The national energy leading group chaired by Premier Wen Jiabao recently
declared that "marketization is the most important element of energy policy."
In support, China Daily itself sent May Day holiday-makers off with a staff
editorial saying market-oriented measures are more effective than administrative
measures to carry out the government's commitment to reducing pollution and
raising energy efficiency.
These calls follow the recent proposal by the Ministry of Finance, the
Ministry of Commerce and the State Council for a new energy consumption law to
be approved by the National People's Congress next year, as well as the sixth
gasoline price increase this year by the National Development and Reform
The energy leading group calls for "perfecting energy laws and regulations"
to "use energy economically." This highlights the purpose of the consumption law
and the price increase, which is to make China use energy more efficiently to
become a stronger and more secure global competitor, perhaps even using
resources better than the United States has. What is most essential to a
country's strategic future is not only economic growth, but how efficiently the
economic growth is achieved; in other words, how much more can be produced for
Only efficient growth is sustainable. The national security of China is also
improved when the nation can depend less on imported commodity to achieve the
same or more economic output.
China's leadership has observed from the rest of the world that market
pricing provides a far more detailed and timely, and therefore more efficient,
resource allocation than administratively set artificially low prices or
Indeed, investors use oil company profits to increase supply and eventually
lower oil prices, but ultimately to directly finance the human-capital intensive
"innovative economy" targeted by the 11th Five-Year Plan (2006-10). It is not
just to reinvest in traditional oil production.
The most striking physical manifestation of China's revolutionary economic
growth is its energy consumption. China accounts for 10 per cent of the world's
energy consumption and half of East Asia's, but for much less of the gross
domestic product (GDP). China is now the world's No 2 oil consumer. China's oil
consumption has quadrupled in the last 15 years. That's a growth rate 30 per
cent faster than GDP growth.
China's electricity consumption is approaching two-thirds of the United
States', according to the electricity forecast released in March by the NDRC.
This makes China the world's second-largest electric power producer.
To sustain this, China's oil companies are now placed under huge bargaining
pressure to procure liquefied natural gas (LNG) as an alternative, cleaner fuel
for electricity production. Also, huge planning and costly stabilization
requirements are placed on State Grid Corporation and China Southern Power Grid
Corporation to accommodate a proliferation of remote power plants near coal and
water resources to the north and west respectively.
While these super-growth energy figures can be a point of pride for Chinese,
the country's leadership has recognized that these numbers have a dark side that
still indicates huge inefficiency and unnecessary over-consumption of energy
relative to GDP and compared to North America, Europe and Japan, where energy
prices have been more market driven.
This is true especially since crude oil prices started rising above their
50-year historical average price in 2001.
China's population control policy combined with productivity improvement did
contribute to improved energy efficiency for 20 years until 2001. But after
2001, China's economy reversed to becoming increasingly energy inefficient
because energy prices to consumers did not rise to the market level.
In other regions of the world, energy consumption has continued to grow more
slowly than GDP, just as it had since the oil-price shocks of 1973 and 1978 gave
the economic incentive to find ways to improve the productivity of energy use,
to marketize the price of natural gas and electricity, and to develop
alternative energy sources.
After the oil price shocks in the 1970s, people adjusted their consumption
and world energy prices eventually collapsed. For example, homes were insulated,
more efficient lighting was used, and smart hot-water heaters were installed. In
addition, more used public transportation, cars became more fuel-efficient,
several co-workers carpooled to work, and companies became more competitive and
invested in energy-saving technology. Many consumers switched to alternative
fuel partly by installing dual-fuel power and heating systems, and small
efficient gas-fired jet engines were developed to produce electricity.
Eventually national wholesale markets were created where natural gas and
electricity could be sold competitively between suppliers and customers who pay
a publicly posted "transportation" fee to the pipeline or electric-transmission
Most importantly, that fee varies by region to reflect the cost of congestion
in the delivery system, and to indicate whether and where it is economically
more efficient to expand either delivery or production, and expand either the
natural gas pipeline system or the electric transmission system.
China bravely started down the road toward energy markets in 2002 when it
broke the State Power Corporation into two grid companies, and five competing
power generating companies, and established the State Electricity Regulatory
Commission to oversee the market.
But the "demand side" of a wholesale market has not yet been developed and
price regulation has persisted with no objective means of determining the most
economically efficient expansion of the nation's electricity and natural gas
Worse, the artificially low prices (especially since 2001) prompted
over-consumption under the scientific law of prices, causing a shortage of power
plants because producers' cost could not be recovered in the artificially low
prices to consumers. This is the same thing that happened to oil refiners and
prompted shortages of refined oil products.
The NDRC has taken some steps in the right direction to address this problem.
Besides the gasoline price increases intended to bring regulated prices
closer to where market prices could prevail, the NDRC recently ended regulated
coal prices to the power generation companies, and forced them to negotiate
contracts directly with the coal producers while allowing them to recover 70 per
cent of any subsequent cost increase in a higher regulated electricity price to
consumers. Meanwhile power plant construction has recently surpassed demand
growth sufficiently to eliminate power shortages by next year.
But the NDRC still has to go much further, and not just in regards to
electricity. In particular it must eventually reflect on current prices and
previously ignored market value increase in coal, electricity and refined oil
The NDRC needs to do so to resolutely transition to wholesale-market pricing
mechanisms driving an energy price to consumers that reflect market-determined
The NDRC now needs to initiate the hard detailed work of preparing those
mechanisms, avoiding the mistakes made by other countries in developing such
mechanisms, and developing flexible advanced economic system-planning, market
forecasting, and system-operation methods that properly take market behaviour
This is the scientific basis for efficiently expanding this nation's
electricity, natural gas, coal and oil-refining and distribution systems into
being the world's greatest.
The author is an American and Canadian investment
banker, economist and energy expert.
(China Daily 05/11/2006 page4)