CHINA'S ENERGY OUTLOOK: CONTINUED HEAVY RELIANCE ON COAL LIKELY

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 0005304570
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 17
• Document Creation Date: June 23, 2015
• Document Release Date: September 10, 2009
• Case Number: F-2008-01057
• Publication Date: October 20, 1997

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Office of Transnational Issues 20 October 1997
China's Energy Outlook: Continued Heavy Reliance on Coal Likely
Senior Chinese officials have said that China plans to continue relying on its abundant
and cheap coal reserves to supply three-quarters of its fast-growing demand for
primary energy. Beijing faces resource, infrastructure, and technological
constraints in substituting other energy sources for coal use that would increase
capital costs and dependence on imported fuels while yielding only modest
environmental benefits.
Our analysis of two coal substitution scenarios indicates that although China could
decrease its dependence on coal by 2015 to about 55 percent of energy demand, coal
use nevertheless would double from 1996 levels,'assuming an average annual
economic growth of 7 percent. Capital costs for new power plants alone would
increase by nearly $140 billion.
? Reductions in annual carbon emissions relative to the baseline case would be 9
and 3 percent, respectively, for aggressive substitution and moderate substitution
cases.
for its few nuclear and renewable energy projects.
? China has not found sufficient proved reserves of oil or gas to boost their
production, and Beijing would have to substantially increase imports to substitute
for coal. China already is aggressively exploiting its largest hydroelectric potential,
including the Three Gorges Dam, and China is relying heavily on foreign equipment
emission levels.
? Carbon emissions in 2015 under either scenario would be about 2.5 times what
they were in 1996, and China would surpass the United States in annual carbon
China's heavy dependence on coal already has caused serious health and
environmental problems, and China does not have the technology to reduce coal
pollutants.
APPROVED FOR
RELEASE^DATE:
04-Sep-2009
 ? So far, Beijing has done little to combat air pollution problems caused by coal use,
and, as a result, respiratory disease from coal pollutants is the leading cause of death
in China, according to the World Health Organization.
and has been unwilling to buy foreign pollution-control equipment.
? China does not have the domestic capability to manufacture clean-coal equipment
stronger environmental laws combined with strict enforcement.
foreign energy sources probably rule out a change in China's energy plans away
from heavy coal use in the near term. Chinese attitudes could change, however, if
leadership concerns grow about the economic and health costs associated with
extensive coal use. Implementation of even a modest coal-substitution plan would
require Beijing to change many of its long-standing energy policies, including
removal of subsidies on energy prices, easing of restrictions on foreign imports, and
The higher costs for alternative energy sources and Beijing's reluctance to rely on
 Heavy Reliance on Coal in Energy Sector
China's economic development has been fueled primarily by coal, and the country
relies heavily on its abundant and cheap coal reserves to supply its fast-growing
demand for primary energy.
China consumed more than 1.3 billion metric tons of
coal in 1996, representing about 75 percent of primary energy consumption. Industry
uses almost 600 million metric tons of coal per year, followed by the electric power
sector, with more than 400 million metric tons annually, and the residential and
commercial sectors, with 200 million metric tons (see figure 1).
? China claims to have more than 1 trillion tons of coal reserves-more than 700 years
of consumption at current rates.
? Coal costs less than other fossil fuels in, world markets, and price subsidies in China
keep coal prices below world levels. For example, in the United States, coal
generally costs less than half as much as heavy oil, or about $7.00 per barrel of oil
equivalent (bee), according to the US Department of Energy
'W'Totai
-Indushial
~Electric
"Residential and Cornmerdal
"?1??Other
Note: Other includes the transportation and nonspecified sectors
 China's heavy dependence on coal has caused serious health and environmental
problems.
? Respiratory disease from poor control of coal pollutants, for instance, is the leading
cause of death in China, according to the World Health Organization.
? China's annual carbon emissions-estimated at more than 800 million tons-are
second only to those of the United States, with nearly 1,500 million tons annually.
With an expected growth rate more than four times that of the United States, China
will have the world's largest carbon emissions by 2015, according to US
Department of Energ projections.
So far, Beijing has done little to address air pollution problems. It lacks the
technology to manufacture clean-coal technologies and has been unwilling to pay for
foreign equipment. If China decides to take more concrete steps, it will either have to
begin a large-scale program to install clean-coal technologies or promote the
substitution of other energy sources.
Although there are potential coal substitution options for China, each faces resource,
infrastructure, and technological constraints.
Oil. China has not found sufficient new reserves to boost stagnating oil production
that averaged some, 3.2 million barrels per day (b/d) last year.
currently supplies nearly 20 percent of primary energy.
? Exploration results in the Tarim Basin- believed by many Western and Chinese
geologists to have the country's best potential for large, undiscovered oilfields-have
been mixed, and most Western oil companies suspended exploration activity there
last year citing poor results and bureaucratic problems, according to press reports.
? Production at China's mature fields in the northeast Daging, Shengli, and Liaohe-
has been stagnant since the late 1980s, and recent press reports indicate that
production at Daqing has begun to decline. These fields account for more than 60
percent of the country's total output, or about 2 million b/d.
? Offshore oil production in the East and South China Seas also has been
disappointing fn the view of many Western industry observers. Output from the
South China Sea probably will start to decline in a few years unless new fields are
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 founds Offshore oil production remains small-
about 300,000 b/d, or approximately 10 percent of total output
Gas. Gas production probably will continue to grow slowly from 1996 levels of some
20 billion cubic meters (bcm). Reported projections of gas consumption to as much
as 80 bcm after 2010 almost certainly would require a significant increase in gas
imports-by pipeline from the former Soviet Union or as liquefied natural gas (LNG),
most likely from Indonesia, Malaysia, or Australia. We estimate that China has some
1,500 bcm of natural gas reserves-in es-in contrast, one Russian gasfield, Urengoi, holds
7,000 bcm of proved reserves. Gas provided about 2 percent of China's primary
energy. demand in 1996.
? Limited gas reserves, lack of an extensive gas-pipeline infrastructure, and long
construction leadtimes hamper gas production and use.
? We have no evidence that China has made any financing arrangements for the
numerous gas pipelines and LNG projects that have been reported in the press.
Hydroelectric. According to US Department of Energy studies, China holds large
potential hydropower resources-nearly 400 gigawatts (GW)-but most of the country's
unexploited resources are far from the country's population centers in the north and
east. China's hydroelectric power plants generate about 20 percent of the nation's
electricity and provide 6 percent of the country's primary energy.
? China currently has 80,000 hydroelectric power plants, but only one has an installed
capacity of more than 2 GW_2 according to industry statistics. Most of these plants
have a capacity of less than 5 megawatts and are not connected to the transmission
grid.
? China already is aggressively pursuing its largest hydropower potential, including
the 1.8-GW Three Gorges Dam, which is planned tolbe on-line by 2010.
Nuclear. Beijing's nascent nuclear power program consists of three units at Qinshan
and Daya Bay, with a combined generating capacity of 2 GW-less than 1 percent of
China's total installed capacity and primary energy use. China plans for nuclear
power plants to be the main alternative to coal-fired plants in the long-ter
with 40 to 50 GW by 2020; however, it will likely be more than
20 years before nuclear power becomes a significant source of electricity because of
the high capital costs of the plants, the lack of indigenous manufacturing capability,
and the lengthy construction process-.
 ? China's current nuclear power plants were built with expensive foreign equipment,
and China does not yet have the technology to manufacture all the critical
components to build its own nuclear power plants
? China's indigenous pressurized-water reactor program is moving slowly, and China
is not likely to develop this technology in the next decade,
Renewable Energy. Although China has abundant solar, geothermal, and wind
resources, they are located far from demand centers. For example, China's sunny
regions are in the far western Himalayan Plateau area, while central China generally is
cloud-covered. Geothermal resources are_ located mainly in the same Himalayan
region, while wind resources are in the western desert and the remote northern
corridor along Inner Mongolia.
? Electricity generation from, renewable energy sources represents less than 1 percent
of China's. total electricity generation because of their locations and high costs
relative to fossil fuels.
? The cost of solar-generated and wind-generated electricity runs about 25 cents and 4
cents per kilowatt hour (kWh), respectively, compared with 1 to 3 cents per kWh for
fossil fuels, according to, industry sources.
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 Our analysis indicates that while China could decrease its dependence on coal by
about 25 percent by 2015 under the most aggressive substitution case, coal use still
would almost double from 1996 levels. Capital costs for new power plants alone
would increase by nearly $140 billion in the aggressive substitution scenario and by
more than $30 billion annually in the moderate substitution case (see figure 4)-an
increase of 30 percent and 7 percent, respectively, over the baseline case.
? Reductions in annual carbon emission relative to the baseline case would be 9 and 3
percent, respectively, for the aggressive substitution and moderate substitution
cases.
? Even so, carbon emissions in 2015 under either scenario would be nearly 2.5 times
what they were in 1996.
Aggressive Substitution Case. This case results in about a 25-percent decrease in
annual coal use by 2015, with a cumulative savings of 6 percent in carbon emissions
from 1997-2015. However, capital costs for new electric power plants increase by
almost $140 billion-or about 30-percent higher than in the baseline case-with another
$25 billion annually needed to offset the additional purchases of oil and gas even with
decreased coal purchases.
 Figure 4
Coal Substitution Model Results
China: Primary Energy Consumption by Fuel
and Scenario, 2015
^Baseline Case-
^ Moderate Substitution Case
^Aggressive Substitution Case
17
Hydro- Natural Other
electric Gas
Million tons
2,500
2,000
1,500
1,000
Carbon Emissions by Case,
1996-2015
5aseline Case
Mode~ ate Substitution Case
Aggressive Substitution Case
00
3000
00
-
2500
- ---____._
2000
1500
-
Baseline Case
1000
?--?-----?---- -?- ??
Moderate Substitution Case
Aggressive Substitution Case
500
0
Cumulative Capital Costs for Power Plants by
Baseline
Case.
Moderate
Substitution
Case
Aggressive
Substitution
Case
 ? In this case, China becomes more heavily dependent on oil imports, especially
incre,qsed reliance on supplies from the Middle East, and will need to build and
upgrade additional refineries to handle the crude.
? Expansion of the gas industry costs $125, billion, mainly for pipelines and other
infrastructure construction, and includes funding for domestic exploration and
development.
? Hydroelectric capacity increases to more than half of China's exploitable resources,
and China turns increasingly to gas and nuclear power to meet its electricity
generation needs.
Moderate Substitution Case. This case results in a 7-percent decrease in annual coal
use by 2015 but only a 2-percent cumulative savings in carbon emissions. Capital
costs under this scenario increase by more~than $30 billion-about 7 percent higher
than in the baseline case-with another $7 billion annually for increased fuel costs.
? China relies more heavily on oil imports than in the baseline case, again with the
Middle East as probably the most important supplier.
? Some $90 billion is needed for gas industry development, although no international
pipelines are built.
? Reliance on nuclear power increases but to a lesser extent than in the aggressive
substitution case.:
Chinese Policies Make Coal Substitution Difficult
The higher costs for alternative energy, Beijing's desire to build its own domestic
energy technology, and a reluctance to rely on energy imports would make it difficult
for China to exercise even moderate coal substitution in the near term in our
judgment. Chinese attitudes could change, however, if leadership concerns grow
about the economic and health costs associated with extensive coal use.
? China's energy policy reflects a strong bias toward least-cost energy development
using coal, with minimal consideration given to environmental consequences.
met
 ? A recent World Bank study put the cost of environmental pollution in China at $50
billion annually.
Implementing even modest coal substitution would require Beijing to change many of
its long-standing energy policies. Key policy changes would include:
? Removal of subsidies on energy prices. A major obstacle to coal substitution would
be removed if energy prices were allowed to rise to market levels. In that case,
electric power and industrial plant operators would look to the most efficient and
flexible way to produce electricity or steam at the lowest overall cost. With prices
for coal and gas at free-market levels, gas would become a more viable option for
China-in regions such as coastal areas where imported gas could compete with
indigenous coal. For example, gas-fired units require less capital costs, are quicker
to build, and come on line faster than coal-fired units.
? Fewer government controls on imports and the elimination of taxes on imported
energy equipment. Beijing maintains a 15-percent tariff on imported energy
equipment and requires foreign suppliers to transfer technology to local
manufactures, according to Chinese press reports. Without these market barriers,
foreign companies that specialize in energy technologies-including US firms-would
be in a better position to encourage alternatives to coal use and gain access to the
Chinese market for coal alternatives.
? Stronger environmental laws with strict enforcement. Stronger air pollution laws
and stricter enforcement would mean that plant operators would become more
conscious about the need to reduce emissions and improve efficiency. In that event,
China may advocate more strongly the use of noncoal energy sources such as
nuclear and natural gas.
 Clean-Coal Technology Options
Our modeling does not include implementation of clean-coal technology; however,
the best opportunity China has to decrease harmful air emissions without using other
fuels is to employ clean-coal technologies such as fluidized bed combustion, flue-gas
desulfurization, and coal gasification units, according to industry experts-although
these technologies do not reduce carbon emissions.2
China has little indigenous environmental
technology development under way and needs to buy such technology from foreign
firms. China's domestic environmental technology program is about 40 years
behind that of the United States.
? China's main effort to reduce emissions centers on improving plant efficiency by
building modern coal-fired plants-300-MW and 600-MW units-and by retrofitting
existing, older units. the majority of capital
expenditures related to coal technology are used to increase energy output through
efficiency gains-an effort that does reduce carbon emissions.
Industry analysis of projections of coal use in China suggest that the country's air
pollution problems would intensify even if clean-coal technologies were used.
? Although such technology would reduce emissions per unit of coal burned, the
projected large increase in future coal consumption would raise sulfur dioxide
emissions from 20 million tons in 1994 to 25-30 million tons in 2020.
by 2020, increased coal consumption will push
China's carbon emissions to 1,700-1,900 million tons or to 25 percent of the world's
total-with China surpassing the United States as the world's largest carbon emitter.
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