7 factors shaping China’s energy future

China is already the world’s biggest energy consumer and producer, but according to some predictions, by 2035 it will also be the world’s largest energy importer, a spot currently held by Europe. Clearly, there are some big transformations taking place in its energy sector. Here are seven factors that have shaped those changes so far and will continue to do so for many years to come.

1. Commodities: a volatile year

Commodity prices have been fluctuating in recent months. For example, while Brent crude has recently settled at around $50 a barrel, some still think it could drop into the $30s. Last month iron ore also fell to less than half of its January 2014 levels. These developments bring both good and bad news for China.

China’s oil import bill for 2014 (at $100 per barrel) is estimated to be $228 billion, amounting to 12% of overall merchandise imports. With falling prices, the same figure for 2015 could be more towards $130 billion-$142 billion – even though demand will be slightly higher – reducing the share of oil imports to 7% of merchandise imports.

A low oil price could also mean a lower bill for natural gas, which China has been keen to promote as part of its energy mix. Lower prices could stimulate GDP growth and support much-needed fiscal and tax reforms. This low-price environment could also make it easier for China to make asset acquisitions in the oil and gas upstream business.

However, low prices might raise the fear of deflation, particularly with the current over-capacity in many energy-related sectors. Such an environment could also crowd out any investment in domestic energy-related sectors.

2. Breaking the coal habit

At last year’s annual meeting of the National People’s Congress, Chinese Premier Li Keqiang declared “war against pollution”. The ten-point plan that followed put forward various measures for capping coal consumption before 2030, and they are already starting to have an effect: in July 2015, Greenpeace reported that China’s urban air pollution levels fell in the first half of 2015.

One initiative aimed at contributing to that progress is the China Coal Consumption Cap Plan, which brings together over 20 leading Chinese stakeholders to establish and implement a binding national limit to cap China’s coal consumption by 2020. Four key industries are expected to be the focus of change: the power sector, steel, cement and construction. The project is pushing for national, sectorial and sub-national targets, the improvement of market mechanisms, and assurances that these will be integrated into the 13th Five-Year Plan.

Just recently, China approved an amendment to its 15-year-old pollution law that grants the state new powers to punish offenders and create a legal framework to cap coal consumption.

3. Natural gas and the push to go nuclear

Natural gas represented just 4% of China’s energy mix in 2009. Under the 12th Five Year Plan, targets were put in place to increase that figure to 8% by 2015 and 10% by 2020. However, demand for gas has actually been lower than expected: last year it fell to about 8%, down from a five-year average of 14%, and forecasts suggest China could have a gas surplus of around 30 billion to 40 billion cubic metres through to 2020. But this does offer an opportunity to push for a more diversified use of natural gas – for example, in power plants to substitute coal or as transportation fuel – and implement much-needed market pricing reforms.

Since Fukushima, China has added 11 new reactors and over 11GW of nuclear-generating capacity, and is set to overtake Russia and South Korea in nuclear capacity, ranking fourth globally by the end of the year. As its capacity expands, the World Nuclear Association predicts it will “go global” and start exporting nuclear technology.

4. A world leader in renewable energy

Deploying renewable energy is a key part of China’s energy and climate policies. In a short time, it has become the world’s leading market for renewable energy, and it is now the largest investor in the sector: it made over $54 billion of investments in 2013 and has an investment target of $15 trillion over the next 15 years.

China is also promoting innovation and entrepreneurship in the clean energy sector. In early 2015, the central government announced plans to establish a $6.5 billion fund for domestic start-ups operating in emerging industries. In early 2015, the state council also announced a “Made in China 2025” initiative to further develop China’s manufacturing industry by improving indigenous innovation in 10 key sectors, including energy efficiency, new materials and renewable energy industries.

5. State-owned enterprises: reforms ahead

Four of the twelve largest Chinese state-owned enterprises are in the energy sector. With revenues of around $100 billion and above in 2014, they rank in the top two-thirds in terms of profitability.

But many people agree these state-owned enterprises are ready for reform. According to HSBC, these reforms should focus on four things: opening up the value chain, liberalizing prices, splitting up and merging together sub-sectors, and introducing competition. Doing so would help open up the energy markets to all players and encourage competition by restructuring and consolidating major oil companies. Recent changes to the top executives at some of the state-owned energy enterprises could accelerate these market-driven reforms in the oil and gas industry.

6. A new and improved Silk Road

In 2013, China announced plans to build a Silk Road Economic Belt; a second plan, the 21st Century Maritime Silk Road, was announced a few months later. The two quickly morphed into one consolidated policy: One Belt, One Road.

The policy, in its aim to promote connectivity, clearly complements China’s external investment strategy and boosts the export of Chinese infrastructure on a grand scale. Within this framework, China will support and finance projects to remove transport bottlenecks by promoting the construction of port infrastructure, gas and oil pipelines, roads, trunk lines and networks.

The scale of these investments became clear with recent data that showed the majority of the 67 overseas loan commitments made by China’s largest lenders were for infrastructure projects in areas along One Belt, One Road.

7. The number 13: unlucky for some, but not China

The number 13, or “shisan” in Mandarin, is considered lucky in Chinese culture and can mean “definitely vibrant”. Could this be the outlook for energy goals in the upcoming 13th Five-Year Plan?

Reacting to recent economic developments, China’s top leaders issued a statement to send a clear message that the next phase of growth will be of higher quality, efficiency, equality and sustainability: “The five years from 2016 are a critical stage for building a moderately prosperous society in all aspects. The 13th Five-Year Plan will focus on realizing this goal.”

According to a recent report from Goldman Sachs, the next Five-Year Plan will include the most ambitious environmental reform agenda ever attempted. It estimates that planned environmental expenditures will exceed $1 trillion, providing many opportunities for the private sector to find business solutions to help achieve China’s ambitious environmental goals.

The year so far has been full of changes in China – some worrying but others very promising. The rest of 2015 and early 2016 will surely continue to bring interesting developments in the country and its energy sector, many of which could be transformational.

The Annual Meeting of the New Champions 2015 is taking place in Dalian, China, from 9-11 September.

Author: Ramya Krishnaswamy, Head of Energy Utilities Industry, World Economic Forum

Image: Worker build a solar energy construction at the Shanghai 2010 Expo site. REUTERS/Nir Elias