Congress (March 2006)

• National Development and Reform Commission creating and re-creating aggressive energy efficiency policies and programs

32

The loss of control led to imposition of new 2010 target of reducing energy/GDP intensity by 20%

0

10

20

30

40

50

2000 2005 2010 2015 2020

Year

Energy Consumed

(million boe/d)

0

10

20

30

40

50

GDP

(trillion 2000 RMB)

actual energy

energy target

actual GDP

GDP target

reference scenario

GDP axis

energy axis

new 2010 target

33

Is the 20% intensity reduction possible?

2,000

2,500

3,000

3,500

2005 2006 2007 2008 2009 2010

Mtce

GDP elasticity=1

LBNL BPS baseline

Aggressive Industrial Efficiency

Aggressive Industrial and ApplianceEfficiency

Aggressive Industrial, Appliance andT&D Efficiency

AGR 5.0%

AGR 3.5%

7.3%

AGR 3.5%

AGR 2.8%(2010 target)

34

2010 Energy Consumption Senarios

1

1.1

1.2

1.3

1.4

1.5

GDPelasticity=1

LBNL BAUbaseline

AggressiveIndustrialEff iciency

+AggressiveApplianceEfficiency

+AggressiveT&D andThermal

Eff iciency

+closingineff icient

plants

EI target

2005=1

AGR 7.5%

AGR 5%AGR 4.3%

AGR 4.1%AGR 3.9%

AGR 3.55%AGR 2.8%

Is 20% energy intensity reduction by 2010 possible?

-11%

-17%

35

Policies• Microeconomic policies (targeting energy efficiency)

— targets for energy efficiency for industries, with strong incentives (carrots) and penalties (sticks)

• Key supporting policies: information and technical guidance; strengthening local energy conservation service provider network; and subsidies directly connected to achieving industrial targets

— enhanced enforcement of tighter building energy standards,

— tighten and assure compliance with appliance efficiency standards,

— strict enforcement and strengthening of auto fuel economy standards,

— initiation of demand-side management programs of scale in several electric utilities, and

— investment in mass transit alternatives.

36

Policies (cont)• Macroeconomic Policies

— Revisiting of energy prices to better reflect costs and taxes to better achieve social/political objectives

— Re-creation of successful approach (during 1980s and part of 1990s) of subsidizing investments in energy efficiency

— Policies that result in additional closings of energy inefficient factories

— We also recommend exploration of ways in which macroeconomic policies can lead to structural changes favoring lower energy use.

THE END