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UPDATED: July 31, 2014 NO. 27 JULY 3, 2014
Fuel for a Revolution
The world's largest energy producer and consumer is considering some big changes
By Zhou Xiaoyan

LOOKING TO GET NUCLEAR: The nuclear power generator with the world's largest installation capacity is shipped out from the production base in Deyang, southwest China's Sichuan Province, to Taishan Nuclear Power plant in south China's Guangdong Province, on August 24, 2013 (WU MINGJUN)

On the back of expanding industrialization and urbanization, China's energy demand has been on the rise for years, making it the largest energy producer and consumer in the world. But external uncertainties on the international geopolitical front have put China in need of producing more energy itself and controlling its runaway energy consumption. Pollution problems have also forced the country to reduce the use of fossil fuels and increase energy efficiency.

On June 13, Chinese President Xi Jinping urged more efforts to revolutionize the country's energy production and consumption habits. Heading a meeting of the Central Leading Group on Financial and Economic Affairs, Xi acknowledged that China faces challenges in coping with rising energy demand, supply restraints, huge environmental costs and backward technology.

Xi said China is working on a guideline to direct energy production and consumption in the coming years and will accelerate revisions of outdated regulations.

China will upgrade coal-burning power generators that fail to meet emission reduction requirements and continue to develop long-distance power transmission lines. It will expand oil and gas cooperation with countries in Central Asia, the Middle East, America and Africa. The country will also intensify its efforts in energy exploration and exploitation, and in building more oil and gas pipelines and storage facilities, said Xi.

Lin Boqiang, an energy researcher at Xiamen University, said that the Chinese leadership is viewing the issue from the standpoint of national development and security.

"A revolution in the energy sector is bound to impact society greatly. The central authorities have used 'revolution' instead of the commonly used term 'reform,' which shows their determination to shift the status quo," said Lin.

Analysts said innovations in administrative governance are required to affect a revolution in energy production and consumption.

Niu Li, an economist at the State Information Center, a government think tank, said that shale gas, gas hydrate, electric vehicles and energy-efficient housing are likely to be areas which will boost an energy revolution.

"In the wake of the financial crisis, all nations are trying to nurture new energy technologies as a new engine to drive economic growth," Niu said.

Structural change

China will also attempt to reform pricing mechanisms and nurture a competitive energy market, according to President Xi.

Experts reacted favorably to Xi's call to accelerate China's energy production and diversity and to raise energy efficiency. They said the leadership's resolve in pursuing an energy revolution will pave the way for more non-state companies to enter the industry and foster healthier competition in the sector.

Lin said he was most impressed by the proposed "institutional revolution in the energy sector."

He said two tasks are paramount in revolutionizing China's energy sector—breaking up the monopoly of state-owned enterprises (SOEs) and letting the market decide energy prices.

Currently, China's energy sector is monopolized by SOEs and energy prices are controlled by the government.

"Right now, about 86 percent of the energy sector is state-owned and that proportion is increasing. The SOE monopoly should be broken up to add more competition to the sector," Lin said.

China's energy resources are mostly located in the less developed central and western regions while the developed coastal regions have huge energy demands. Energy output provinces have made tremendous contributions to economic development by diverting energy to other better-off regions at government-mandated prices. Worse still, the energy production process has heavily polluted these energy-rich regions. It's a situation analogous to the poor helping out the rich, analysts said.

Lin said the lack of a market-based pricing mechanism makes it harder to attract private capital into the energy sector.

The reform of the pricing mechanism of energy products is progressing very slowly, partly because price is used as a tool in government macro-control policies. Setting and adjusting energy prices involves complicated work inside the government and represents a "game of interests" among the parties concerned. Such direct government price intervention will lead to uncertainty in profits, making private capital more reluctant to enter the energy sector, Lin added.

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