China: The Drivers of Current Energy Policy
Chinese energy policies can be seen as being directed by the intersection of geopolitics (the risk of the interdiction of the increasing levels of oil and gas imports), the domestic politicization of local air pollution, and an industrial policy targeted at new “green” industries.
3.2.1. Historical Trends in Chinese Energy Consumption and Imports
The three tables below (Boyd & Ufimsteva 2021) show the changes in consumption in coal, oil and natural gas over time. The rapid growth of China from 1980 to 2013 was predominantly fuelled with rapidly growing domestic coal production, with import levels limited to 6% of consumption. With domestic production of coal increasing in the past few years, and consumption growth moderating, it is possible that China will return to a position of coal self-sufficiency on a net basis (some imports of coking coal may still be required). From the early 1990s the limited domestic production of oil was overtaken by consumption, creating an increase in imports. Oil consumption growth accelerated from 2001 onwards, with large increases in imports that grew to 9.6 million barrels of oil per day (Mbpd) in 2019; imports now provide approximately two thirds of domestic consumption and China has become the largest global importer of oil and its derivatives. With limited prospects for increases in domestic oil production and the rapid growth in the number of personal and commercial vehicles, the import share of oil is set to increase further. From 2009 onwards, natural gas consumption also increased rapidly and when combined with a lack of progress in the development of domestic shale gas deposits (Forbes 2019) led to increased imports. With the Chinese state targeting a doubling of the natural gas share of primary energy consumption to 10%, the level of imports is set to substantially increase in the next decade.
Although China regarded the world energy market “as an unfair and unsafe arena for latecomers” (Shaofeng 2008, p. 96) its growing oil and then gas import needs forced it to rely upon the global oil markets. These concerns were ameliorated somewhat by a diversification of supplying nations and fossil fuel related foreign direct investment by Chinese national oil companies (NOCs). Its acceptance within the neoLIO provided China with a relatively secure and reliable international fossil fuel trading environment at a low cost. Natural gas imports have been increased through pipeline supplies from Russia and Central Asia, together with seaborne LNG supplies.
Although in the past few years, non-fossil fuel sources of energy have rapidly expanded, this has been from a small base. In addition, the ongoing increases in Chinese energy consumption have been greater than the additional energy supplied from non-fossil fuel sources resulting in an ongoing increase in the consumption of fossil fuels. The relative share of energy consumption provided by fossil fuels my fall, but with overall energy consumption growing the absolute levels of consumption may remain the same or even grow. This is seen in table 3.4 below, with even coal consumption continuing to grow between 2011 and 2021; with an acceleration in growth in 2021. With the new renewables now accounting for 7.2% of primary energy consumption, continued rapid growth may begin to offset increases in energy consumption and lead to an absolute reduction in fossil fuel usage. Such an outcome may occur in the next few years if the growth in new renewables is maintained, but such an outcome will require a reduction in the overall primary energy consumption growth rate; through more rapid gains in energy efficiency, lower economic growth, or a combination of both. The rapid growth in electric vehicle (EV) sales (see below) may provide greater energy efficiency, but with the greater amounts of energy required in the production of an EV (when compared to an ICE vehicle) taking a number of years to be offset by lower energy consumption than ICE vehicles, it may be toward the end of this decade before increasing EV sales reduce energy consumption on a net basis.
3.2.2. Geopolitics and Energy Security
The increasing dependence upon imported oil and natural gas, with the former predominantly provided through surface shipping from the Middle East and Africa, when combined with an increasingly conflictual geopolitical environment threatens Chinese energy security. The resulting policy changes would be expected to focus on the safety of the supply of fossil fuels, and the ability to resist any form of energy embargo. This fits into an overall policy framework driven by the level of net imports and the level of conflict within the geopolitical environment:
Since 1993, China has moved from the upper left quadrant (characterized by energy self-sufficiency and low potential for conflict), to the lower left (a stage of energy import dependence within a low conflict environment), and then from 2011 increasingly into the lower right quadrant (with high risk of conflict and high dependence on external energy sources). The main areas of concern from an energy security perspective are the increasing levels of natural gas and oil imports.
China has significant domestic gas production and has very recently been able to overcome its inability to grow that production through unconventional sources – especially coal bed methane. Even with this, consumption continues to outstrip domestic production with the probability of import dependency rising to over 50% by 2025 (Angus Media 2019, EIA 2019). China has developed significant supplies of natural gas that are sourced from “friendly” nations (Russia, Central Asia) delivered through land-based pipelines and has plans to significantly increase those levels of secure supplies (Wu 2014; Zhao & Chen 2014; Jamali 2018). The most important new project is the Power of Siberia gas pipeline, which will have a full capacity of 38 Bcm/year in 2022-23, approximately 9.5% of consumption in 2022 (Liang, Abrue & Fan 2019). The in place Central Asia – China gas pipeline has a capacity of 55 Bcm/year and is forecast to be running at peak capacity by 2019 (Putz 2018). The state has also merged the gas pipelines of the three national oil companies to improve efficiency and effectiveness. With further gas pipelines and expanded liquefied natural gas (LNG) deliveries from Russia, China has the potential to replace all other supplies – including those from Australia (a member of the Five Eyes with the US), Qatar (the site of a major US military base) and the Middle East in general.
Domestic oil production has grown at a rate of only 0.3% per year in the past decade, well behind an annual increase of 4.9% in consumption, with the result being an increasing level of imports – with an import dependency of 72% in 2018 (BP 2019). The Chinese state has a goal of increasing domestic oil production by 50% (2 million barrels per day [Mbpd]) through expanded development spending over the next 5 years (Forbes 2019), but by 2022 Chinese domestic oil production had increased by only a few 100,000 bpd and has yet to regain the previous peak reached in 2015 (Trading Economics 2023). There has been an annual increase in oil consumption from 9.6 Mbpd to 15.4 Mbpd between 2011 and 2021, a 5.6% annualized growth rate (BP 2022).
China has established a strategic oil reserve and it “has around 80 days of oil in storage, including those in its strategic petroleum reserve (SPR), oil storage at oil firms and commercial stocks” (Daly 2019) which equates to about 788 Mb. With the fall in oil prices due to COVID-19 China has taken the opportunity to significantly add to its petroleum reserves. Coal to Liquids (CTL) plants to replace oil as a carbon feedstock have been estimated to cost $67-$82 per barrel of oil equivalent (Hydrocarbons Technology 2019), and increased state pollution and water use regulations may further hinder large-scale adoption (Guo & Xu 2018). China’s usage of methanol as a transportation fuel has risen rapidly in the current decade and was over 500,000 bpd in 2016 (EIA 2017), making up 8% of liquid fuel use in 2015 (Ingham 2017). Chinese methanol is predominantly derived from coal, so its increasing usage as a transportation fuel would leverage the nation’s large coal reserves to reduce imported oil consumption.
China’s oil refinery capacity is greater than that required for domestic demand, with the result that in 2019 it is estimated that approximately 10% (1 Mbpd) of China’s crude oil imports will be re-exported as oil products (Zhuo, Xu & Yep 2019). Current oil pipelines from Russia and Central Asia have the ability to deliver 1.2 Mbpd of oil (Collins 2018). Taking into account the pipeline-delivered oil, together with the ability to shut down the excess refining capacity, a very sizeable exposure to seaborne oil deliveries still exists. If we assume that the combination of transport electrification (see below) and increased domestic oil production serves to stabilize oil imports at 10 Mb/d significant measures would be required if an oil embargo were instituted against China. The analysis below draws on Collins (2018).
With the Chinese average coal-fired plant utilization below 50% (Myllyvirta et al., 2020), the amount of electricity generated from coal could be quickly and substantially increased. Such an increase could not only reduce the use of seaborne imported natural gas, but also be utilized to increase the usage of China’s extensive electrified ground transportation (subways, light-rail, trains, electric buses, delivery vehicles, taxis and personal vehicles) to partially replace seaborne oil imports. Low coal plant generating plant utilization may be more due to local government resistance to the closure of local coal-fired plants than any contingency planning, but it does provide a “strategic reserve” of electricity generating power. The level of coal stocks and the ability to increase domestic coal production and imports from Russia, would be the limiting factor on the increased utilization of coal-fired generating plants.
With the 2019 level of strategic petroleum reserve, together with other crude stocks, estimated at 788 Mb (Daly 2019), China would be able to withstand a seaborne energy blockade for approximately 15 months. This could be extended to 20 months through the emergency addition of a new oil pipeline from Russia transporting 0.6 Mb/d. China’s latest increases in its strategic oil reserves could extend a possible holdout period to significantly beyond 2 years. During such an extended period, further pipelines could be completed, and structural changes would also reduce oil demand. An important point is the importance of Russia and the Central Asian states to the energy security of China during a possible seaborne energy blockade for at least the next decade, if not longer. Only when the need for imported oil and gas has been reduced to minimal levels will this dependency be fully removed.
It is extremely doubtful that the US could impose a seaborne energy blockade upon China for over two years, given the scale of the global economic and political fallout. The price crash resulting from the removal of Chinese demand from global oil markets would severely impact many oil exporting nations, many of which may worry about being displaced as unreliable suppliers after the blockade; there would also be the additional risk of an accelerated Chinese move toward the electrification of transport. Another big question is whether the US would risk antagonizing Russia by interfering with Russian tankers delivering oil to China through the Sea of Japan and the Yellow Sea. Given this, China may be said to have already substantially desecuritized its energy supply, removing it as a possible geo-economic vulnerability to be used against it. Post 2025, as greater and greater numbers of electric vehicles (EVs) enter the Chinese personal and commercial fleets, together with the scrapping of older less efficient internal combustion engine vehicles (ICEVs) etc., the ease with which China could withstand an energy blockade could rapidly increase. As with the window for successful US military action against China in the South China Sea and environs passing by 2025, any possibility of a successful energy blockade may also have passed by then – if not already.
3.2.3. Domestic Politicization of Local Air Pollution
The Party-state has reacted vigorously to the domestic politicization of local air pollution, working to both show its responsiveness and co-opt citizen actions within Party controlled processes. In doing this, the interaction between the PS and the citizenry is kept within “normal” politics, removing the possibility of a politicization of the issue of local air pollution in a manner threatening to the legitimacy and domestic dominance of the Party-state. The swiftness of the actions taken to reduce air pollution supports the legitimacy of the Party-state, with that legitimacy now more based on performance rather than ideology (Yang and Zhao, 2014; Zhao, 2009). “By putting air pollution control as one of the ‘three initiatives with top priorities’ and an integral part of the ‘construction of ecological civilization,’ the government showed unprecedented political will in addressing the issue.” (Wang, 2021, p. 4).
Stringent particulate matter regulations have been imposed upon the coal-fired electricity fleet, requiring “scrubbers” to be installed, and actions taken to move many electricity-generating plants away from concentrated urban areas. At the same time, the use of natural gas and low-carbon electricity generation has been increased, and natural gas increasingly targeted to reduce the role of coal for space heating purposes (Wang et al., 2020). In addition, policies were put in place to reduce coal usage of industrial boilers and to reduce the pollutant emissions of the remaining coal-fired boilers (Wang et al., 2021). What is considered “one of the world’s strictest rules on automobile pollutants” (Xinhua 2019) has also been put in place, with its final stage scheduled for implemented in July 2023, and the use of EV’s within urban areas incentivized. The move from coal to natural gas for space heating and cooking will also reduce air pollution
China has been upgrading its coal-fired electricity generating fleet to supercritical and ultra-supercritical high-efficiency power generation units that both reduce coal usage, and as a side effect of that extra efficiency, particulate matter and carbon dioxide emissions per unit of electricity (Wang, Xu & Ren 2018). Super and ultra-supercritical high efficiency units provide approximately half of Chinese coal-fired electricity generating capacity (Hart, Basset & Johnson 2017). The Chinese state is already tightening regulations with respect to acceptable plant efficiency levels to obsolete the least efficient plants “By 2020, every existing coal-fired power unit in China must meet an efficiency standard of 310 gce per kilowatt-hour; any units that do not meet that standard by 2020 will be retired. In contrast, none of the current top 100 most efficient U.S. coal-fired power units would meet that same efficiency standard today [my italics]” (Hart, Basset & Johnson 2017). With the average ultra-supercritical plants in Southeast Asia being 22% more efficient in transforming coal into electricity than subcritical ones (World Coal Association 2016), and the best plants 41% more efficient than the average SE Asia subcritical plant (Power Technology 2019), there is a large scope for China to significantly increase the electricity output of its coal-fired fleet without increasing the amount of coal consumed. This ongoing ability to increase the amount of electricity generated for a given amount of coal allows for a level of domestic coal consumption “projected to broadly plateau over the next 20 years” (Wang, Xu & Ren 2018, p. 161) while supporting the need for the increases in electricity production required for continued economic growth.
3.2.4. Industrial Policy
The Party-state has driven a consolidation of the coal mining industry into larger automated mines (Wang, Xu & Ren 2018) to increase the efficiency of the overall industry. This produced a temporary fall in coal production in mid-decade as smaller mines were closed but production rebounded in 2017 and 2018 (BP 2019). Approval was given to “40 new ‘modernized’ domestic coalmines, with a total capacity of 196 million tonnes, in the first three quarters of 2018” (Singh, Xu & Schmollinger 2019).
The low carbon energy sector has been targeted as a growth area in which China can provide technology leadership, and as a source of new job opportunities. The installation of significant levels of solar and wind energy in China has aided the development of the related domestic industries. State support for the solar industry during the over-capacity crisis of the early 2010s allowed the industry to survive that crisis and then become the globally dominant supplier of solar panels that it currently is. Support for the nuclear industry has also been provided by the expansion of capacity within China, with the industry now in a position to bid for foreign plant installations. Within the renewable electricity generation sector China has rapidly moved from being a laggard to the position of a leader, both as an implementer of renewable technologies and as a manufacturer of such technologies.
The electrification of transport is also a key area of development for China. The massive implementation of subways, trams and trains (including a high-speed train network larger than the rest of the world combined) has facilitated the growth of highly competitive industries within these sectors. In parallel, EV manufacturing has been supported though both producer subsidies and consumer incentives. China leads the world in the production and usage of electric buses, a fleet with a high utilization rate with respect to personal vehicles. Roughly 99% of the 385,000 electric buses worldwide operate in China, 17% of the overall Chinese bus fleet (Poon 2018), with estimates that for every 1,000 electric buses 500 barrels of diesel are displaced per day. The city of Shenzen has already moved to a 100% electric bus fleet (Keegan 2018). Some local governments have also been targeting taxi fleets, which have much higher than average utilization rates, for electrification. Local government has direct control over the composition of taxi fleets, through the regulation of the types of vehicles allowed and the provision of charging points. These powers have been used by a number of Chinese cities to replace gasoline-powered taxis with EV’s (Chun 2018; Keegan 2018). This focus on high-utilization transport may significantly increase the reduction in oil usage from the adoption of EVs.
From only a 0.9% market share in 2015, Chinese EV sales grew at a compound annual rate of 69% to reach a market share of 3.9% in 2018, with 75% of EV sales being pure battery electric vehicles (as against hybrid models) in 2018 (Hertake et al 2019). Sales fell in the second half of 2019 due to reductions in EV state subsidies, but this can be seen as a strategic step to shake out the less efficient among a plethora of Chinese suppliers and to reduce the rapidly increasing fiscal impact of such subsidies. With the removal of restrictions on foreign-owned EV production, those subsidies may have also increasingly gone to foreign car manufacturers. Due to the previous state regulations that only allowed EV manufacturing by locally owned and joint-venture entities and steered manufacturers toward domestic battery manufacturers (Huang 2019), the domestic market has been predominantly supplied by domestic manufacturers. The state’s development plans called for the production of 2 million EV’s in China by 2020 and a 20% market share for new energy vehicles (NEVs) in 2025 (Hernandez 2018). Actual production was 250,000 in 2015, 410,000 in 2016, 660,000 in 2017, 1.2 million in 2018 (Qiao & Lee 2018; EEI 2019), fell slightly in 2019, 1.24 million in 2020, then grew to 3.5 million in 2021 (Cong 2022) and 6.5 million in 2022 (Zhou 2023); with an increasing number of exports that totalled 679,000 in 2022 (Ren 2023) and are set to rapidly expand in the next few years. With BYD producing more new energy vehicles (NEVs) than Tesla in 2022, and with it and other Chinese manufacturers looking to rapidly expand exports, the challenge to Western car manufacturers may become existential. The market share of NEVs in China in 2022 was 30% (Kane 2023), already 1.5 times the target that had been set for 2025. Given that the vast majority of cars sold in China are net new additions to the fleet (Collins 2019) this level of EV market share may bend the upward curve of oil usage growth but will not result in any shrinkage of the ICE fleet.
Chinese manufacturers had struggled to produce competitive internal combustion engine cars, resulting in a heavy foreign presence within the Chinese market. For example, 40% of Volkswagen and 50% of BMW global sales are in China (Hanley 2018). This provides significant leverage for China with respect to European car manufacturers who are also being pushed to develop EVs by new EU28 emission regulations. The foreign manufacturers will be forced to sell an increasing number of EVs within China just to defend market share against domestic competitors. The pressure from China, combined with that from recent EU28 regulations, may spur the sales of EVs within the EU28 where the majority of car sales replace current fleet vehicles resulting in a reduction in European oil demand. The result would be a greater reliance upon the Chinese market for oil exporting nations, and possible significant disruption for the European and US car industry that significantly lags with respect to EVs (excepting Tesla). The recent inability of the European ICE manufacturers to gain share in the sales of NEVs in China does not bode well for their future performance, especially with Chinese manufacturers (and Tesla) increasingly targeting the European market.
A report on the geopolitics of a low carbon energy transition (GCGET 2019, p. 40) states that “leaders in technological innovation are positioned to gain the most from the global energy transformation” to renewables, and that “No country has put itself in a better position to become the world’s renewable energy superpower than China. In aggregate, it is now the world’s largest producer, exporter and installer of solar panels, wind turbines, batteries and electric vehicles, placing it at the forefront of the global energy transition.” Such a position offers “its industry the opportunity to overtake US and European companies, which have been dominant in sectors such as cars and energy machinery”. The report also notes that in 2016 China had a 29% cumulative share of renewable energy patents, compared to 18% for the US, 14% each for the European Union and Japan (Ibid., p. 41). An analysis of renewable energy patents in 2017 gave China a 76% share, with the US only having a 10% share (PEi 2018).