The Transation of Chinas Energy System Challenges and Opportunities Deborah Seligsohn Senior Advisor, China Climate and Energy Program World Resources Institute Before The Subcommittee on Energy and Power Committee on Energy and Commerce U.S. House of Representatives April 4, 2011 1 Summary In my testimony today, I will start by discussing both where China is now and its plans for the upcoming five years, and then I will talk about some of the business opportunities this creates for other countries, including the United States, that want to compete in new energy technologies. Energy, environment and climate policy has become increasingly important in China in the last decade. As with any policy focus, there are a number of interests and drivers involved. The confluence of concerns about energy security, environmental protection, climate change and economic restructuring has strengthened the Chinese government’s commitment to both energy efficiency and non-fossil fuel development. Under the 11 thFive-Year Plan 2006-2010, China made considerable progress. It came quite close to its energy intensity target, reducing energy intensity over the five-year period by 19.1, and it increased non-fossil fuel use by 3.1 per year, so that non-fossil energy now comprises 8.3 of China’s total energy use. In March, China’s National People’s Congress adopted its 12 thFive-Year Plan. The plan sets 2015 goals that continue to focus on energy efficiency and non-fossil energy development and set China well on the way to meeting its 2020 goals made at Copenhagen. The five‐year goals are to reduce carbon intensity by 17 and energy intensity by 16, to increase the share of non‐fossil fuels in China’s total energy mix to 11.4, and to increase forest cover by 12.5 million hectares and forest stock volume by 600 million cubic meters. While decreasing as a percentage of total energy used, coal will continue to be an important energy source for many years. To address the greenhouse gas issue, China is actively pursuing a research and commercial scale pilot program looking at carbon capture and storage, a technology China has a strong interest in mastering. International partnerships with Chinese clean technology companies are growing rapidly. What makes China attractive to U.S. and international investors is the clear policy framework which gives businesses the certainty they are looking for before investing. Companies including First Solar, GE, Duke Energy and American Electric Power have all announced new initiatives in the last year. Increasingly entrepreneurs with new ideas are looking to China to make those ideas become a reality. With a similarly supportive policy environment, the U.S., with its unsurpassed research resources and proven track record in new technologies, could be an unsurpassable winner. 2 The Transation of Chinas Energy System Challenges and Opportunities Thank you for the opportunity to contribute to the deliberations of this Committee. My name is Deborah Seligsohn, and I am Senior Advisor to the China Climate and Energy Program at the World Resources Institute. The World Resources Institute is a non-profit, non-partisan environmental think tank that goes beyond research to provide practical solutions to the world’s most urgent environment and development challenges. We work in partnership with scientists, businesses, governments, and non-governmental organizations in more than seventy countries to provide ination, tools and analysis to address problems like climate change and the degradation of ecosystems and their capacity to provide for human well-being. I am delighted to speak with you today about the ongoing transation of China’s energy system, and the challenges and opportunities these changes present not only for China, but also for the United States. I will start by discussing both where China is now and its plans for the upcoming five years, and then I will talk about some of the business opportunities this creates and the real challenge this speed of change in China presents for other countries, including the United States, that want to compete in new energy technologies. Drivers of climate and energy policy Energy, environment and climate policy has become increasingly important in China in the last decade. As with any policy focus, there are a number of interests and drivers involved. The confluence of these concerns has strengthened China’s commitment to policy implementation. The major drivers include  Energy security Energy security has been one of China’s major historic concerns, going back at least as far as the Sino-Soviet split in the late 1950s/early 1960s, when China was left without a stable supply of imported oil. iWhen China began to import oil in the 1990s it faced a period of global stable prices, and energy security became more of a back burner issue. This began to change in the last decade, as energy prices became more unstable, political instability in source countries became more apparent, and potential conflict with other consumer countries also became a greater concern. At the same time, China became increasingly concerned about security of supply, even from domestic sources. In other words, heavy dependency on coal from a single region leaves China very vulnerable 3 to natural disasters, such as the blizzards of 2008. iiDiversifying supply both domestically and internationally helps address the multiple energy security concerns. Improving efficiency also reduces these pressures, whether they be logistical, economic, or political.  Environmental protection In the past decade the Chinese government and the Chinese public have become increasingly concerned about protecting the Chinese environment, and in particular about the impact of urban air pollution. These concerns have been driven partly by a series of well-publicized disasters, partly by China’s demonstrated ability to improve air quality during the 2008 Olympics, iiiand partly as a result of increased affluence that has driven public demand for a more comprehensive view of development. Although China’s gross domestic product on a per capita basis is still quite modest by global standards, less than 5000 per capita per year, ivthis is still a considerable increase in wealth from just a few years ago. Starting in the early 2000s, there has been a growing sense that China can provide more than just economic growth to its people, that quality-of-life improvements, including social services as well as environmental protection, are also important.  Climate change The Chinese in the 1990s viewed the climate discussion purely in terms of external pressure. If there were an opportunity it was perhaps to acquire some additional technology. Today that picture is much more complex. In its latest report on national progress on the climate change issue, China’s own National Development and Re Commission NDRC states “China is one of the countries that are highly vulnerable to the impact of climate change.” vThis concern about the impacts of climate change is a driver not only in China’s domestic policy ation, but also in China’s approach to international climate negotiations and its interest in seeing stronger developed country targets.  Economic transation Chinese policymakers have developed an increasingly sophisticated conception of what they need to do to maintain strong economic growth, and this includes the notion that they need to move away from reliance on heavy industry. As Tsinghua Professor Hu Angang explained in a piece on the development of the 12 thFive-Year Plan, its key theme determined early in the drafting process is “transation.” viTransing China’s economic structure is viewed as 4 critical not just to reducing the environmental impact of growth, but to ensure that China does not wind up in a “middle income development trap,” in other words, be unable to grow beyond the middle-income developing country status. viiAs a result of all of these factors, energy policy has grown considerably in importance in national economic planning over this past decade. As someone who has lived in China for much of the last three decades, I can tell you the change is quite visible. In the early part of the 2000s, energy policy was managed by one Vice Premier and one Vice Chairman of the NDRC, and climate change was the purview of scientists and international negotiators. This is no longer the case. Starting in 2007, Premier Wen Jiabao began to weigh in heavily on energy issues, regularly convening meetings of provincial and sectoral leaders. By 2009, President Hu Jintao was addressing not only energy, but also climate change in international fora. The FiveYear Plans Energy and environment played a critical role in the 11 thFive-Year Plan, China’s national policy for the period stretching from 2006 through the end of 2010. Three key targets were put in the plan reducing energy intensity per unit GDP by 20, and reducing sulfur dioxide a key air pollutant and COD chemical oxygen demand, a key water pollution measurement by 10 each. China actually exceeded both the sulfur dioxide and COD targets, in fact reducing sulfur dioxide by more than 13. It came quite close to its energy intensity target, reducing energy intensity over the five-year period by 19.1. viiiTo get to that energy intensity target required a great deal of heavy lifting, especially in the last year of the plan period. This was particularly true because provinces had been slow to start implementing the plan targets in 2006. The pressure they were under to reach this goal in 2010 should ensure they begin implementation of the next Five-Year Plan with more alacrity. We already see indications that the provinces are focusing on these energy and environmental goals. Our organization, the World Resources Institute, just hosted a meeting with Provincial Development and Re Commission officials to discuss improving city-level environmental planning. Twenty-eight of the thirty-one provinces in China sent representatives. In other words, contrary to 5 popular perception, China has not only set goals for itself in environmental and energy policy improvements, but it has also made significant strides in achieving them. It is in fact heartening that China reported an energy intensity number that fell a little bit shy of the target, showing increased seriousness about measurement and reporting. This hearing occurs at a particularly opportune moment for discussing where China is heading from a climate and energy perspective. China’s 12 thFive-Year Plan was adopted at the National People’s Congress NPC in March of this year. This plan in some areas is quite similar to the previous Five-Year Plan, and in other areas goes well beyond the previous plan. The most striking advance in the current Five-Year Plan is the attention paid to climate change. While energy and environment were important in the previous Five-Year Plan, five years ago climate change was barely addressed. This time around climate change is the first topic in the environmental portion of the plan, and environment itself has more prominence than ever before. The plan sets 2015 goals congruent with the three commitments that China made at Copenhagen ixand then reaffirmed in Cancun. These commitments were  To reduce carbon intensity by 40 to 45 by 2020 as compared with 2005;  To increase the share of non-fossil fuels in China’s primary energy mix to 15 by 2020; and  To increase domestic forest cover by 40 million hectares and forest stock volume by 1.3 billion cubic meters by 2020 over a 2005 baseline. Each of these is addressed in the 12 thFive-Year Plan  The five-year carbon intensity reduction goal is 17;  The 2015 non-fossil fuel goal is set to reach 11.4 of China’s total energy mix; and  The 2015 forest goals are to increase forest cover by 12.5 million hectares and forest stock volume by 600 million cubic meters. xChina also set a goal to reduce energy intensity by 16 over the next five years. And there were key environmental targets as well both sulfur and COD are targeted for an additional 8 overall reduction and several new air and water pollutants are added with reduction targets of 10 each. The goals for the 6 three items that were covered in the previous Five-Year Plan, energy intensity, sulfur and COD, are somewhat lower in the 12 thFive-Year Plan. This is not surprising, because many of the “low hanging fruit,” the easiest reduction measures, have already been taken. In the case of energy intensity, studies by the Lawrence Berkeley National Laboratory show that two programs in particular contributed to the recent energy intensity reduction. The first is the Top-1000 Energy-Consuming Enterprise Program, which focused on improving energy efficiency in China’s largest 1000 companies, responsible for one third of China’s total energy use. xiThe second is a program of plant closures, where China closed down the smallest, dirtiest and least efficient factories in a number of heavy industry sectors including power, steel, cement, other metals and paper. xiiNDRC Vice Chairman Xie Zhenhua just reported in a speech during his visit to Australia last week that China’s cumulative shutdowns of inefficient electric power plants over the last five years totaled 72 GW or approximately 8 of China’s total installed capacity–that is almost equal to the total installed capacity of electricity in South Korea or Spain. xiiiThis type of shutdown of inefficient plants is really unprecedented globally and is a significant part of the reason that the Chinese coal-fired power plant fleet is now more efficient than that of the United States. xivChina has committed not only to a carbon intensity reduction, but to tracking that reduction. At last month’s national People’s Congress, Premier Wen Jiabao stated that China will put in place “well- equipped statistical and monitoring systems for greenhouse gas emissions, energy conservation and emissions reductions” to ensure these policies are tracked and properly implemented. It is worth noting that we also have independent corroboration of some of the results of the 11 thFive-Year Plan. In particular, atmospheric scientists at Harvard University have been working with colleagues at Tsinghua and Beijing universities to uate both energy efficiency and air pollution results. Using independent monitoring stations they were able to measure a pattern of improving fuel combustion efficiency consistent with the 11 thFive-Year Plan goal to reduce energy intensity by 20. xvEnergy efficiency has provided the major portion of China’s carbon emissions control to date, and the most significant gains have come from this combination of focusing on the largest and the 7 smallest enterprises. As China moves forward, it will need to expand its programs to the very large number of companies in the middle. Significantly, in the