Energy

Electricity generation capacity has increased dramatically, but electricity consumption has soared, resulting in power shortages in many parts of the country and brownouts in nearly all the provinces in the first three months of this year.

Local governments are pushing to expand generation capacity, but the investments in the power sector have fueled an overheating economy. Massive projects in the energy sector are underway across the map, and China's supply of power could return to a surplus as early as 2007 in spite of the ferocious growth in energy demand.

Foreign-investment opportunities range from bringing traditional power generation and transmission equipment plants into the 21st century to prospects in renewable and earth-friendly resources on an unprecedented scale.

Until the late 1990s, China's energy structure was essentially a centrally controlled monopoly, overseen for years by former premier Li Peng, who ironically fostered a regional approach to energy issues. In recent years, local interests have been offset by the establishment of a national grid allowing for the transmission of power from remote regions to the coastal provinces. In early 2005, a national energy policy office was established under the State Council to set long-term energy policy.

China's main energy source is coal, accounting for more than 65% of its total energy consumption, compared with around 25% for the rest of the world. China is largely self-sufficient in coal, but has caused several problems, one being its impact on the environment and the related costs of cleanup and healthcare. Power shortages sometimes stem from transport network capacity problems that delay coal shipments. One solution has been the placement of power plants close to coal fields or ports, allowing for coal to be converted to electricity and delivered to consumers over power lines instead of rail lines. Solutions to environmental problems lie both in reducing the role of coal and in finding cleaner ways to use coal. Methods such as gasification, lique-faction, and coal washing are being explored. Investment in coal production is growing fast due to high coal prices, and the government is concerned both about over-investment in coal mining, and the appalling safety records of Chinese mines. Fixed-asset investment in the coal sector surged more than 86% year-on-year in the first quarter of 2005. In 2003, China surpassed Japan as the world's second-largest importer of oil. In 2004, crude oil imports increased by 34.8% to 120m tons, and China's oil demand is forecast to rise 8.8% this year to 6.94m barrels per day (BPD). Of this, around 3.67m BPD are domestically produced. Beijing officials are wary of being too dependent on foreign oil supplies. About half of China's petroleum imports come from the Middle East, and Chinese energy planners are seeking to diversify oil sources, including pipeline projects with Russia and Central Asian countries. As China's current oil reserves amount to only a few days of national consumption, compared with about two months of oil reserves in the US, China is planning to expand its oil reserves to equal 30 days of imported oil by 2008.

China's oldest oil fields are located in the northeast, while newer sources are under development in the Bohai Sea and in the East and South China Seas. Potential for oil extraction is the root of territorial disputes among countries surrounding the South China Sea. Xinjiang in China's far west holds significant oil production potential; but delivery is a major obstacle.

China's three largest oil industry firms – Sinopec, CNPC and CNOOC – have all listed shares in recent years, heralding significant reforms of the oil market. But the majority stake of all three remains state-owned. The effect of listings and partnerships with foreign investors has been a shift towards transparency and more effective regulation and management.

Hydroelectric power, accounting for nearly 20% of China's energy mix, has the potential to grow further. The flagship project is the Three Gorges dam on the Yangtze River, the world's largest hydroelectric project. Due to be fully operational in 2009, the dam began producing electric power in 2003. Several major dams are placed along China's second-largest river, the Yellow River to the north, and smaller power generation facilities are in operation on just about all of China's waterways.

Natural gas so far accounts for 3% of China's energy mix, compared with an average of 22% in developed countries, and is forecast to grow to 8.7% by 2020. With its low environmental impact, gas is an attractive alternative to coal and there are plans to convert all major cities to natural gas. Several pipelines from offshore locations are already pumping gas supplies to Shanghai, Tianjin, Hong Kong and other cities. The most ambitious natural gas project is the 'East-to-West' pipeline stretching from Xinjiang to Shanghai. The pipeline is scheduled to be completed this year.

Nuclear power is another area of huge growth. Nuclear-generated power, a source of 2.29% of China's energy output in 2003, is projected to total 66bn KWh, or 2.4% in 2010. China has abundant supplies of uranium and ample space for nuclear byproduct disposal. Nuclear plants are currently operating in Guangdong and Zhejiang, and many new plants are either under construction or are being planned.

China is in an unparalleled position to incorporate renewable and earth-friendly energy into its energy supply scheme. The central government has invested in the development of wind power, a resource with great potential in Inner Mongolia and the northeast, as well as in coastal and even offshore locations. Solar power is currently a more expensive option, but roof solar panels are widely used by farmers to power water heaters.