|Project Rationale and Linkage to Country/Regional Strategy
Energy Sector Development and Energy Efficiency: The People's Republic of China (PRC) possesses Asia's largest and fastest growing energy sector. While energy fuels economic growth and poverty reduction, inefficient energy uses induce accelerated resource depletion and impose severe environmental damage. It would be the poor who will suffer first and most. There exist daunting challenges to ensure that the ongoing energy growth trajectory be both environmentally sustainable and economically desirable. With a strong political commitment toward improving energy conservation and addressing negative impact of global climate change, the PRC Government has articulated a clear vision as reflected in its target of quadrupling the per-capita gross domestic product (GDP) while only doubling the energy uses during the period 2000-2020. This requires that the energy elasticity of GDP growth be maintained around 0.3 over the next 12 years. To meet this serious challenge, the PRC has put energy efficiency (EE) improvement as its highest priority for the energy sector. The National Development and Reform Commission (NDRC) issued a Medium- and Long-Term Energy Conservation Plan in January 2005. The 11th Five-Year Development Plan requires a mandatory 20% energy intensity reduction by 2010, which has been allocated to the provincial and municipal levels. Ten key areas for energy savings have been identified, and 1,000 enterprises with intensive energy uses are now under tight supervision for EE enhancement. Meanwhile, a series of incentives, including tax privileges, have been adopted to stimulate energy conservation activities. Structural adjustment, technological upgrading, improved demand-side management, and decommissioning of inefficient facilities (e.g., small and old thermal power plants) have been actively pursued.
Electricity Generation in the PRC: The PRC has been rapidly expanding its electricity generation capacities to support fast economic growth and massive urbanization. During the 10th Five-Year Plan period (2001-2005), the PRC?s annual GDP growth averaged about 10%, while the annual power generation growth averaged about 13%. By the end of 2007, the total installed generating capacity in the PRC reached 718 gigawatt (GW), of which 556 GW (77.4%) was coal-fired. The high use of coal for electricity generation (about 1.4 billion ton in 2007), which is the highest in the world, leads to severe pollution and vast greenhouse gas (GHG) emissions, accounting for about 40% of the country?s carbon dioxide (CO2) emission, 55% of sulfur dioxide (SO2) emission, 80% of nitrogen oxide emission, and 23% of particulate emission. Because of a large stock of smaller and older designed power plants, coal-fired electricity generation in the PRC has a relative low efficiency; average coal consumption for each kilowatt-hour of electricity generated, which was 356 grams (g) of standard coal equivalent in 2007 and is about 60 g higher than that in industrialized countries. Since the newly installed coal-based generation units (CGUs) generally have a capacity of 300 megawatt or more and have better control systems, their design efficiency is comparable to international practice. Their utilization has to be maximized to reduce coal consumption and pollution emissions. Currently, approximately 30% of CGUs are of smaller capacity, and the Government has decided to shut down the very old plants with aggregate capacity of 50 GW by 2010.
Needs to Optimize Power Generation Scheduling and Dispatch System in PRC: The current power generation scheduling and dispatch system (GS&DS) in the PRC allows about the same utilization hours to large-efficient and small-inefficient CGUs, resulting in energy waste and excessive emissions. Furthermore, the average annual utilization of CGUs was only 5,344 hours (61%) in 2007, which is considerably lower than the 90% availability of new CGUs, implying large potentials for utilization improvement. NDRC has taken an initiative to develop and implement a new energy-efficient and environmentally friendly GS&DS that maximizes the use of renewable energy (RE) and ranks CGUs according to their marginal fuel uses, in order to significantly reduce coal consumption and GHG emissions. The guideline for pilot implementation of the new GS&DS was approved by the State Council in August 2007. Five provinces, namely, Guangdong, Guizhou, Henan, Jiangsu, and Sichuan, started testing the new GS&DS in end of 2007.
There are urgent needs to remove market distortions and to intensify sector reforms, since current energy pricing and management schemes do not appropriately reflect resource scarcity and environmental externalities. International practices show that a properly designed electricity market, coupled with penalties for pollution and taxes on fossil fuels, sends right signals for investing in energy conservation and emission abatement technologies. However, basic environmental monitoring and evaluation systems (e.g., SO2 emissions trading system) are still at a pilot stage in the PRC and will require considerable investment and time before they can yield sufficient results. In the absence of such complementary measures, a competitive electricity market based on just price bidding generally gives the old and nearly fully-depreciated CGUs cost advantages and further aggravate environmental problems.
Consistency with ADB's Strategies: Asian Development Bank's (ADB's) operational strategy aims at inclusive economic growth in an efficient, equitable, and sustainable manner. In its Long-Term Strategic Framework II (2008-2020), ADB has identified energy as a core operational sector and achieving environmental sustainability as a strategic priority. ADB has also introduced new initiatives (e.g., the Energy Efficiency Initiative [EEI] and the Carbon Market Initiative [CMI]), and adopted new and more client-oriented operational modalities (e.g., multitranche financing facility and non-sovereign operations) to reinforce its assistance to its developing member countries to acquire low-carbon technologies and to implement EE projects. ADB?s Country Partnership Strategy for the PRC has also emphasized on balanced and sustainable growth with more efficient uses of resources and more stringent protection of environment. The PRC?s 11th Five-Year Development Plan specifically requires financial assistance from international financial institutions (IFI) to be used for resource conservation, environmental protection and infrastructure development. The provincial governments in the provinces to be selected for pilot implementation have satisfactory track records of project implementation, but they lack the capacity to initiate innovative EE projects for IFI financing and to significantly improve development impacts through adjusting and optimizing project designs. Their institutional capacity needs to be further strengthened so that more EE projects can be planned and implemented to achieve the goals of the Government on sustainable socioeconomic growth, environmental protection, and mitigation of global warming and climate change. Apparently, there exists strong and clear consistency between the PRC and ADB priorities and strategies in the energy sector. The proposed technical assistance (TA) will delineate concrete measures to further strengthen this strategic linkage and contribute toward sustainable poverty alleviation.