By Robert Blohm
The national energy leading group chaired by
Premier Wen Jiabao recently declared that "marketization is the most
important element of energy policy."
China Daily itself sent May Day holiday-makers off with a staff
editorial saying market-oriented measures are more effective than
administrative measures to carry out the government's commitment to
reducing pollution and raising energy efficiency.
follow the recent proposal by the Ministry of Finance, the Ministry of
Commerce and the State Council for a new energy consumption law to be
approved by the National People's Congress next year, as well as
the sixth gasoline price increase this year by the National Development
and Reform Commission (NDRC).
The energy leading group calls for
"perfecting energy laws and regulations" to "use energy
economically." This highlights the purpose of the consumption law
and the price increase, which is to make China use energy more
efficiently to become a stronger and more secure global competitor,
perhaps even using resources better than the United States has. What is
most essential to a country's strategic future is not only economic
growth, but how efficiently the economic growth is achieved; in other
words, how much more can be produced for less.
growth is sustainable. The national security of China is also improved
when the nation can depend less on imported commodity to achieve the
same or more economic output.
China's leadership has observed
from the rest of the world that market pricing provides a far more
detailed and timely, and therefore more efficient, resource allocation
than administratively set artificially low prices or subsidies.
investors use oil company profits to increase supply and eventually
lower oil prices, but ultimately to directly finance the human-capital
intensive "innovative economy" targeted by the 11th Five-Year Plan
(2006-10). It is not just to reinvest in traditional oil production.
most striking physical manifestation of China's revolutionary economic
growth is its energy consumption. China accounts for 10 per cent of the
world's energy consumption and half of East Asia's, but for much less
of the gross domestic product (GDP). China is now the world's No 2 oil
consumer. China's oil consumption has quadrupled in the last 15 years.
That's a growth rate 30 per cent faster than GDP growth.
electricity consumption is approaching two-thirds of the United
States', according to the electricity forecast released in March by the
NDRC. This makes China the world's second-largest electric power
To sustain this, China's oil companies are now
placed under huge bargaining pressure to procure liquefied natural gas
(LNG) as an alternative, cleaner fuel for electricity production. Also,
huge planning and costly stabilization requirements are placed on State
Grid Corporation and China Southern Power Grid Corporation to
accommodate a proliferation of remote power plants near coal and water
resources to the north and west respectively.
super-growth energy figures can be a point of pride for Chinese, the
country's leadership has recognized that these numbers have a dark side
that still indicates huge inefficiency and unnecessary over-consumption
of energy relative to GDP and compared to North America, Europe and
Japan, where energy prices have been more market driven.
This is true especially since crude oil prices started rising above their 50-year historical average price in 2001.
population control policy combined with productivity improvement did
contribute to improved energy efficiency for 20 years until 2001. But
after 2001, China's economy reversed to becoming increasingly energy
inefficient because energy prices to consumers did not rise to the
In other regions of the world, energy consumption
has continued to grow more slowly than GDP, just as it had since the
oil-price shocks of 1973 and 1978 gave the economic incentive to find
ways to improve the productivity of energy use, to marketize the price
of natural gas and electricity, and to develop alternative energy
After the oil price shocks in the 1970s, people
adjusted their consumption and world energy prices eventually
collapsed. For example, homes were insulated, more efficient lighting
was used, and smart hot-water heaters were installed. In addition, more
used public transportation, cars became more fuel-efficient, several
co-workers carpooled to work, and companies became more competitive and
invested in energy-saving technology. Many consumers switched to
alternative fuel partly by installing dual-fuel power and heating
systems, and small efficient gas-fired jet engines were developed to
Eventually national wholesale markets
were created where natural gas and electricity could be sold
competitively between suppliers and customers who pay a publicly posted
"transportation" fee to the pipeline or electric-transmission operator.
Most importantly, that fee varies by region to reflect the cost of
congestion in the delivery system, and to indicate whether and where it
is economically more efficient to expand either delivery or production,
and expand either the natural gas pipeline system or the electric
China bravely started down the road toward
energy markets in 2002 when it broke the State Power Corporation into
two grid companies, and five competing power generating companies, and
established the State Electricity Regulatory Commission to oversee the
But the "demand side" of a wholesale market has not
yet been developed and price regulation has persisted with no objective
means of determining the most economically efficient expansion of the
nation's electricity and natural gas pipeline systems.
the artificially low prices (especially since 2001) prompted
over-consumption under the scientific law of prices, causing a shortage
of power plants because producers' cost could not be recovered in the
artificially low prices to consumers. This is the same thing that
happened to oil refiners and prompted shortages of refined oil products.
The NDRC has taken some steps in the right direction to address this problem.
the gasoline price increases intended to bring regulated prices closer
to where market prices could prevail, the NDRC recently ended regulated
coal prices to the power generation companies, and forced them to
negotiate contracts directly with the coal producers while allowing
them to recover 70 per cent of any subsequent cost increase in a higher
regulated electricity price to consumers. Meanwhile power plant
construction has recently surpassed demand growth sufficiently to
eliminate power shortages by next year.
But the NDRC still has
to go much further, and not just in regards to electricity. In
particular it must eventually reflect on current prices and previously
ignored market value increase in coal, electricity and refined oil
The NDRC needs to do so to resolutely transition to
wholesale-market pricing mechanisms driving an energy price to
consumers that reflect market-determined costs.
The NDRC now
needs to initiate the hard detailed work of preparing those mechanisms,
avoiding the mistakes made by other countries in developing such
mechanisms, and developing flexible advanced economic system-planning,
market forecasting, and system-operation methods that properly take
market behaviour into account.
This is the scientific basis for
efficiently expanding this nation's electricity, natural gas, coal and
oil-refining and distribution systems into being the world's greatest.
The author is an American and Canadian investment banker, economist and energy expert.