|Project Rationale and Linkage to Country/Regional Strategy
The primary energy consumption of the PRC increased rapidly from approximately 1 billion metric tons of coal equivalent (tce) in 1990, to 2 billion tce in 2004, and 3 billion tce in 2009. Soaring energy demand is both a driver and a consequence of the rapid economic growth in the PRC. However, the PRC's per capita energy consumption is still very low, only about one-third of the average of OECD countries. It is expected that in the foreseeable future, the PRC's energy demand and consumption will continue to grow. Some estimates show that before 2015, the PRC's primary energy consumption will exceed 4 billion tce.
The PRC has grown from being a minor and largely self-sufficient energy consumer to a major importer. In 2010, it was the second largest oil importer only behind the United States. Of its approximately 429 million tons of oil consumption in 2010, 226 million (or more than half) was imported. Apart from oil, natural gas and coal consumption has also increased rapidly. In 2010, it imported approximately 12 million tons of natural gas and 160 million tons of coal. The increasing reliance on import of fossil fuels is causing energy security concerns.
Increased fossil-fuel consumption has also worsened environmental pollution, sharply increased greenhouse-gas emissions and is casting serious doubts on the sustainability of the current energy-intensive economic growth pattern. The Government of PRC has recognized that sustaining economic growth will not be possible without addressing constraints on energy supply and environmental degradation. To promote the development of a modern energy industry, the government has been steadily advancing reforms, including promoting the market-based regulatory system and optimizing low-carbon energy supply mix.
Energy policy-making and -implementing responsibilities in the PRC are shared among many government agencies at national and local levels. The National Energy Leading Group of the State Council, established in 2005, is the highest decision-making body. The National Development and Reform Commission (NDRC) and the National Energy Administration (NEA), a partially independent ministry under NDRC are major agencies responsible for formulating energy sector development strategies, developing energy policy, and coordinating among ministries. In general, the NEA is responsible for energy supply, while the NDRC take the lead in energy efficiency, energy pricing, and industry regulation. A number of other ministries also have important roles in some specific areas. For example, the Ministry of Land and Resources oversees the exploitation of fossil-fuel resources and reserves. The Ministry of Water Resources oversees hydropower resources. The Ministry of Agriculture is responsible for rural energy development. The Ministry of Finance actively participates in any reforms involving financial incentives, tax reforms and fees. The State Electricity Regulatory Commission plays a key role in power sector reform and electricity market regulation. Finally, energy policies made by the governmental agencies at national level must be implemented by the counterparts of these agencies at provincial and municipal levels.
While the PRC's energy regulation system is robust and has served the sector well during its rapid growth period, it needs further refinements and harmonization to become a more market-oriented energy sector. The existing energy regulation system in the PRC has some shortcomings, which needs to be addressed. Foremost, the current energy regulation system does not involve a comprehensive energy law. It should set out the basic principles that subsidiary sectoral laws should follow. It should also define and reorganize, if necessary, the responsibilities among various ministries in relation to energy. The PRC's energy regulation challenges are largely shaped by its national economic policy goals. Paramount among them is the need to sustain its rapid economic growth, but in a way that is more environmentally sustainable than has so far been the case. In response to the rapid development of the domestic energy market and changes in policy priorities in the 12th Five Year Plan, the new energy law has to reflect latest developments in market-based energy regulation abroad and adapting it to the PRC's context.
Some sectoral laws and regulations enacted previously have become outdated and should be updated to reflect the current market situation. For example, the electricity law should be updated to promote electricity market reform, streamline the investment mechanism, and facilitate renewable energy integration. The separation of generation from transmission and distribution after 2002 has enabled introduction of wholesale and retail competition, but how the grids will be regulated is yet to be decided. Also, the government has shown increasing willingness to use economic levers to influence energy supply and demand. Decisions about feed-in-tariffs for preferred technologies, particularly those using renewable sources, will affect investments and energy supply mix in the future.
Rapid rise in energy imports increases demand for international cooperation on energy, thereby, requiring a harmonized relationship between domestic energy regulations and international practices. Like in many OECD countries, the need for an emergency oil stock is needed to withstand any disruption in supply of oil. In this regard, it is essential to study international practices and their relevance to the PRC. The operational mechanism for this emergency stock should also be developed. Transboundary issues like hydropower development on international rivers, and ocean energy utilization, have to be studied. It is critically important that domestic laws and regulations are harmonized with existing international laws.
The existing energy infrastructure in the PRC, along with its regulation system, was developed for the fossil fuel-based economy and inherited from the previously centrally-planned system. While the PRC is accelerating its market-oriented reforms, there is an urgent need to comprehensively analyze above-mentioned issues and help the PRC create an enabling regulatory environment for energy sector development. The establishment of an open, transparent, and orderly energy regulation system will pave the way for future reforms and facilitate the rapid and smooth development of the energy sector in the PRC.
There is a strong and direct link between this TA and ADB's operational priorities. The PRC is a middle-income country with a sizable number of poor people. Sustaining rapid economic growth will be vital for poverty reduction and inclusive development. But it will not be possible without addressing environmental sustainability and security of energy supply. Recognizing the close links between economic growth, energy demand, and environmental protection, the PRC has already formulated many reforms to correct the current growth pattern.
In Strategy 2020, ADB has identified energy as a core operational sector and achieving environmental sustainability as a strategic priority to pursue its mission to help its developing member countries reduce poverty and improve living conditions. ADB's country partnership strategy (2011-2015), which is being finalized, identifies low-carbon development a priority and identified knowledge and financing to catalyze policy and regulatory reforms to drive innovation. This TA is expected to strengthen the legal and regulatory frameworks in the PRC, to promote the utilization of renewable energy and strengthen market-based regulatory system to improve energy intensity, and help reduce greenhouse gas emissions. There is a strong and direct link between this TA and ADB's operational priorities.