December 1, 2009 1:46 pm

Power surge

China’s energy policy has been little short of hyperactive in recent months. Hardly a week goes by without the country announcing a substantial investment in oil projects abroad or a new wind power farm at home.

The flurry of initiatives reflects official anxiety over China’s energy strategy and a prevailing view that it needs a substantial rethink. As the government tries to create the conditions for the economy to continue growing at its 8 per cent-plus rate, energy has emerged as a potential bottleneck.

Some of the government’s concerns reflect China’s growing reliance on foreign oil. Domestic oil demand has doubled in the past decade to 8m barrels a day, and analysts expect it could double again over the next 10 years. More to the point, in a short time, China has gone from being a modest net exporter of oil to importing more than half of its supplies, a large part of it from some of the most politically sensitive places in the world, such as Sudan.

China’s energy demand is also at the heart of its growing pollution problems, given that 70 per cent of its energy is derived from coal-fired power stations which, as well as contributing to global warming, are a big threat to health. A joint research project run by the World Bank and the Chinese government, released in 2007, discovered that 750,000 people die in China prematurely every year from diseases caused by air pollution.

One prong of China’s response has been to redouble efforts to secure overseas oil resources, as well as access to other commodities. Indeed, Beijing decided at the start of the year that the financial crisis was a one-off chance to snap up international assets at good prices.

“The international financial crisis ... is equally a challenge and an opportunity,” Zhang Guobao, head of the National Energy Administration, said earlier this year. “The slowdown ... has reduced the price of international energy resources and assets and favours our search for overseas resources.”

As latecomers to the international oil industry, China cannot offer potential foreign partners advanced technological expertise. But they do have two potential trump cards – access to substantial financial resources, and relations with regimes that other countries have shunned.

China has tried to apply that financial muscle as best it can this year. Chinese banks have lent $10bn to Petrobras of Brazil in return for an oil supply contract that Sinopec, one of the big three Chinese companies, hopes could eventually turn into a participation in Brazil’s new deep-sea oil discovery. China has also lent $25bn to Russian energy companies in return for another oil supply contract and the pledge that a trans-Siberian oil pipeline will have a spur that extends down to northern China.

“The global economic crisis has presented China with a rare opportunity to trade its abundant foreign currency reserves for oil, mineral and other resources around the world,” says Wenran Jiang, a China expert at the University of Alberta, Canada.

Oil companies have also taken advantage of Beijing’s diplomatic contacts. In one example in January, Iran’s national oil company signed a $1.7bn deal with CNPC, the parent company of PetroChina, to develop the North Azadegan oilfield – part of a growing web of investments in Iran, which Washington fears will prevent Beijing from supporting tougher sanctions on Iran. Indeed, oil traders reported last month that China was selling refined gasoline back into Iran, in spite of US pressure to stop doing so.

If China has become more aggressive about securing overseas energy supplies, it has also launched ambitious plans to both improve its use of energy at home, and to diversify the sources of its power supply.

Three years ago, the government launched a five-year plan to improve energy efficiency, and – with a little help from the downturn late last year – looks like it will get near to meeting this goal.

Officials are close to setting a new target for more efficient energy use between 2011 and 2015, and Hu Jintao, China’s president, announced at a special UN conference on climate change in September that his country would set a target to achieve a “notable” reduction in carbon intensity – the amount of carbon created for each unit of output. “We have taken and will continue to take determined and practical steps to tackle this challenge,” Hu said about climate change. His speech won plaudits from some environmental groups that, only two years ago, were fierce critics of China’s environmental record.

On top of that, China is investing heavily in several forms of renewable energy and has set a target of achieving 15 per cent of its energy supply from such sources by 2020. That includes, for instance, a target to have wind-generation capacity of 150 gigawatts by 2020, five times the current US wind power capacity. Chinese companies also account for about 40 per cent of the global supply of solar panels.

Electric cars are another example of China’s commitment to renewable energy. BYD, a Chinese company founded just over a decade ago, started life making lithium-ion batteries for Nokia and Motorola mobile phones, before founder Wang Chuanfu moved into making cars in 2003. Then he decided to combine the two industries and develop his own electric cars using the company’s batteries. BYD has already beaten the likes of General Motors to bring a hybrid gasoline-electric car to the market, and the company claims it will start selling its e6 electric sedans in the US next year.

Environmental and energy security concerns help explain China’s support for these industries, but there is also an element of industrial policy. In many of the sectors that China is keen to develop – such as building commercial aircraft – the country is playing a game of catch up, trying to improve technologies that other countries have long dominated. But the new industries of renewable energy give China a chance to immediately become a technology leader, and to create companies that will be powerful in some of the new industries of this century.

Yet in spite all these developments in policy, China is fighting an uphill battle to change the fundamentals of its energy supply. There are, for instance, plenty of teething problems in expanding wind power. Nearly half of the wind farms that have been installed in the country are not connected to the electricity grid, according to Paulo Soares, head of China operations at wind power company Suzlon Energy.

But the biggest obstacle is that coal will remain the backbone of China’s energy system for decades, because it is the one raw material that China has in abundance and it is cheap.

The capacity of China’s coal-fired power system was around 350GW in 2007, and could rise to as high as 950GW in 2030, according to the Energy Information Organisation. Some observers believe that the only real solution for Chinese emissions is rapid deployment of technologies to capture carbon in power plants, but these are expensive and largely untested. It will be a long time before China cures its addiction to coal.

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