With industrial growth still surging on at breakneck pace, China's factories are crying out for fuel to keep the wheels turning while an increasing number of upwardly-mobile car owners are waiting at gas stations. As the regular summer brown-outs in cities confirm, energy is at a premium in China, although the price paid by consumers still doesn't reflect this. Beijing has cast its net far and wide in search of the overseas oil assets that will help secure the country's future energy supply. On the domestic front, the coal industry appears to be finally getting the shakeup it needs to become a safe and efficient energy provider. While China isn't a member of the International Energy Agency, the energy arm of the Organization for Economic Cooperation and Development, the nation's massive fuel demands have clear implications for all of the 26 countries that receive policy advice from the agency. Whether it was oil price hikes or attempted takeovers, China has played a role in most of the big energy stories in recent times. IEA Chief Economist Dr. Fatih Birol talked to CHINA ECONOMIC REVIEW about oil supplies, renewable energy and nuclear power – and why coal will remain king.
Q: If China continues to grow by at least 7% a year for the next decade, what fuel supply levels will be required to maintain this? Is there a danger of China exhausting the world's oil at a price it can afford?
A: China will need a lot of energy to fuel growth at that rate. If you look at it in global terms, if China grows at 7% it should not pose a major threat to the global oil supply and demand balance because we have enough oil coming from the major supplying countries. The risk is not how much China will grow or how much oil it will demand because the key production countries will be able to increase their capacity. Even with China's growth, its per capita consumption is below global averages. But it is a major energy importer and will become even more so in the future. It currently imports 3 billion barrels of oil a day and this will come to 10 billion barrels per day by 2030. China tomorrow will be the US of today in terms of imports. And with increasing oil prices this will prove such a burden that it may be a factor in the slowdown of the country's economy. There are two major policies the Chinese government may want to take into consideration. The first is to slow growth in oil demand at home by pushing policies to increase efficiency of oil use, improving standards for cars and other vehicles. Then, of course, China is already very active in working to secure access to oil throughout the world. And if they are successful in this, it will contribute to the security of their oil supply.
Q: To what extent will China becoming a major player in the developing world, helping emerging markets develop and – more significantly – finding fresh energy markets?
A: China has a very aggressive strategy when it comes to energy supply. They have obtained many oil concessions in Azerbaijan, Kazakhstan, Canada, Sudan, Venezuela, Indonesia, Iran and Iraq. In Canada, Sinopec is very eager to get access to oil; CNOOC has purchased an upstream stake in a small but significant oilfield in Malacca, which belongs to Indonesia. But I do not think these initiatives will be a major solution to the country's oil supply problem. China will make some gains, and it will slow down the increasing reliance on the Middle East and international oil markets, but such activity will not represent a major diversification from global sources.
Q: Given that China's coal reserves are huge, can you envisage a time when the country will be less dependant on coal?
A: Even with a greater commitment to nuclear power, coal will still form the backbone of China's energy supply. What we see today is that 75% of the total energy used in power generation in China comes from coal. This will decline in the future, but not substantially. With the current policies in place, it will only have come down to 70% by 2030. Coal dependency will decline as a result of more nuclear power and more renewables, as these can provide an environmental solution, and more gas used in power generation. In order of magnitude, it will be nuclear, gas and then renewables. There is also the option of using coal in a cleaner way through clean-coal technology. If this proves to be economically viable in the future, it could change the dynamics.
Q: What are the problems China faces with clean-coal technology?
A: At present, it is expensive and there are serious technological barriers for commercial application. To clean the coal, you have to make a much greater investment, and this investment increases the overall cost of coal. If you compare conventional coal with clean-coal technologies, clean-coal works out six times more expensive and this is a big hurdle. In the future, if research and development brings the cost down, this may change the picture, but we are still a long way from that point. It makes more sense to build the power plants next to the coal mines and transmit the electricity instead of transporting the coal. In general, this could provide up to 20% savings.
Q: On the subject of transport, are there signs of China supplanting communication for transportation, particularly in urban centers. What impact could telecommuting have on energy use reduction?
A: If it proves an effective way of working, telecommuting could save a lot of energy in terms of transportation bills and heating. New buildings would not need to be built. We can see a significant amount of energy saving here, but there is still a question whether this form of work can be designed in an efficient way. Many companies encourage employees to work from home, but this is far from being a general practice.
Q: China has repeatedly said it is committed to renewable energy, unveiling a series of proposals and introducing the Renewable Energy Law, which took effect January 1. How strong is this commitment, and how effective do you think it will be?
A: Renewable energy provides two important advantages: one, it is a domestic energy source, which means you do not have to import it; and two, it does not bring up environmental questions. So in these respects, it is good. But when it comes to costs, both wind and solar are very, very expensive compared to other energy sources. And a country like China, which is in the development phase, needs a lot of cheap energy. Currently, the share of such renewable energies in China's electricity generation is just 0.3%, which is negligible. I think that if the government pushes this significantly with new subsidies and support, it can go up to 2% in 20 years time. But to do that, a large amount in subsidies is required and I am not sure that, in the absence of international financing, the government would be willing to provide it. So on one hand, I see the advantages of renewables in a country like China, but looking at the cost implications, I am skeptical about these political statements.
Q: What would be the impact of a sharp rise in oil prices on the government's stance on renewable energy?
A: Renewables are not profitable at medium oil prices but could become so at higher prices. The prices should not only be high, but constant over an extended period to build investor confidence. We are now in the fourth year of high prices and, if they stay like this, investors will be confident enough to put money into these areas of alternative supply. The most promising renewables for China would micro-hydro, wind and solar – in that order. Micro-hydro is the best option as it is less costly when compared to others, but you cannot have it everywhere. In terms of biofuels, they can provide alternatives, but again, no large-scale applications, so what it provides to the local grid is almost negligible. The most important one in terms of capacity is large-scale hydro power, though some people consider it a renewable and others do not. However, it all comes down to government subsidies to get things started and I do not think China is able to do this. The Danish and German governments, for example, provide huge subsidies to wind, but China has different priorities. One possibility is that the government could secure international financial aid to develop such resources. But left alone to Chinese domestic financing, I do not see a huge increase in renewable energy.
Q: China is in the process of negotiating for rights in the mining of Australian uranium. What do you make of this, and China's general commitment to nuclear power?
A: I think China will go nuclear. Nuclear power has become a great option for two reasons. Firstly, there is the issue of high oil prices. Many countries which planned to import a lot of gas in the future will face the same problem because gas prices are closely linked to oil prices. Because of this, more and more countries are thinking of the nuclear option. The second reason is the environment. Climate change is a major issue and nuclear power does not create problems such as carbon emissions and acid rain. So for these two reasons, nuclear power is an option that will be considered very closely. Nuclear power in China currently produces 4 gigawatts a year and we expect this to rise to 20 GW in 2020, and 35 GW in 2030. This is very strong growth.