Energy policy to fuel economic objectives

Although the 12th Five-Year Plan technically concludes in 2015, it is more apt to view the plan as the opening salvo to a pivotal decade intended to shepherd China toward a sustainable, innovative, and integrated continental economy. Indeed, the new plan is a sober recognition that pursuit of China's current export and investment-led growth model is facing diminishing returns.

Sustaining growth, in the face of a realignment in global consumption and demand patterns, will require a different emphasis on qualitative growth and domestic consumption. A lower 7 percent growth target and language that trumpets economic development over growth indicate that Chinese policymakers realize this.

China's economic model propels its energy consumption, which concentrated among heavy industry and manufacturing fuels an export juggernaut. In other words, China's energy problems are a direct result of being an industrial "producer", which is the opposite of the United States, which is a consumer-led energy guzzler. Viewed this way, it becomes obvious that the energy pattern in each country reflects a major symptom of the central economic imbalance of production and consumption between China and the US.

It is no surprise then that Beijing persistently argues that China's energy consumption per capita is just one-tenth that of the US. So by exiting its current hyper-industrialization phase and by restructuring its economy, the process should naturally lead to an improvement in what seems to be China's unbridled energy consumption.

Three targets will matter the most through 2015: reducing energy intensity per unit of GDP by 16 percent; cutting carbon intensity per unit of GDP by 17 percent (40-45 percent by 2020); and having non-fossil fuels account for 11.4 percent of the primary energy mix (15 percent by 2020). These targets are significant because they are domestically binding, meaning that they carry political weight and that actions are necessary in the 12th Five-Year Plan if China has any chance of meeting these targets by 2020.

While there has been considerable "renewable fever" in China, it has obscured the substantial expansion China has in store for hydro, natural gas and nuclear, all under the banner of clean energy. The overarching objective is to diversify reliance on coal - currently about 70 percent of the energy mix and the major culprit of carbon emissions in China. But it is simply unrealistic to achieve meaningful progress on renewable energy alone. Even as installed wind power has been doubling in recent years, with a total of about 40 gigawatt (GW) at the end of 2010, that still represents less than 5 percent of total installed capacity. Meanwhile, domestic solar demand remains miniscule, as the Chinese government has resisted a feed-in-tariff that would catalyze solar consumption.

Chinese officials aim to double natural gas in the energy mix to 8 percent, with the National Energy Administration projecting a very bullish 260 billion cubic meters of gas consumption by 2015. Plans for nuclear power seem equally ambitious, with the China Electricity Council (CEC) estimating nearly a five-fold increase in installed capacity to 43 GW in five years.

Yet dethroning coal from its dominant position in China's energy hierarchy will be exceptionally difficult, even assuming optimistic scenarios for deploying other energy sources. For instance, the CEC expects thermal installed capacity at 67 percent (primarily coal-fired), or 963 GW, over the next five years, down from roughly 74 percent at the end of 2009. But here's the kick: This nonetheless represents an absolute expansion of perhaps close to 300 GW of new coal capacity over the next five years. Therefore, it is imperative to simultaneously focus on developing clean coal and carbon technologies.

Policymakers are relying on a variety of tactics that involve fuel diversification, renewable deployment, resource-based taxes, and energy price reforms. China will also have to increasingly focus on demand-side management as millions enter the middle class and alter their energy consumption patterns and covet personal autos.

And so the next decade carries with it a sense of urgency to make substantial headway on an energy agenda that resides at the core of China's broader economic objective. Its relative success depends fundamentally on whether the 12th Five-Year Plan closes the curtains on the era of "GDP fetish" and strikes a new equilibrium between quantity of growth and quality of life.（China org.cn）