World Energy Outlook 2007

In August 2006, the State Council issued a statement on strengthening energy
conservation work, and it circulated a major document by NDRC and other
ministries in June 2007 called Comprehensive Action Plan for Energy Saving and
Emissions Reduction, designed to ensure action at all levels of government.
One area with considerable scope for improvement is the enforcement of
existing energy-efficiency regulations for public procurement, energy-efficiency
standards and labelling, and – most importantly – for energy codes for
buildings.
Improvements in technical efficiency usually proceed very slowly and require
either retrofits to existing equipment and buildings or high-quality new
installations. China has had the opportunity to take advantage of surging rates of
investment in recent years to install a huge amount of new equipment, raising
average efficiencies. However, in markets where speed of installation has been
paramount, in order to take advantage of prevailing demand, systems are still not
necessarily designed with operating efficiency as a priority. Similarly, there is wide
recognition that technical and administrative capacity for implementing
efficiency needs strengthening, both in government and in enterprises.
Market Reforms
China’s markets for energy products are at various stages of evolution, as reforms
progress at different speeds. Although the government has adopted an
increasingly liberal approach to economic policy, it has approached energymarket
reform conservatively, on the grounds that energy is a strategic
commodity. Price-setting remains a sensitive issue and subsidies remain large in
some cases, albeit in an effort to achieve important policy goals. Although coal
prices at the local and national levels are determined largely by market processes,
access to and the cost of long-distance transport is still subject to government
regulation, particularly by the Ministry of Railways. The oil market has seen
gradual moves towards liberalisation, but consumers remain insulated from
global markets and high regulatory barriers protect the incumbent national oil
companies from international competition. Natural gas development is
hindered by inefficient pricing and it takes time to develop liquefied natural gas
(LNG) and long-distance pipeline gas import projects.
The freeing of coal prices without concomitant liberalisation of electricity prices
(wholesale or retail) has been a point of great contention, particularly during the
2003-2004 power shortages. The price-setting mechanism for power now allows
some flexibility, but many power generators are trying to protect themselves by
buying upstream into coal supplies and some upstream companies such as
Shenhua Coal Group have growing electricity businesses. The separation of
generation from transmission and distribution businesses was completed soon
after 2002. This has set one of the preconditions for the introduction of wholesale
278 World Energy Outlook 2007 - CHINA’S ENERGY PROSPECTS